The effects of minimum-wage increases on wage offers, wage premiums and employee effort under incomplete contracts

Brink, William D.; Kuang, Xi; Majerczyk, Michael

doi:10.1016/j.aos.2020.101195

Cited by 8 publications

(10 citation statements)

References 57 publications

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“…For example, Choi (2014) finds that employer's offer of a more generous contract is not as powerful in increasing employees' effort when the supply of labor is low compared to when the supply of labor is high. In another example, Brink et al (2020) document that a legal change that increases the minimum wage requirement on employers can negatively impact the effectiveness of the gift-Workplace penalties, trust, and communication exchange contract. Similarly, Abdel-Rahim et al (2021) find that employees' reactions to employers' more generous contracts are significantly lower for employers from a different culture than for employers from a similar culture.…”

Section: Theoretical Background and Hypothesesmentioning

confidence: 99%

“…In the well-known employment contract based on the gift-exchange economic premise, accounting researchers have investigated social norms such as trust and reciprocity (e.g. Hannan, 2005; Kuang and Moser, 2009; Brink et al ., 2020; Douthit et al ., 2022). In such contracts, researchers find supporting empirical evidence that employers' choice to offer a premium wage in excess of the minimum market wage is translated as trust by employees who in turn exert an effort level in excess of the minimum work standard as a way to reciprocate (Hannan, 2005; Kuang and Moser, 2009).…”

Section: Introductionmentioning

confidence: 99%

“…cultural differences), labor market variables (e.g. increased demand for labor, and legal requirements to increase minimum wages) or the source of contracts can reduce the effectiveness of the gift-exchange contracts in generating efficient economic outcomes through trust and reciprocity (Choi, 2014; Brink et al ., 2020; Abdel-Rahim et al ., 2021; Liu et al ., 2022; Douthit et al ., 2022). In this study, we extend this growing stream of accounting research on gift-exchange contracts by examining how workplace penalties that punishes employees' shirking on effort impact the effectiveness of trust and reciprocity in these contracts.…”

Section: Introductionmentioning

confidence: 99%

“…Our study contributes important insights to theory. First, we contribute to the growing literature examining the impact of organizational and environmental features on the effectiveness of gift exchange (Kuang and Moser, 2009; Charness and Dufwenberg, 2006; Brink et al ., 2020; Abdel-Rahim et al ., 2021). Despite the traditional agency theoretic assumption that workplace penalties will increase employees' effort levels, we find that penalties can potentially crowd out the employer's desire to trust and consequently reduce employees' reciprocity [3].…”

Section: Introductionmentioning

confidence: 99%

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An experimental study on the effect of penalties on employers' trust and employees' reciprocity and the moderating effect of communication

Abdel-Rahim,

Liu

2023

JAAR

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PurposeThere is growing scholarly interest in the use of penalty in employment contracts which reduce employees' pay if the employee's performance does not meet a pre-specified performance threshold. Prior accounting research has focused exclusively on the effect of penalty on employee performance. In this study, the authors extend earlier research by examining how penalty affects the employers' wage offers. Prior research suggests that employers' generous wage offers in employment contracts are normally translated as trust by employees who in turn reciprocate with higher effort. The authors present a theory that predicts penalty reduces employers' wage offers. Then, the authors propose unrestricted communication between employers and employees as a potential moderator for the negative effect of penalty on trust and reciprocity.Design/methodology/approachThe authors implement a controlled lab experiment with a 2 × 3 experimental design (Penalty: Present and Absent; and Communication: None, One-Way and Two-Way).FindingsThe authors develop their predictions by utilizing insights from motivational-crowding and organizational communication theories. The authors hypothesize and find evidence that employers' ability to penalize employees can reduce employers' motivation to offer generous wages. As a result, reduced trust demotivates employees to provide high effort. However, the authors find that a two-way communication moderates the negative effect of penalties by restoring trust, thereby, increasing reciprocity. Finally, the authors find evidence that relationship-oriented messages explain the moderating effect of communication.Research limitations/implicationsThis study is subject to limitations inherent in all experimental studies. The decisions in the study experiment are less complex than those found in practice. Moreover, there are significantly higher costs and potential benefits to shirk on effort in practice. The authors encourage future research on other organizational features that would influence the generalizability of their theory and results. Nonetheless, this study makes an important contribution to the literature on trust, reciprocity, gift-exchange contracts, managerial controls and communication.Practical implicationsThis paper has several important implications for theory and practice. The authors show that the presence of penalty may not automatically result in increasing employees' effort level, contrary to traditional economic theory predictions. This effect is driven mainly by the crowding out effect of a penalty on employers' desire to signal trust. Therefore, the presence of an open communication channel may become an important tool to reverse the psychological effect of reduced trust when penalty is present. Therefore, the study's findings contribute to the trust–reciprocity literature on how management control system influences employers' and employees' behavior. These findings are especially germane given the trend in the workplace toward establishing open communication at different levels within the firm hierarchy. The study also contributes to the literature on trust–reciprocity as critical informal controls and social norms in accounting practices (Bicchieri, 2006; Stevens, 2019), shedding light on how firms may influence employees' reciprocity in management control practices and induce them to act in line with the firm's objectives by opening communication channels.Originality/valuePrior accounting research document that penalty in employment contracts increases employee performance due to loss aversion. The study, however, demonstrates that the positive effect of penalty is not sustained in a gift-exchange contract. Specifically, the study's experimental results provide evidence that the availability of penalties can psychologically change the way employers perceive their decisions on offering generous wages (i.e. trust) and consequently reduce employees' reciprocation of high effort levels. Yet, the authors propose a two-way communication as a restorative mechanism for the lost trust. Implications for theory and practice are discussed.

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Section: Theoretical Background and Hypothesesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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An experimental study on the effect of penalties on employers' trust and employees' reciprocity and the moderating effect of communication

Abdel-Rahim,

Liu

2023

JAAR

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“…Many studies from Web of Science core database emphasize the crucial role of wages as a motivation. Turker D., Brink W., and Kuang X. conclude «empirically supported that being a socially responsible employer positively affects the relevant employee outcomes»; furthermore, they experimentally investigate how wage premiums influence employee efforts [3,4]. A CS is designed to rely on the quantitative and qualitative content of labor, while balancing the benefits of the employee and the employer.…”

Section: Introductionmentioning

confidence: 99%

Enterprise Compensation System Statistical Modeling for Decision Support System Development

et al. 2021

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This article raises the issue of decision support system (DSS) development in enterprises concerning the compensation system (CS). The topic is relevant as the CS is one of the main components in human resource management in business. A key element of such DSSs is CS models that provide predictive analytics. Such models are able to give information about how a particular CS affects output, product quality, employee satisfaction, and wage fund. Thus, the main goal of this article is to obtain a CS statistical model and its formulas for determining the probability densities of resultant indicators. To achieve this goal, the authors conducted several blocks of research. Firstly, mathematical formalization of CS functionality was described. Secondly, a statistical model of CS was built. Thirdly, calculations of CS result indicators were made. Reliable scientific methods were used: black box modeling and statistical modeling. This article proposes a statistical and analytical model. As an example, a piecework-bonus system statistical model is demonstrated. The discussion derives formulas of integral estimations showing the probability density of the resulting CS indicators and the related statistical characteristics. These results can be used to predict the behavior of the workforce. This constitutes the scientific novelty of the study, which will establish significant advances in the development of DSSs in the field of labor economics and HR management.

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Asymmetric nexus between wages and productivity in the context of the global financial crisis

Nasir

Howes

et al. 2022

Journal of Economic Behavior & Organization

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The effects of minimum-wage increases on wage offers, wage premiums and employee effort under incomplete contracts

Cited by 8 publications

References 57 publications

An experimental study on the effect of penalties on employers' trust and employees' reciprocity and the moderating effect of communication

An experimental study on the effect of penalties on employers' trust and employees' reciprocity and the moderating effect of communication

Enterprise Compensation System Statistical Modeling for Decision Support System Development

Asymmetric nexus between wages and productivity in the context of the global financial crisis

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