DO WAGE CUTS DAMAGE WORK MORALE? EVIDENCE FROM A NATURAL FIELD EXPERIMENT

Abstract

Employment contracts are often incomplete, leaving many responsibilitiessubject to workers’ discretion. High work morale is thereforeessential for sustaining voluntary cooperation and high productivity infirms. We conducted a field experiment to test whether workers reciprocatewage cuts and raises with low or high work productivity. Wagecuts had a detrimental and persistent impact on productivity, reducingaverage output by more than 20 percent. An equivalent wage increase,however, did not result in any productivity gains. The results from anadditional control experiment with high monetary performance incentivesdemonstrate that workers could still produce substantially moreoutput, leaving enough room for positive reactions. Altogether, theseresults provide evidence consistent with a model of reciprocity, as opposedto inequality aversion.