No. 193: Wage Transparency in Labor Markets under Relative Income Concerns

We model an oligopsonistic labor market where firms with heterogeneous productivities hire workers whose preferences exhibit relative income concerns. We then analyze an increase in wage transparency that expands workers‘ reference groups. We find that larger reference groups induce less aggressive competition for workers, lowering average wages and increasing wage compression. This shifts employment away from high-productivity firms, reducing aggregate output and, when labor market frictions are low, total welfare. Our findings highlight a novel mechanism through which increased wage transparency may negatively impact labor market outcomes, by affecting wage competition between firms.