The distribution of pay and the willingness to quit among U.S. workers

As the U.S. labor market continues its slow but steady recovery from the Great Recession, the movements in the so-called quit rate, or the share of workers voluntarily leaving their jobs, is being watched closely for signs that wages are beginning to increase alongside jobs growth. A continued increase in the quit rate would be a sign that employers are starting to hire away workers who are already employed elsewhere, presumably enticing them with higher wages. How large those salary increases need to be to get workers to leave their current employers is often a matter of how much companies within different industries are willing to pay to poach new talent. But a new research paper looks at how some workers might also be responsive to relative wage increases inside their own firm when it comes to quitting their current jobs.

This new paper, by economists Arindrajit Dube of the University of Massachusetts-Amherst, Laura Giuliano of the University of Miami, and Jonathan Leonard of the University of California-Berkeley, looks at how the quit rate at a large U.S. retail company changed after a pay increase in light of two minimum wage hikes, one in 1996 and the second in 1997. After the minimum wage was increased, the firm increased wages for a large number of workers—well beyond those who were earning below the minimum wage. According to the three authors, 5 percent of hourly workers at the firm were below the new minimum wage in 1996 and 10 percent were in 1997, yet the firm ended up raising wages for 30 percent of its workers in 1996 and 40 percent in 1997.

What’s most interesting about how the workers received raises at the firm is the way they were allocated. Workers were sorted into sections based on their wages spanning fifteen cents an hour, with everyone inside of that section moving up to a new wage level. So everyone making between $4.40 and $4.54 an hour, for example, were moved up to the same higher wage. This means a worker making $4.54 an hour would see his colleagues making $4.55 an hour get a much larger raise. These seemingly very similar workers ended up with very different raises because of an arbitrary difference.

This difference also creates a very clear break between very similar workers, which allows Dube, Giuliano, and Leonard to use a technique called “regression discontinuity” to examine the causal effect of the differences in wage increases within the firm. In this case, they can study the effect on the quit rate of workers. What they find is that concerns within the firm had a large impact on decision of workers to quit.

Specifically, the authors show that the probability of a worker quitting is quite sensitive to changes in the average wages of their peer coworkers. In fact, workers seem to be much more sensitive to peer wages inside the firm than outside the firm. And more specifically, workers who end up earning less than their peers are more likely to quit.

The authors say these results have two implications for the U.S. labor market. The first is that the lack of responsiveness to outside wages is a sign of quite a bit of friction in the jobs market, which means workers need to see significant wage difference to move to another firm. Such frictions are a sign of the bargaining power of employers in the labor market.

The second takeaway is that workers do seem to care about wage inequality within their firms as workers who end up earning less than their peers are far more likely to quit, a sign that frustration with inequity is at play. This means employers trying to keep workers might want to look at “compressing their wage distribution,” economic parlance for reducing the pay gaps between workers within firms. These results indicate that workers are so averse to arbitrary inequality that they’ll leave the firm and accords with other results showing that pay inequities affect worker satisfaction.

Dube, Giuliano, and Leonard’s results would indicate that a more equitable distributions of pay within firms might decrease quit rates and reduce turnover within the firm. While some workers quit to go find higher pay at another job, employers might want to reduce the number of workers who quit because of frustration with inequitable pay.