My lip balm is eating my lips!

The other day I hurried home from work, pulled open my bathroom cupboard and with a crazed look in my eye, scanned through the list of ingredients of my various lip balms and moisturisers for salicylic acid.   For according to Martin Lindstrom, author of “Brandwashed”, the US leading brand of lip balm, Carmex, contains this ingredient, which “eats away at living tissue”. What is THAT doing in a lip balm? Well, apparently, along with foods high in MSG, sugar and fat, Mr Lindstrom is suggesting that some products are deliberately manufactured to make them a little bit addictive.

I expect you are desperate to know how my bathroom toiletries performed. Annoyingly, the labels had come off some of them, but I couldn’t see  salicylic acid on any of the ones I checked. Phew. But then, a friendly scientist informed me that I also needed to look for benzyl salicylate and that a dead give-away was a tingly feeling on the skin. No, surely not! My special overnight care lip balm! But then I have until now been very happy with both the overnight lip care balm. So is this chemical good for me? Is it only good in the short-term? Do I wake up with lovely smooth lips in the morning at the moment, but will one day, suddenly wake up with my lips falling off after a lip balm overdose? How has the life of a consumer come to this: that I require the services of friendly scientists to make the right purchasing decision?

And I don’t know if you have noticed, but it is ridiculously difficult to get lists of ingredients online, so if you’re an online shopper, it’s pot luck, even if you are a scientist.

So for me, this was one of the more surprising revelations in the book. Others included the potential for advertising to babies in the womb and the fact that royal families across different countries get together to discuss strategy (do they use Powerpoint, I wonder?). If you’re fairly familiar with behavioural economics or psychology, there are many things here that won’t shock you: like the potent influence that one person’s shopping choices can have on another, or the effect on consumers of making a product seem aspirational or scarce. And if you’ve read the papers lately, you won’t be that surprised by how supermarkets, credit card companies and social networking sites like Facebook are using people’s data to better target their advertising.

But reading the stuff I didn’t know already has made me slightly paranoid. As a type these words, I’m licking my lips, unsure whether they are actually tingling or I’m just imagining it. Some of Mr Lindstrom’s stories, like advertising to unborn children seem entirely fantastic. Yet Martin Lindstrom is a marketing expert, so you’d think he would know what he’s talking about. But then again, as he himself says in the book, fear sells.

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Benevolent dictators versus leaders with personality

Do benevolent dictators exist? And do democratically elected leaders always deliver better outcomes for their peoples? Authoritarian North Korea has unequivocally not delivered economic benefits for its citizens in the way that more democratic neighbours have. But recently, China’s mix of authoritarianism with a pinch of capitalism seems to at least be delivering growth, although whether its people are truly benefiting from it is another question. Democracy can certainly be a messy business, and can be slow too – witness the US’s difficulties in agreeing its budget in 2011: a process that almost resulted in Government being “shut down”.

The Limited Power of Voting to Limit Power, by researchers Hong Geng, Arne Robert Weiss and Irenaeuss Wolff describes the results of some experiments designed to examine how the way leaders behave when they are in power is affected by how they got there. First of all, some caveats: these are stylised experiments, with small groups of people, that ignore the possibility of re-election. In addition, some of the effects the researchers found are small relative to the sample sizes: but the fact that the same effects were seen across experiments with both Chinese and German participants suggests some interesting patterns:

1) Leaders who didn’t have to go through an election process (i.e. were dictators) were no more selfish that those who were elected.

2) Candidates who competed on personalities rather than election pledges were more selfish when they got into power, and less likely to “govern” in the interests of the voters.

The latter result is particularly interesting, especially given the concern that politics has become more personality-based, with politicians expected to show their human side: smiley politicians have an advantage over more dour rivals. The authors of this paper suggest that being elected on the basis of personality could induce a feeling of self-entitlement in the new leader, that isn’t present when someone has been elected solely because of their election pledges and promises. 

By contrast, the first result, on the possible existence of benevolent dictators, seems less likely to be a general result. In the real-world, it seems likely that dictators also have a sense of self-entitlement, either because they were brought up to the job within a political dynasty, or because they have accomplished some feat to wrest power by other means. These effects are hard to replicate in a stylised experiment.

But is there anything we can do to move away from personality-based politics? In a world where it takes time and effort to compare manifestos, personalities can seem, and probably are, a short-cut to making a decision about who to vote for. And differences in policies and their effects are difficult to get a handle on, and not helped by the way they are presented by different politicians. Is it even reasonable to expect voters not to be interested in politicians’ lives and personalities?

The full paper is here.

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Why are the French miserable?

A pro-Sarkozy sticker, after being defaced, in...

According to a recent slew of books, French children don’t throw food. And French women don’t get fat. I have noticed that they often have nice scarves. So chic.

But does that make them happy? No. According to happiness surveys, self-declared happiness is lower in France, Portugal and Germany than other European countries. But France and Germany in particular score reasonably well on GDP per capita measures and the UN’s human development index (which takes into account education and health, as well as income). So why so sad? Economist Claudia Senik set out to investigate this in a recent paper, The French Unhappiness Puzzle: The Cultural Dimension of Happiness.

Claudia Senik’s theory is that the differences in happiness across countries are to do with culture. She tests this theory by comparing the happiness of “natives” against immigrants – the premise being that if different cultural backgrounds are important, this would show up as differences in happiness between natives and immigrants in a particular country. And it does indeed turn out that first generation immigrants in France are happier than French-born inhabitants – and are close to the European happiness average. This is significant, because previous studies have suggested that immigrants are usually less happy than natives. Second generation immigrants are not so happy though – as might be expected if a French cultural upbringing is to blame, their happiness levels tend to be more similar to that of French natives .

Is it a language issue? It could be that people in different countries simply interpret the survey questions in different ways. But Claudia Senik finds no evidence for this in the data for Belgium and Switzerland, where different languages are spoken in different regions.

The paper argues that: “‘happiness policies’ should take into account the irreducible influence of psychological and cultural factors. As those are -at least partly- acquired in school and other early socialization instances, this points to some new aspects of public policy such as considering the qualitative aspects of the education system.”

So, living in France reduces self-declared happiness by 0.23 happiness points. But British people, contain the impulse to crow. We don’t exactly come out all that happy on these surveys either.

The full paper is here

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Executive pay: we need to think beyond £s

Looking Up To The Canary Wharf Main Buildings

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The main political parties have achieved near-consensus that something needs to be done about executive pay. There is an argument that Government has no role in this area, and that private firms, with all their incentives to seek greater profits are the ones best-placed to design pay schemes that work. Except, that apparently, they’re not very good at doing just that. There is a growing body of research that shows that the link between pay and performance is simply not clear-cut. Studies by psychologists such as Dan Ariely have in fact shown that paying people to do things often makes a task less enjoyable and makes them spend less effort on it.
 
So, we have a problem. If pay and performance aren’t so closely linked after all, then many firms simply aren’t properly incentivising the best people for the job to do the best job they can. It means that firms are likely to have higher costs, which feed into higher consumer prices, for no extra benefit. We aren’t putting resources to their best possible use, because we aren’t getting the performance we are paying for.

Much of the political debate has stemmed from a feeling that pay is too high, ignoring the more fundamental issue of whether firms are properly incentivising employees and executives to perform. The different parties have therefore set out solutions on how to restrain pay. David Cameron has suggested increased transparency and giving shareholders binding, rather than advisory, votes on remuneration packages. Meanwhile, Vince Cable as well as Labour leaders have expressed some support for having employees on remuneration committees. But both of these options have flaws.
 
Taking an informed view as to whether an executive pay package is appropriate takes effort and analysis. What are other companies doing? What is the risk of losing an employee to a competitor company? What is the right balance between a fixed salary and a performance based element? How should performance be measured? Crucially, are there other ways of compensating employees that might work better? Those with only small shareholdings in a company don’t have a strong incentive to properly monitor pay structures, or answer these questions. Those with large shareholdings and strong vested interests already do have an incentive, and arguably already have sufficient clout to be able to place pressure on companies to change pay schemes, should they wish to do so. So it isn’t clear that changing shareholder rights is going to make a big difference.
 
On the other end of the spectrum, employees within a company are certainly likely to have better information about how the company operates, and better understand what drives performance in their organisation. But do they know what alternatives are available? Do they know what works well in other companies? And can they be relied on, in the interests of fairness, to vote against better pay packages which they themselves might benefit from one day? 

Ultimately, we need to focus on better understanding what works. We need to understand what incentivises people to perform and what doesn’t. For employees generally, autonomy, the freedom to be creative, and ensuring people have a sense of purpose have all been shown to be important in driving motivation, as discussed in Dan Pink’s book Drive. Chuka Umunna was right to note in his recent speech that pay alone does not drive incentives. From this we need to learn that measures like increasing pay transparency, and trying to encourage better shareholder engagement in voting on pay packages is just tinkering with the edges of the problem at best. At worst, it can be counter-productive: regulatory measures in the US in the 1990s to increase transparency in executive pay arguably increased the ratchet effect, whereby benchmarking of executive salaries led companies to continually attempt to pay above average to be sure that they were getting the best talent.
 
We need to fully realise that motivation isn’t just about money. We need to better understand what practices work, and what don’t – for employees earning the lowest wages to the executives at the top. The public sector could take the lead in this area: undertaking research and restructuring public sector workplaces to better increase motivation without necessarily raising overall pay.

In the current climate, surely it’s worth doing even if just for the potential to reduce long-term costs. The executive pay “problem” isn’t going to be solved until we know what works.

This article was also published on Left Central

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Bigoted? No, just overconfident and bad at statistics

There are different shades of discrimination. There is active dislike of a particular group of people, and then there is the tendency to make generalisations about individuals based on the (perceived) characteristics of the group you associate them with e.g. of the “you’re a woman and therefore probably a bad driver” type. Both, of course can be damaging and impede different individuals’ ability to achieve their full potential in society. The former is especially frowned upon and is pretty much socially unacceptable. In principle, the latter is becoming so too – but can we stop ourselves making generalisations that influence our decision-making?
 

Examples of figures from mental rotation tests.

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A recent study by behavioural economics academics Konstanze Albrecht, Emma von Essen, Juliane Parys and Nora Szech suggests an interesting division between the behaviour of men and women assessing the likely performance of individuals in tasks that men are traditionally good at – in this particular study, mental rotation tasks. They find that women tend to be over-influenced by the average performance of a group of people rather than the specific attributes of an individual. So, for example, women assessing other women for a role that men tend to perform better at focus too much on the average performance of most women, rather than the actual performance of the woman they are assessing. But this effect is not specifically about gender discrimination in favour of men. The study shows that even in an entirely neutral context, where you have two groups of people, divided on some other arbitrary lines, women will tend to be over-influenced by average performance when assessing an individual: even if it is entirely clear how good the individual is, so that any information about the group they belong to is entirely irrelevant.
 
For men, the tendency to take into account irrelevant information about group performance is there, although it is stronger when groups are divided along gender lines. Interestingly, the most self-confident men tend to overvalue male performers specifically – perhaps because they tend to project their own self-confidence onto other men.
 
Conclusion: If you’re a woman applying for a job in a male dominated sector, you want to be interviewed by a man with low confidence.

The paper, Updating, Self-Confidence and Discrimination is here.

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An economist’s guide to keeping your New Year resolutions

Got some New Year resolutions? Wondering how you’re going to keep them? Think you could benefit from some behavioural economics and psychology tips (who doesn’t?!).

1) Make your resolution public. If you care about what people think of you, you probably won’t want them to see you fail. So, tell your friends and family what you’re aiming to do. See psychology expert Robert Cialdini’s work on public commitments for more details, or take a look at his book, “Influence” for a summary. 

Gym2) Make it costly to fail. If it will cost you money to fail, you may be persuaded to try harder. But beware: paying up-front for, say, a gym membership might not work as well as you think. Economists Stefano DellaVigna and Ulrike Malmendier looked at gym members at US health clubs and found that people overestimated how much they would use the gym, and were therefore paying for expensive gym contracts that they weren’t using. Instead, try making a commitment to paying out a certain amount contingent on not achieving your chosen goal. For example, make a bet with a friend that you’ll achieve your goal (unless your resolution is to gamble less in 2012). Or commit to giving a certain amount of money to charity if you fail on your goal.  Websites like StickK allow you to make these types of commitments.

3) Remember it gets easier once you get into the habit. Behavioural economics experts like Daniel Kahneman, Richard Thaler and Cass Sunstein all use “System 1” or the “automatic system” to describe the type of human thought that happens automatically or instinctively – for example, quickly withdrawing your hand from a hot surface. If you can manage to get into a routine, gradually your preferred behaviour will turn into a habit – it starts to become a bit more like a System 1 process. For example: the habit of getting off one station early and walking home from work. After a while of concerted effort, you’ll (hopefully) find yourself doing it without thinking much about it.

Good luck!

Got any other tips? Post them below.

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Fairytale economics

 Are you sitting comfortably? It’s time for a Five Minute Economist Christmas special: in an unusual fit of whimsy not unconnected to the festive season, economists discuss their take on a selection of fairytales. Enjoy, and see you in the New Year, for Five Minute Economist’s guide to keeping New Year resolutions.

"Fee-fi-fo-fum, I smell the blood of an E...

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Jack and the beanstalk
Jack is sent off to market to sell a cow. On the way, he meets a man who convinces him to swap the cow for magic beans. Jack’s mum is unimpressed and throws the beans out of the window. Overnight, a beanstalk grows in the garden. Jack climbs the beanstalk, meets a giant. Fee fi fo fum etc. Jack steals gold and various other items of value from the giant, and cuts the beanstalk to stop the giant climbing down after him.

Mr In Fo: A big problem here is information asymmetry between Jack and the man who sells him the beans. Jack has no idea whether the beans are magic or not, and naively does not even consider that the seller has an incentive to exaggerate the magic quality of the beans. Luckily for Naive Jack in this instance the seller is on the wrong end of the asymmetry, not realising how valuable the magic beans really are.

Ms Yoosta Bea Banker: You haven’t thought about the ex-ante risk. I suggest that the seller knew all about the power of the magic beans, but when taking into account the high cost and risk of failure, decided they were only worth as much as the cow. God knows what Jack was thinking at the time. This is risk-seeking behaviour, of the like I’ve never seen since the Lehmans Brothers 2006 Christmas party.

Dr Roolo Flaw: This story does not have a fairytale ending. What I see here is the complete disregard for the enforcement of property rights. Where is the incentive for giants to engage in productive behaviour if idiot bean swappers are allowed to come along and steal hard-earned profits? “Jack and the Beanstalk” is anti-capitalist propaganda, and it’s shocking that we’ve been feeding our kids this nonsense for so long.

Cinderella - Prince Charming & Cinderella

Cinderella
Poor Cinderella lives with ugly stepsisters and an evil stepmother. Her fairy godmother takes pity on her and says Cinderella will go to the Ball. The fairy godmother ingeniously makes a carriage out of a pumpkin, and turns Cinderella’s rags into a beautiful gown and glass slippers. The catch is that Cinderella must get back before midnight, when the magic wears off. Cinderella meets the prince, but has to rush off, leaving her slipper behind. The prince uses the glass slipper to find his Cinderella among all the ladies of the land. 

Mr Ogre Nised: Cinderella has a classic overconfidence problem, thinking that she had enough time to speak to the Prince, get a proposal in the bag, and leave before midnight.  Luckily for her all turned out well, although after much costly fuss which could have been avoided if she had planned enough time to have a proper conversation with the Prince about who she was. But then studies have shown that we’re all over-confident, apart from people who are clinically depressed. So that’s something for Cinderella to be pleased about.

English: "The Miller's Daughter". He...

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Rumpelstiltskin
A miller tries to impress the King by telling him his daughter can spin straw into gold. King shuts miller’s daughter in room and demands she spins straw into gold. Rumpelstiltskin appears and offers to help in return for the girl’s first-born child. King is happy and marries girl. The new queen gets out of her promise to Rumpelstiltskin by guessing his name.

Ms D’Emmo Crassey: What is so surprising about this case study is that the media and public have never been particularly interested in the amoral behaviour of the father. This type of lobbying behaviour has clear parallels to our current problems, when we have powerful companies promising Governments all sorts of things in return for special treatment. The King was right to try to test out this lobbyist’s claims: too many politicians today accept all sorts of unevidenced assertions from companies at face-value.  

Mr Sent Ralbank: That is slightly surprising. But not as surprising as the fact that, having discovered a technology for turning straw into gold, the King did nothing about it. I would have expected him to attempt to drastically raise gold production. Of course, in a country where gold was the basis of currency, this would have simply increased the money supply and inflation without actually increasing economic growth. But it would have been a way for an unscrupulous King to pay his debts. This King shows remarkable self-restraint and infinite wisdom for this period in history. It’s possible he may have been an early economist.

Want more economics posts with a Chrsitmassy feel? Check out Five Minute Economist’s Guide to a utility maximising Christmas

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Does money makes things worse?

Plastic Bags Blow!

Image by katerha via Flickr

Want to encourage people to do something? Give them a monetary incentive: pay them to do it, or fine them if they don’t. This is the traditional economic answer. But over the years, various studies have shown that it isn’t so simple.

A recent paper by Samuel Bowles and Sandra Polania-Reyes at the University of Siena is a great attempt to bring together the results of different studies in the area and try to draw out some implications for Government policy. In doing so, they summarise some particularly interesting examples:

Haifa day centres: Imposing fines on parents who arrived late to pick up their children from day centres in Haifa, Israel, entirely backfired. The number of late pickups doubled after the fines were introduced.

Irish bag tax: A small tax on plastic bags had the desired effect, resulting in a 94% drop in plastic bag use in two weeks.

Swiss voting: When authorities removed fines for people who didn’t vote, voting turnout fell, as you might expect. However, monetary incentives might not be the only thing at play here, because reducing the cost of voting by allowing postal votes had no effect  on turnout.

The authors of the paper argue that it isn’t so much the fine itself that is important, but what the imposition of a fine says about the different parties involved. They say that: “Fines deployed either to exploit or to control the target (or that give this appearance or that have this effect) are likely to be less effective… and may even be counterproductive. The reason, we think, is that they activate the target’s desire to constitute himself or herself as a dignified and autonomous individual who is treated fairly by others.”

They also recommend that monetary incentives are accompanied by explanations that emphasise how people’s actions will be socially beneficial, so that people are more likely to endorse the purpose of the policy, rather than be offended by it, or think it is unjust. For example, the Irish plastic bag tax was preceded by a publicity campaign, which emphasised the social obligation to use plastic bags wisely. In contrast, no explanation was given to parents for the Haifa day centre fines.

I think the simple message here is that people just like to be treated like grown-ups.

The paper, “Economic incentives and social preferences: substitutes or complements?” is here. The paper also contains references for the Haifa day centre, Irish bag tax and Swiss voting studies summarised above.

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What’s the meaning of happiness?

Satisfaction? Contentment? Excitement? Peace? All of the above?

Earlier this week, the UK’s Office for National Statistics (ONS) published findings from its initial investigation into the UK’s subjective well-being. It tested out various types of questions, asking people about their satisfaction with life, whether they felt that the things they do in their lives are worthwhile, and whether they felt happy on the previous day and whether they felt anxious on the previous day. The answers to these questions were related, but there wasn’t an exact correlation, for example, in general, people tended to be more likely to give higher scores when asked about how worthwhile their lives were rather than how satisfied they were. 

The ONS also showed that you would get different results depending on whether you ask people if they were happy rather than joyful, and even if you asked them if they were calm rather than relaxed or peaceful.

Is there one definition of happiness or do we all experience happiness in different ways? Previous studies have shown that what people think of as happiness varies across culture and age. For example a study by Cassie Mogilner, Assistant Professor of Marketing, suggested that the meaning of happiness steadily shifts over the course of life from excited-happiness when one is young to peaceful-happiness as one gets older.

In a more recent paper, researchers Cassie Mogilner , Jennifer Aaker and Sepandar Kamvar explore the idea that the reason why the meaning of happiness appears to change with age is because young people are more focused on the future – and therefore equate excitement with happiness, whereas older people are more focused on the present – and therefore equate calm with happiness. Now, I don’t know about you, but this doesn’t seem immediately obvious to me.

Does this excite you?

But they do in fact show that getting younger people to focus on the present leads them to equate calm with happiness, and getting older people to focus on the future leads them to equate excitement with happiness. And what people think happiness means influences what they think will make them happy, and therefore can change their buying habits. For example, young people were more likely to choose a “calm” herbal tea (Sweet Dreams, a relaxing blend of chamomile and mint) , when they were primed to focus on the present – rather than the more “exciting” option (Peppermint, a refreshing peppermint blend). I don’t tend to think of any types of herbal tea as “exciting”, but maybe that’s just me.

All these different meanings of well-being and happiness mean that there are lots of questions we need to answer if well-being is to become more useful in helping Governments make better policy. Luckily it’s something advertisers are interested in too. There’s nothing like commercial incentives to advance human knowledge.

The full paper, “How Happiness Impacts Choice” is available here: http://gsbapps.stanford.edu/researchpapers/library/RP2084-1.pdf

The ONS study is here: http://www.ons.gov.uk/ons/dcp171776_244488.pdf

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High Pay Commission’s transparency blind spot

Copy of the Cruikshank drawing from Charles Di...

Could we be going back to this?! Image via Wikipedia

“By 2035 the top 0.1% will take home 14% of the national income. Equivalent to that seen in Victorian England.” So proclaims the final report of the High Pay Commission, which was set up to look at the inequality in pay in the UK and what to do about it. They had to do a bit of extrapolating at both ends to come up with this conclusion, as they only had data from 1913 to 2007, and the Victorian era ended in 1901. But subsequent eras such as the Edwardian era and World War 1 have less of a whiff of the workhouse and Oliver Twist about them, so you can see why the Commission were keen to stretch the data out a bit.

The pedant in me is slightly annoyed by this example of engineering, the lack of clarity on whether they have taken tax into account or not, and the mis-spelling of “Dan Ariely” as “Dan Ariel”. But these are, perhaps, relatively minor quibbles. There is plenty of other data out there which points to the fact that those at the top are seeing their pay grow at a faster rate than those lower down. And anyway, the Commission’s data engineering allowed me to start my blog post with a gratifyingly dramatic quote, so I won’t complain too much.

The report contains some very interesting ideas and possible solutions, including placing employees on remuneration committees, shareholder voting on remuneration arrangements for up to three years ahead, and publicly advertising non-executive positions. But the report provides less credible justification for some measures, which I put down to two reasons. Firstly, it does not contain a thorough enough analysis of why there is a growing gap in pay, what has or hasn’t worked in past, and what this means for what needs to be done, including a proper discussion of different options. For example, there is no discussion of the idea that middle-skill jobs are becoming less important with improvements in technology, and all the ramifications this has for the salary that people lower down in organisations can demand. Secondly, as with so many policy thinkers, there is a tendency to idolise transparency, without considering what type of transparency is needed and why.

This perhaps partly explains how the commission have ended up with the recommendation to “publish the top ten executive pay packages outside the boardroom”. Clearly, there is an apparent contradiction here with one of the report’s explanation for rises in executive pay, the ratchet effect, whereby benchmarking of executive salaries leads companies to continually attempt to pay above average. How do we know that publishing the top ten executive pay packages outside the boardroom won’t lead to the same result, but with a slightly larger group at the top heading off into the stratosphere instead? The report does not provide any reasoning to explain why its other recommendations might outweigh this effect.

What would happen, I wonder, if there was increased transparency all the way down an organisation? At specific skill levels, this might reduce discrepancies in pay, perhaps with some ratcheting up in the short-term for those who were previously under-paid. But the ratcheting could not continue over the long-term, at all skill levels, without seriously affecting the competitiveness of a firm. No doubt, there would be upward pressure on pay in some areas, but these would tend to be areas where there is high demand for certain types of skills, relative to supply. These areas wouldn’t necessarily be at executive board level:  they could be for researchers with specialist knowledge, economists maybe (I think hopefully).

Only being a five minute economist, I don’t have the time to fully research this question. But please do let me know if you have seen any interesting research on the effects of different types of pay transparency measures in firms. 

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