Under what conditions do pay dispersion associated with higher/lower quit rates in firms?

What is it about?

A long line of research on pay dispersion reported conflicting results on the outcome of pay dispersion within firms, depending on the theoretical domain from which the question is investigated. While research grounded in economics argue that pay dispersion reduce employee exit due to motivational effect, an equally long line of research grounded in social psychology argues the opposite - that pay dispersion increase employee exit due to social comparison costs. We reconcile these findings by suggesting that pay dispersion results in higher employee exits or retention depends on the level at which pay is dispersed. We found evidence for both arguments - that pay dispersion increase exits when dispersed horizontally but reduce exits when dispersed vertically.

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Why is it important?

This is an important finding given that the debate on positive and negative effects of pay dispersion on employee retention remain inconclusive despite decades of research. Part of the difficulty stems from the fact that studies have employed samples from different industry, national contexts, pay levels and time periods. Our findings from the population of labor market data from Sweden help reconcile these differences by spelling out the conditions under which we can observe both outcome in the same (yet general) context.

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