Do Co-Workers' Wages Matter? Theory and Evidence on Wage Secrecy, Wage Compression and Effort

47 Pages Posted: 1 Dec 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: November 2004

Abstract

We study worker and firm behavior in an environment where worker effort could depend on co-workers' wages. Theoretically, we show that an increase in workers' 'concerns' with co-workers' wages should lead profit-maximizing firms to compress wages under quite general conditions. However, firms should be harmed by such concerns, and such concerns can justify paying equal wages to workers of unequal productivity only when those concerns are asymmetric (in the sense that only underpayment matters). Our laboratory experiments indicate that workers' effort choices are highly sensitive to their own wages, but largely unresponsive to co-workers' wages. Despite this, in apparent anticipation of a negative worker reaction, firms in our experiment were more likely to compress wages when wages became public information. Profits were not significantly reduced by a requirement to make wages public. Overall, our results seem to weaken the case that either wage secrecy or wage compression is a profit-maximizing policy in practice.

Keywords: experiments, effort, social preferences, jealousy, wage compression, wage secrecy

JEL Classification: C92, J33, M12, M52

Suggested Citation

Charness, Gary and Kuhn, Peter J., Do Co-Workers' Wages Matter? Theory and Evidence on Wage Secrecy, Wage Compression and Effort (November 2004). Available at SSRN: https://ssrn.com/abstract=628044 or http://dx.doi.org/10.2139/ssrn.628044

Gary Charness

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

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

Peter J. Kuhn (Contact Author)

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

North Hall 3036
Santa Barbara, CA 93106
United States
(805) 893-3666 (Phone)
(805) 893-8830 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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