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

Abstract

We analyze how separations responded to arbitrary differences in own and peer wages at a large US retailer. Regression-discontinuity estimates imply large causal effects of own-wages on separations, and on quits in particular. However, this own-wage response could reflect comparisons either to market wages or to peer wages. Estimates using peer-wage discontinuities show large peer-wage effects and imply the own-wage separation response mostly reflects peer comparisons. The peer effect is driven by comparisons with higher-paid peers-suggesting concerns about fairness. Separations appear fairly insensitive when raises are similar across peers-suggesting search frictions and monopsony are relevant in this low-wage sector. (JEL D63, J31, J42, J62, L81)When making decisions about job mobility, do workers mainly compare their pay with the outside market? Or do they also make comparisons with the pay of coworkers in their own firm? If workers are very sensitive to wage differences across firms as in the standard competitive labor-market model, then employers have little scope to set wages. But even if a firm's wage-setting is not fully constrained by market competition, employers could still be constrained by employee concerns about relative pay within the firm. Such internal constraints could lead to wage compression or to measures that inhibit comparisons across coworkers-such as pay secrecy and outsourcing of jobs. Estimates of how employee turnover responds to external and internal wage comparisons are therefore central to understanding the wage-setting behavior and other employment practices of firms. Yet the endogeneity of wages in natural employment settings has made causal evidence hard to establish.In this paper, we analyze how job separations responded to arbitrary wage differences among sales employees at a large US retailer with hundreds of stores nationwide (henceforth "the firm"). Using quasi-experimental variation that resulted from a

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