HIGHER WAGES ENCOURAGE US TO WORK HARDER

Nearly two-thirds of workers are willing to reciprocate higher pay with higher work effort, according to an experimental study by Sandra Maximiano, Randolph Sloof and Joep Sonnemans, published in the July 2007 issue of the Economic Journal. What’s more, employees seem to be willing to reward behaviour in this way no matter how much the employer is benefiting from their efforts.

Suppose that this month your employer, as a one-time event, forgoes some of his or her own profits to pay you a higher wage. Would you reciprocate this ‘gift’ by working harder in return? According to mainstream economics, which envisages you as a money-maximising but effort-minimising person, you would certainly not.

But the selfish homo economicus does not seem to fit all of us. A large number of laboratory experiments report that a sizeable fraction of workers (frequently 40-60%) do reward higher wages with higher effort. But these results are observed for simple bilateral, one-employer/one-worker relationships only.

To explore whether the results of these experiments can be generalised to more complex real world settings, the research team from the University of Amsterdam conducted a laboratory experiment in which the employer employs several workers.

The experimental study was based on a ‘gift exchange’ game that represents, in a very stylised way, the interaction between an employer and his or her workers in an environment where labour contracts are necessarily incomplete. In particular, the contract does not specify exactly how much effort the worker should exert.

In the game, there is an employer who moves first by offering a wage to the worker, who, in case of acceptance, makes a costly effort choice. If the worker is entirely selfish, he or she will supply minimum effort irrespective of the actual wage offered. Anticipating this non-responsiveness of effort to the wage paid, a selfish employer just offers the minimum wage.

The authors compare a baseline one-worker experiment with another experiment with four workers. In the second experiment, the employer is playing the same gift exchange game as in the first, but now with four workers at the same time. If wages and efforts were the same in both experiments, the employer would make four times more money when employing four workers.

The results for the one-worker experiment are in line with previous findings. In particular, on average, effort levels increase as the wage increases, and around 60% of workers are willing to reciprocate high wages with high effort.

Results for the experiment with four workers per employer show that these findings on gift exchange are quite robust. Effort levels are only marginally lower than in the treatment with one worker per employer, despite the fact that the employer now earns much more than the workers do.

This finding indicates that intentions are an important driving force behind gift exchange. Workers are willing to sacrifice to reward kind behaviour by the employer (high wages) and/or to punish unkind behaviour (low wages). Preferences concerning the fair and/or efficient allocation of money are insufficient to explain workers’ behaviour in this experiment.

ENDS

Notes for editors: ‘Gift Exchange in a Multi-Worker Firm’ by Sandra Maximiano, Randolph Sloof and Joep Sonnemans is published in the July 2007 issue of the Economic Journal.

The authors are at the University of Amsterdam.

For further information: contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com); or Sandra Maximiano via email: s.m.s.n.maximiano@uva.nl