In recent years, pay transparency has gradually shifted from a voluntary corporate practice to a global policy trend—many U.S. states have successively introduced pay transparency laws, and the EU has also adopted the Pay Transparency Directive. While these policies aim to narrow the wage gap, a key question remains: Will they affect workers’ career choices, especially whether high-wage groups are more inclined to leave traditional jobs to start their own businesses?

A recent study published in the Journal of Banking and Finance by Prof. Walid Saffar(co-authored with Longfei Shang), from the School of Accounting and Finance (AF) at The Hong Kong Polytechnic University (PolyU), titled " Pay Transparency and Entrepreneurship", provides a clear answer.

By analyzing U.S. state-level policy data, the study reveals the differential impact of pay transparency on the entrepreneurial choices of workers with different income levels.The research is based on the classic "occupational choice theory"—an individual’s choice between "entrepreneurship" and "wage employment" depends on the "relative return" of the two options. If the value of wage employment is lower than that of entrepreneurship, people tend to choose entrepreneurship; otherwise, they stay in traditional jobs.

To accurately identify the causal relationship between pay transparency and entrepreneurship, the study leverages the staggered adoption of U.S. state-level pay transparency laws (different states enacted such laws between 1982 and 2013) and uses a difference-in-differences (DID) design to rule out interference from economic cycles, industry trends, and other factors. The data comes from the U.S. Current Population Survey (CPS), covering more than 1.7 million individual labor records from 1976 to 2015. Entrepreneurship is defined by "self-employment," and wage changes are also tracked to verify the underlying mechanism.The study confirms following core conclusions through rigorous empirical analysis.

High-wage workers: Entrepreneurial probability rises significantly

After the implementation of pay transparency laws, the probability of high-wage workers becoming entrepreneurs increases by an average of 0.31 percentage points—a 25.83% increase compared to the average before the laws were enacted.

Why? Employers, unable to afford universal salary increases, choose to cut high-wage workers’ salaries to balance overall compensation costs. Specifically, high-wage workers’ hourly wages decrease by approximately $5.22 (a 19.45% drop relative to the pre-law average of $26.84). Additionally, other companies in the same state may follow suit, making it difficult for high-wage workers to find new high-paying jobs. This reduces the value of wage employment, making entrepreneurship a more attractive option.

Low-wage workers

In contrast, low-wage workers’ probability of starting a business decreases by an average of 0.13 percentage points—a 14.13% decline relative to the average.

Why? Pay transparency allows low-wage workers to clearly understand their colleagues’ salaries, giving them a basis to negotiate raises with employers. As the value of wage employment increases, staying in stable traditional jobs becomes more appealing than taking the risk of entrepreneurship.

Overall trend: High-wage workers drive entrepreneurial growth

On average, pay transparency laws increase overall entrepreneurial activity—but this effect is entirely driven by high-wage workers. The study also confirms through "dynamic effect tests" that there is no pre-law upward trend in entrepreneurship, ruling out the reverse causality of "rising entrepreneurship promoting law enactment."

The findings of this study offer clear insights for enterprises, policymakers, and employees:

For enterprises: With high-wage workers more likely to leave for entrepreneurship, companies need to adjust their compensation strategies—such as designing clear salary structures or providing long-term incentives (e.g., equity)—to retain core high-talent employees.

For policymakers: Pay transparency laws need to balance "wage fairness" and "entrepreneurial vitality."

For employees: High-wage earners can use pay transparency information to weigh the trade-off between "stable income" and "entrepreneurial returns"; low-wage earners can leverage the policy to negotiate fairer salaries and make career choices that match their risk tolerance.

Keywords: Pay transparency, Entrepreneurship, Pay transparency laws, Compensation

Research Paper:
Saffar, W., & Shang, L. (2024). Pay Transparency and Entrepreneurship. Journal of Banking and Finance,162,107128

👉 Read the full article here: https://www.sciencedirect.com/science/article/pii/S0378426624000487