Pay, Reference Points, and Police Performance*

TLDR

Theories posit that pay raises below a reference point diminish job performance. This study uses final‑offer arbitration outcomes in New Jersey police unions to test whether wage outcomes relative to a reference point affect officer performance. Officers who lose arbitration exhibit lower arrest rates, longer sentences, and higher crime reports, with larger declines when the awarded wage is further from the union demand, confirming that fairness and reference‑point considerations shape workplace behavior.

Abstract

Several theories suggest that pay raises below a reference point will reduce job performance. Final offer arbitration for police unions provides a unique opportunity to examine these theories, as the police officers either receive their requested wage or receive a lower one. In the months after New Jersey police officers lose in arbitration, arrest rates and average sentence length decline, and crime reports rise relative to when they win. These declines in performance are larger when the awarded wage is further from the police union's demand. The findings support the idea that considerations of fairness, disappointment, and, more generally, reference points affect workplace behavior.