Relative Pay Comparisons in the Workplace: Field Evidence on Effort and Labor Supply

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A long tradition in economics and psychology has advanced the notion that individuals care about not only their own pay, but also their pay relative to that of their co-workers. This project implements a field experiment with full-time manufacturing workers over a one-month period to test whether relative pay comparisons affect effort and labor supply. Measuring the extent to which individuals care about the wages of their co-workers has potentially broad implications for wage structure. If wage inequality reduces effort or labor supply, this can generate wage compression (differences in wage that are much smaller than differences in productivity) and wage rigidity (wages that do not adjust to market conditions). Relative pay comparisons also have implications for the organization of labor markets and firm boundaries. In the experiment, workers perform individual production tasks, but are organized into distinct teams, defined by the type of product they produce. Teams are randomized to receive either compressed wages (where all workers earn the same daily wage, drawn randomly from one of three wage levels) or heterogeneous wages (where each team member is paid a different wage according to his baseline productivity ranking). If pay inequality decreases morale, then holding own wage fixed, a worker will reduce output when his co-workers are paid more than himself. In addition, this study explores the conditions under which unequal pay affects morale. First, the design induces variation in the perceived fairness of pay differences: production tasks differ in the extent to which co-worker output is observable. Second, it induces random variation in actual fairness: the fixed pay differences between co-workers are less fair when a worker is close in baseline productivity to his higher paid peers.