Your Salary Negotiation Is About To Change

Nov 15, 2017
Finance

Maryland Law Seeks to Close Gender Wage Gap

SMITH BRAIN TRUST – How do you close the gender wage gap? Maryland will take one step on New Year's Day 2018, when a law goes into effect that bans companies of 15 or more employees from inquiring about a job candidate’s salary history. Proponents of the law say it works to stem the cycle of wage inequity, making sure that unfairly low pay doesn’t follow women from job to job, exacerbating the wage gap over time.

But this step doesn’t go far enough, says Liu Yang, associate professor of finance at the University of Maryland’s Robert H. Smith School of Business. And it doesn’t get to the heart of wage inequity, she says. 

To close the wage gap, she says, companies need gender diversity at the highest levels of leadership. "This is a step," Yang says. "But it might not be the most efficient way."

Massachusetts became the first state in 2016 to ban questions about salary history. Since then, several cities and states, including Maryland, have followed suit.

The long-standing practice of asking job candidates for their wage history is "a very effective defense mechanism" for any employer accused of paying female employees less than male ones. An employer can simply run a regression of wage and position, factoring in what workers were paid in previous jobs, and showing that those previous salaries were the cause of the inequity.

"Having a previous wage gives the employer an excuse to keep the gender wage gap," Yang says. "That’s the key benefit of this law: It means that employers will no longer have that excuse."

She says the "hopeful thinking" behind the new law is that women who are paid less than their male peers should see that salary gap erased as they move to a new job. "I am not fully convinced that this will achieve the goal," she says. 

Rather than making an offer that represents a certain increase on a job candidate’s current wage, employers will, in many cases, have to use a bit of guesswork. And not wanting to overpay for talent, many will begin those guesses on the low end of the spectrum. 

And that means the new law will effectively broaden the space for negotiation between employer and job candidate.

"That puts women at a disadvantage," Yang says. "We know that women are not as aggressive as men in terms of wage negotiations. A lot of studies have shown this."

Further, behavioral studies have shown that when women ask for money, they are viewed as more greedy and more demanding compared to men asking for the same money. "With this law, we just go from one problem to another," she says.

The law will ban employers from asking about wage history, but won’t ban candidates from volunteering that information. And candidates on the higher end of the pay scale, Yang predicts, will likely do so.

Those who don’t volunteer their wage information will be assumed to be lower than average on the pay scale, she adds, and will draw salary offers on the lower end.

"There are many consequences coming out of this game when you block information on previous wage," Yang says. "And many of them do not put women on equal footing with men."

In her own research, Yang has found effective ways to reduce the gender wage imbalance. For example, companies that have women in the highest leadership positions cut the gender wage gap in half.

"A very promising way to promote gender equity is to break the glass ceiling and put more women in leadership roles," Yang says. "When women take leadership roles, it promotes a more gender equitable culture. It makes people think about the contributions that women bring to the firm and slowly that changes the culture, which leads to more equal pay."

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About the Expert(s)

YangLiu

Liu Yang's primary research interest is in the area of corporate finance including mergers and acquisitions, investments, corporate governance, and labor and finance. Dr. Yang’s work has been published in all three leading academic journals in finance including the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies.

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Robert H. Smith School of Business
Map of Robert H. Smith School of Business
University of Maryland
Robert H. Smith School of Business
Van Munching Hall
College Park MD 20742