As Wages Increase, Do People Work More or Less? A Wage Frame Effect

Abstract

In jobs in which workers have the flexibility to decide how much work to supply, such as in the gig economy, the effect of a wage change on work supply can be hard to predict. A wage increase offers workers the opportunity to make more money. At the same time, it allows them to make money faster, so they can enjoy more leisure and do not need to work as much. Economic theory alone does not predict which outcome is more likely to occur, and the empirical evidence is also mixed. This paper provides some psychological insights into this economic problem by showing that the short-term effect of a wage change on work supply depends on how the change is framed. Given a current wage of “work l hours to earn $m,” a pay-change frame (“work the same l hours and earn $M”) facilitates a change in work supply in the same direction as the wage change, whereas a load-change frame (“work L hours and earn the same $m”) facilitates the opposite change. Hence, if strategically framed, a wage decrease can elicit the same increase in work supply as a wage increase. A set of studies demonstrate this wage frame effect on both actual work performance and expressed willingness to work. The findings from these studies offer a behavioral perspective on a classic labor economics problem, document a novel framing effect for the judgment and decision-making literature, and suggest a nudge strategy that managers and policy makers can use in incentive designs. This paper was accepted by Yuval Rottenstreich, behavioral economics and decision analysis.