Institution for Social and Policy Studies

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The Challenges to Fair Pay for Group Work

Authored By 
Emily Nix
Publication date 
May 13, 2016

No one likes to be taken advantage of, but in a world where group work is the norm millions of workers may be getting short changed. One reason why fair pay for group work is so challenging is well known. When we all work together it can be difficult for an outsider (our boss, for example) to figure out who exactly did what and pay each of us our fair share. This challenge is likely familiar to just about anyone who has been involved in group work.

However, in recent research I uncover an additional, more subtle challenge to fair pay for group work. Specifically, I find that there are important learning spillovers in group work: we learn valuable skills from working with our colleagues that make us more productive in the future. It turns out that figuring out how to compensate our colleagues for the skills we get from interacting with them is much more challenging than economists previously thought. In particular, I find that firms likely fail to appropriately compensate workers for these learning spillovers.

What is particularly problematic about this failure to properly compensate for learning spillovers is that not only is the pie not split fairly, but the pie is smaller than it could be. In the language of economics, the compensation of learning spillovers goes beyond an equity question to an efficiency problem. When equity is in question, we are worried about how to split a given pool of money fairly. When we consider efficiency, we are interested in producing as much as possible with our initial resources.

While equity is arguably a subjective matter, efficiency is more straightforward – if we fail to achieve an efficient economic outcome it means we could make at least one person better off without making anyone worse off, i.e. we could increase the pie. In other words, if learning spillovers lead to an efficiency problem, we are leaving money on the table.

To provide some intuition for why this issue with learning spillovers occurs and how it impacts the size of our economic pie, consider the following example. Suppose going to college increases your productivity at work. This should (and does) show up in wages that are higher for college educated workers. As a result, college is worthwhile to individuals for whom the gains in wages (relative to just going to high school) outweigh the costs (in both time and money) of going to college and everyone who should go to college does go to college.

However, I find that a college degree not only makes an individual more productive, but also makes that individual’s colleagues more productive. In a perfect world with no frictions and where all economic agents have perfect information, economic theory predicts that competitive forces will still work to properly compensate individuals not only for their own increase in productivity from going to college, but also for the increase in the productivity of their colleagues. As a result, the gains to society of sending an individual to college (in terms of increases in GDP) are equal to the gain to the individual of going to college (in terms of an increase in pay), and the right amount of individuals will get a college education.

Unfortunately, we do not live in such a perfect world. In my research I instead consider a world where there is asymmetric information regarding learning spillovers. The asymmetric information I consider is a scenario where firms do not know exactly how much any given individual learns from his or her colleagues. I prove that when this is the case, firms fail to properly compensate workers for learning spillovers. As a result, the right amount of people may not go to college, and our economic pie may be smaller than it could be.

In practice, the impact of this imperfection could be substantial. This is due to the fact that learning spillovers are large. Specifically, using administrative data from Sweden I find that a worker who experiences an increase in the average education of his colleagues by 10 percentage points will receive (on average) a 0.3% increase in his wages the following year. While 0.3% may seem like a small number, it is actually a substantial increase in light of the fact that wages only increased by around 2% a year for the population in Sweden during the period of my analysis.  Thus, an additional 0.3% increase in wages due to learning from colleagues comes to a quarter of the average increase in wages. Furthermore, I find that at least 12.61% of the gain in adding a college educated worker comes from learning spillovers, and the social returns of adding a college educated worker may exceed private returns by up to 14.43%.

Together, these results suggest potentially large economic losses from the failure to properly compensate workers for learning spillovers, losses that could justify policy intervention to fix the problem. My research to date has uncovered the problem and provided some of the first evidence on the magnitude of the potential losses. In future work, I hope to formulate feasible policy solutions.

Emily Nix is a Ph.D. candidate in the economics department. Her research explores human capital development both in and out of the labor market, and how individual human capital choices interact with existing laws, policies, and institutions. Her work can be found at www.emilyenix.com.

Blog contributor 
Policy Fellow
Area of study 
Labor & Work