Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior

56 Pages Posted: 4 Sep 2015

See all articles by Arindrajit Dube

Arindrajit Dube

University of California, Berkeley - Institute for Research on Labor and Employment

Laura M. Giuliano

University of Miami - School of Business Administration - Department of Economics

Jonathan S. Leonard

University of California, Berkeley - Finance Group; National Bureau of Economic Research (NBER)

Abstract

We analyze how quits responded to arbitrary differences in own and peer wages using an unusual feature of a pay raise at a large U.S. retailer. The firm's use of discrete pay steps created discontinuities in raises, where workers earning within 1 cent of each other received new wages that differed by 10 cents. First, we estimate a regression discontinuity (RD) model based on own wages; we find large causal effects of wages on quits, with quit elasticities less than -10. Next, we address whether the overall quit response reflects the impact of comparisons to market wages or to the wages of in-store peers. Here we use a multi-dimensional RD design that includes both a sharp RD in the own wage and a fuzzy RD in the average peer wage.We find that the large quit response mostly reflects relative-pay concerns and not market comparisons. After accounting for peer effects, quits do not appear to be very sensitive to wages – consistent with the presence of significant search frictions. Finally, we find that the relative-pay effect is nonlinear and driven mainly by workers who are paid less than their peers – suggesting concerns about fairness or disadvantageous inequity.

Keywords: turnover, search frictions, fairness, quits, peer effects, regression discontinuity

JEL Classification: J00, J31, J42, J63

Suggested Citation

Dube, Arindrajit and Giuliano, Laura M. and Leonard, Jonathan S., Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior. IZA Discussion Paper No. 9149. Available at SSRN: https://ssrn.com/abstract=2655098

Arindrajit Dube (Contact Author)

University of California, Berkeley - Institute for Research on Labor and Employment ( email )

2521 Channing Way #5555
Berkeley, CA 94720
United States
510-642-9951 (Phone)

HOME PAGE: http://www.irle.berkeley.edu/cwed/dube.html

Laura M. Giuliano

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States
305-284-1628 (Phone)

Jonathan S. Leonard

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-642-7048 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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