DO WORKERS REALLY CARE? RE-EXAMINING THE ROLE OF SOCIAL PREFERENCE IN MORALE FORMATION

Abstract

Nominal wage rigidity is a ubiquitous phenomenon which has interested labor economists, macro-economists, and psychologists alike. One of the most popular explanations of a fall in 'morale' due to a wage cut, leading to downward nominal wage rigidity, is negative reciprocity towards employers. This paper studies morale and its determinants more systematically, by differentiating between the role of social preferences, such as reciprocity, and fairness perception in morale. We experiment with a wage change in a two-period task and test the effect of choosing a wage based on respective social preference on the worker's productivity. We also test how fairness perceptions affect productivity. It's interesting to fi nd that allowing workers to choose a wage rate in accordance with own social preference actually weakly reduces the productivity of workers. In fact, this fall in productivity equals the fall in productivity when wage is decreased by about 50%. We don't find an effect of fairness perception on effort provision. The evidence suggests a substitution of reciprocity among different groups of other agents and adds to our understanding of the role of social preference, especially of reciprocity, in wage rigidity.