Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment

Abstract

Employment contracts are often incomplete, leaving many responsibilities subject to workers' discretion. High work morale is therefore essential for sustaining voluntary cooperation and high productivity in firms. We conducted a field experiment to test whether workers reciprocate wage cuts and raises with low or high work productivity. Wage cuts had a detrimental and persistent impact on productivity, reducing average output by more than 20 percent. An equivalent wage increase, however, did not result in any productivity gains. The results from an additional control experiment with high monetary performance incentives demonstrate that workers could still produce substantially more output, leaving enough room for positive reactions. Altogether, these results provide evidence consistent with a model of reciprocity, as opposed to inequality aversion.JEL classification: C93, J30.

Gift exchange and the separation of ownership and control

“…The specifics of our design are more in line with Maximiano et al (2007) though. Like in that paper we let subjects play the gift-exchange game only once, rather than repeatedly in a row.…”

“…Compared to Fehr et al (1998) and Maximiano et al (2007) the payoff functions that we use here differ in two notable ways. First, the marginal returns to effort are four times higher, i.e.…”

“…Abeler et al (2010) explore whether effort decisions of (in principle) equally productive workers are affected by equal versus unequal wages. 3 As our focus is on vertical fairness the study of Maximiano et al (2007) is more closely related to ours. In that experiment the employer has four workers and (by design) pays an equal wage to them.…”

The effects of time delay in reciprocity games

“…In the field, psychologists found that a waitress with a broad smile receives greater tips (Tidd & Lockard, 1978), while economists have found that kind acts are rewarded in the context of charitable donations (Falk, 2007). Both economists and psychologists have also found negative reciprocity, for example, in the context of wage cuts (Greenberg, 1990;Kube, Marechal & Puppe, 2010). Several theoretical models complement these investigations (e.g., Cox et al, 2007;Dufwenberg & Kirchsteiger, 2004;Falk & Fischbacher, 2006).…”

Performance Appraisals and the Impact of Forced Distribution—An Experimental Investigation

“…Recent studies …nd mostly moderate support for positive reciprocity. See for instance Gneezy and List (2006), Cohn et al (2009), Kube et al (2010), Bellemare and Shearer (2009) and Hennig-Schmidt et al (2010). 4 See for instance "Performance Reviews: Many Need Improvement" in the New York Times (September 10, 2006).…”