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Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior

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  • Dube, Arindrajit

    (University of Massachusetts Amherst)

  • Giuliano, Laura

    (University of Miami)

  • Leonard, Jonathan

    (University of California, Berkeley)

Abstract

We analyze how quits responded to arbitrary differences in own and peer wages using an unusual feature of a pay raise at a large U.S. retailer. The firm's use of discrete pay steps created discontinuities in raises, where workers earning within 1 cent of each other received new wages that differed by 10 cents. First, we estimate a regression discontinuity (RD) model based on own wages; we find large causal effects of wages on quits, with quit elasticities less than -10. Next, we address whether the overall quit response reflects the impact of comparisons to market wages or to the wages of in-store peers. Here we use a multi-dimensional RD design that includes both a sharp RD in the own wage and a fuzzy RD in the average peer wage. We find that the large quit response mostly reflects relative-pay concerns and not market comparisons. After accounting for peer effects, quits do not appear to be very sensitive to wages – consistent with the presence of significant search frictions. Finally, we find that the relative-pay effect is nonlinear and driven mainly by workers who are paid less than their peers – suggesting concerns about fairness or disadvantageous inequity.

Suggested Citation

  • Dube, Arindrajit & Giuliano, Laura & Leonard, Jonathan, 2015. "Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior," IZA Discussion Papers 9149, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp9149
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    More about this item

    Keywords

    peer effects; quits; fairness; search frictions; turnover; regression discontinuity;
    All these keywords.

    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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