Does Pay Inequality Affect Worker Effort? Experimental Evidence

40 Pages Posted: 2 Mar 2004

See all articles by Gary Charness

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Peter Kuhn

University of California, Santa Barbara (UCSB) - Department of Economics; IZA Institute of Labor Economics; National Bureau of Economic Research (NBER)

Date Written: 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 Classification: A13, B49, C91, J31, J41

Suggested Citation

Charness, Gary and Kuhn, Peter J., Does Pay Inequality Affect Worker Effort? Experimental Evidence (December 15, 2006). Available at SSRN: https://ssrn.com/abstract=511502 or http://dx.doi.org/10.2139/ssrn.511502

Gary Charness (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

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Peter J. Kuhn

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

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(805) 893-8830 (Fax)

IZA Institute of Labor Economics

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National Bureau of Economic Research (NBER)

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