Pay Inequality, Procedural Fairness, and Work Effort: an Experimental Investigation

This article provides new experimental evidence on the interplay between pay inequality, procedural fairness, and employees’ effort. We propose a novel laboratory design that enables us to: (i) isolate the effect of wage inequality on effort from other confounding factors, such as piece-rate incentives or gift-exchange; (ii) understand the mediating role of procedural fairness; and (iii) directly measure employees’ perceptions of fairness. We find that employees respond more strongly to disadvantageous wage inequality, and that this is related with their perceptions of being treated unfairly. However, when this inequality is justified, its effect on fairness perceptions and effort disappears. A heterogeneity analysis reveals that treatment effects are larger among female and younger subjects. We conclude that wage inequality affects employees’ perceptions of fairness and effort, and that fair procedures can nevertheless help mediate its adverse effects.