Does Pay Inequality Affect Worker Effort? Experimental Evidence
We study worker behavior in an efficiency-wage environment in which coworkersâ€™ wages can influence a workerâ€™s effort. Theoretically, we show that an increase in workersâ€™ responsiveness to coworkersâ€™ wages should lead profit-maximizing firms to compress wages. Our laboratory experiments, by contrast, show that while workersâ€™ effort choices are highly sensitive to their own wages, effort is not affected by coworkersâ€™ wages. This casts doubt on the notion that workersâ€™ concerns with equity might explain pay policies such as wage compression or wage secrecy.
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