Ebook Relative Wages and Employee Theft: Evidence from Retail Chains
Efficiency wage theories propose that higher levels of pay induce higher productivity from workers. This argument explains an apparent anomaly in the labor market where some firms pay above-market clearing wages, even when individuals with comparable characteristics to those employed remain involuntarily unemployed. Proponents of these theories argue that cutting wages to market-clearing levels would decrease the productivity of their employees and would result in a higher “labor cost per efficiency unit” (Yellen 1984).
Some efficiency wage theories explain this phenomenon based on the workers’ desire to maximize their own gains. For example, the “shirking model” suggests that above-market wages can induce employees to work harder rather than shirk, due to the greater costs associated with losing their jobs (Shapiro and Stiglitz 1984; Dickens, Katz, Lang, and Summer 1989). Other theories adopt a sociological perspective (e.g. the “gift exchange” and “reciprocity” models), where the positive relationship between relatively higher wages and employee productivity is explained by fairness and reciprocity considerations. In particular, these models predict that employees who believe they are paid more than what they consider to be fair (e.g. more than the pay received by a comparable set of employees in a competing firm) will reciprocate to the firm by increasing their performance, but employees who believe they are paid unfairly (e.g. below-market wages) may reduce their performance and even harm the company “in the name of fairness” (Akerlof 1984; Akerlof and Yellen 1990; Fehr and Gachter 2000).
While different versions of efficiency wage theories have been proposed, the main assumption underlying these models is that there exists a positive relationship between relatively higher wages and work productivity, which motivates firms to pay employees more than the minimum wage required to hire them. Prior empirical studies have tested this positive relationship by focusing on the association between relatively higher wages and employee effort. For the most part, laboratory experiments have found support for this relationship, yet recent field studies have suggested that the effect of wages on employee effort may not persist in the long run.
In this study, we consider an additional effect that relative wages may have on employee behavior, which has remained relatively unexplored in the literature. Using data from retail chain stores, we examine the extent to which relative wages (defined in this study as employee wages relative to the wages paid to employees in competing stores) induce a reduction in the amount of employee theft. Based on the efficiency wage models presented above, we predict that relatively higher wages will reduce employee theft due to employees’ stronger desire to retain their jobs and/or positive reciprocity to their employers for treating them fairly. Relatively lower wages, on the other hand, will increase employee theft due to the employees’ lower desire to retain their jobs and/or retaliation against their employers for treating them unfairly.
The potential benefits of reducing theft could be significant. Occupational theft is undoubtedly a widespread problem: it accounted for 88.7% of the 959 cases of occupational fraud reviewed in 2008 by the Association of Certified Fraud Examiners (hereafter, ACFE) (ACFE 2008). This problem is particularly severe in retail chains, where high levels of employee turnover and geographic dispersion lead to significant monitoring problems (Brickley and Dark 1987; Campbell, Datar, and Sandino 2009). Indeed, a survey conducted by Hollinger and Clark (1983), indicated that 35% of retail store employees admit to stealing from their company, and according to the 2008 National Retail Security Survey, inventory-related employee theft amounted to $15.9 billion in the U.S. retail industry alone (NRSS 2008).
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