Relative Pay Comparisons in the Workplace: Field Evidence on Effort and Labor Supply

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.

Policy implications 
In contexts where differences in outputs are not clearly observable, output-based incentives or pay schemes may decrease productivity, attendance and group cohesion.
Emily Breza, Supreet Kaur, Yogita Shamdasani; The Morale Effects of Pay Inequality, The Quarterly Journal of Economics, Volume 133, Issue 2, 1 May 2018, Pages 611–663