A long tradition in economics and psychology has advanced the notion that individuals care about not only their own pay, but also their pay relative to that of their co-workers. We use a field experiment with Indian manufacturing workers to test whether relative pay comparisons affect effort and labor supply. Workers perform individual production tasks, but are organized into distinct teams - defined by the type of product they produce. We randomize teams to receive either compressed wages (where all workers earn the same random daily wage) or heterogeneous wages (where each team member is paid a different wage according to his baseline productivity level). This enables effort comparisons across workers who receive the same absolute wage, but vary in the wages of their co-workers. In addition, we introduce heterogeneity in the extent to which pay differences across co-workers seem justified.
Daily production for each worker: Count of the total items produced in a day. Daily attendance of each worker, including time of arrival and departure from worksite. Total labour earnings of each worker: Data from worksite payroll as well as end line survey responses about outside activities on days when workers are absent. Team-level output.
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