Abstract
Wage rates, efficiency wages, and gift exchange in a labor market are all crucial aspects in regard to designing contracts to ensure high effort from workers. We extend this literature by discussing the relationship between known differences in wages (social comparison) and workers’ effort provision. We conduct an experiment in which subjects perform effort tasks for piece-rates. All subjects are paid the same wage rate in the first half of the experiment, but in the second half are paid different wage rates; the primary variable we study is the information about others’ wage rates given to a subset of subjects. We find that subjects’ efforts respond strongly to information about others’ wages. Such findings have implications for contract structuring for workers.
Highlights
A pillar of economics is that individuals respond to incentives; in many conventional models of labor markets, the incentive to which workers respond is their own wage
Consider how she might react if the minimum wage suddenly increases to her current wage. Her compensation is unchanged so that one would predict no change in behavior. If her reference point has moved to the new minimum wage, she is not being paid a premium over her reference point, and her behavior may change; one might expect either a decrease in the extensive margin or intensive margin or both
A Kruskal–Wallis test on this task across all treatments reveals no differences in successful effort provision (p = 0.691)
Summary
A pillar of economics is that individuals respond to incentives; in many conventional models of labor markets, the incentive to which workers respond is their own wage. Consider an entry-level employee who expects to be paid minimum wage but instead gets paid one dollar more than this amount She might consider such a wage in a positive light if her reference point is the minimum wage rate and increase productivity significantly [2]. This paper presents a real-effort task experiment in which subjects who are given information about others’ wages behave very differently than those who do not know this information This situation deviates from the standard gift-exchange problem between workers and employers and allows for social comparison and fairness to influence job effort. If worker A knows that worker B gets higher compensation for the same job, Worker A might see Worker B’s wage as the reference point and believe she is underpaid This effort would likely be more substantial if they were friends or a member of the worker’s social network [6].
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