The Morale Effects of Pay Inequality

Source: Emily Breza, Supreet Kaur, and Yogita Shamdasani, National Bureau of Economic Research (NBER), NBER Working Paper No. 22491, August 2016

From the abstract:
The idea that worker utility is affected by co-worker wages has potentially broad labor market implications. In a month-long experiment with Indian manufacturing workers, we randomize whether co-workers within production units receive the same flat daily wage or different wages (according to baseline productivity rank). For a given absolute wage, pay inequality reduces output and attendance by 0.24 standard deviations and 12%, respectively. These effects strengthen in later weeks. Pay disparity also lowers co-workers’ ability to cooperate in their selfinterest. However, when workers can clearly observe productivity differences, pay inequality has no discernible effect on output, attendance, or group cohesion.