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Does Pay Inequality Affect Worker Effort? An Assessment of Existing Laboratory Designs

Author

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  • Marco Fongoni

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper develops a theoretical framework to think about employees' effort choices, and applies this framework to assess the ability of existing laboratory designs to identify the effect of pay inequality on worker effort. The analysis shows that failure to control for a number of confounds-such as reciprocity towards the employer in multilateral gift-exchange games (vertical fairness), or the incentive to increase effort when feeling underpaid under piece rates (income targeting)-may lead to inaccurate interpretation of evidence of treatment effects. In light of these findings, the paper provides a set of recommendations on how to improve identification in the design of laboratory experiments in the future.

Suggested Citation

  • Marco Fongoni, 2022. "Does Pay Inequality Affect Worker Effort? An Assessment of Existing Laboratory Designs," Working Papers hal-03888315, HAL.
    • Handle: RePEc:hal:wpaper:hal-03888315
    Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03888315
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    References listed on IDEAS

    as
    1. Dirk Sliwka & Peter Werner, 2017. "Wage Increases and the Dynamics of Reciprocity," Journal of Labor Economics, University of Chicago Press, vol. 35(2), pages 299-344.
    2. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    3. Andy Snell & Jonathan P. Thomas, 2010. "Labor Contracts, Equal Treatment, and Wage-Unemployment Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 98-127, July.
    4. repec:bla:ecinqu:v:51:y:2013:i:3:p:1779-1794 is not listed on IDEAS
    5. John Sseruyange & Erwin Bulte, 2020. "Wage Differentials and Workers’ Effort: Experimental Evidence from Uganda," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(3), pages 647-668, June.
    6. Jennifer C. Smith, 2015. "Pay Growth, Fairness, and Job Satisfaction: Implications for Nominal and Real Wage Rigidity," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(3), pages 852-877, July.
    7. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    pay inequality; effort; laboratory experiments; reference dependence; fairness;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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