The Effect of Wage Proposals on Efficiency and Income Distribution

Pre-play non-binding communication in organizations is prevalent. We study the implications of pre-play wage proposals and information revelation in a labour relationship in a laboratory experiment. In the baseline, that depicts a typical labour market interaction, the employer makes a wage offer to the worker who may then accept or reject it. In a subsequent treatment, workers, moving first, make private, non-binding, wage proposals to the employer. Our findings suggest that wage proposals promote higher wages, efficiency, and income equality. We run an additional experiment as a robustness check where we make the wage proposals public. We find that most of the results hold. Similar wage proposals are observed in the Public and Private information treatments, while accepted wages in the public treatment are higher than the baseline and significantly lower than under private information. It seems that workers conform to the available information on the wage of their co-worker from the last period when proposals are public. Interestingly, while both benefit over the baseline, public information on wage proposals benefits firms more than workers. We also develop a theoretical model to rationalize our results. The experimental results provide broad support for our hypotheses