WHEN EQUAL PAY IS UNFAIR
Equal wages are perceived as unfair by highly motivated employees. Consequently, they may lead to discouragement and a strong decline in work performance. These are the results of new research by Steffen Altmann and colleagues, in which 144 university students were given the roles of ‘employers’ and ‘workers’ – and half of the employers could pay workers individually and the other half had to pay equal wages.
The results of the study suggest that often-heard claims about the fairness of equal pay should be treated with cautionshould be treated with caution.: wWhile ‘equal pay for equal work’ is certainly uncontroversial, this situation is likely to be the exception rather than the rule. In a world where workers (XXXare heterogeneous and) differ in their skills and performance, fairnessmight also calls for ‘unequal pay for unequal work’.
Firms might motivate their workforce by providing additional incentives for high-performing workers. ‘These incentives need not be monetary,’ says Steffen Altmann, ‘non-monetary benefits like extra vacation or awards can be useful devices to motivate workers in this context.’. However, the results do not imply that equal wages are generally a bad choice. Which payment scheme is preferable for a specific firm ultimately depends on additional factors such as the transparency of coworkers’ work efforts, or the importance of exogenous shocks to work performance.
The study is based on a laboratory experiment involving 144 university students who were given the roles of ‘employers’ and ‘workers’ during the experiment. Each employer employed two workers who decided independently how much work effort to exert.
Subsequently, half of the employers could reward their employees by paying them individualised wages. The other employers could also decide on the wage level, but were restricted to paying their workers equally.
Employees were much more motivated to work when they were paid individual wages. While the participants who were paid individually achieved almost the highest possible performance level, those who worked under equal wages produced hardly half as much. In addition, their performance got worse over time.
‘The strong differences in employees’ behaviour The differences in employees’ behavior is surprising from a purely monetary perspective, as the wages paid by employers made it profitable for the workers to exert high work efforts in both experimental treatments (XXX conditions / situations). are the result of social comparisons between the workers,’ explains Steffen Altmann, one of the study’s authors.
The findings of the study suggest that the strong difference between the two payment schemes is caused by tHard-working employees contribute more to the firm’s success and thus expect to be rewarded with a higher payment compared to the low-performing co-workers. The employers who could pay individual wages respected this social norm in 85% of the cases by appropriately modifying their wages.
By contrast, the norm was almost always violated under equal wages. As a consequence, high-performing agents who received the same wage as their lazier co-workers reduced their work effort. he violation of “reciprocity”---the social norm (XXXpreference, fairness norm?) to reward kind actions and punish unkind ones, even at a cost. In the experiment, the norm of reciprocity implied (XXXprescribed) that a worker who worked harder and thus contributed more to the firm’s success should be rewarded with a higher payment compared to his low-performing co-worker. The employers who could pay individual wages respected this in 85% percent of the cases by appropriately modifying their wages. By contrast, the social norm was frequently violated under equal wages: as exerting higher efforts was also more costly for the employees, a high-performing agent ended up with lower (net) pay than his “lazy” co-worker. The reactions of the employees show clearly that employees workers who were in principle willing to exert high efforts got discouraged by the equal pay.
ENDS
Notes for editors: ‘Reciprocity and Payment Schemes: When Equality is Unfair’ by Johannes Abeler, Steffen Altmann, Sebastian Kube and Matthias Wibral was presented at the Royal Economic Society’s 2007 annual conference at the University of Warwick, 11-13 April.
The authors are at the Institute for the Study of Labor (IZA) and the Universities of Bonn and Karlsruhe.
For further information: contact Steffen Altmann on +49-228-3894-403 (email: ); or Romesh Vaitilingam on 07768-661095 (email: ).