Inequality hurts. That's the message of this new paper from Bruno Frey and colleagues. They looked at how US basketball players and German bundesliga footballers' performance is affected by pay inequalities. And they found that players who earn less than their team-mates tend to perform worse, even controlling for ability. Low pay relative to one's peers reduces one's performance, even though rising pay across the board improves it.
This has implications outside of sport. It suggests that a firm that pays a big bonus to a "star" performer - or just gives him a pay rise to try and keep him - might see its overall performance worsen, as its less well paid employees work less well in response. This effect could outweigh the tendency for the well-paid employee to respond positively to the higher incentive.
What's not so clear, though, is the precise mechanism. Do relatively poorly paid players consciously under-perform out of resentment? Or is it instead that pay is a way for employers to convey expectations? Low pay signals that a boss doesn't expect his employee to perform especially well, and people have a way of living up or down to expectations?
Whatever the mechanism, this suggests that conventional thinking might not be the whole truth. It's commonly thought that people are poorly paid because they are unskilled. But could there be an element of reverse causality here - that people are unskilled because they are low paid?