Each year, thousands of young Australians enter the workforce with a sense of excitement and trepidation. More than half will work in sectors typically associated with lower pay, such as hospitality, construction and retail, and many will be new migrants facing challenges adapting to a new life and country.

Ensuring that new workers know their rights and are protected against unduly low pay is not only part of a fair and equitable society, but can also help them progress their careers and build a stronger economy.

An online experiment to study wage bargaining

A recent study by BehaviourWorks provides some insights into the complex behavioural factors at play in wage negotiations.

The study focused on the behavioural effects of including the minimum wage on a workplace information statement, which all employers must provide to new employees before they start.

In the absence of any award or enterprise agreements, the Australian national minimum wage is currently (November 2019) $19.49 per hour for full- and part-time adult employees, and $24.36 for casual adult employees.

In particular, the team examined whether minimum wage information had an anchoring effect on wage setting.

Anchoring is a cognitive bias or tendency for us rely too heavily on the first piece of information we receive when making estimates or judgements and has been known to impact negotiation outcomes.

What did we do?

The study involved a series of online experiments with 1,500 participants, half of whom were employed in industries typically associated with minimum pay rates.

Participants were asked to complete a simulated wage bargaining task, where they were randomly assigned to the role of manager or worker.

There were three versions of the task, 1: where there was no minimum wage information, 2: where participants viewed a relatively low minimum wage, and 3: where participants viewed a relatively high minimum wage.

Behavioural consequences of the minimum wage

As expected, minimum wage information was effective in shifting wages to fair levels. Consistent with the anchoring effect, providing the minimum wage influenced the wages that managers set and workers accepted.

However, this effect was stronger for a high minimum wage.

What’s more, introducing a high minimum wage also resulted in a higher employment rate. This is because minimum wage information helped coordinate wage-setting so that managers offered a higher wage than what workers were asking for.

A further interesting finding is that the minimum wage not only dictated the wages that people set, but also the wages that people thought were “fair”.

“Typically, we think of fairness as a fixed concept, but when we asked people to indicate what a fair wage should be, we found that this was also anchored by the specific minimum wage information they had been exposed to,” explains lead researcher, Dr Kun Zhao.

The exercise also revealed some biases in managers’ wage setting, with managers tending to believe that they offered higher wages than everyone else; an example of the better-than-average or over-confidence effect.