Effectiveness of the German pay transparency law and the gender pay gap

Abstract

Germany, like many other countries, implemented a new pay transparency law to reduce the gender pay gap in 2017. The German Pay Transparency Law (ETG) targets mainly employers to reveal their wage structure, and employees are entitled to claim fair wages. This paper investigates the effectiveness of this policy via comprehensive data that link detailed information from all full-time employees in a representative sample of German establishments. Using a difference-in-discontinuity (diff-in-disc) at the two relevant establishment thresholds (approximately 200 employees and approximately 500 employees) of the law, we study changes in the gender pay gap and employment as well as its interaction with existing employee organizations to reduce unequal pay. The short-term results show that the ETG was only effective in reducing the raw gender wage gap in the presence of works councils and collective bargaining agreements for medium-sized firms (between 200 and 499 employees). In the absence of these institutions, establishments without works councils and collective bargaining agreements increased their unexplained gender wage gap after the introduction of the ETG. These results emphasize the importance of the presence of works councils and collective bargaining agreements in advancing equal pay policies. JEL classification: D22, J16, J21, J31, J71