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Federal Reserve Bank of Boston
Current Policy Perspectives
Relative pay, productivity, and labor supply
Anat Bracha

Relative pay — earnings compared with the earnings of others doing a similar job, or compared with one’s earnings in the past — affects how much individuals would like to work (labor supply) and their effort on the job; it therefore has implications for both employers and policy makers. A collection of recent studies shows that relative pay information, even when it is irrelevant, significantly affects labor supply and effort. This effect stems mainly from those who compare unfavorably, as essentially all studies find that awareness of earning less than others or less than in the past significantly reduces labor supply or effort on the job. Comparing favorably, however, has mixed effects. For labor supply, awareness of pay differences either has a positive effect, when the comparison is with past pay, or no effect, when the comparison is with others’ pay, and it generally has no effect on exertion of effort.

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Anat Bracha, Relative pay, productivity, and labor supply, Federal Reserve Bank of Boston, Current Policy Perspectives 17-2, 01 Oct 2016.
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Keywords: relative pay; effort; labor supply; lab and field experiments
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