Meanwhile, in the HR Dept…

Fascinating study from the Journal of Labor Economics that just came to my attention, examining how companies change their hiring practices once they stop asking job candidates about previous salary history. The conclusion: companies talk to more candidates, ask those candidates more questions, and offer them higher wages.

The study was done by Moshe Barach of Georgetown University and John Stern at NYU. They created an online job market, where workers could bid on projects (graphic design, data entry, report writing, research, etc.) that paid by the hour or by the project. Employers could also use the site to see profiles of potential employees, and both sides could contact each other to express interest in working together.

The professors then divided the roughly 6,000 employers using the platform into two camps: a “treatment group” that could not see a worker’s salary history, and a “control group” that could.

Their paper walks through 48 pages of dense academic analysis that we don’t need to cover here. Suffice to say, those employers without access to salary history considered more applicants: 7.12 per job opening, compared to 6.7 for the control group. They also evaluated employees who had a somewhat lower past wages (7 percent less), and actually hired employees with even lower wages (16 percent less). Which means those new hires were getting larger wage increases.

So what’s going on?

In economist-speak, a person’s salary indicates how productive he or she is. The more money you earn, the more productive an employee you (presumably) are. So businesses use salary history as an information shortcut to estimate your productivity. And when the company decides your previous salary history means you’re overqualified for a position, it is essentially saying you are “too productive” for the job at hand.

Well, the professors asked, if salary history is a shortcut businesses use to determine an employee’s probable value, how do companies change their hiring practices when they don’t have access to that information?

Employers without access to salary history considered more applicants, and actually hired employees with lower average past wages. Which means those new hires were getting larger wage increases.

This study suggests that companies dig for that information themselves. That’s why they interview more candidates per opening, and ask more questions during the interview process. They’re more likely to encounter, and consider, candidates with what we’ll politely call “untraditional” salary histories.

And once a company does find a candidate it likes, who can clearly do the task at hand, that candidate is in a stronger bargaining position and stands to earn more money. That’s why companies in the study ended up hiring employees from lower previous wage levels. The companies weren’t necessarily offering more, so much as they were open to considering candidates who had previously been paid less.

Critics might counter with their own economist-speak: “Ha! If companies have to work harder to gather information about salary history, that makes recruiting employees more expensive. Therefore they will do less hiring.” That is theoretically true, but Moshe and Stern say their study didn’t find evidence of that response in practice.

Not So Fast

This experiment does have two big caveats.

First, the workers participating in the online market didn’t know that the employers couldn’t see their salary history. In the real world, when states enact salary history bans, workers do know that fact — and they may change their job hunting strategies because of it. Moshe and Stern speculate that low-paid employees may seek higher wages more energetically, while high-paid employees might temper their demands a bit.

Second, this experiment involved project-based labor where both sides could bargain aggressively over wages paid. That’s quite different from office jobs that offer fixed salaries set by some stingy CFO and an HR director who visits Salary.com. Would we still see the same dynamics Moshe and Stern found in their experiment? We don’t know.

And Whither Compliance?

Multiple jurisdictions already ban questions about salary history: Massachusetts, California, Delaware, and Puerto Rico; plus the cities of Philadelphia, San Francisco, and New York. More are likely to come, especially in Democratic-leaning parts of the country where policies in favor of workers and better pay are politically popular.

The theory behind such policies is that they will close the pay gap between men and women, whites and minorities. That may be so. I also suspect that over time these policies could help to curb age discrimination, since businesses won’t have as easy a path to label older candidates overqualified. (That last part could become quite popular as our society continues to age.)

The policy management challenges to this could get tricky. A company would need to decide whether it wants one universal policy about salary history, or a flexible approach depending on state law where your local offices are. You’d also need to train managers that they can’t ask about history. And, of course, the company would need to course-correct its other approaches to hiring, although that’s more an HR department headache than yours.

Still, this study provides some interesting early commentary on salary history laws. I suspect we’ll see more of them soon.