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Does Pay Inequality Affect Worker Effort? Experimental Evidence

Gary Charness
University of California, Santa Barbara - Department of Economics

Peter Kuhn
University of California, Santa Barbara - Department of Economics; Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)

December 15, 2006

Abstract:
We study worker behavior in an efficiency-wage environment where co-workers' wages can influence a worker's effort. Theoretically, we show that an increase in workers' responsiveness to co-workers' wages should lead profit-maximizing firms to compress wages. Our laboratory experiments, on the other hand, show that - while workers' effort choices are highly sensitive to their own wages - effort is not affected by co-workers' wages. This casts doubt on the notion that workers' concerns with equity might explain pay policies such as wage compression, or wage secrecy.

Keywords: Wage compression, wage secrecy, wage inequality, experiment, gift exchange

JEL Classifications: A13, B49, C91, J31, J41

Working Paper Series

Date posted: March 02, 2004 ; Last revised: January 05, 2007

Suggested Citation

Charness, Gary and Kuhn, Peter J., Does Pay Inequality Affect Worker Effort? Experimental Evidence (December 15, 2006). Available at SSRN: http://ssrn.com/abstract=511502

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Contact Information

Gary Charness (Contact Author) University of California, Santa Barbara - Department of Economics ( email ) 2127 North Hall Santa Barbara, CA 93106 United States 805-893-2412 (Phone) 805-893-8830 (Fax)
Peter J. Kuhn University of California, Santa Barbara - Department of Economics ( email ) North Hall 3036 Santa Barbara, CA 93106 United States (805) 893-3666 (Phone) (805) 893-8830 (Fax)
Institute for the Study of Labor (IZA) P.O. Box 7240 D-53072 Bonn Germany
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States