Working Without Wages: The Consequences of Widespread Pay Delays

Abstract

In this paper, we study a rarely documented firm practice in low-income countries that affects millions of workers and has far-reaching implications for labor markets: the withholding of employees’ wages. Using original survey data from Lagos, Nigeria, we find that 30 percent of workers across firms of all sizes report delayed or unpaid salaries. We develop a model showing theoretically that wage withholding can be nearly costless for firms and even increase employee effort when contractual enforcement is weak. To examine how wage withholding affects workers’ effort and labor-market participation, we implement a field experiment. We find that delaying wages increases employees’ initial effort, without affecting absenteeism or total hours worked. Signaling salary reliability significantly increases job take-up by about 25 percent, an effect driven predominantly by individuals who had initially expressed no interest in wage employment. However, these workers are no more productive than those who accepted jobs without a salary guarantee, suggesting that firms face minimal costs from engaging in this practice. In contrast, workers place high value on reliable pay, yet weak enforcement and limited worker alternatives create a moral hazard for firms to withhold wages.