Am I underpaid? Too often, younger workers don’t know

Sarah Green Carmichael, Tribune News Service

One goal of New York City’s new salary transparency law is to close the persistent pay gap between men and women. By requiring companies that are hiring to post salary ranges with job descriptions, the theory goes, applicants will have more information on what a certain job is worth and more leeway to negotiate for the best offer. This, in turn, may finally boost the salaries of women and people of colour to be more in line with those of white men.

I hope the law does help close these pay gaps. I also hope it helps another group of people: younger workers.

As it stands, too many young people are fumbling around in the dark when it comes to making informed decisions about what to study in school and which jobs to pursue upon graduation. If many of them are clueless, it’s only because clues are so hard to find.

Online databases like Fairygodboss and Glassdoor have tried to fill the data void by collecting crowdsourced data on salaries, but this approach has limitations; it isn’t always clear where these jobs are based, how many years of experience they require or what sorts of responsibilities they include. The same job title can mean wildly different things at different organisations. And it’s tough to know how trustworthy self-disclosed numbers are.

The result of the information vacuum is that few of us have any idea whether we’re paid fairly — even if we have years of experience in the workforce. While this most obviously applies to those who are underpaid, the overpaid can also be misled in a different way.

In a 2021 Payscale survey, half of workers who were paid at or above average wrongly believed they were underpaid. In a 2015 study, only 21% of overpaid workers realised they were paid above market rates. Such employees needlessly suffer more from low morale than those who have an accurate understanding about how well they’re compensated.

Being highly educated doesn’t protect one from grossly miscalculating what other people make. When a Wharton professor, Nina Strohminger, asked her class of future business titans to estimate the average American salary, a quarter of them thought it was over six figures, and one thought it was $800,000 a year. The real figure? $45,000.

Such compensation delusions are widespread, on both ends of the income scale. An influential study by Sorapop Kiatpongsan and Michael Norton showed most people have no idea how much CEOs earn. Survey respondents guessed CEOs earned about 30 times as much as an average worker. In fact, CEOs earn vastly more — 350 times as much.

Clearly, we don’t know how the other quintile lives. But it should be obvious by now that we don’t really know how much people in our own socioeconomic bracket earn, either.

New York City’s new law aims to fix this by requiring the salary range to be included in the job description. This makes it different from other US laws with similar goals. Other localities require salary ranges to be disclosed to, for example, current employees upon request or to applicants who have gotten past the first-round interview. That keeps the information out of the public eye. New York’s law throws the door open to anyone curious about a particular career path.

While salary befuddlement knows no age, it is particularly costly for workers who are just starting out. The first 10 years of one’s career are crucial for wage growth. It can take a decade to recover from the bad luck of graduating into a recession.

While older workers have bigger, broader networks — and thus might be able to research salary options by asking around — younger workers without those contacts are more likely to be operating in the dark. That’s especially true of those who are the first in their families to go to college, or whose parents aren’t great networkers themselves, or in families where talking about money is taboo.

Personal finance gurus blithely advise young grads to “do your research” before making any major decisions, ignoring how difficult this data is to find. Business majors may be surprised to learn how little they can command, with an average base salary of just $47,850, according to Glassdoor data. That puts them squarely between students of fashion design and international relations, and not that far ahead of those famously low-paid degree-holders, philosophy majors.

And how is one supposed to know if graduate school is a worthy investment without having a clear idea of what the return might be? It is not surprising to learn that film school doesn’t pay off. But there are lots of jobs that require or strongly encourage postgraduate degrees — teacher, museum curator, therapist, librarian and speech pathologist, to name a few — that don’t pay a whole lot in salary. Even lawyers and doctors can struggle to pay off their grad school debt.

By providing more granular data — the kind that comes from job postings, not entry-level base salary averages — New York’s new law could also encourage young people to follow their passions, by reassuring them that some jobs are not as low-paid as they’ve been led to believe. For example, many aspiring writers were pleasantly surprised to learn last week that a travel writer can earn six figures when one spontaneously disclosed her salary.

Clearing up compensation confusion could have broader implications for the economy as a whole. If a free market is to operate, well, freely, then workers need a certain amount of information.

In a recent NBER paper, low-paid workers tended to assume they wouldn’t earn much more by switching jobs. But administrative data on workers who did change jobs showed these beliefs were mistaken. “If workers had correct beliefs,” they estimate, between 10% and 17% of low-wage jobs “would not be viable.” Low-paying employers relied on these workers staying uninformed.

When employers start sharing salary ranges on their job postings, it does a lot more than tell potential hires what a job is worth. It gives those starting out in their careers more information about the trajectory they might expect. And it has the potential to shine more daylight into the dark corners of the economy.