BEHAVIORAL SCIENCES WORKSHOP: Supreet Kaur (Columbia University/Visiting Yale), “The Morale Effects of Pay Inequality”

The idea that worker utility is affected by co-worker wages has potentially broad implications for the labor market–for example, through wage compression, wage rigidity, firm boundaries, and the distribution of earnings. We use a month-long field experiment with Indian manufacturing workers to test whether relative pay comparisons affect effort and labor supply. In our setting, workers are paid a flat daily wage and organized into distinct product teams. We randomize teams to receive either compressed wages (where all teammates earn the same wage) or heterogeneous wages (where each team member is paid a different wage according to his baseline productivity rank). For a given absolute wage level, workers reduce output by 0.36 standard deviations if they are on a team where they are paid less than their peers. They are also less likely to come to work–giving up 9% of their earnings. These effects strengthen in later weeks. In contrast, workers do not increase output when they are paid more than their peers. The perceived justification for pay differences mediates negative morale effects. Specifically, lower relative pay does not cause effort reductions when co-worker output is highly observable, or when one’s higher-paid co-workers are substantially more productive than oneself (in terms of baseline productivity). Finally, performance on endline games indicates that pay disparity reduces team members’ ability to cooperate in their own self-interest. These findings are consistent with several empirical regularities in the labor market.

Supreet Kaur’s research is in development economics and behavioral economics, with a focus on labor markets. She was awarded the David A. Wells Prize by the Harvard Economics Department in 2012 and the CESifo Distinguished Affiliate Award in Behavioural Economics in 2015.

The Behavioral Sciences Workshop is held jointly between the Yale departments of Economics, Political Science, Psychology, and the School of Management.