Does Pay Inequality Affect Worker Effort? Experimental Evidence

We study worker behavior in an efficiency-wage environment in which coworkers’ wages can influence a worker’s effort. Theoretically, we show that an increase in workers’ responsiveness to coworkers’ wages should lead profit-maximizing firms to compress wages. Our laboratory experiments, by contrast, show that while workers’ effort choices are highly sensitive to their own wages, effort is not affected by coworkers’ wages. This casts doubt on the notion that workers’ concerns with equity might explain pay policies such as wage compression or wage secrecy.