Institute for Research on Labor and Employment

When work groups support the goals of the firm, firms will want to narrow wage dispersion in order to increase group cohesiveness and productivity. This narrowing of wage differentials has several implications: (1) Firms will pay wages that vary less than marginal productivity; (2) Firms that must pay the high end of their wage distribution a particularly high wage will pay all workers particularly high wages; (3) The market ignores the rent that egalitarian wages provide to low-wage workers, and the rent will be under-provided in equilibrium. At the margin, increasing the number of workers in cohesive firms and/or increasing wages for the low end of the wage distribution will increase the total amount of rents, raising national output.