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
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number
1417.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Milton Harris & Bengt Holmstrom, 1981.
"A Theory of Wage Dynamics,"
Discussion Papers
488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
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.
[Downloadable!]