Relative Pay, Productivity, and Labor Supply Relative Pay, Productivity, and Labor Supply

By Anat Bracha

Concerns regarding relative pay—earnings compared with the earnings of others doing a similar job or compared with one's earnings in the past—affect labor supply and productivity. Specifically, changes in pay, transparency of differential pay across workers, and the ability to explain these differences seem to be important for the decision of how much to work and how much effort to exert on the job. This implies, in turn, that relative pay concerns may contribute to unemployment and help determine the success or failure of using differential pay to incentivize employees. This brief summarizes a collection of studies showing the effect of relative pay information, even if irrelevant, on labor supply and effort.

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