On the economic architecture of the workplace: Repercussions of social comparisons among heterogeneous workers

Stark, Oded and Hyll, Walter (2011): On the economic architecture of the workplace: Repercussions of social comparisons among heterogeneous workers. Forthcoming in: Journal of Labor Economics , Vol. 29, No. 2 (2011)

Abstract

We analyze the impact on a firm’s profits and optimal wage rates, and on the distribution of workers’ earnings, when workers compare their earnings with those of co-workers. We consider a low-productivity worker who receives lower wage earnings than a high-productivity worker. When the low-productivity worker derives (dis)utility not only from his own effort but also from comparing his earnings with those of the high-productivity worker, his response to the sensing of relative deprivation is to increase the optimal level of effort. Consequently, the firm’s profits are higher, its wage rates remain unchanged, and the distribution of earnings is compressed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social comparisons; Heterogeneous workforce; Relative deprivation; Effort exertion; Earnings gap; Earnings compression
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M5 - Personnel Economics > M54 - Labor Management; D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles

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