IDEAS home Printed from https://ideas.repec.org/a/eee/aosoci/v89y2021ics0361368220300799.html
   My bibliography  Save this article

The effects of minimum-wage increases on wage offers, wage premiums and employee effort under incomplete contracts

Author

Listed:
  • Brink, William
  • Kuang, Xi (Jason)
  • Majerczyk, Michael

Abstract

We experimentally investigate how increases in legally required minimum wages affect wage offers, wage premiums (i.e., the excess of wages over the minimum wage), and employee effort. Prior research has documented a gift-exchange relationship between firms and employees, whereby higher wage offers lead to higher effort. However, when the minimum wage increases, expectations regarding gift wages may also change. We predict that, following such a change, firms and employees will self-servingly determine their reference point for gift wages. As a result, while firms will increase wage offers, wage premiums will decline, and thus employees will not increase their effort. The results of (1) a laboratory experiment and (2) two online experiments are consistent with our predictions, suggesting that minimum-wage increases can have a negative effect on employee effort. Ultimately, employees respond to equivalent wages differently depending on the context surrounding the wage level. Implications for theory and practice are discussed.

Suggested Citation

  • Brink, William & Kuang, Xi (Jason) & Majerczyk, Michael, 2021. "The effects of minimum-wage increases on wage offers, wage premiums and employee effort under incomplete contracts," Accounting, Organizations and Society, Elsevier, vol. 89(C).
  • Handle: RePEc:eee:aosoci:v:89:y:2021:i:c:s0361368220300799
    DOI: 10.1016/j.aos.2020.101195
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0361368220300799
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.aos.2020.101195?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(3), pages 817-868.
    3. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    4. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
    5. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    6. Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
    7. repec:eee:labchp:v:3:y:1999:i:pb:p:2101-2163 is not listed on IDEAS
    8. R. Lynn Hannan & Frederick W. Rankin & Kristy L. Towry, 2006. "The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective," Contemporary Accounting Research, John Wiley & Sons, vol. 23(4), pages 885-918, December.
    9. John Horton & David Rand & Richard Zeckhauser, 2011. "The online laboratory: conducting experiments in a real labor market," Experimental Economics, Springer;Economic Science Association, vol. 14(3), pages 399-425, September.
    10. Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163, Elsevier.
    11. Arindrajit Dube & Laura Giuliano & Jonathan Leonard, 2019. "Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior," American Economic Review, American Economic Association, vol. 109(2), pages 620-663, February.
    12. Mirko Draca & Stephen Machin & John Van Reenen, 2011. "Minimum Wages and Firm Profitability," American Economic Journal: Applied Economics, American Economic Association, vol. 3(1), pages 129-151, January.
    13. Matthew J C Crump & John V McDonnell & Todd M Gureckis, 2013. "Evaluating Amazon's Mechanical Turk as a Tool for Experimental Behavioral Research," PLOS ONE, Public Library of Science, vol. 8(3), pages 1-18, March.
    14. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-431, July.
    15. Lisa Koonce & Jeffrey Miller & Jennifer Winchel, 2015. "The Effects of Norms on Investor Reactions to Derivative Use," Contemporary Accounting Research, John Wiley & Sons, vol. 32(4), pages 1529-1554, December.
    16. Alan S. Blinder & Don H. Choi, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 1003-1015.
    17. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2009. "Homo Reciprocans: Survey Evidence on Behavioural Outcomes," Economic Journal, Royal Economic Society, vol. 119(536), pages 592-612, March.
    18. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    19. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, July.
    20. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    21. Phillipe Aghion & Nicholas Bloom & John Van Reenen, 2014. "Incomplete Contracts and the Internal Organization of Firms," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 37-63.
    22. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    23. repec:cup:judgdm:v:5:y:2010:i:5:p:411-419 is not listed on IDEAS
    24. Carl M. Campbell III & Kunal S. Kamlani, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 759-789.
    25. Babcock, Linda, et al, 1995. "Biased Judgments of Fairness in Bargaining," American Economic Review, American Economic Association, vol. 85(5), pages 1337-1343, December.
    26. Owens, Mark F. & Kagel, John H., 2010. "Minimum wage restrictions and employee effort in incomplete labor markets: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 73(3), pages 317-326, March.
    27. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    28. R. Lynn Hannan & John H. Kagel & Donald V. Moser, 2002. "Partial Gift Exchange in an Experimental Labor Market: Impact of Subject Population Differences, Productivity Differences, and Effort Requests on Behavior," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 923-951, October.
    29. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    30. Hsee, Christopher K., 1996. "Elastic Justification: How Unjustifiable Factors Influence Judgments," Organizational Behavior and Human Decision Processes, Elsevier, vol. 66(1), pages 122-129, April.
    31. Clara Xiaoling Chen & Tatiana Sandino, 2012. "Can Wages Buy Honesty? The Relationship Between Relative Wages and Employee Theft," Journal of Accounting Research, Wiley Blackwell, vol. 50(4), pages 967-1000, September.
    32. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-649, May.
    33. Fehr, Ernst & Kirchler, Erich & Weichbold, Andreas & Gächter, Simon, 1998. "When Social Norms Overpower Competition: Gift Exchange in Experimental Labor Markets," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 324-351, April.
    34. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    35. Jean Baldwin Grossman, 1983. "The Impact of the Minimum Wage on Other Wages," Journal of Human Resources, University of Wisconsin Press, vol. 18(3), pages 359-378.
    36. Berinsky, Adam J. & Huber, Gregory A. & Lenz, Gabriel S., 2012. "Evaluating Online Labor Markets for Experimental Research: Amazon.com's Mechanical Turk," Political Analysis, Cambridge University Press, vol. 20(3), pages 351-368, July.
    37. Xi (Jason) Kuang & Donald V. Moser, 2011. "Wage Negotiation, Employee Effort, and Firm Profit under Output†Based versus Fixed†Wage Incentive Contracts," Contemporary Accounting Research, John Wiley & Sons, vol. 28(2), pages 616-642, June.
    38. Thompson, Leigh & Loewenstein, George, 1992. "Egocentric interpretations of fairness and interpersonal conflict," Organizational Behavior and Human Decision Processes, Elsevier, vol. 51(2), pages 176-197, March.
    39. Kahneman, Daniel, 1992. "Reference points, anchors, norms, and mixed feelings," Organizational Behavior and Human Decision Processes, Elsevier, vol. 51(2), pages 296-312, March.
    40. Armin Falk & Ernst Fehr & Christian Zehnder, 2006. "Fairness Perceptions and Reservation Wages—the Behavioral Effects of Minimum Wage Laws," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1347-1381.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Francisco Lasso-Valderrama & Carmiña O. Vargas, 2024. "Distribution, Inequality and Poverty in Colombia: An Assessment of the Contribution of the Minimum Wage," Borradores de Economia 1279, Banco de la Republica de Colombia.
    2. Nasir, Muhammad Ali & Wu, Junjie & Howes, Cameron & Ripley, Helen, 2022. "Asymmetric nexus between wages and productivity in the context of the global financial crisis," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 164-175.
    3. Artur Mitsel & Aleksandr Shilnikov & Pavel Senchenko & Anatoly Sidorov, 2021. "Enterprise Compensation System Statistical Modeling for Decision Support System Development," Mathematics, MDPI, vol. 9(23), pages 1-19, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    2. Christian Koch, 2021. "Can reference points explain wage rigidity? Experimental evidence," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 55(1), pages 1-17, December.
    3. Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 398-420, July.
    4. Tetsuo Yamamori & Kazuyuki Iwata, 2023. "Wage claim detracts reciprocity in labor relations: experimental study of gift exchange games," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 573-597, July.
    5. John A. List, 2006. "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 1-37, February.
    6. Kocher, Martin G. & Luhan, Wolfgang J. & Sutter, Matthias, 2012. "Testing a forgotten aspect of Akerlof’s gift exchange hypothesis: Relational contracts with individual and uniform wages," Discussion Papers in Economics 12816, University of Munich, Department of Economics.
    7. Tetsuo Yamamori & Kazuyuki Iwata, 2019. "Endogenous Social Preferences in Bargaining and Contract Enforcement," Working Papers e134, Tokyo Center for Economic Research.
    8. Lin, Chung-Cheng & Yang, C.C., 2010. "Reciprocity and downward wage rigidity," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1155-1168, December.
    9. Dariel, A. & Riedl, A.M., 2013. "Reciprocal preferences and the unraveling of gift-exchange," Research Memorandum 034, Maastricht University, Graduate School of Business and Economics (GSBE).
    10. Mark F. Owens, 2010. "Other-Regarding Preferences with Peer Workers in Labor Markets: An Experimental Investigation," Working Papers 201008, Middle Tennessee State University, Department of Economics and Finance.
    11. Becker, Johannes & Hopp, Daniel & Süß, Karolin, 2020. "How altruistic is indirect reciprocity? - Evidence from gift-exchange games in the lab," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224592, Verein für Socialpolitik / German Economic Association.
    12. Gerhards, Leonie & Heinz, Matthias, 2017. "In good times and bad – Reciprocal behavior at the workplace in times of economic crises," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 228-239.
    13. Fortuna Casoria & Arno Riedl, 2013. "Experimental Labor Markets And Policy Considerations: Incomplete Contracts And Macroeconomic Aspects," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 398-420, July.
    14. Chung-cheng Lin & C.C. Yang, 2006. "Receiprocity and Downward Wage Rigidity," IEAS Working Paper : academic research 06-A015, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    15. Grossmann, Volker, 2002. "Is it rational to internalize the personal norm that one should reciprocate?," Journal of Economic Psychology, Elsevier, vol. 23(1), pages 27-48, February.
    16. Paul, Maureen, 2006. "A cross-section analysis of the fairness-of-pay perception of UK employees," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(2), pages 243-267, April.
    17. Simon Gächter & Esther Kaiser & Manfred Königstein, 2024. "Incentive contracts crowd out voluntary cooperation: Evidence from gift-exchange experiments," Discussion Papers 2024-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    18. Dato, Simon & Feess, Eberhard & Nieken, Petra, 2019. "Lying and reciprocity," Games and Economic Behavior, Elsevier, vol. 118(C), pages 193-218.
    19. Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2007. "Gift Exchange in a Multi-Worker Firm," Economic Journal, Royal Economic Society, vol. 117(522), pages 1025-1050, July.
    20. Simon Gächter & Daniele Nosenzo & Martin Sefton, 2012. "The Impact of Social Comparisons on Reciprocity," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(4), pages 1346-1367, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:aosoci:v:89:y:2021:i:c:s0361368220300799. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/aos .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.