Wage Differences Matter: An Experiment of Social Comparison and Effort Provision when Wages Increase or Decrease

Abstract

Wage rates, efficiency wages, and gift exchange in a labor market are all crucial aspects in regard to designing contracts to ensure high effort from workers. We extend this literature by discussing the relationship between known differences in wages (social comparison) and workers’ effort provision. We conduct an experiment in which subjects perform effort tasks for piece-rates. All subjects are paid the same wage rate in the first half of the experiment, but in the second half are paid different wage rates; the primary variable we study is the information about others’ wage rates given to a subset of subjects. We find that subjects’ efforts respond strongly to information about others’ wages. Such findings have implications for contract structuring for workers.

Keywords

• social comparison
• effort provision
• changing wages
• lab experiment