A social identity analysis of how pay inequality divides the workplace

The present research examines why organizations with more unequal pay structures have been found to be characterized by a range of negative workplace outcomes. Drawing on the social identity approach, we propose that higher pay disparity can increase the comparative fit of pay categories whereby the organizational “haves” (the highest paid employees) and “have nots” (the lowest paid employees) are more likely to be categorized into distinct social groups. In turn, this can lead to poorer organizational functioning. In two studies, a field survey (N = 413) and an experiment (N = 286), we found that higher pay inequality increased the comparative fit of pay categories, which, in turn, was associated with lower superordinate (organizational) identification, higher perceived workplace conflict, higher leader toxicity, and lower perceptions of identity leadership (i.e., a leader who creates a sense of shared identity in the organization). Our research provides novel insights into how higher inequality affects employees’ categorization processes, thereby creating a psychological divide and contributing to organizational dysfunction.