24 Oct 2013Working Paper Summaries

When $3+$1 > $4: The Effect of Gift Salience on Employee Effort in an Online Labor Market

by Duncan Gilchrist, Michael Luca and Deepak Malhotra

Do employees work harder when they are paid more? This study shows that paying above-market wages, per se, does not have an effect on effort. The authors offered an experiment in a field setting that allowed them to test for the conditions under which higher wages elicit higher effort. They hired three groups of workers for a data entry task on the online labor market oDesk.com, telling them all that this was a one-time job. Group one ("3") was hired at $3 per hour. Group two ("3+1") was also hired at $3 per hour, but before starting work, people in group two were told that there was unexpectedly extra money in the budget and they would instead be paid $4 per hour. Group three ("4") was hired directly at $4 per hour, so that the "extra" money would not signal a salient "gift" from the employer. Our findings show that higher wages in which the gift was salient (3+1) led to higher and more persistent effort. However, higher wages by themselves (4) had no effect on effort compared to the lower wage (3) condition. Moreover, higher effort in the 3+1 group was strongest for employees with the most experience on oDesk, and those who had worked most recently on oDesk-exactly the kind of workers for whom our $1 additional payment was likely to be most salient (e.g., because it is not common in this labor market). Key concepts include:

An employer has the ability to set an employee's reference point, and giving a surprise gift can be more impactful than simply paying higher wages.
Targeted gifts-aimed at those who are most likely to interpret the additional reward as a gift-can be a cost-effective mechanism to reward employees, improve morale and increase productivity.
However, reciprocity and gift giving are unlikely to explain all types of "efficiency wages" (i.e., "above market" wages) as we see them in the world around us because high wages that are baked into the hiring wage contract do not elicit the same productivity increase, but may induce greater effort by increasing the desire to keep a high-paying job if continued employment is possible.

Author Abstract

Behavioral economists argue that above-market wages elicit reciprocity, causing employees to work harder-even in the absence of repeated interactions or strategic career concerns. In a field experiment with 266 employees, we show that paying above-market wages ($4), per se, does not have an effect on effort compared to a lower baseline wage ($3). However, structuring a portion of the wage as a clear and unexpected gift by hiring at a given wage, and then offering a raise with no strings attached after the employee has already accepted the contract ($3 + $1) does lead to persistently higher effort. Consistent with the idea that the recipient's interpretation of the wage as a gift is an important factor, we find that effects are strongest for employees with the most experience and those who have worked most recently-precisely the individuals who would recognize that this is a gift.