Social Comparison, Wage Inequality and Procedural Fairness: an Experimental Investigation

Marco Fongoni
University of Strathclyde
marco.fongoni@strath.uk

Jasper Hepp
University of Bielefeld
hepp.jasper@googlemail.com

Sofie R. Waltl
Luxembourg Institute of Socio-Economic Research & Vienna University of Economics and Business;
sofie.waltl@liser.lu

The research benefits from funding by the University Jubilee Fund of the City of Vienna (Hochschuljubiläumsfonds der Stadt Wien), grant PRO-FAIR, and internal funding by LISER.

Abstract

This article provides new laboratory evidence on the interplay between social comparison, procedural fairness and employees’ morale and effort. We propose a new design which enables us to: i) isolate the effect of wage inequality on effort from other confounding factors that are present in previous experiments, such as piece-rate incentives or gift-exchange; ii) understand the mediating role of procedural fairness, that is, whether wage inequality based on merit is considered to be more acceptable by employees. We find that employees respond more strongly to disadvantageous wage inequality by decreasing their effort relative to their high-paid peers, and that the strength of this response is correlated with loss aversion. However, we also find that if wage inequality is the outcome of ex ante differences in employees’ ability (i.e., it is justified), its effect on morale and effort disappear. We conclude that transparency and fair procedures can help mediate the adverse effect of wage inequality in the workplace.

JEL.: C43; D9; G4; R31

Keywords: Assymetric Effects; Earnings Inequality; Loss Aversion; Procedural Fairness; Transparency

Dissemination

Registration DOI: 10.17605/OSF.IO/8EFRS

Draft Article: here

Presentations (incl. scheduled): [34th National Conference of Labour Economics, Universita del Piemonte, Novara, Italy, April 2019][University of Reading, October 2019] [NOeG Winter Workshop, Vienna, Austria, December 2019]