Pay inequality affects attendance, productivity and the social fabric of manufacturing workers in India, thus revealing impacts on firm productivity.
The idea that worker utility is affected by co-worker wages has potentially broad labour market implications. In a month-long experiment with Indian manufacturing workers, Emily Breza, Supreet Kaur and Yogita Shamdasani (Breza et al. 2017) establish the effects of pay inequality on co-workers within production units. She finds that pay inequality reduces output, as well as attendance by 10%. Pay disparity also lowers co-workers' ability to cooperate. However, when workers can clearly observe productivity differences, pay inequality has no discernible effect on output, attendance, or group cohesion.