By Noah Smith
Suppose you’re on a trip overseas and you need to buy a shirt, but you don’t know any of the brands. You see two shirts in a store that both look pretty good, but one costs twice as much as the other. You might assume that the more expensive shirt somehow is superior — that it’s better made or that the locals will see it as more stylish. You might decide it’s worth the price and spend the extra money.
This isn't how economics is supposed to work. Econ 101 teaches us that demand curves slope down; when something is more expensive, buyers are supposed to want less of it, not more. But when it’s hard to find
This also can happen in the labor market. It’s hard to know exactly how much an employee deserves to be paid before they’ve been hired. Even if they have sterling credentials, they might not end up being very productive once on staff. Instead of rigorously evaluating each employee or taking a gamble, many employers do the lazy thing and use a worker’s salary history to determine how much to offer them. Economists Robert Hall and Alan Krueger
That just confirms what most job searchers already know: the more they’ve been paid in the past, the more they can demand in the future. This lazy method of inferring quality from price may seem to make sense for an individual company, but it can create a disconnect between pay and productivity because one undeserved increase or decrease in salary can get frozen in for a worker’s entire career. This is especially pernicious when the unfair salary distortion is the result of discrimination.
Race and gender
Thus, in recent years, some states have begun
Economists are now finding that the bans are working as intended. A
The efficacy of salary history prohibitions suggests that a good deal of the lower wages Black Americans receive compared with their white counterparts isn't because of current racial discrimination, but to the entrenched legacy of past discrimination, or what some call structural racism.
Salary history bans represent one way that policy makers can strike a blow against structural racism and sexism, while also forcing employers to make smarter calculations of how much workers are worth, thus increasing both social equality and economic efficiency. Inferring quality from price is always risky, whether it’s in stocks, houses or dress shirts; but in the case of labor markets, it perpetuates unfairness as well. Every state should adopt such a ban.