Working Paper: NBER ID: w11786
Authors: Gary Charness; Peter Kuhn
Abstract: We study worker and firm behavior in an efficiency-wage environment where co-workers' wages may potentially influence a worker's effort. Theoretically, we show that an increase in workers' responsiveness to co-workers' wages should lead profit-maximizing firms to compress wages under quite general conditions. Our laboratory experiments, on the other hand, show that --while workers' effort choices are highly sensitive to their own wages-- effort is not affected by co-workers' wages. As a consequence, even though firms in our experiment tended to compress wages when wages became public information, this did not raise their profits. Our experimental evidence therefore provides little support for the notion that inter-worker equity concerns can make wage compression, or wage secrecy, a profit-maximizing policy.
Keywords: Pay Inequality; Pay Secrecy; Worker Effort; Efficiency Wage Models
JEL Codes: C91; J41; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in workers' responsiveness to coworker wages (J39) | Profit-maximizing firms compress wages (D21) |
| Workers' effort choices are highly sensitive to their own wages (J31) | Workers' effort is not significantly affected by coworkers' wages (J31) |
| Coworker wages (J31) | Worker effort (J29) |
| Equity-driven behavior influences wage policies (J38) | Wage compression does not enhance profitability (J31) |