Illustration of wage-setting practices

Is Your Boss Leaving Money on the Table? Unveiling the Hidden Costs of Coarse Wage-Setting

Mira Elwood in Business & Economy December 2025 • 4 min read.

"New research reveals how common wage-setting practices may be hurting firms, impacting pay equity, and creating hidden economic inefficiencies."

In today's complex economic landscape, the process of determining wages is a critical yet often misunderstood aspect of business operations. While economic models assume that both firms and workers act with perfect optimization, recent research suggests a different reality. A notable trend has emerged from both survey and administrative data: wages tend to cluster around round numbers. This phenomenon, referred to as 'wage bunching', challenges traditional economic thought and hints at less-than-optimal behaviors within the market.

Wage bunching suggests some market participants are not behaving according to strict optimization principles. One explanation is that firms strategically set wages at round numbers to exploit cognitive biases in workers, such as the 'left-digit bias,' where individuals place undue emphasis on the leftmost digit of a number. However, another perspective suggests that wage bunching arises from firms engaging in simplified, or 'coarse,' wage-setting practices, potentially due to the costs and complexities of fine-tuning every salary decision.

A groundbreaking study using data from over 200 million new hires in Brazil sheds new light on this debate. The research investigates whether the tendency to set wages at round numbers is partly driven by firms' use of coarse wage-setting strategies. By analyzing worker-firm matched data, the study uncovers a series of compelling insights into the prevalence, causes, and consequences of this widespread practice, prompting a re-evaluation of how firms approach compensation and its broader economic impacts.

The Surprising Downside of 'Rounding Up': Why Coarse Wage-Setting Can Hurt Business

The study begins by confirming a significant level of wage bunching at round numbers within the Brazilian labor market. Following this, the research explores the outcomes of firms that engage in this practice. Contrary to the expectation that firms exploiting worker biases would perform better, the study reveals a surprising trend: firms that rely on round-numbered salaries tend to experience worse market outcomes.

These 'bunching firms' exhibit several negative indicators, including poorer worker-firm matches (indicated by higher separation rates), lower job growth, and a greater likelihood of exiting the market altogether. This suggests that paying round salaries isn't a strategic move to boost profits, but rather a symptom of underlying operational inefficiencies.

Worse worker-firm matches: Employees hired at round-numbered salaries are more likely to leave their jobs, suggesting a mismatch between the worker's skills and the job requirements.
Lower job growth: Firms using coarse wage-setting strategies experience slower expansion compared to their counterparts.
Increased risk of market exit: Bunching firms face a higher probability of going out of business.

To understand these findings, the study proposes that firms may use round-numbered salaries as a simplified approximation when faced with uncertainty about the optimal wage. Estimating a new worker's true value to the firm is a complex task, requiring consideration of numerous factors that are difficult to quantify. Rather than investing in precise calculations, some firms may rely on a 'rule-of-thumb' approach, leading to coarse wage-setting.

Is It Time to Rethink Your Pay Scale?

This research highlights that how wages are set matters more than we might think. As the labor market evolves, it becomes increasingly crucial for businesses to adopt wage-setting practices that are both equitable and economically sound. By moving beyond simplified approaches and embracing more nuanced methods of compensation, firms can foster stronger worker-firm relationships, drive growth, and improve their overall competitiveness. Ultimately, a more thoughtful approach to wage determination can lead to better outcomes for businesses and their employees alike.

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Everything You Need To Know

What is 'wage bunching,' and what does it suggest about how companies determine employee pay?

Wage bunching is the phenomenon where wages tend to cluster around round numbers. This suggests that some firms may not be behaving according to strict optimization principles when setting salaries. Instead of fine-tuning every salary decision based on a worker's specific value, firms might be engaging in simplified, or 'coarse,' wage-setting practices. While not explicitly mentioned, this could also imply a lack of investment in sophisticated HR technologies or analytics that could facilitate more precise wage determination. The research indicates that firms may be using round-number salaries as a simplified approximation, but it is not necessarily driven by an attempt to exploit cognitive biases.

How does 'coarse wage-setting' affect a company's performance and the worker-firm match?

Coarse wage-setting, where firms use round-numbered salaries as a simplified approximation, is associated with worse market outcomes for companies. 'Bunching firms' experience poorer worker-firm matches, which are indicated by higher separation rates, lower job growth, and an increased risk of market exit. This suggests that employees hired at round-numbered salaries are more likely to leave their jobs due to a mismatch between their skills and the job requirements. The practice of coarse wage-setting doesn't improve outcomes but indicates underlying operational inefficiencies.

What are the potential economic consequences of firms engaging in coarse wage-setting practices?

The economic consequences of firms engaging in coarse wage-setting are far-reaching. It challenges the traditional economic assumption that firms act with perfect optimization. When firms use 'rule-of-thumb' approaches instead of investing in precise calculations to determine a worker's value, it leads to inefficiencies such as poorer worker-firm matches, lower job growth, and increased risk of market exit for these firms. This can create broader distortions in the labor market, hindering overall productivity and economic growth, and potentially impacting pay equity, though this is not explicitly detailed.

The study mentioned data from Brazil. Are the findings about 'coarse wage-setting' and 'wage bunching' likely to be applicable in other countries, or are they specific to the Brazilian labor market?

While the study uses data from the Brazilian labor market, the underlying principles of 'coarse wage-setting' and 'wage bunching' are likely applicable to other countries. Human cognitive biases, such as the 'left-digit bias,' are universal, and the complexities and costs associated with fine-tuning every salary decision exist in most economies. The extent of 'wage bunching' may vary based on cultural norms, labor laws, and industry practices, but the fundamental concept that firms sometimes simplify wage decisions for various reasons is likely widespread. Further research in different countries would be needed to confirm the extent and specific implications in those contexts.

In what ways might companies move beyond 'coarse wage-setting' to create more equitable and economically sound compensation strategies?

Companies can move beyond 'coarse wage-setting' by embracing more nuanced methods of compensation. This involves investing in more precise calculations to determine a worker's value, considering numerous factors that are difficult to quantify. Companies can also use tools like performance reviews, skill assessments, and market benchmarking to provide more tailored and accurate compensation. This approach fosters stronger worker-firm relationships, drives growth, and improves competitiveness. By adopting more thoughtful approaches to wage determination, companies can achieve better outcomes for both the business and its employees.