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Retracting a Gift: How Does Employee Effort Respond to Wage Reductions?

  • Darin Lee
  • Nicholas G. Rupp

Since the days of Henry Ford, employers have argued that higher pay induces employees to provide additional effort. While the converse is also thought to be true, there is little empirical evidence testing this hypothesis. Not only are significant company-wide pay cuts rarely observed in practice but measures of employee effort are typically difficult to quantify. This article examines the effort responses of U.S. commercial airline pilots following a recent series of large, permanent pay cuts. Using airline on-time performance as proxy for unobservable pilot effort, we find only limited support for the hypothesis that pay cuts lower employee effort.

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File URL: http://dx.doi.org/10.1086/522906
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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 25 (2007)
Issue (Month): ()
Pages: 725-761

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Handle: RePEc:ucp:jlabec:v:25:y:2007:p:725-761
DOI: 10.1086/522906
Contact details of provider: Web page: http://www.journals.uchicago.edu/JOLE/

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