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

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Author Info

  • Charness, Gary

    ()
    (University of California, Santa Barbara)

  • Kuhn, Peter J.

    ()
    (University of California, Santa Barbara)

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 coworkers’ 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.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1417.

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Length: 47 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1417

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Related research

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

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References

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  1. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  9. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
  10. Charness, Gary B & Rabin, Matthew, 2001. "Understanding Social Preferences With Simple Tests," University of California at Santa Barbara, Economics Working Paper Series qt0dc3k4m5, Department of Economics, UC Santa Barbara.
  11. Fehr, Ernst, et al, 1998. "When Social Norms Overpower Competition: Gift Exchange in Experimental Labor Markets," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 324-51, April.
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Citations

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Cited by:
  1. Andrew Clark & David Masclet & Marie-Claire Villeval, 2010. "Effort and comparison income: experimental and survey evidence," Post-Print halshs-00459777, HAL.
  2. Teck-Hua Ho & Xuanming Su, 2009. "Peer-Induced Fairness in Games," American Economic Review, American Economic Association, vol. 99(5), pages 2022-49, December.
  3. Wu, Steven Y. & Roe, Brian E. & Sporleder, Thomas L., 2007. "Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9703, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Andrew Clark & Davis Masclet & Marie-Claire Villeval, 2006. "Effort and Comparison Income : Survey and Experimental Evidence," Working Papers 0601, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  5. Maximiano, Sandra & Sloof, Randolph & Sonnemans, Joep, 2013. "Gift exchange and the separation of ownership and control," Games and Economic Behavior, Elsevier, vol. 77(1), pages 41-60.
  6. Andrew Clark & David Masclet & Marie-Claire Villeval, 2006. "Effort, revenu et rang : une étude expérimentale," Post-Print halshs-00104905, HAL.
  7. Heike Hennig-Schmidt & Bettina Rockenbach & Abdolkarim Sadrieh, 2005. "In search of worker's real effort reciprocity - a field and a laboratory experiment," Artefactual Field Experiments 00065, The Field Experiments Website.
  8. Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2007. "Gift Exchange in a Multi-Worker Firm," Economic Journal, Royal Economic Society, vol. 117(522), pages 1025-1050, 07.
  9. Cardoso, Ana Rute, 2005. "Big Fish in Small Pond or Small Fish in Big Pond? An Analysis of Job Mobility," IZA Discussion Papers 1900, Institute for the Study of Labor (IZA).

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