The “Leaky Bucket” Once Again; or, Reading Emiliano Huet-Vaughn on the Unexpected Benefit of Telling People What Their Coworkers Make: Wednesday Focus: April 9, 1944

In general, economists believe that more information is good. Information does not cost anything to disseminate: it wants to be free. Information may be useful. And, if you have sufficient strength of will, you can always throw information away if it is not useful. Therefore there is a very strong presumption that you need some very special reason to justify keeping information close.

By contrast, the conventional wisdom among American corporate human relations is that as far as information about relative pay levels is concerned the best strategy is to treat your workers like mushrooms: keep them in the dark and feed them bullshit. This is thought to greatly increase the bosses’ bargaining power, and the profit gains from increased targeting power outweigh the bosses’ share of efficiency losses from information that is not distributed. Rather than opening sneaky bucket redistributing wealth downward, this is a leaky anti-redistributional bucket, moving less wealth upward then it takes out of the lower pool.

Now comes Emiliano Huet-Vaughn to say that it looks like the anti-redistributional bucket is even leakier. In the new behavioral economics world in which you are no longer looked at weirdly by other economists–as if perhaps you should have been a sociologist–if you include things other than personal consumption of goods and services as arguments in the utility function, it looks as though the fact that people are engaged by and respond to friendly contests may have powerful implications. This is, I think, key to what we are doing here: The Okun-Samuelson “leaky bucket” we-must-trade-off-efficiency-and-equity-along-some-social-possibility-frontier-given-our-political-preferences-for-social-welfare was a way that the economist could preserve his her bipartisan credibility in the mid-20th century. To say that the market was most productive and “efficient” would please the American right. To say that the government could produce a more equitable distribution via policy would please the left. And the economist was the neutral technocratic arbiter, just giving the facts.

But it was always convenient rather than true. The evidence for it was rather thin. And the failure of the great American experiment in raising income inequality that we began under Reagan to deliver even faster-growing real GDP, let alone faster-growing economic welfare, should sober anyone still attached to the “leaky bucket”.

Emiliano Huet-Vaughn: The Unexpected Benefit of Telling People What Their Coworkers Make: “Each year, Equal Pay Day comes and goes on April 8 amid rising income inequality, low social mobility, and pay disparities…

I divided people into two groups. One group was given information about the earnings of others performing similar work at the same piece rate as them, and the other group was kept in the dark about their peers’ earnings…. People in the group shown their relative earnings position were more productive than those that weren’t given that information… 10 percent after they learned their relative positions. Why did pay disclosure increase productivity?… [It] may be that people care about their position relative to their coworkers… where they stand in their peer groups… an internalized sense of status…. These gains were made simply by giving workers information….

Chang-Tai Hsieh et al, (2014) estimated] that opening up professions to women and Americans of color accounted for between 15 to 20 percent of economic growth (in terms of aggregate output per worker) between 1960 and 2008.

Of course, my research is far from the final word…. Very good work by other economists has found results both consistent with and contrary to the finding of a positive productivity effect due to disclosure of relative standing information. Moreover, in my setting… relative earnings information… [was] also information about relative performance….

People are responsive to information about relative standing… policies intended to reduce inequities may also increase efficiency… policies [that] can promote both equity and growth.