Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/20715 
Year of Publication: 
2004
Series/Report no.: 
IZA Discussion Papers No. 1417
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
We study worker and firm behavior in an environment where worker effort could depend on co-workers? wages. Theoretically, we show that an increase in workers? ?concerns? with coworkers? wages should lead profit-maximizing firms to compress wages under quite general conditions. However, firms should be harmed by such concerns, and such concerns can justify paying equal wages to workers of unequal productivity only when those concerns are asymmetric (in the sense that only underpayment matters). Our laboratory experiments indicate that workers? effort choices are highly sensitive to their own wages, but largely unresponsive to co-workers? wages. Despite this, in apparent anticipation of a negative worker reaction, firms in our experiment were more likely to compress wages when wages became public information. Profits were not significantly reduced by a requirement to make wages public. Overall, our results seem to weaken the case that either wage secrecy or wage compression is a profit-maximizing policy in practice.
Subjects: 
experiments
effort
social preferences
jealousy
wage compression
wage secrecy
JEL: 
C92
M52
M12
J33
Document Type: 
Working Paper

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