Mutual Concern, Workplace Relationships and Pay Scales

A relatively novel area of research in economic theory is how the quality of human relationships in the workplace affects reward systems and labour productivity. Akerlof’s gift exchange model (1982) is a path-breaking contribution. In an attempt to explain a firm’s egalitarian wage policy towards a group of its employees in a context where the average productivity in the group was also well above the standard required, Akerlof introduces both preferences for income equality among co-workers and loyalty to group norms on the part of the workers and the firm. With these assumptions he succeeds in explaining conduct that appears irrational within the standard neoclassical framework. Another interesting paper is that by Kandel and Lazear (1992), which seeks to explain how profit-sharing plans can have beneficial incentive effects. The authors focus on the role of peer pressure in curbing the incentive to free-riding inherent in such plans, and emphasize that guilt can be the only effective form of pressure when individual effort is not observable; hence the importance of empathy in motivating co-workers not to cheat on each other. In a similar vein, Rotemberg (1994) investigates whether friendly relations in the workplace can induce altruistic feelings among co-workers, thus helping to solve the free-rider problem in team production. The author discusses at length the experimental study on the productivity effects of incentive pay and labour group practices, which Mayo carried out at Hawthorne Works (Mayo, 1933).