Paying better employees higher wages probably makes sense, right? But can the resulting pay inequality de-motivate your team? Frank explores.

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Simple economic models (and pretty simple intuition) suggest we should pay more for better employees. The indirect upshot of this though is that workers will make different amounts.

But what if people find out about a pay disparity? Does it make things weird? Does it hurt morale?

Well, in This Week in Behavioral, we try not to pose provocative questions unless we have the answer. And this one has significant implications.

This weeks answer comes from a new paper by Emily Breza, Supreet Kaur, and Yogita Shamdasani, The Morale Effects of Pay Inequality.

The authors took over a whole firm in India, where goods are manufactured by hand. For a few weeks, they pay workers a good, but equal wage. Then, they raise everyones wages. Everyone works in small groups all day.

Then they gave everyone a raise! Awesome! But for half the groups, everyone gets the same raise. For the other half of the groups though, they raise better workers pay even more. Everyone should be happy since everyone is getting paid more, right? Doesnt seem so.

In groups with pay inequality, everyone stops showing up to work as often even the super high pay workers. Turns out people dont like coming to work when there is pay inequality.

Most interestingly, the bad news only holds for groups where workers were somewhat equally productive before the pay raises.

When theres one woman whos twice as good as everyone else? She can make more. Thats fine. People show up. People work. Cohesion is fine. When you maybe, sorta produced a little bit more than me? And now youre getting paid that much more? Thats not going to fly.

Makes for some interesting implications on how disparate pay, income and returns can affect social dynamics within a previously cohesive group. And a stronger argument for knowing what youre doing.

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