Do Co-Workers’ Wages Matter? Theory and Evidence on Wage Secrecy, Wage Compression and Effort
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.Download Info
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1417.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;Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-12 (All new papers)
- NEP-EXP-2004-12-12 (Experimental Economics)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
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"Effort and Comparison Income: Experimental and Survey Evidence,"
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"In Search Of Workers' Real Effort Reciprocity-A Field and a Laboratory Experiment,"
Journal of the European Economic Association,
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"Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study,"
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