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Employees do not just perform in accordance with their own pay but also the pay of their peers. Pay inequality can act as a disincentive, reducing employee output and attendance by a significant amount. It is irrelevant whether they have a higher or lower salary than that of their co-workers. Pay disparity also lowers the ability of employees to work in their own interests and cooperate with other workers effectively. Pay inequality may have no discernible effect if an employee is aware that a peer with a higher salary produces a greater output than them.
Ulugova Mokhira (Thu,) studied this question.