Abstract illustration of a paycheck with blurred numbers representing coarse wage-setting.

Decoding Wage Discrepancies: Is Your Boss Leaving Money on the Table?

Rhea Morgan in Business & Economy December 2025 • 4 min read.

"New research reveals how 'behavioral firms' and coarse wage-setting could be impacting your earnings and the broader economy."

The way wages are determined is a cornerstone of economic models, but what happens when real-world practices don't align with these theoretical ideals? Recent studies have uncovered a curious trend: wages tend to cluster around round numbers. This phenomenon challenges the assumption that markets operate with perfect precision and begs the question: Are firms strategically manipulating wages, or is something else at play?

A groundbreaking paper by German Reyes sheds light on this very issue, diving deep into the concept of 'coarse wage-setting.' Reyes's research, leveraging a massive dataset of over 200 million new hires in Brazil, suggests that the bunching of wages at round numbers is partly due to firms adopting simplified, less-than-optimal wage-setting strategies. These strategies, while perhaps unintentionally, have significant implications for market efficiency and worker compensation.

This article breaks down Reyes's findings, exploring the mechanics of coarse wage-setting, its consequences for both firms and workers, and what this all means for the future of fair and equitable compensation.

What is Coarse Wage-Setting and Why Do Firms Do It?

Abstract illustration of a paycheck with blurred numbers representing coarse wage-setting.

Coarse wage-setting, as defined by Reyes, is the practice of firms using simplified, often rounded, figures when determining employee salaries. Instead of meticulously calculating the 'perfect' wage based on a worker's potential productivity and market conditions, companies might rely on easy-to-remember numbers like $30,000, $35,000, or $40,000. Why? Because optimizing wages is hard work.

Reyes argues that optimization costs play a significant role. Accurately assessing a new hire's potential contribution to a company is a complex undertaking, requiring firms to gather and process vast amounts of information. Instead of investing heavily in this process, some firms opt for a 'good enough' approach, using rounded wages as a convenient rule of thumb.

Uncertainty: Estimating a new worker's productivity is inherently challenging. What tasks will they perform? How will their work impact the bottom line?

Optimization Costs: Gathering and analyzing data to determine the optimal wage takes time and resources.

Behavioral Economics: Firms might not always act in a perfectly rational way. Heuristics and simplified decision-making processes can lead to coarse wage-setting.

To illustrate this, Reyes builds a wage-posting model where optimization costs lead to the adoption of coarse rounded wages. He then provides evidence using two research designs to support these model predictions. All in all, suggests that coarse wage-setting is a real, and quite normal part of the modern economy.

The Bigger Picture: Implications and What You Can Do

Reyes's research highlights the pervasive nature of coarse wage-setting and its potential impact on economic outcomes. By understanding these dynamics, both firms and workers can make more informed decisions. For companies, it serves as a reminder to invest in fair and accurate wage-setting practices. For employees, it empowers them to negotiate for compensation that truly reflects their value and potential. As Reyes's work suggests, awareness and informed action can pave the way for a more equitable and efficient labor market.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2206.01114,

Title: Coarse Wage-Setting And Behavioral Firms

Subject: econ.gn q-fin.ec

Authors: Germán Reyes

Published: 02-06-2022

Everything You Need To Know

What is 'coarse wage-setting' and how does it affect my paycheck?

Coarse wage-setting, as defined by German Reyes, refers to the practice where firms use simplified, rounded figures when determining employee salaries. Instead of precisely calculating the 'perfect' wage, companies may use easy-to-remember numbers like $30,000 or $35,000. This can affect your paycheck because you might be paid less than if the company meticulously calculated your worth. The implications are that your compensation might not fully reflect your productivity and market value, potentially leaving money on the table for both you and the firm due to inefficient wage allocation.

Why would a company choose 'coarse wage-setting' over a more precise method?

Firms may opt for 'coarse wage-setting' primarily because of 'optimization costs.' Accurately determining a new hire's potential contribution requires significant resources and effort. It involves gathering and processing vast amounts of information, which is time-consuming and expensive. Rather than investing heavily in this process, some firms adopt a 'good enough' approach, using rounded wages as a convenient rule of thumb. There are also other factors like uncertainty in estimating a new worker's productivity and 'behavioral economics' where firms may not always act rationally, leading to simplified decision-making.

What are the potential implications of 'coarse wage-setting' for firms and the broader economy?

For firms, the implications of 'coarse wage-setting' include potentially less efficient allocation of resources if wages don't accurately reflect worker productivity. This can lead to higher labor costs or reduced productivity if highly skilled workers are underpaid. In the broader economy, 'coarse wage-setting' can distort wage distributions and potentially affect overall market efficiency. It challenges the assumption of perfect precision in markets, indicating that real-world practices may deviate from theoretical economic models, affecting the fairness and equity of the labor market.

How does German Reyes's research contribute to understanding wage discrepancies?

German Reyes's research provides valuable insights into how 'coarse wage-setting' impacts wage determination. His work, using a large dataset of over 200 million new hires in Brazil, demonstrates that wages tend to cluster around round numbers. He explains this phenomenon through his 'coarse wage-setting' model, showing that firms may use simplified wage strategies due to 'optimization costs'. This suggests that these strategies can significantly affect market efficiency and worker compensation. Reyes's work highlights that understanding these dynamics is crucial for firms and employees to make informed decisions regarding wage setting and negotiation.

As an employee, how can I use the information about 'coarse wage-setting' to negotiate a better salary?

As an employee, awareness of 'coarse wage-setting' empowers you to negotiate more effectively. Understanding that firms may use rounded numbers can inform your salary discussions. You can research the market value for your role and skills to counter the potential for underpayment. Prepare data that supports your worth and highlight your contributions. If you know your potential salary is around $30,000, try negotiating towards a higher value considering what you bring to the table. This information helps you advocate for compensation that reflects your true value and potential within the organization. By negotiating based on data and understanding potential firm practices, you increase your chances of securing fairer compensation.