10 1016 J Joep 2016 08 003 The Effect

Journal of Economic Psychology 56 (2016) 274–298
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Journal of Economic Psychology

journal homepage: www.elsevier.com/locate/joep
The effect of employee loyalty on wages

Oliver Masakure
Lazaridis School of Business and Economics, Wilfrid Laurier University, 73 George Street, Brantford, Ontario N3T 2Y3, Canada
a r t i c l e i n f o a b s t r a c t
Article history: In spite of a sizeable body of research linking employee loyalty to organizational
Received 14 October 2015 performance, the causal link between employee loyalty and employee wages has rarely
Received in revised form 18 July 2016 been examined. We use the UK’s 2011 Work and Employment Relations Survey (WERS)
Accepted 12 August 2016
employee-firm matched data to estimate ordinary least squares (OLS), instrumental
Available online 17 August 2016
variables (IV) models and treatment effects models. Our results show that employee
loyalty is negatively associated with wages.
Keywords:
Ó 2016 Elsevier B.V. All rights reserved.
Employee loyalty
Wages
Instrumental variables
1. Introduction
Employee loyalty has captured the attention of scholarly researchers and managers for many years because of the desir-
able consequences attributed to high levels of employee loyalty, such as: working hard (Drizin & Schneider, 2004; Sweetman,
2001), providing higher quality service to customers (Loveman, 1998; McCarthy, 1997; Sirdeshmukh, Singh, & Sabol, 2002)
and reduced intentions to quit (Hoffmann, 2006; Sweetman, 2001; Ton & Huckman, 2008), all of which enhance organiza-
tional performance (Brown, McHardy, McNabb, & Taylor, 2011; Loveman, 1998). Loyal employees tend to go above and
beyond their work duties to further the company’s interests (Drizin & Schneider, 2004; Hajdin, 2005; Sweetman, 2001). A
growing number of studies on monetary incentive schemes have modeled the importance of non-pecuniary sources of
worker motivation and showed that production is enhanced when workers act in the interests of the employer (Akerlof &
Kranton, 2005; Benabou & Tirole, 2003). A large literature on business ethics has analyzed the roots, nature and conse-
quences of loyalty to employees and firms. Some argue that loyalty benefits both employees and firms (Elegido, 2013;
Mele, 2001; Randels, 2001; Schrag, 2001), but others question the value of loyalty (Carbone, 1997). The evidence states that
firms routinely fail to acknowledge past employee loyalty and contributions (Dabos & Rousseau, 2004; Roehling, Cavanaugh,
Moynihan, & Boswell, 2000) and renege on their explicit or implicit contractual promises to workers (Harmon, Kim, & Mayer,
2015; Robinson & Rousseau, 1994). In addition, it is now common for firms to downsize their workforce even when there are
no financial pressures to do so (see Datta, Guthrie, Basuil, & Pandey, 2010 for a review). The failure by firms to fulfill their
commitment to workers happens in spite of the potential negative workplace consequences, such as labour turnover and
reduced job performance (Bunderson, 2001; Dabos & Rousseau, 2004; Harmon et al., 2015).
There is, however, limited empirical evidence on the link between employee loyalty and monetary rewards. An exception
is Cohen (2009) on loyalty and wages in US firms, Judge, Livingston, and Hurst (2012) on the agreeableness trait and wages in
the US, Nyborg and Zhang (2013) on corporate social responsibility and wages in Norway and Linz, Good, and Busch (2013)
on loyalty and earnings in six post-communist countries. However, none of these studies estimate the causal effect of loyalty
on earnings, which is the focus of this study. More specifically, we use instrumental variables methods on data from the UK’s
E-mail address: omasakure@wlu.ca
http://dx.doi.org/10.1016/j.joep.2016.08.003
0167-4870/Ó 2016 Elsevier B.V. All rights reserved.
O. Masakure / Journal of Economic Psychology 56 (2016) 274–298 275
Work Employment and Relations Survey (WERS) of 2011. We study wages because pay is one of the most frequent measures
of objective career success, and it is a key facet in occupational life (see Abele & Spurk, 2009; Judge, Cable, Boudreau, & Bretz,
1995; Ng, Eby, Sorensen, & Feldman, 2005; Nicholson & De Waal-Andrews, 2005).
Employee loyalty is a complex, multifaceted construct that has been defined through numerous perspectives, including
philosophical (Gilbert, 2001; Randels, 2001; Schrag, 2001) and psychological lens (Hart & Thompson, 2007). Some studies
have defined employee loyalty as a behavior (Carson, Carson, Birkenmeier, & Toma, 2006; Hoffmann, 2006; Rusbult,
Farrell, Rogers, & Mainous, 1988), an attitude (Hart & Thompson, 2007; Leck & Saunders, 1992), a virtue (Schrag, 2001),
or a combination of psychological traits and virtues (Mele, 2001; Randels, 2001). Sweetman (2001) suggests that loyal
employees ‘‘exhibit the kinds of behaviors that make businesses successful—they work hard, stay late, go the extra mile
to delight the customer, and recommend the company to their friends as a good place to work.” In this paper, we take
the ‘attitude’ perspective, which views loyalty as an employee’s feeling of attachment to his/her employer (Hart &
Thompson, 2007; Leck & Saunders, 1992; Sweetman, 2001).
Given that there are only a few empirical studies that have considered the association between loyalty and wages, we
focus on this relationship. Cohen (2009) considered the links between employee loyalty and employee retirement portfolios,
as well as the link between employee loyalty and wages. Cohen measured loyalty as a proportion of the employee’s pension
savings invested in their company’s stock. The study found that workers who are more loyal to their respective employers
(i.e. save a large proportion of their pension wealth in their company stock) lose about 20% of their retirement income, in
spite of the existence of alternative retirement plans available to them (Cohen, 2009). The study also finds that, when work-
ers are more loyal to a firm, the firm can pay them lower wages (Cohen, 2009). Using data from different sources,1 Judge et al.
(2012) find that US employees who score high on the agreeableness personality trait earn about 18% less in wages that those
who are disagreeable.2 Based on data from Norway, Nyborg and Zhang (2013) find that workers in firms with a higher reputa-
tion for corporate social responsibility earn between 21% and 30% less in wages that those in firms with lower corporate social
responsibility reputation.3 However, these results are not causal.
In contrast to Cohen (2009), Judge et al. (2012), Nyborg and Zhang (2013) and Linz et al. (2013) find a positive association
between employee loyalty and wages using cross-sectional cross-country data from six post-communist countries. Their
results are not causal because of the possibility of reversed causality and/or unobserved heterogeneity. For example, it is pos-
sible that wages lead workers to feel more loyal to the firm. Alternatively, omitted variables may jointly influence the rela-
tionship between employee loyalty and wages. Failure to address endogeneity can bias estimates even in large samples
because estimators of the model parameters are inconsistent (Wooldridge, 2010). Instrumental variables regression can
address both sources of endogeneity (reverse causality and omitted variables bias).
The rest of the paper is structured as follows: Section 2 focuses on the theoretical link between loyalty and wages, fol-
lowed by a description of the data and empirical approach in Section 3. Section 4 focuses on data analysis, followed by a
discussion of the results and conclusions in Section 5.
2. Theoretical links between loyalty and wages
Workers act in the interests of their employers for a number of reasons. Sometimes, money is the motivation, but often it
is because they are intrinsically motivated to do their work (Benabou & Tirole, 2003; Besley & Ghatak, 2005; Francois, 2007).
The non-pecuniary benefits they derive from their work include feelings of meaning, pride, and purpose in their tasks; iden-
tification as part of a work-related community; alignment of their values with those of the organization; and increased sat-
isfaction in their personal lives because of their work (Elegido, 2013; Gilbert, 2001; Hart & Thompson, 2007; Hoffmann,
2006; Mele, 2001; Randels, 2001; Schrag, 2001).
Economic theory shows that, when the intrinsic incentives of the employee and the values of the employer are more
aligned, employees are willing to work for less pay so that monetary rewards and intrinsic incentives will be substitutes
(Akerlof & Kranton, 2005; Besley & Ghatak, 2005; Francois, 2007; Benabou et al., 2003). More specifically, in a theoretical
model of employee workplace identity and wages, Akerlof and Kranton (2005) show that workers who identify with their
employer will be willing to work for lower wages, while those who do not will require higher monetary rewards to perform
their jobs well. It is important to note that these theories are at the firm level, and not at the supervisor level.
The literature cites a number of mechanisms through which loyalty will be associated with wages, but we focus on one
channel where workers are heterogeneous in their loyalty, and the firm may choose to pay them differently, so that there is a
negative correlation between loyalty and wages. The literature assumes a profit-maximizing firm with monopsony power
1
The data came from the US’s National Longitudinal Surveys of Youth (NLSY97) and the National Survey of Midlife Development in the United States
(MIDUS) and the Wisconsin Longitudinal Study (WLS).
2
People who score high in agreeableness tend to be more co-operative, warm and not antagonistic. The reason why they earn lower wages is that highly
aggregable workers are more oriented toward maintaining relationships in the workplace, and as such are less likely to negotiate harder for their pay.
Disagreeable people may value money more and are more likely to make higher investments in their extrinsic success. It has been suggested that disagreeable
people are more likely to take a job that will put them far away from extended family, but an aggregable person might choose not to move because they want to
balance career and strong family ties (Judge et al., 2012).
3
One reason is that some workers prefer or get more attached to work for an employer that is socially responsible (Nyborg & Zhang, 2013). The firm’s CSR
reputation induces some employees to be more attached to the firm and to work hard to meet the firm’s goals even when monetary incentives are weak
(Nyborg and Zhang, 2013).
276 O. Masakure / Journal of Economic Psychology 56 (2016) 274–298
over the setting of wages. In addition, studies show that an employee with a high level of loyalty to their employer will have
a smaller psychological cost from exerting effort into his/her work. As well, we assume that the firm also provides non-
pecuniary benefits to its workers such as private health coverage, pension scheme or extended paid leave.
However, because most of these benefits involve direct costs, they are costly to the firm in the first place. Thus a rational
employer will only provide these perks if they expect some benefits that can at least offset these investments and consistent
with the compensating wage differentials theory, a profit maximizing firm will reduce its wage bill on loyal workers (Rosen,
1974). Thus when a worker’s level of loyalty increases, a firm can pay that worker a lower wage and still get high effort from
him/her. However, a less loyal worker has a higher psychological cost of exerting effort, and the firm may have to pay a
higher wage for him/her to work exert the same amount of effort as the peer (Akerlof & Kranton, 2005). Thus, we hypothesize
a negative relationship between loyalty and wages.
3. Data description
In order to explore the causal link between employee loyalty and employee wages, we use data from the Workplace
Employment Relations Survey (WERS) 2011, the sixth in the series. The WERS is a nationally representative survey of British
workplaces with five or more employees. The purpose of WERS is to provide data on workplace relations and employment
practices in Britain. The survey covers establishments from all industry sectors except those in primary industries (agricul-
ture, fisheries) and private households with domestic staff. The exclusion of primary industry is not a concern because, in the
UK, it is not a major employer. The WERS data has both a management component and an employee component. For the
management component, an interview was conducted with the senior person responsible for industrial relations, employee
relations, or personnel matters at the firm level. The employee component collected information from 25 randomly chosen
workers within each organization. The data set contains 21,981 employees from 2680 workplaces. Since our focus is on pri-
vate sector employees, we have 10,552 observations after missing values are taken into account.
3.1. Empirical analysis
We investigate the causal relationship between employee loyalty and employee wages using cross sectional data from
WERS 2011. As discussed above, the negative link (Cohen, 2009) and positive link (Linz et al., 2013) between employee loy-
alty and employee wages is not causal because the loyalty variable may be endogenous due to omitted variables or reverse
causality. The omitted variables bias problem may arise if there are unobservable characteristics that are correlated with
both employee loyalty and employee wages. A reverse causality bias between loyalty and wages may arise if higher wages
lead employees to develop a sense of loyalty to the organization.
A common method that addresses both sources of endogeneity is an instrumental variables (IV) model. The IV model
requires finding observable characteristics that provide exogenous variation in employee loyalty that are uncorrelated with
wages except through loyalty. We estimate the following two stage least square (2SLS) through Stata’s ivreg2 procedure;
employee wages in Eq. (1) and employee loyalty in Eq. (2):
ln Wij ¼ a þ ^Lij s þ Xij b þ Kj c þ lij ð1Þ
Lij ¼ a þ Rij d þ Xij b þ Kj c þ eij ð2Þ

where outcome variable ln Wij is the log of wages of the ith worker in the jth workplace. The variable L is employee loyalty
and R is the vector of instruments. The variable ^
L is the predicted value of loyalty from the first-stage regression. The vector X
includes individual characteristics with b as the vector of coefficient estimates, while K is a firm-specific factor for workplace
j, while lij and eij are errors term. The coefficient of interest is s. As we explain below, our endogenous variable is binary. We
fit a 2SLS with a linear probability model in the first stage following extant literature (Angrist & Krueger, 2001), and a linear
model on control variables and the predicted value of employee loyalty in the second stage. We apply bootstrapped standard
errors clustered at the firm level.
We are not aware of previous studies that have used instrumental variables to assess the effect of employee loyalty on
wages, even though some of the literature on economic growth has used some measure of religion as an instrument for inter-
personal trust (Zak & Knack, 2001), attitudes toward trust (Guiso, Sapienza, & Zingales, 2006) and moral values toward work
(Balan & Knack, 2012). The argument in these studies is that, while individual trust and morality are shaped by religious
beliefs, religious beliefs only influence economic outcomes through trust and moral values. This means that religious beliefs
are a good instrument for individual traits because they have no direct effect on economic outcomes (Balan & Knack, 2012;
Guiso et al., 2006; Zak & Knack, 2001).
Consistent with this reasoning, and as detailed below, we use the respondent’s religion as an instrument for employee
loyalty. For the purposes of this paper, we call this variable ‘‘religiousness.” This instrument comes from a question that
asked respondents about their religious affiliation. Respondents were asked to indicate (1) No religion; (2) Christian
(including Church of England, Church of Scotland, Catholic, Protestant, and all other Christian denominations; (3) Buddhist;
(4) Hindu; (5) Jewish; (6) Muslim; (7) Sikh; and (8) Another Religion. From these responses, we created a dummy
variable with a value of 1 if the individual indicated any of the religions (2–8), and zero otherwise. Following extant
studies (Lim, MacGregor, & Putnam, 2010), we create a binary variable, even though the non-religious category is very
diverse.4
The first identification assumption of the standard IV is that the instrument (religiousness) should be strongly correlated
to employee loyalty. This is theoretically plausible because studies on religion suggest that believing in a superior being cap-
tures people’s deep-seated values and beliefs, and influences views on the meaning of work and life in general (Allan, Duffy,
& Douglass, 2015; Dik & Duffy, 2009; Wuthnow, 1994). Religion/religious beliefs are an important dimension of one’s cul-
tural values (Weller, Purdam, Ghanea, & Cheruvallil, 2013). More specifically, religiousness may increase one’s sense of a
sacred calling in life, which could lead to a greater willingness on average to sacrifice personal interests for others (Hall,
Oates, Anderson, & Willingham, 2012; Walker, Jones, Wuensch, Aziz, & Cope, 2008; Wuthnow, 1994 p.101). Religious people
are more likely to express a greater desire to serve others and seek unity with others through sharing values, and have a
sense of belonging and community in the workplace (Pajak & Blase, 1989).
Using a sample of business students, Westerman, Whitaker, and Hardesty (2013) examined the link between three val-
ues: belief in God, conscientiousness, and Machiavellianism and work-related values. They found that students who believed
in God were more likely to be virtuous advocates (i.e. other-centred and other-sensitive). Virtuous advocates are more con-
cerned with helping the team or organization to reach its goals than about seeking their own personal goals, and they help
the team achieve its goals by being sensitive to the needs and feelings of their associates (Westerman et al., 2013). The argu-
ment is that religiousness may be the source of this moral and social other-centred focus (Westerman et al., 2013; Wuthnow,
1994). Hall et al. (2012) suggest that the more aware people are of their values, the more they make choices in the workplace
that are aligned with those values.
Identification of the IV model also requires that the instrument should not be correlated with unmeasured determinants
of wages. That is, the belief in God should only influence wages through its effect on loyalty. While studies on economic
growth suggest that religion affects economic outcomes via social values, at a micro level, this assumption may be
problematic if religiousness serves as a proxy for unobserved individual factors (such as work ethic) that are associated with
wages. If this is the case, the religious variable may have an independent effect on wages resulting in upwardly
biased IV estimates. Yet, as we argue below, contemporary work ethic is secular (Miller, Woehr, & Hudspeth, 2002;
Wuthnow, 1994).
First, the religiousness variable captures the general orientation of people who believe in a superior being and not the
ethical or cultural content or activities of a particular religious creed. Secondly, contemporary work ethic (as opposed to
the Protestant work ethic) is a general combination of work-related values and behaviors (Miller et al., 2002; Wuthnow,
1994). It is secular and not tied to any one set of religious beliefs (Miller et al., 2002 p.456).5 According to Miller et al.
(2002 p.456) ‘‘what was conceived as a religious construct is now likely secular and is best viewed as general work ethic
and not a Protestant work ethic p.456”. In secular societies, the virtues of hard work, responsibility and civility are held in
almost equal measure by the non-religious and religious (Manning, 2013; Zuckerman, 2009). In contemporary workplaces ‘faith
neither encourages nor discourages hard work because work has simply become institutionalized as part of the way in which
most people live their lives’ (Wuthnow, 1994 p.57). Wuthnow (1994 pp.62–65), further argues that both religious and non-
religious workers have to work hard to make a living; most religious people work in non-religious workplaces; and both tend
to experience the same job demands, frustrations, and pressures including work-family conflict and job insecurity.6
Third, firms devote considerable resources in screening for workers with desirable personality attributes, especially a
work ethic (Autor & Scarborough, 2008; Englmaier, Kolaska, & Leider, 2015; Huang & Cappelli, 2010). However, an efficient
screening mechanism is one that is unbiased; it increases the precision of screening, and reduces the potential for self-
selection (e.g. by the religious, minority groups etc.) because it does not require the applicant to be aware of possessing
the relevant attributes (Autor & Scarborough, 2008). In their study, Autor and Scarborough (2008) found that screening
had no impact on hiring minorities but it uniformly raised productivity among minorities and non-minorities. Thus, as long
as the screening is unbiased, work ethic should not differ between the religious and non-religious workers.
Economic theory predicts that more successful individuals (i.e. those with the highest opportunity cost of time) select less
costly religions or choose to participate less in religious activities (Iannaccone, 1998). However, religiousness and active par-
ticipation in religious activities are not the same. In addition, while studies show a positive link between religious affiliation
during childhood and educational attainment, Voas and McAndrew (2012) argue that there is also a complex heterogeneity
in educational attainment across religious groups and among the non-religious, as well as an overlap between religion, race
and education (Lehrer, 2003; Weller et al., 2013). Some people keep their parents’ ideologies and some switch their beliefs in
adulthood (i.e. turn religious or non-religious) (Voas & McAndrew, 2012).7 However, studies also find that people who are
raised religiously exhibit some common beliefs and preferences, even if they reject religion as adults (Guiso, Sapienza, &
4
Researchers typically use the category of non-religious. However, Lim et al. (2010) argue that the non-religious category is diverse and includes those who
identify their religion as ‘atheist’, ‘agnostic’, ‘humanist’ or ‘secular’.
5
Miller et al. (2002) defines work ethic as: (i) multidimensional; (ii) pertains to work and work-related activity in general, not specific to any particular job
(yet may generalize to domains other than work); (iii) is learned; (iii) refers to attitudes and beliefs (not necessarily behavior); (iv) is a motivational construct
reflected in behavior; and (v) is secular, not necessarily tied to any one set of religious beliefs.
6
According to Wuthnow (1994 p.57), although Protestantism has been associated with the rise of the work ethic, the institutionalization of hard work in
contemporary societies means that religious affiliation and religious beliefs are no longer as important as they were in influencing hard work and diligence.
7
The last decades have seen a large number of people in Europe turning to atheism due to increased secularization in Europe (Weller et al., 2013).
Zingales, 2003). An important distinction then, is that religious people tend to use religion to find meaning, service and com-
munity at work, and in life in general (Wuthnow, 1994).
In addition, it is unlikely that wages or loyalty determine religiousness. Religious beliefs are a malleable but slowly-
moving variable. If religiousness is determined by higher wages, then we would expect that only religious workers would
be well-paid. As mentioned above, hard work is institutionalized in most contemporary workplaces, and these expectations
apply to both religious and non-religious employees. If religiousness influences lower wages, then we would expect to find
lower wages among religious workers only. This is not the case, as shown by Meredith (2013), who uses panel data from the
United States and finds no link between wages and measures of religiosity. Lastly, the concern that religiousness is picking
up something related to education, age and other personal factors can also be handled econometrically; religiousness should
not directly influence wages once we control for individual factors including gender, age, education, race, marital status,
respondent’s involvement in the workplace, relationship with management, or firm and industry factors.
Thus, the respondent’s religiousness is used as an instrument. We estimate a just-identified model for two reasons. The
first is practical: we lack more variables that can act as suitable instruments. The second is that, in theory, because the F-
statistic varies inversely with the number of weak instruments, the bias from IV estimation is an increasing function of
the number of weak instruments. Angrist and Pischke (2009) suggest using a single ‘best’ instrument and estimating a
just-identified model because a just-identified model is the least biased.
3.2. Variables
The dependent variable of interest is the log of hourly earnings for each employee. WERS respondents had to indicate
their wages through 14 banded categories for weekly wages (before taxes and other deductions), including overtime pay-
ments.8 The estimations are based on hourly wages calculated from the 14-banded categories. In our analysis, the wages of each
worker is coded as the mid-point of the range reported. For the top coded range, we use 150% of the unbounded top range. This
approach of coding the top wage bracket using 1.5 times the highest wage bracket is consistent with extant economics studies
(Brochu, Deri, & Morin, 2012; Phipps, Burton, & Lethbridge, 2001). This value is then divided by the respondent’s usual weekly
work hours (including overtime and extra hours), resulting in a continuous hourly wage measure. Like in Drolet and Mumford
(2012), we exclude from the analysis workers earning an hourly wage rate below £1 or above £100. As a way of checking the
sensitivity of our main results, we also use the 14 wage categories in an ordered probit instrumental variables regression.
The explanatory variable of interest is employee loyalty. The survey included three items from the Organizational Com-
mitment Questionnaire of Lincoln and Kalleberg (1990)9 that have been used in previous studies on management practices,
employee loyalty and firm performance (Brown et al., 2011; Davis-Blake, Broschak, & George, 2003; Green, 2008). The three
WERS questions are: ‘I share many of the values of my organization’; ‘I feel loyal to my organization’ and ‘I am proud to tell
people who I work for.’10 Respondents were asked to complete these items on a five-point scale (1, strongly agree to 5, strongly
disagree). While the first and third items capture aspects of attachment to the organization, we focus on the second item: ‘I feel
loyal to my organization’ because it directly assesses loyalty.
The coding of responses on a five-point scale naturally leads to a loyalty measure that is ordinal with many points of sup-
port. This loyalty measure is our treatment variable. However, because instrumental variables estimates based on multi-
valued treatments are hard to interpret, we follow extant studies by converting the ordinal loyalty variable into a binary
variable to make the interpretation of the causal estimates easier (Angrist & Evans, 1998; Frolich, 2007; Imbens &
Angrist, 1994). We thus create a binary treatment variable from the item ‘I feel loyal to my organization’ that takes the value
of 1 if response is 1 or 2 (strongly agree or agree), and zero if >2 (neither agree nor disagree, disagree or strongly disagree).11
In terms of controls, we include factors that influence employee loyalty including the respondent’s sex, race, age, education,
marital status, number of children, tenure in the workplace, union membership and the job-skills match (Berntson & Näswall,
2010; Brown et al., 2011; Davis-Blake et al., 2003; Larsen & Navrbjerg, 2015; Niehoff, Moorman, Blakely, & Fuller, 2001). We
control for employee involvement in decision-making in the workplace. Respondents had to indicate their level of satisfaction
with decision-making. This was measured on a five-point scale (1, very satisfied to 5, very dissatisfied) and to enable easier
interpretation this was reversed so that 1 reads (very dissatisfied) and 5 reads (very satisfied). We also add the respondent’s
perception of trust of the management. This trust measure comes from a question in which the respondents had to indicate the
extent to which they thought ‘managers dealt with employees honestly,’ ‘managers can be relied upon to keep their promises,’
‘managers treat employees fairly,’ and ‘managers here are sincere in attempting to understand employees views.’ These four
8
The 14 categories for weekly gross wages were (1) less than £60; (2) £61–£100, (3) £101–£130;(4) £131–£170; (5) £171–£220; (6) £221–£260; (7) £261–
£310; (8) £311–£370; (9) £371–£430; (10) £431–£520; (11) £521–£650; (12) £651–£820; (13) £821–£1050 and (14) £1051 or more.
9
The Lincoln and Kalleberg (1990) instrument has the following items: ‘My values and the values of this company are similar’; ‘I feel very little loyalty to this
company’; ‘I am proud to work for this company’; ‘I am willing to work harder than I have to in order to help this company succeed’; ‘I would take any job in
order to continue working for this company’; ‘I would turn down another job for more pay in order to stay with this company’. The WERS items were ‘I share
many of the values of my organization’; ‘I feel loyal to my organization’ and ‘I am proud to tell people who I work for’.
10
The first item captures a passive (and unobservable by managers) attachment to the organization (Allen & Meyer, 1990; Berntson & Näswall, 2010). The
second item assesses loyalty directly (Leck & Saunders, 1992), and the third item reflects an active attachment to the organization (that may be observable to
managers) (Drizin & Schneider, 2004; Sweetman, 2001; Yee, Yeung, & Cheng, 2010).
11
We also created a dummy variable from the three items taking the value of one if the mean of the three items was less than 3, and zero otherwise. All
results were similar, and thus the loyalty measure from the single item was retained because it is a more direct indicator of loyalty.
items were measured on a five-point scale (1, strongly agree to 5, strongly disagree), but were reversed so that 1 reads (strongly
disagree) and 5 reads (strongly agree). Due to the possibility of collinearity between these four trust measures, we created a
composite trust measure which we labeled employee trust, with a Cronbach alpha score of 0.877.
We also include a set of variables relating to whether or not employees at an individual level were affected by the
2008–2010 recession with respect to a variety of aspects relating to their jobs, since these experiences could influence
the extent to which the employee chose to attach to the firm (Berntson & Näswall, 2010; Davis-Blake et al., 2003; Larsen
& Navrbjerg, 2015).
We use data from the management questionnaire to control for firm-level factors. First we control for non-pecuniary
benefits. Managers were asked if the firm provides the following benefits for the largest occupational group in terms of
employees: ‘Pension Scheme,’ ‘Company car,’ ‘Private health insurance,’ ‘Extended Paid Leave’ and ‘Sick Pay’. We created a
variable capturing the number (ranging from zero to five) of benefits of the suggested five that employees receive.12
Secondly, the survey provides detailed information about other Human Resources Management practices including the use
of personality tests and competence tests on hiring as well as merit/performance based payments. We control for these three
HRM practices.13 Lastly, we include firm size (micro, small, large with medium as the omitted category) and industry controls.14
Table 1 presents the differences in means between the treated (loyal) and control (unloyal) groups along with their cor-
responding t-values. Wages and religiousness are significantly higher among loyal employees. Males are less likely to be
loyal, but there is no significant difference in loyalty by level of education. As well, staying longer in the firm is not neces-
sarily associated with loyalty. What seems to matter is the employee’s level of involvement in the workplace and their trust
in management. The 2008–2010 recession experiences are also significantly different between the two groups. However,
firms that use incentive pay schemes and hire workers using personality and competence tests do not necessarily have more
loyal workers. Overall, there are significant differences between the two groups.
4. Discussion of results
Our focus is on private sector workers, and the results are detailed in Tables 2–6. We begin with OLS estimates in Table 2.
All regressions throughout the paper use robust standard errors clustered at the firm level. In Column 1, we only include
loyalty, firm and industry controls. Loyalty enters with a positive and statistically significant coefficient of 0.054. We then
add more controls sequentially in Columns 2 and 3 and the coefficient on the loyalty variable rises to 0.073. Column 4
includes employee involvement, trust of managers and job-skills match, while Column 5 includes employee experiences dur-
ing the recession. Once this inclusion is done, the coefficient on the loyalty variable drops to 0.031 but retains statistical sig-
nificance. Other variables enter in familiar ways to the earnings literature; those who are older, male, and have a university
education earn higher wages, but those with activity limitations earn less. As well, wages are higher in large firms and in
firms that conduct competence tests when hiring. Thus loyalty is positively associated with wages, which is consonant with
Linz et al. (2013) based on OLS. However, as argued above, an objection to these OLS estimates is that they are biased and not
causal because loyalty is endogenous. Below, we report results that address this issue using an instrumental variables
approach.
4.1. IV Estimates
To address the possibility of reversed causality, we estimate IV regressions. As discussed above, we estimate a just iden-
tified model with religiousness as an instrument for employee loyalty. Given that we have a binary endogenous variable and
a binary instrument, we estimate a 2SLS (making the first stage a Linear Probability Model). This follows from the literature
arguing that a linear regression for the first-stage estimates generates consistent second-stage estimates even with a binary
endogenous variable (Angrist, 2001; Angrist & Krueger, 2001).
The first stage results are presented in Appendix 1. The dependent variable for the first stage is the loyalty dummy vari-
able and the key variable of interest is the instrument for loyalty. In Column 1, we present the coefficient on loyalty without
any covariates. We then include covariates sequentially to test the robustness of the instrument on the basis of observable
characteristics that may be correlated with loyalty and whether this will influence the coefficient on loyalty when included.
In all first stage regressions, the religiousness variable is positive and strongly associated with loyalty. The magnitude of the
instrument ranges from 0.068 (Column 1) without covariates to 0.049 (Column 5) when all covariates are included.
The positive association between religiousness and loyalty is consistent with studies showing that religious individuals
have a greater proclivity to serve others and help the organization to reach its goals than their non-religious counterparts
(Hall et al., 2012; Walker et al., 2008; Westerman et al., 2013). The rest of the first stage results suggest that employees
who feel more satisfied with their involvement in decision making in the workplace and have more trust in the management
are more likely to be loyal. It is important to note that there is no link between loyalty and education and loyalty and tenure
12
In terms of the total number of firms, 90.71% of all firms and 84.45% of the private firms provide at least one non-wage benefit.
13
Data from the WERS shows that the use of competence and personality tests is prevalent in the private sector; about 42.57% and 63.96% of private sector
firms use personality tests and competence tests respectively when selecting job candidates. In addition, 53.26% use merit/performance based payment
systems.
14
We get the same results using firm fixed effects.
Table 1
Descriptive statistics.
Loyal = 1 Loyal = 0
Mean Mean Diff. t-value
Log of hourly wages 2.669 2.615 0.054 4.207***
Religiousness 0.701 0.621 0.080 7.856***
Age 40.857 40.377 0.480 1.668
Age2 1841.838 1795.942 45.896 1.957*
White 0.818 0.846 0.028 3.353***
Male 0.502 0.610 0.107 9.813***
Married 0.676 0.641 0.035 3.392***
#Children 0.343 0.314 0.029 2.825**
University 0.242 0.243 0.001 0.133
Tenure < 1 yr 0.142 0.116 0.027 3.519***
Tenure 2–5 yrs 0.240 0.238 0.002 0.214
Tenure 5–10 yrs 0.233 0.239 0.006 0.658
Tenure > 10 yrs 0.270 0.278 0.008 0.785
Involvement 0.524 0.146 0.378 36.605***
Trust management 3.406 2.481 0.925 25.644***
Trade union 0.191 0.274 0.083 9.266***
Higher skills 0.496 0.558 0.062 5.661***
Work-skills match 0.456 0.377 0.079 7.232***
Lower skills 0.039 0.062 0.023 5.035***
Activity limitations 0.074 0.099 0.025 4.195***
Not employed in this workplace during the recession 0.066 0.101 0.035 5.953***
Workload increased 0.203 0.274 0.071 7.653***
Work was reorganized 0.131 0.200 0.069 8.677***
Moved to another job 0.041 0.063 0.022 4.614***
Wages frozen or cut 0.216 0.292 0.077 8.113***
Non-wage benefits cut 0.036 0.054 0.018 3.943***
Contract work hrs cut 0.043 0.070 0.027 5.462***
Paid overtime restricted 0.130 0.226 0.097 11.984***
Took unpaid leave 0.015 0.028 0.012 3.816***
Training restricted 0.066 0.101 0.035 5.953***
Size < 10 0.062 0.036 0.026 5.239***
Size 10–49 0.357 0.321 0.035 3.376***
Size 50–249 0.330 0.342 0.012 1.140
Size 250+ 0.250 0.300 0.050 5.173***
Personality tests 0.422 0.438 0.017 1.529
Incentive pay 0.532 0.534 0.002 0.146
Competence tests 0.634 0.659 0.025 2.396*
# Non-wage benefits 2.369 2.394 0.025 0.820
N 7728 2502
Notes: t statistics in parentheses.

*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
in the workplace. Unionised workers are less likely to be loyal. While less intuitive, this may reflect members’ perceptions of
union effectiveness and the extent to which management actively encourage union membership (Bryson, 2001). Employees
with activity limitations and job-skill mismatch (over skilled and under skilled) are less likely to feel loyal. This is in line with
the negative relationship between lack of opportunities for personal growth and professional development and loyalty
(Drizin & Schneider, 2004).
The results of from the second stage 2SLS are presented in Table 3. We first assess the validity of our instrument. One
important concern with the IV approach is the problem of weak instruments, which tend to bias second stage estimates
and may weaken standard tests for endogeneity. Our data is clustered within the firm, and thus the standard approaches
(e.g., the rules-of-thumb for the first-stage F-tests (Stock & Yogo, 2005) invalid since they assume homoskedastic errors
(see Cameron & Miller, 2015). As well, recent research shows that even the use of robust and clustered standard errors
can result in standard errors that are too small and a rejection of the null hypothesis of no effect too often (Young, 2016).
A growing literature has highlighted the use of bootstrap methods to improve inference in linear models when there is
within-cluster dependence (Cameron, Gelbach, & Miller, 2008; Finlay & Magnusson, 2016). Some studies have proposed
bootstrap techniques for linear IV models when the number of clusters is small (Cameron et al., 2008; Finlay &
Magnusson, 2016) and the instruments are weak (Finlay & Magnusson, 2016). However, when the number of clusters is
large, like in our case (G = 1086), cluster robust and standard bootstrap methods should suffice (Cameron & Miller, 2015;
Cameron et al., 2008). Thus we use cluster bootstrap methods available in Stata as in Cameron and Miller (2015).15 We check
15
We use the Stata vce (bootstrap, cluster(varlist)) command with 1000 replications (Cameron & Miller, 2015; Cameron & Trivedi, 2009).
Table 2
OLS results: dependent variable is log of hourly wages-private sector only.
(1) (2) (3) (4) (5)

Loyalty 0.054*** 0.071*** 0.073*** 0.031** 0.031**
(3.66) (6.75) (6.96) (2.87) (2.73)
Age 0.035*** 0.034*** 0.034*** 0.034***
(11.05) (10.97) (10.84) (10.48)
Age2 0.0004*** 0.0003*** 0.0003*** 0.0004***
(9.67) (9.98) (9.80) (9.43)
White 0.067*** 0.058*** 0.053*** 0.049**
(4.28) (3.76) (3.51) (3.01)
Male 0.143*** 0.142*** 0.139*** 0.137***
(12.31) (12.21) (12.01) (12.12)
Married 0.098*** 0.095*** 0.093*** 0.087***
(9.61) (9.37) (9.22) (8.61)
#Children 0.041*** 0.037*** 0.035*** 0.033**
(3.88) (3.54) (3.38) (3.14)
University 0.277*** 0.280*** 0.273*** 0.257***
(21.14) (21.44) (21.26) (20.71)
Tenure <1 yr 0.067*** 0.071*** 0.066***
(4.39) (4.68) (4.43)
Tenure 2–5 yrs 0.017 0.015 0.0108
(1.46) (1.28) (0.93)
Tenure >10 yrs 0.069*** 0.069*** 0.067***
(5.99) (6.04) (5.67)
Involvement 0.094*** 0.094***
(9.63) (9.56)
Trust management 0.004 0.004
(1.14) (1.15)
Trade union 0.010 0.008
(0.61) (0.49)
Higher skills 0.020* 0.021*
(2.38) (2.55)
Lower skills 0.001 0.007
(0.48) (0.34)
Activity limits 0.057*** 0.060***
(3.63) (3.90)
Recession experiences
Workload increased 0.035**
(3.18)
Work was reorganized 0.008
(0.60)
Moved to another job 0.009
(0.46)
Wages frozen or cut 0.059***
(4.88)
Nonwage benefits cut 0.063**
(3.26)
Contract work hrs cut 0.103***
(4.51)
Paid overtime restricted 0.097***
(6.84)
Took unpaid leave 0.056
(1.88)
Training restricted 0.069***
(4.33)
Firm-level controls
Firm size <10 0.009 0.020 0.0279
(0.26) (0.60) (0.83)
Firm Size 50–249 0.058** 0.049* 0.048**
(2.98) (2.53) (2.58)
Firm size 250+ 0.005 0.016 0.021
(0.20) (0.63) (0.86)
Pers. tests 0.070*** 0.065*** 0.068*** 0.067***
(3.64) (3.37) (3.57) (3.48)
Incentive pay 0.049** 0.052** 0.0484** 0.047**
(2.81) (2.96) (2.80) (2.82)
Comp. tests 0.010 0.011 0.012 0.011
(0.57) (0.65) (0.70) (0.65)
(continued on next page)

Table 2 (continued)
(1) (2) (3) (4) (5)

# Non-wage benefits 0.082*** 0.083*** 0.083*** 0.077***
(12.18) (12.13) (12.05) (11.53)
Industry (#19) Yes Yes Yes Yes
Constant 2.615*** 1.291*** 1.347*** 1.350*** 1.381***
(151.65) (18.24) (19.19) (19.16) (19.47)
Cohen’s F2 0.001 0.719 0.742 0.765 0.792
N 10,230 10,230 10,230 10,197 9950
Notes: t statistics in parentheses. Based on firm level cluster bootstrapped standard errors with 1000 replications.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
for instrument strength using an inversion of the Anderson Rubin (A-R) confidence interval test. The AR test is fully robust to
weak instruments (Chernozhukov & Hansen, 2008).
At the bottom of the table we report the Anderson–Rubin (AR) 95% confidence interval, which are estimated using the
weakiv-package in Stata (Finlay, Magnusson, & Schaffer, 2013). Since our model is just identified, we can compare the
inverted Anderson Rubin confidence intervals and the Wald confidence intervals. We find that the AR confidence regions
are bounded and not very different from the bounded asymptotic Wald confidence intervals. This may be because our model
is just identified. It is also known that the AR confidence sets may be empty, very short, very wide or unbounded (Davidson &
Mackinnon, 2014). One reason why the AR confidence sets tend to be wide is because the test sacrifices power for robust-
ness, specifically better Type I error control (see Davidson & Mackinnon, 2014). What matters more in our case is that in most
of the estimations, the AR intervals lie on the negative side of the real line and exclude the numerical value of 0. That is, this
interval does not include zero. This implies that the instruments are valid (Chernozhukov & Hansen, 2008). In addition, the
Kleibergen-Paap Wald rank F-test of excluded instruments are statistically significant in all the models. This also suggests
that the instruments are valid. We cannot perform the Hansen J statistic to test for model overidentification because our
models use a single instrument.
Before discussing the IV results, we briefly discuss what the IV estimate is meant to capture. The IV only solves the prob-
lem of causal inference with partial compliance. Imbens and Angrist (1994) and Angrist, Imbens, and Rubin (1996) argue that
the IV estimates measure the effects on outcomes for those sub-populations whose behavior can be manipulated by the
instrument but would not otherwise. They call these ‘compliers,’ and the resulting parameter is called the Local Average
Treatment Effect (LATE).16 Thus, the impact of loyalty on wages can only be ascertained for the subpopulation of ‘compliers’
(Frolich, 2007; Imbens & Angrist, 1994). Given the likely heterogeneity of returns to loyalty among employees, it is appropriate
to interpret this IV as an estimate of a LATE: specifically, the average effect of loyalty on the earnings of the religious.
Some studies argue that loyalty may reduce quit intentions (Hoffmann, 2006; Sweetman, 2001; Ton & Huckman, 2008)
and this may in turn induce employees to stay longer with the firm. At the same time, some studies suggest that retention in
the workplace may be associated with religion/spirituality (see Mittal, Rosen, & Leana, 2009). In this context, it is important
to check that the coefficient on loyalty captures the full causal effect of loyalty on wages. The concern is that, even after
instrumenting, there remains an indirect causal link of loyalty on wages that works through tenure that would bias the coef-
ficient on loyalty. We check this by estimating regressions with and without (all) the extra control variables. As is apparent in
Table 3, the LATE is stable with and without all covariates.
Column 1 only includes the loyalty variable, and the LATE is 0.236. We then add employee factors and firm and industry
controls in Column 2 and the LATE becomes 0.270. In Column 3, we add employee tenure specifically to ascertain if tenure
has an indirect impact on wages through its impact on loyalty, and the LATE becomes 0.297. In Column 4, we include
employee involvement in the workplace, employee trust on managers, trade union membership and skills-job match. In Col-
umn 5, we control for employee experience with the recession and the estimate becomes 0.331. The LATE suggests that
religious employees who are loyal earn about 33% less in wages. At first glance, this loyalty penalty seems rather large. How-
ever, remember that this is the effect of loyalty on the wages of a subpopulation that is affected by the instrument,
religiousness.
Overall, the results show that controlling for endogeneity of loyalty reverses the loyalty estimate—that is, loyal employees
earn lower wages. A reversal of the OLS estimates in a 2SLS suggests the presence of endogeneity bias in OLS. The negative
link between loyalty and wages is consistent with the theoretical framework developed earlier, showing that employees
16
In essence, the LATE framework partitions the population with an instrument into three subgroups defined by the manner in which the members of the
population react to the instrument (Angrist & Pischke, 2009). In our context, the first group has ‘Compliers’: those affected by the instrument: employees who
are loyal due to the influence of the instrument. The second group consists of ‘Always-takers’: employees who are loyal irrespective of religiousness, while the
third group comprises of the ‘Never Takers’: employees who would not be loyal whether they are religious or not. However, LATE does not tell us anything
about the effects on ‘Always-takers’ and ‘Never-takers’ because the treatment status of these two groups cannot be induced to change by the variation in the
instrumental variable (Angrist & Pischke, 2009).
Table 3
Results from 2SLS regressions-private sector only.
(1) (2) (3) (4) (5)

Loyalty 0.236 0.281* 0.297* 0.306** 0.331**
(1.12) (1.88) (1.98) (2.86) (2.96)
Age 0.034*** 0.033*** 0.032*** 0.033***
(9.97) (9.77) (9.41) (9.58)
Age2 0.00033*** 0.00033*** 0.00032*** 0.00033***
(8.39) (8.49) (7.99) (8.29)
White 0.049** 0.039* 0.029 0.029
(2.73) (2.12) (1.42) (1.48)
Male 0.118*** 0.118*** 0.111*** 0.114***
(6.67) (6.74) (5.79) (6.41)
Married 0.110*** 0.108*** 0.104*** 0.097***
(9.04) (8.79) (8.52) (7.91)
#Children 0.054*** 0.052*** 0.048*** 0.043***
(4.12) (3.88) (3.65) (3.42)
University 0.274*** 0.277*** 0.261*** 0.248***
(19.68) (19.90) (17.79) (17.71)
Tenure <1 yr 0.048** 0.059*** 0.062***
(2.72) (3.51) (3.97)
Tenure 2–5 yrs 0.013 0.010 0.005
(1.01) (0.70) (0.41)
Tenure >10 yrs 0.073*** 0.076*** 0.075***
(5.61) (5.62) (5.65)
Involvement 0.195*** 0.176***
(3.75) (3.63)
Trust management 0.021* 0.018*
(2.25) (2.02)
(1.37) (1.13)
Higher skills 0.028** 0.025**
(2.65) (2.66)
(1.22) (1.02)
Activity limitations 0.069*** 0.068***
(3.86) (3.92)
Workload increased 0.028*
(2.16)
(1.26)
(0.38)
(3.41)
Nonwage benefits cut 0.058*
(2.49)
(4.42)
(6.17)
(1.64)
(4.00)
Firm size <10 0.018 0.018 0.010 0.019
(0.49) (0.49) (0.26) (0.58)
Firm size 50–249 0.067** 0.066** 0.047* 0.046*
(3.25) (3.08) (2.25) (2.26)
Firm size 250+ 0.002 0.011 0.012 0.018
(0.07) (0.39) (0.46) (0.69)
Pers. tests 0.073*** 0.071*** 0.077*** 0.075***
(3.54) (3.40) (3.75) (3.61)
Inventive pay 0.050** 0.052** 0.044* 0.043*
(2.71) (2.80) (2.41) (2.46)
Comp. tests 0.008 0.013 0.016 0.014
(0.45) (0.67) (0.82) (0.76)
#Non-wage benefits 0.085*** 0.087*** 0.087*** 0.081***
(11.64) (11.40) (11.23) (11.30)

Table 3 (continued)
(1) (2) (3) (4) (5)

Constant 2.834*** 1.573*** 1.635*** 1.606*** 1.597***
(17.36) (9.67) (10.18) (10.50) (10.97)
R2 0.038 0.345 0.346 0.335 0.374
First stage instrument 0.068*** 0.057*** 0.058*** 0.047*** 0.049***
(7.60) (6.36) (6.42) (5.61) (5.70)
First stage tests
Partial R2 0.0058 0.0052 0.0040 0.0032 0.0034
F- test of excluded instruments 54.68 40.29 40.70 34.10 34.55
Kleibergen-Paap rk Wald F-test 54.678 40.285 40.697 34.103 34.547
Anderson-Rubin weak instruments test (Chi2 = 1) 1.38 3.07 3.44 4.47 3.14
(p = 0.240) (p = 0.080) (p = 0.064) (p = 0.035) (p = 0.076)
Anderson-Rubin C.I. 95% [0.681, 0.141] [0.667, 0.021] [0.683, 0.004] [0.893, 0.035] [0.754, 0.013]
Wald Chi2 = 1 1.24 (p = 0.265) 2.50 (p = 0.113) 2.81 (p = 0.0934) 3.47 (p = 0.0625) 2.93 (p = 0.0849)
Wald C.I. 95% [0.651, 0.178] [0.628, 0.066] [0.644, 0.050] [0.833, 0.021] [0.738, 0.037]
N 10,230 10,230 10,230 10,197 9950
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
whose interests are more aligned to the organization may be willing to work for lower wages (see also Akerlof & Kranton,
2005; Besley & Ghatak, 2005; Cohen, 2009; Francois, 2007).
4.1.1. Alternative estimation strategies

The linear 2SLS is not the only way to go. We use two alternative approaches that deal with the endogeneity of loyalty and
allow us to identify the causal link between loyalty and wages. These are other treatment effects methods and an ordered
probit IV model.
4.1.1.1. Treatment effects models. One potential criticism of LATE is that it is a treatment effect for a subpopulation
affected by the instrument and is often difficult to interpret (see Heckman & Urzúa, 2010). More specifically, what
we obtain in Table 3 is the effect of loyalty on employees who change treatment status (i.e. loyalty) because of the
instrument-religiousness. We use three treatment effects estimators that enable us to also make causal links between
loyalty and wages: average treatment effect on the treated (ATET), Potential Outcomes Means (POMs) and average
treatment effect (ATE).
In the context of our analysis and the treatment effects framework, we can assume that ln W1 captures the logarithm of
hourly wages for treated (loyal) employees, and ln W0 represents the logarithm of hourly wages for the untreated (i.e. not
loyal) employees. However, for loyal employees, we can only observe ln W1 , so ln W0 is the potential outcome or counter-
factual for loyal employees. This potential outcome captures how much loyal employees would be paid if they chose not
to be loyal. For employees that are not loyal, we observe ln W0 , and in this case ln W1 is the potential outcome or counter-
factual for employees that are not loyal. This represents how much employees that are not loyal would be paid had they
chosen to be loyal. We can only observe one outcome and not both and this creates a ‘‘missing data” problem. This missing
data problem can be solved by treatment effects methods.
The identification of ATE, ATET and POMs relies on assumptions about treatment assignment.17 A key assumption for the
identification of ATE, ATET and POMs is the conditional independence assumption (CI) (see Wooldridge, 2010). It states that
conditional on a rich set of control variables, the outcomes are independent of treatment.18 If valid, it rules out confounding
due to unobserved factors once controls are included in the regression and propensity matching approaches can be used
(Imbens & Wooldridge, 2009). The second assumption is that data are independent and identically distributed (i.i.d.). This
ensures that the outcome and treatment status of each individual are unrelated to the outcome and treatment status of all
the other individuals in the population. The third assumption is the overlap, which states that each individual has a positive
probability of receiving treatment (Wooldridge, 2010).
17
It is important to point out two things that make LATE different from ATE, ATET and POMs. First, LATE crucially hinges on the instrument, meaning that a
different instrument will generally change the LATE (Card, 2001; Ichino & Winter-Ebmer, 1999; Wooldridge, 2010). In contrast, ATE, ATET and POMS are
defined without reference to an IV, but with reference to a population, though they can be estimated using IV approaches when endogeneity is an issue
(Wooldridge, 2010). Second, the LATE only captures a subset of the treated but not both the treated and the untreated. However, the ATE averages over the
entire population, while ATET is the average for those who were actually treated (Wooldridge, 2010). In our context, ATET includes loyal workers influenced by
the instrument (‘compliers’) plus workers who are loyal regardless of whether the instrument is switched on or off (‘always takers’) (Angrist & Pischke, 2009).
18
However, the CI assumption is too strong and is violated in most cases because the vector of controls may contain variables that are themselves affected by
the treatment, resulting in ‘selection on unobservables’ or ‘endogenous treatment’ (Imbens & Wooldridge, 2009; Wooldridge, 2010).
Table 4
Linear regression with endogenous treatment- private sector only.
(1) (2) (3) (4) (5)

ATET ATET ATET ATET ATET
Loyalty 0.139* 0.326*** 0.310*** 0.303*** 0.297***
(2.12) (6.64) (5.89) (6.56) (6.33)
Age 0.034*** 0.033*** 0.033*** 0.033***
(9.91) (9.78) (9.77) (9.73)
Age2 0.000335*** 0.000335*** 0.000334*** 0.000340***
(8.38) (8.59) (8.57) (8.60)
White 0.047** 0.039* 0.034* 0.031
(2.75) (2.24) (2.08) (1.90)
Male 0.115*** 0.117*** 0.117*** 0.116***
(8.82) (8.97) (9.42) (9.40)
Married 0.112*** 0.108*** 0.102*** 0.099***
(10.41) (10.13) (9.80) (9.19)
Children 0.056*** 0.052*** 0.045*** 0.042***
(4.92) (4.61) (4.12) (3.91)
University 0.272*** 0.277*** 0.264*** 0.249***
(19.81) (20.23) (19.93) (19.36)
Tenure <1 yr 0.048** 0.061*** 0.063***
(3.02) (3.98) (4.00)
Tenure 2–5 yrs 0.013 0.010 0.006
(1.02) (0.86) (0.48)
Tenure >10 yrs 0.073*** 0.074*** 0.074***
(5.76) (6.03) (5.97)
Involvement 0.171*** 0.168***
(11.22) (10.99)
Trust management 0.017*** 0.016***
(4.14) (3.90)
(1.34) (1.22)
Higher skills 0.026** 0.025**
(2.77) (2.71)
(1.12) (1.01)
Activity limitations 0.066*** 0.067***
(4.01) (4.11)
Workload increased 0.028*
(2.46)
(1.37)
(0.42)
(3.80)
Nonwage benefits cut 0.058**
(2.66)
(4.67)
(7.01)
(1.73)
(4.07)
Firm-level factors
Firm size < 10 0.022 0.019 0.012 0.020
(0.62) (0.53) (0.34) (0.61)
Firm size 50–249 0.068** 0.067** 0.048* 0.046*
(3.27) (3.21) (2.38) (2.32)
Firm size 250+ 0.004 0.012 0.013 0.018
(0.16) (0.45) (0.52) (0.73)
Pers. Tests 0.074*** 0.071*** 0.075*** 0.075***
(3.56) (3.41) (3.75) (3.79)
Incentive pay 0.048** 0.052** 0.045** 0.044*
(2.70) (2.91) (2.63) (2.57)
Comp. tests 0.012 0.013 0.015 0.014
(0.66) (0.69) (0.82) (0.77)

Table 4 (continued)
(1) (2) (3) (4) (5)

ATET ATET ATET ATET ATET
#Non-wage benefits 0.089*** 0.088*** 0.086*** 0.081***
(12.78) (12.59) (12.63) (12.14)
Industry (#19) Yes Yes Yes Yes Yes
Constant 2.761*** 1.615*** 1.646*** 1.546*** 1.577***
(52.88) (18.69) (19.10) (19.61) (19.75)
First stage instrument
Religiousness 0.219*** 0.172*** 0.175*** 0.171*** 0.173***
(7.70) (6.17) (6.26) (5.81) (5.73)
Rho 0.207** 0.516*** 0.503*** 0.451*** 0.449***
(3.06) (8.97) (7.99) (7.81) (7.57)
Wald test of indep. eqns 8.83 52.97 43.24 44.87 42.35
Prob > chi2 0.003 0.000 0.000 0.000 0.000
N 10,230 10,230 10,230 10,197 9950
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
Table 5
Potential outcome means for the treated: estimates are in log of hourly wages.
PO means
Loyal Estimate Bootstrapped St. Error z-stat P > |z| [95% C. I]
0 2.675*** 0.185 14.44 0.000 [2.312; 3.038]
1 2.503*** 0.038 65.044 0.000 [2.528; 2.678]
Notes: z statistics based on firm level cluster bootstrapped standard errors with 1000 replications. * p < 0.05, **
p < 0.01.
***
p < 0.001.
Table 6
Marginal effects from the Ordered Probit Instrumental Variables Model-Wage categories represent gross weekly wages.
Panel A Prob = 1 Prob = 2 Prob = 3 Prob = 4 Prob = 5 Prob = 6 Prob = 7

[<£60] [£61–£100] [£101–£130] [£131–£170] [£171–£220] [£221–£260] [£261–£310]
* * * * * *
Loyalty 0.056 0.049 0.034 0.034 0.047 0.04 0.03*
(2.29) (2.29) (2.27) (2.29) (2.29) (2.27) (2.27)
Panel B Prob = 8 Prob = 9 Prob = 10 Prob = 11 Prob = 12 Prob = 13 Prob = 14
[£311–£370] [£371–£430] [£431–£520] [£521–£650] [£651–£820] [£821–£1050] [£1051 +]
Loyalty 0.014* 0.005* 0.03* 0.055* 0.062* 0.057* 0.095*
(2.25) (1.99) (2.28) (2.3) (2.3) (2.28) (2.29)
Notes: Robust standard errors are clustered at the firm level.

t statistics in parentheses. ** p < 0.01, *** p < 0.001.
*
p < 0.05.
Estimating ATE requires that the CI assumption is fully met but ATET and POMs can be estimated using a weaker CI
assumption which allows for selection on unobservables and the use of an exogenous instrument (Wooldridge, 2010
906–912). Although the ATE requires that all covariate patterns have a positive probability of being allocated to each treat-
ment state, ATET and POMs can be estimated when only the covariate patterns for which someone is treated have a positive
probability of being allocated to each treatment state (Wooldridge, 2010). This weaker overlap assumption has been used in
studies on job training (Heckman, 1997).
4.1.1.2. Treatment effects on the treated. While LATE captures only a subpopulation of loyal workers influenced by the
instrument ‘compliers’, ATET includes ‘compliers’ plus ‘always takers’ or workers who are loyal regardless of whether the
instrument is switched on or off (Angrist & Pischke, 2009).
We estimate ATET using an endogenous treatment-regression model. This model has an equation for the outcome ln Wij
and an endogenous treatment Lij equation that represents the loyalty treatment for employee i in firm j respectively. This
model is elaborated in Cameron and Trivedi (2005):
ln Wij ¼ a þ Lij s þ Xij b þ lij ð3Þ

1; if Tij k þ mij > 0
Lij ¼ ð4Þ
0; otherwise
where Xij are the covariates used to model the outcome, Tij are the covariates in the treatment assignment model. The vari-
ables X and W may overlap but it is assumed that at least one component of T, denoted z is a unique determinant of L .We
refer to z as an instrumental variable that is correlated with the endogenous variable loyalty Lij , but uncorrelated with the
outcome ln Wij , except through Lij . We use religiousness as an instrument for loyalty. The error terms lij and mij are bivariate
normal with mean zero and covariance matrix.
" #
r2 rq
ð5Þ
rq 1
This is a constrained model because the variance and correlation parameters are identical across the treatment and
control groups.19 We estimate this model by maximum likelihood using the Stata etregress command. This command
uses a probit model in the first stage estimation (Stata, 2013) and thus the first stage results are based on a probit
model.
The ATET results are displayed in Table 4. The corresponding first-stage results are presented in Appendix 2. The ATET
estimates range from 0.139 in Column 1 to 0.297 in Column 5 and are all statistically significant. If we use results from
Column 5 with all the controls, we find that the wages of loyal employees are on average 30% lower. The ATET is lower than
the ATE because ATET is a weighted average of the effect of ‘compliers’ and ‘always takers’ (Angrist & Pischke, 2009). Thus
while the ATET and LATE estimates are not usually the same, our estimates are very close and both suggest a negative influ-
ence of loyalty on wages.
At the bottom of Table 4, we find that the correlation between the treatment-assignment errors and the outcome errors is
0.441 and statistically significant. This correlation matters because as discussed above, ATET is estimated under a weaker CI
assumption which allows for ‘selection on unobservables’ and modeling of the error structure (Cameron & Trivedi, 2005). A
significantly positive correlation suggests that unobserved determinants of loyalty are positively correlated with unobserved
determinants of wages. If this correlation was zero, it would mean that we have no endogeneity that is due to unobserved
heterogeneity. However, since the correlations are not zero, it means that failure to model the error structure and instrument
for loyalty would result in an upward bias of the loyalty coefficient on wages and inconsistency of the OLS (Cameron &
Trivedi, 2005). The positive coefficient gives credence to why we use the linear outcome endogenous treatment effects
approach.
4.1.1.3. Potential outcomes means. In addition to ATET, it may be interesting to assess the average wage penalty of being loyal
in a population. In the treatment effects language, this parameter is captured by the potential outcome means for the treated
(POMs). Drawing from the discussions above, the potential-outcome means (POMs) are the means of ln W1 and ln W0 in the
population. Since we focus on the potential wages on the treated, the counterfactual for ln W1 (i.e. what would ln W0 be for
that loyal employee if they had they chosen not to be loyal), the POMs on the treated estimate is captured by the mean of
ln W0 .
As discussed above, the assumptions for estimating ATET and POMs are similar. When we have no concerns about
endogeneity and the conditional independent assumption is met, POMS can be estimated using the teffects command in
Stata. However, when endogeneity is a concern, then POMS can be estimated using the eteffects command in Stata which
addresses the confounding effects of unobserved variables. To control for the endogeneity of the treatment assignment,
the eteffects command uses a control-function approach, by including the residuals from the treatment assignment model
as a regressor in the models for the potential outcome (Stata, 2013; Wooldridge, 2010).
The endogenous treatment effects model specified in Eqs. (3)–(5) can be generalized to a potential-outcome model with
separate variance and correlation parameters for the treatment and control groups. Denoting ln W0ij and ln W1ij as the out-
comes and Lij as the treatment, an unconstrained model can be written as:
ln W0ij ¼ a þ Xij b0 þ l0ij ð6Þ
ln W1ij ¼ a þ Xij b1 þ l1ij ð7Þ

1; if Tij k þ mij > 0
Lij ¼ ð8Þ
0; otherwise
19
It uses a constrained normal distribution to model the deviation from the conditional independence assumption.
where ln W0ij is the wage that employee i, in firm j obtains if employee i selects treatment 0 (i.e. is not loyal) and ln W1ij is the
wage employee i, in firm j gets if employee i selects treatment 1 (i.e. is loyal). It is not possible to observe both ln W0ij and
ln W1ij , only one or the other. For potential wage outcomes we thus observe:
ln Wij ¼ Lij ln W1ij þ ð1 Lij Þ ln W0ij ð9Þ
It is assumed that the triple ðe0ij ; e1ij ; mij Þ is jointly trivariate normal distributed with zero mean and covariance
matrix
2 3
r20 r01 r0 q0
6
4 r01 r21 r1 q1 7
5 ð10Þ
r0 q0 r1 q1 1
The parameter r01 captures the covariance between e0ij and e1ij . However, this covariance parameter cannot be estimated
because the potential outcomes ln W0ij and ln W1ij are never observed simultaneously. Thus the parameter r01 is normally
set to zero (see Cameron & Trivedi, 2005). As well, the treatment error variance, mij is normalized to 1 since we only observe
whether an outcome occurs under treatment. This potential outcome model is estimated by a one-step control function esti-
mator and the eteffects command in Stata (2013).
Table 5 details the estimates from the POMs model with cluster bootstrapped standard errors and 95% confidence inter-
vals. The estimate shows that the treated POM is 2.50354 while the untreated POM is 2.675216. Note that because the
dependent variable is the natural log of hourly wages in British pounds (£), the POMs estimates are the natural log of hourly
wages. This implies that by taking 2.71838^2.50354 and 2.71838^2.675216, we get £12.225 and £14.155 respectively. The
interpretation of the potential outcome for the treated is that loyal workers would earn on average £14.16 per hour had they
chosen not to be loyal compared to £12.23 because they chose to be loyal. In addition, because ATE is the difference between
potential outcomes in the population, it can be estimated by taking the difference in means of POM treated and POM
untreated or through a regression (see Stata, 2013). In our case, ATE is the average of the differences between the wages
when each employee is loyal and the wages when no employee is loyal. Thus the ATE estimate of loyalty on wages is
difference in POMs: 2.50354 2.675216 = 0.171676. If we use the above hourly wage estimates, we find that wages are
on average 18.73% lower among those who are loyal relative to those that are not loyal. As expected, different treatment
effects estimators are associated with different loyalty estimates, but they all show that loyalty has a negative effect on
wages.
4.1.1.4. Non-linear IV approach. In Tables 2–5, the dependent variable was the log of hourly wages constructed from the mid
points of the wage categories. One perspective would be that the linear instrumental variable models ignore a considerable
amount of discreteness in the original wage measure and that a nonlinear model would add value given the data. As well, the
regressions in Table 3 did not model the error structure of the treatment and potential outcomes. That is, unobserved
random determinants of loyalty may be correlated with unobserved random determinants of wages. Both concerns are
valid.
An alternative approach we adopt is to use the original wage categories as captured in the WERS and model the
probability that a loyal employee ends up in a certain wage band using an ordered probit instrumental variables model.
The WERS 2011 captured the gross weekly wages using 14 wage categories. The 14 categories are as follows: (1) less
than £60; (2) £61–£100, (3) £101–£130;(4) £131–£170; (5) £171–£220; (6) £221–£260; (7) £261–£310; 8) £311–£370;
(9) £371–£430; (10) £431–£520; (11) £521–£650; (12) £651–£820; (13) £821–£1050 and (14) £1051 or more. Given
these 14 wage categories, one approach would be to reduce the number of wage bands by combining them, but this
exercise would lead to loss of information and need conceptual justification. Thus we use all the 14 wage bands. The
ordered IV approach is the most flexible given the nature of the wage data. However one drawback is that because the
14 wage bands capture weekly wages, the results cannot be readily compared with the linear IV estimates which
are constructed from mid-point wages then adjusted for hours worked as discussed above. Thus the purpose of this
non-linear approach is to simply demonstrate that loyalty is also associated with lower wages when a non-linear specifica-
tion is used.
The ordered probit instrumental variables model is estimated using Roodman (2011)’s conditional mixed process
estimator (cmp) in Stata. The cmp estimator uses a probit model in the first stage of the IV ordered probit model
(Roodman, 2011). In addition, the cmp estimator assumes an underlying multivariate normal distribution for the error terms
in the equations and uses maximum likelihood. The regression is identified by using religiousness as the instrument for
loyalty.
The marginal effects are presented in Table 6 panel A for wage categories 1–7 and Table 6 panel B for wage categories
8–14.20 Both indicate a negative impact of loyalty across the wage categories. These marginal effects are the equivalent of LATE
for the religious (see Angrist & Pischke, 2009). We should note that because the wage bands capture weekly and not hourly
20
The full results are presented in Appendices 3A and 3B.
wages, the estimates are not directly comparable to the linear IV. However, they reveal more information on the magnitude of
the LATE as one moves from the lowest to the highest wage category. As shown in Column 1, a loyal worker is likely to earn
wages in the bottom category (p = 1; less than £60/week) by about 5.5% and the effect is statistically significant. In addition,
the marginal effects for a worker to be in the second (p = 2; £61–£100) and third (p = 3; £101–£130) lowest wage categories
are 4.9% and 3.4%, respectively.
The probability that a loyal worker moves into a higher wage bracket continues to fall and becomes negative starting from
the ninth wage category (p = 9; £371–£430). For example in Table 6 panel B we find that loyalty reduces the probability that
a worker falls into the second (p = 13; £821–£1050) and top wage bracket (p = 14; £1051 or more) by 5.7% and 9.5%,
respectively. We can see that much of the loyalty penalty is concentrated in the bottom two and top two wage categories.
Thus the very systematic pattern of estimates across the 14 wage categories lends substantial support to the results
in Tables 3–5.
At the bottom of the table, we report a correlation between the treatment-assignment errors and the outcome errors of
0.431 that is statistically significant. This means that unobserved factors that raise the observed wages tend to occur with
unobserved factors that increase the propensity to be a loyal employee. While a number of tests exist for checking the
strength of instruments in linear models, there is no formal theory on the appropriate rules-of thumb for the F-statistic when
the structural model is non-linear. However, weak instruments are a property of the first stage. Given that in a non-linear IV
model, the reduced form for the endogenous variable is linear, it is possible to use the first stage F-statistic for the excluded
instruments and use the Stock and Yogo (2005) recommendations. The first stage regression has an F-statistic with a value of
32.036, which is larger than the rule of thumb of a first stage F-statistic of 10 based on Stock and Yogo (2005).21 This suggests
that the instruments are not weak.
4.1.1.5. Discussion of results. Overall, our LATE estimate shows that loyal employees earn about 30% less in wages relative to
their non-loyal counterparts. We find negative and as expected different estimates using treatment effects estimators (ATET,
POMs and ATE). While IV estimates are very helpful to measure causal effects, they are not beyond controversy and thus
should be interpreted with caution. We however provide some potential reasons for this large negative estimate. We should
note that extant studies based on OLS and different measures of loyalty have also found a large penalty for loyalty among
employees. We captured loyalty as a behavior, ‘‘I feel loyal to this organization”, but in some extant studies loyalty is defined
as a trait (Mele, 2001; Randels, 2001), attitude (Hart & Thompson, 2007; Leck & Saunders, 1992) or virtue (Schrag, 2001). As
discussed before, Cohen (2009) find that employees who save a large proportion of their pension wealth in their company
stock, lose about 20% of their retirement income. Judge et al. (2012) show that employees with a high agreeableness person-
ality trait earn about 18% less in wages relative to those who are disagreeable. Nyborg and Zhang (2013) indicates that
employees in firms with a higher reputation for corporate social responsibility earn between 21% and 30% less in wages that
those in firms with lower corporate social responsibility reputation. Thus beyond estimating causal effects, our findings may
be sensitive to the specific measure of loyalty that we used in this study.
While our LATE and ATET estimates are larger than extant OLS estimates, it is not uncommon for IV estimates
to be considerably higher or lower than the corresponding OLS estimate. In order to illustrate this point, we make
reference to studies on schooling which are often used as the prototypical example for demonstrating challenges in trying
to estimate causal effects. A large literature on returns to education has produced IV estimates that between 20% and 100%
above the corresponding OLS estimates (Card, 2001; Ichino & Winter-Ebmer, 1999; Lemieux & Card, 2001; Oreopoulos,
2006). As well, Boeri, Philippis, Patacchini, and Pellizzari (2015) estimated the causal impact of immigrant population
density on employment of migrants in Italy and found IV estimates that were five times more negative than OLS
estimates.
A key reason is that LATE only captures the average effects for a subgroup of those exposed to the instrument- the
‘compliers’ (Angrist & Pischke, 2009; Card, 2001; Oreopoulos, 2006). In addition, ATET which in our case uses the same
instrument as in LATE, captures a weighted average of ‘‘compliers” and ‘always takers’ (Angrist & Pischke, 2009; Imbens
& Angrist, 1994). In contrast, the OLS estimate, in the absence of omitted variables and measurement error biases, captures
the average effects across everyone (Card, 2001; Oreopoulos, 2006). As well, Card (2001) has suggested that an instrument
may have heterogeneous effects on the treated so that, for some treated the instrument may have high marginal treatment
effects than for others.
In addition, our results should be interpreted in the context of our instrument. As discussed above, the LATE estimate cap-
tures the effect of that particular instrument and different instruments would produce different effects (Card 2001; Ichino &
Winter-Ebmer, 1999; Wooldridge, 2010). The lack of alternative instrumental variables can lend our results susceptible to
being restricted. If we had an instrument capable of identifying the lowest and highest wage returns on loyalty, we could
use those estimates as lower and upper bounds of the variation of the loyalty impact on wages. Ichino and Winter-Ebmer
(1999) used this approach to get lower and upper bounds of returns on education. While we are not able to use another
instrument to verify the stability of our results, different instruments generate different causal estimates for different sub-
groups of the population (Card, 2001; Ichino & Winter-Ebmer, 1999; Wooldridge, 2010).
21
The F = 32.036 is simply the square of the t statistic (5.66) on the religiousness coefficient from the first-stage regression.
5. Conclusions
This study assesses the wage benefits to workers who are loyal to their employer using an instrumental variable and
treatment effects approach. The data come from the Workplace Employment Relations Survey (WERS 2011). Focusing on
the private sector only, we find that workers who feel loyal to their employer are more likely to earn lower wages. Using
instrumental variables regressions, we interpret our results as local average treatment effects (LATE); the average earnings
of those influence by the instrument. We then estimate the average treatment effect on the treated (ATET), potential out-
come on the treated (POMs) and the average treatment effect (ATE). We find that the negative impact of loyalty on wages
persists. These findings give credence to some extant studies (Cohen, 2009; Judge et al., 2012; Nyborg & Zhang, 2013), and
are consistent with observations that employee loyalty is routinely not rewarded by organizations (Robinson & Rousseau,
1994; Roehling et al., 2000). We have argued that loyalty results in lower wages because employers have greater bargaining
power over employees who are loyal, and such workers are more averse to severing the ties with the organization, and are
thus willing to work for a lower wage. Our results however, contradict Linz et al. (2013), who find that loyal workers get paid
more.
The study is not without its limitations. One concern with using self-ratings of loyalty is that self-ratings may be inflated
relative to others-ratings (supervisors or co-workers) due to employee impression management or social desirability (Allen,
Rush, & Russell, 2000; Donaldson & Grant-Vallone, 2002). Some studies have used others-rated behaviors to address com-
mon method variance concerns (Podsakoff, Mackenzie, & Podsakoff, 2012; Podsakoff & Organ, 1986). However, we defend
our use of loyalty self-ratings and are not the first ones to do so. The first reason is theoretical; our theoretical framework
is the firm level, where workers are heterogeneous in their loyalty to the employer and the firm may choose to pay them
differently. In this model, we do not explicitly model the actions of managers/supervisors. A different theoretical model
could consider how managers/supervisors elicit different levels of loyalty from workers and pay them accordingly. It is per-
haps in such a model where other-ratings (supervisors or co-workers) would be more appropriate.
Second, some studies find no mean differences between self-reported ratings and supervisor and co-worker ratings for
organizational citizenship behaviors (Carpenter, Berry, & Houston, 2014), overall job performance (Conway & Huffcutt,
1997; Harris & Schaubroeck, 1988) or counterproductive work behavior (Berry, Carpenter, & Barratt, 2012). This suggests
that other-ratings are not inherently superior to self-report ratings (Berry et al., 2012; Carpenter et al., 2014). Carpenter
et al. (2014) argue that self-ratings may be preferred in cases where employees have a better sense of the affective behaviors
they have enacted than supervisors/coworkers.22 Our employee loyalty as measured through the following items: ‘I share
many of the values of my organization;’ ‘I feel loyal to my organization,’ and ‘I am proud to tell people who I work for,’ plausibly
fits this category. Indeed, Carpenter et al. (2014) argue that, when affective behaviors are likely to occur out of the view of super-
visors and co-workers, self-ratings by the workers themselves provide a better reflection of their affective behaviors (Carpenter
et al., 2014). In addition, Podsakoff and Organ (1986) argue that when the outcome variable is quantitative (rather than affec-
tive) and verifiable, spurious inflation is less likely to occur. Judge et al. (1995) found a difference of less than 1% between archi-
val and self-reports of salary. Since our outcome variable is wages, it is reasonable to argue that the issue of common method
variance is less of a concern. As well, when respondents are interviewed anonymously as is done in WERS, impression manage-
ment is unlikely to be a problem (Allen, 2006). Last, the instrumental variable approach (as was used here), is a straightforward
solution to the problem of common method bias in cases where the source of this bias cannot be measured or identified directly
(see Antonakis, Bendahan, Jacquart, & Lalive, 2010; Podsakoff et al., 2012).
It may also have been important to assess whether the link between loyalty and wages varies with the prevailing eco-
nomic climate. The best way to explore this would have been to use the WERS 2004, which relates to the pre-financial crisis
period. However, we were not able to do so because the WERS 2004 survey did not have a question on religion, which we
used as an instrument, nor any other variable that could be used as an instrument for employee loyalty. We leave this assess-
ment for future research.
Acknowledgements
I am grateful to the Data Archive at the University of Essex for supplying data from the 2011 Workplace and Employee
Relations Survey. I thank Ayesha Ali and the journal’s reviewers for comments that considerably improved the paper. Data
used in this paper can be requested from the Data Archive at the University of Essex, UK, http://data-archive.ac.uk/. All
remaining errors are my own.
Appendix A
See Appendices 1, 2, 3a and 3b.
22
It has been shown that organizational citizenship behavior actions and items such as ‘‘defends the organization when outsiders criticize it,” ‘‘Encourages
friends and family to utilize organization products” (Moorman & Gerald, 1995) and ‘‘takes steps to prevent problems with other workers (Podsakoff, Mackenzie,
Moorman, & Fetter, 1990)” reflect behaviors that are less likely to be observable by other-raters.
Appendix 1
First stage results: dependent variable is loyalty dummy variable-linear probit.
(1) (2) (3) (4) (5)

Religiousness 0.068*** 0.057*** 0.058*** 0.047*** 0.049***
(7.60) (6.36) (6.42) (5.61) (5.70)
Age 0.004* 0.004* 0.003 0.003
(2.32) (2.23) (1.91) (1.51)
Age2 0.00005* 0.00006** 0.00005* 0.00004*
(2.57) (2.60) (2.44) (2.02)
White 0.026* 0.027* 0.035** 0.034**
(2.13) (2.24) (2.89) (2.86)
Male 0.065*** 0.062*** 0.061*** 0.058***
(6.92) (6.62) (6.91) (6.55)
Married 0.027** 0.029** 0.020* 0.022*
(2.77) (2.92) (2.09) (2.26)
Children 0.034*** 0.035*** 0.026** 0.025*
(3.39) (3.52) (2.73) (2.54)
University 0.00005 0.0006 0.019 0.019
(0.00) (0.05) (1.90) (1.84)
Tenure <1 yr 0.049*** 0.028* 0.012
(4.12) (2.26) (0.94)
Tenure 2–5 yrs 0.011 0.012 0.015
(1.10) (1.10) (1.42)
Tenure >10 yrs 0.007 0.010 0.018
(0.64) (0.89) (1.63)
Involvement 0.231*** 0.222***
(26.64) (25.51)
(11.11) (10.68)
Trade union 0.044*** 0.043***
(3.67) (3.57)
Higher skills 0.017* 0.011
(2.18) (1.36)
Lower skills 0.053* 0.054*
(2.36) (2.39)
Activity limits 0.028 0.023
(1.89) (1.51)
Workload increased 0.014
(1.24)
Work was reorganized 0.034*
(2.41)
(0.61)
Wages frozen or cut 0.031**
(2.85)
Nonwage benefits cut 0.009
(0.34)
Contract work hrs cut 0.024
(1.06)
Paid overtime restricted 0.037**
(2.90)
(0.21)
Training restricted 0.002
(0.12)
Firm size <10 0.068*** 0.067*** 0.026 0.025
(3.70) (3.80) (1.54) (1.51)
Firm size 50–249 0.023 0.022 0.003 0.005
(1.63) (1.61) (0.28) (0.42)
Firm size 250+ 0.042* 0.040* 0.006 0.008
(2.47) (2.37) (0.43) (0.52)
Pers. test 0.016 0.016 0.020 0.022
(1.21) (1.23) (1.83) (1.94)
Incentive pay 0.002 0.001 0.008 0.010
(0.18) (0.08) (0.80) (1.01)
Comp. Test 0.001 0.001 0.004 0.005
(0.10) (0.05) (0.41) (0.48)
#Non-wage benefits 0.009 0.010* 0.010* 0.010*
(1.88) (2.08) (2.10) (2.29)
Industry (#19) Yes Yes Yes Yes Yes

Appendix 1 (continued)
(1) (2) (3) (4) (5)

Constant 0.711*** 0.760*** 0.738*** 0.560*** 0.568***
(83.72) (18.71) (17.83) (12.97) (13.03)
Centred R2 0.006 0.025 0.029 0.151 0.155
N 10,230 10,230 10,230 10,197 9950
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
Appendix 2
First stage probit regression with endogenous treatment: dependent variable is loyalty.
(1) (2) (3) (4) (5)

Religiousness 0.219*** 0.172*** 0.175*** 0.171*** 0.173***
(7.70) (6.17) (6.26) (5.81) (5.73)
Age 0.023* 0.019* 0.016 0.013
(2.48) (2.22) (1.84) (1.50)
Age2 0.00028** 0.00026* 0.00023* 0.00012
(2.67) (2.48) (2.21) (1.88)
White 0.139** 0.134** 0.177*** 0.170***
(3.05) (2.92) (3.63) (3.45)
Male 0.198*** 0.198*** 0.214*** 0.207***
(6.09) (6.07) (6.22) (5.95)
Married 0.088** 0.091** 0.074* 0.082*
(2.64) (2.76) (2.11) (2.26)
Children 0.123*** 0.123*** 0.104** 0.099**
(3.62) (3.63) (2.80) (2.62)
University 0.020 0.022 0.091* 0.078*
(0.53) (0.59) (2.34) (1.99)
Tenure <1 yr 0.150** 0.099 0.042
(3.17) (1.95) (0.80)
Tenure 2–5 yrs 0.033 0.044 0.055
(0.89) (1.11) (1.37)
Tenure >10 yrs 0.033 0.049 0.073
(0.82) (1.19) (1.74)
Involvement 0.917*** 0.895***
(25.42) (24.48)
(11.76) (11.17)
Trade union 0.148*** 0.143**
(3.43) (3.26)
Higher skills 0.065* 0.045
(2.12) (1.45)
Lower skills 0.141* 0.148*
(1.97) (2.06)
Activity limits 0.084 0.070
(1.61) (1.31)
Workload increased 0.060
(1.55)
Work was reorganized 0.119**
(2.67)
(0.12)
Wages frozen or cut 0.097*
(2.46)
Nonwage benefits cut 0.027
(0.33)
Contract work hrs cut 0.060
(0.82)
Paid overtime restricted 0.104*
(2.48)
(0.26)
Training restricted 0.007
(0.12)
Appendix 2 (continued)
(1) (2) (3) (4) (5)

Firm-level factors
Firm size < 10 0.257*** 0.263*** 0.132 0.129
(3.36) (3.42) (1.62) (1.59)
Firm size 50–249 0.073 0.075 0.010 0.017
(1.52) (1.57) (0.21) (0.37)
Firm size 250+ 0.139* 0.138* 0.040 0.045
(2.47) (2.46) (0.73) (0.81)
Pers. test 0.039 0.040 0.062 0.065
(0.93) (0.95) (1.49) (1.57)
Incentive pay 0.006 0.002 0.035 0.040
(0.16) (0.04) (0.93) (1.05)
Comp. test 0.028 0.026 0.046 0.043
(0.65) (0.61) (1.09) (1.01)
#Non-wage benefits 0.036* 0.039* 0.037* 0.037*
(2.13) (2.29) (2.14) (2.17)
Constant 0.548*** 0.900*** 0.795*** 0.189 0.210
(21.10) (4.76) (4.19) (0.96) (1.06)
N 10,230 10,230 10,230 10,197 9950
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
Appendix 3a
Marginal effects from the Ordered Probit Instrumental Variables Model Wage categories represent gross weekly wages.
Prob = 1 Prob = 2 Prob = 3 Prob = 4 Prob = 5 Prob = 6 Prob = 7

[<£60] [£61–£100] [£101–£130] [£131–£170] [£171–£220] [£221–£260] [£261–£310]
Loyalty 0.056* 0.049* 0.034* 0.034* 0.047* 0.04* 0.03*
(2.29) (2.29) (2.27) (2.29) (2.29) (2.27) (2.27)
Age 0.005*** 0.005*** 0.003*** 0.003*** 0.004*** 0.004*** 0.003***
(9.93) (10.66) (10.51) (10.6) (11.27) (10.43) (9.85)
Age2 0.000*** 0.0000508*** 0.0000*** 0.0000347*** 0.0000489*** 0.0000417*** 0.0000306***
(9.39) (9.99) (9.85) (9.94) (10.55) (9.88) (9.42)
White 0.001 0.001 0.001 0.001 0.001 0.001 0.001
(0.65) (0.65) (0.65) (0.64) (0.64) (0.64) (0.64)
Male 0.031*** 0.027*** 0.018*** 0.018*** 0.026*** 0.022*** 0.016***
(11.3) (11.82) (11.47) (11.61) (12.98) (12.81) (11.97)
Married 0.012*** 0.01*** 0.007*** 0.007*** 0.010*** 0.009*** 0.006***
(8.41) (8.49) (8.46) (8.69) (8.62) (8.66) (8.19)
#Children 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.15) (0.15) (0.15) (0.15) (0.15) (0.15) (0.15)
University 0.033*** 0.029*** 0.020*** 0.020*** 0.028*** 0.024*** 0.018***
(13.6) (14.15) (13.31) (13.53) (15.12) (14.61) (13.68)
Tenure <1 yr 0.007*** 0.006*** 0.004*** 0.004*** 0.006*** 0.005*** 0.004***
(3.72) (3.77) (3.74) (3.77) (3.76) (3.78) (3.76)
Tenure 2–5 yrs 0.001 0.001 0.001 0.001 0.001 0.001 0.000
(0.57) (0.57) (0.57) (0.57) (0.57) (0.57) (0.57)
Tenure >10 yrs 0.009*** 0.008*** 0.006*** 0.006*** 0.008*** 0.007*** 0.005***
(5.63) (5.69) (5.59) (5.72) (5.79) (5.67) (5.63)
Involvement 0.029*** 0.026*** 0.018*** 0.018*** 0.025*** 0.021*** 0.016***
(5.1) (5.12) (5.01) (5.11) (5.12) (5.02) (4.97)
Trust management 0.002* 0.002* 0.001* 0.001* 0.002* 0.002* 0.001*
(2.41) (2.41) (2.4) (2.42) (2.41) (2.39) (2.39)
Trade union 0.004 0.003 0.002 0.002 0.003 0.003 0.002
(1.57) (1.56) (1.57) (1.58) (1.58) (1.57) (1.57)
Higher skills 0.004*** 0.004*** 0.002*** 0.002*** 0.003*** 0.003*** 0.002***
(3.69) (3.67) (3.66) (3.68) (3.71) (3.73) (3.69)
Lower skills 0.005 0.004 0.003 0.003 0.004 0.003 0.002
(1.52) (1.51) (1.52) (1.52) (1.52) (1.51) (1.51)
Activity limitations 0.012*** 0.011*** 0.007*** 0.007*** 0.010*** 0.009*** 0.007***
(6.39) (6.29) (6.41) (6.42) (6.43) (6.3) (6.19)
Workload increased 0.011*** 0.009*** 0.006*** 0.006*** 0.009*** 0.008*** 0.006***
(6.5) (6.49) (6.71) (6.79) (6.92) (7.01) (6.8)

Appendix 3a (continued)

[<£60] [£61–£100] [£101–£130] [£131–£170] [£171–£220] [£221–£260] [£261–£310]
Work was reorganized 0.003 0.003 0.002 0.002 0.003 0.002 0.002
(1.8) (1.8) (1.8) (1.8) (1.8) (1.8) (1.79)
Moved to another job 0.0000129 0.0000113 0.00000777 0.00000771 0.0000109 0.00000927 0.0000068
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Wages frozen or cut 0.007*** 0.007*** 0.004*** 0.004*** 0.006*** 0.005*** 0.004***
(3.99) (4.01) (4.05) (4.01) (4.06) (4.13) (4.14)
Nonwage benefits cut 0.013*** 0.011*** 0.008*** 0.008*** 0.011*** 0.009*** 0.007***
(5.05) (4.87) (4.94) (4.93) (5.05) (5.01) (4.91)
Contract work hrs cut 0.020*** 0.017*** 0.012*** 0.012*** 0.017*** 0.014*** 0.010***
(6.85) (6.77) (6.55) (6.72) (6.91) (6.93) (6.71)
Paid overtime restricted 0.018*** 0.016*** 0.011*** 0.011*** 0.015*** 0.013*** 0.010***
(8.31) (8.38) (8.17) (8.31) (8.52) (8.2) (8.04)
Took unpaid leave 0.006 0.005 0.004 0.003 0.005 0.004 0.003
(1.7) (1.69) (1.7) (1.7) (1.71) (1.7) (1.7)
Training restricted 0.000*** 0.009*** 0.006*** 0.006*** 0.008*** 0.007*** 0.005***
(4.81) (4.91) (4.82) (4.87) (4.92) (4.89) (4.89)
Firm-level controls
Firm size <10 0.002 0.002 0.001 0.001 0.002 0.002 0.001
(0.5) (0.5) (0.5) (0.49) (0.49) (0.49) (0.49)
Firm size 50–249 0.003 0.003 0.002 0.002 0.003 0.002 0.002
(1.33) (1.32) (1.33) (1.32) (1.33) (1.32) (1.32)
Firm size 250+ 0.005 0.004 0.003 0.003 0.004 0.003 0.003
(1.41) (1.42) (1.42) (1.42) (1.42) (1.43) (1.42)
Pers. tests 0.008** 0.007** 0.005** 0.005** 0.007** 0.006** 0.004**
(2.9) (2.92) (2.94) (2.96) (2.93) (2.91) (2.91)
Incentive Pay 0.009*** 0.008*** 0.005*** 0.005*** 0.007*** 0.006*** 0.005***
(4.05) (4.1) (4.03) (4.05) (4.06) (4.06) (4.01)
Comp. tests 0.002 0.002 0.001 0.001 0.001 0.001 0.001
(0.74) (0.74) (0.74) (0.74) (0.74) (0.74) (0.74)
#Non-wage benefits 0.009*** 0.008*** 0.006*** 0.005*** 0.008*** 0.007*** 0.005***
(8.81) (9.15) (9.04) (9.42) (9.54) (9.29) (8.98)
Industry (#19) Yes Yes Yes Yes Yes Yes Yes

t statistics in parentheses.
*
p < 0.05.
**
p < 0.01.
***
p < 0.001.
Appendix 3b
Marginal effects from Ordered Probit Instrumental Variables Model Wage categories represent gross weekly wages.

[£311–£370] [£371–£430] [£431–£520] [£521–£650] [£651–£820] [£821–£1050] [£1051 +]
Loyalty 0.014* 0.005* 0.03* 0.055* 0.062* 0.057* 0.095*
(2.25) (1.99) (2.28) (2.3) (2.3) (2.28) (2.29)
Age 0.001*** 0.001*** 0.003*** 0.005*** 0.006*** 0.005*** 0.009***
(7.02) (4.06) (10.1) (11.09) (11.06) (11.05) (10.94)
Age2 0.0000148*** 0.0000057*** 0.000031*** 0.000057*** 0.000064*** 0.000059*** 0.000***
(6.86) (4.01) (9.55) (10.38) (10.34) (10.42) (10.25)
White 0.000 0.000 0.001 0.001 0.002 0.001 0.002
(0.64) (0.63) (0.64) (0.64) (0.64) (0.65) (0.65)
Male 0.008*** 0.003*** 0.016*** 0.030*** 0.034*** 0.031*** 0.052***
(7.91) (4.00) (11.3) (12.79) (13.01) (13.06) (13.25)
Married 0.003*** 0.001*** 0.006*** 0.012*** 0.013*** 0.012*** 0.020***
(6.57) (3.79) (8.23) (8.97) (8.89) (8.55) (9.04)
#Children 0.000054 0.0000207 0.000 0.000 0.000 0.000 0.000
(0.15) (0.15) (0.15) (0.15) (0.15) (0.15) (0.15)
University 0.009*** 0.003*** 0.018*** 0.033*** 0.037*** 0.034*** 0.057***
(8.64) (4.01) (12.77) (16.06) (15.83) (15.37) (16.8)
Tenure <1 yr 0.002*** 0.001** 0.004*** 0.007*** 0.008*** 0.007*** 0.012***
(3.56) (2.74) (3.71) (3.77) (3.79) (3.8) (3.81)
Tenure 2–5 yrs 0.000 0.000 0.000 0.001 0.001 0.001 0.001
(0.57) (0.57) (0.57) (0.57) (0.57) (0.57) (0.57)
Tenure >10 yrs 0.002*** 0.001*** 0.005*** 0.009*** 0.010*** 0.010*** 0.016***
(5.11) (3.3) (5.56) (5.79) (5.78) (5.77) (5.88)
Appendix 3b (continued)

[£311–£370] [£371–£430] [£431–£520] [£521–£650] [£651–£820] [£821–£1050] [£1051 +]
Involvement 0.008*** 0.003*** 0.016*** 0.029*** 0.033*** 0.030*** 0.050***
(4.66) (3.21) (5.02) (5.21) (5.18) (5.07) (5.17)
Trust management 0.001* 0.000* 0.001* 0.002* 0.003* 0.002* 0.004*
(2.38) (2.06) (2.4) (2.43) (2.43) (2.4) (2.42)
Trade union 0.001 0.000 0.002 0.004 0.004 0.004 0.006
(1.56) (1.45) (1.56) (1.58) (1.58) (1.57) (1.57)
Higher skills 0.001*** 0.000** 0.002*** 0.004*** 0.005*** 0.004*** 0.007***
(3.51) (2.76) (3.7) (3.76) (3.72) (3.69) (3.71)
Lower skills 0.001 0.000 0.002 0.004 0.005 0.005 0.008
(1.51) (1.41) (1.51) (1.52) (1.52) (1.51) (1.52)
Activity limitations 0.003*** 0.001*** 0.007*** 0.012*** 0.014*** 0.013*** 0.021***
(5.32) (3.61) (6.31) (6.44) (6.47) (6.51) (6.48)
Workload increased 0.003*** 0.001*** 0.006*** 0.010*** 0.012*** 0.011*** 0.018***
(5.78) (3.54) (6.61) (6.98) (6.9) (6.82) (6.94)
Work was reorganized 0.001 0.000 0.002 0.003 0.004 0.003 0.006
(1.75) (1.69) (1.81) (1.8) (1.8) (1.79) (1.8)
Moved to another job 0.00000329 0.0000012 0.0000067 0.000013 0.000014 0.000013 0.000
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Wages frozen or cut 0.002*** 0.001** 0.004*** 0.007*** 0.008*** 0.008*** 0.013***
(3.89) (2.87) (4.02) (4.12) (4.11) (4.11) (4.07)
Nonwage benefits cut 0.003*** 0.001*** 0.007*** 0.013*** 0.014*** 0.013*** 0.022***
(4.53) (3.1) (4.81) (5.01) (5.11) (5.07) (5.08)
Contract work hrs cut 0.005*** 0.002*** 0.010*** 0.019*** 0.022*** 0.020 0.033***
(5.68) (3.6) (6.74) (6.98) (6.92) (6.94) (7.01)
Paid overtime restricted 0.005*** 0.002*** 0.010*** 0.018*** 0.020*** 0.019*** 0.031***
(6.5) (3.82) (8.24) (8.89) (8.57) (8.3) (8.67)
Took unpaid leave 0.001 0.001 0.003 0.006 0.006 0.006 0.010
(1.66) (1.58) (1.7) (1.7) (1.7) (1.7) (1.7)
Training restricted 0.003*** 0.001*** 0.005*** 0.010*** 0.011*** 0.010*** 0.017***
(4.48) (3.17) (4.84) (4.93) (4.94) (4.87) (5.00)
Firm-level controls
Firm size <10 0.001 0.000 0.001 0.002 0.002 0.002 0.004
(0.49) (0.49) (0.49) (0.49) (0.49) (0.49) (0.5)
Firm size 50–249 0.001 0.000 0.002 0.003 0.004 0.003 0.006
(1.32) (1.26) (1.33) (1.32) (1.33) (1.33) (1.33)
Firm size 250+ 0.001 0.000 0.003 0.005 0.005 0.005 0.008
(1.41) (1.36) (1.42) (1.42) (1.43) (1.42) (1.42)
Pers. tests 0.002** 0.001* 0.004** 0.008** 0.009** 0.008** 0.013**
(2.88) (2.34) (2.9) (2.95) (2.95) (2.92) (2.95)
Incentive pay 0.002*** 0.001*** 0.005*** 0.009*** 0.010*** 0.009*** 0.015***
(3.69) (2.99) (4.1) (4.09) (4.13) (4.08) (4.03)
Comp. tests 0.000 0.000 0.001 0.002 0.002 0.002 0.00
(0.74) (0.74) (0.74) (0.74) (0.74) (0.74) 3(0.74)
#Non-wage benefits 0.002*** 0.001*** 0.005*** 0.009*** 0.010*** 0.009*** 0.015***
(6.8) (3.94) (9.24) (10.15) (9.68) (9.32) (9.27)
Industry (#19) Yes Yes Yes Yes Yes Yes Yes

t statistics in parentheses.
*
p < 0.05,
**
p < 0.01.
***
p < 0.001.
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Journal of Economic Psychology 56 (2016) 274–298

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Journal of Economic Psychology

The effect of employee loyalty on wages

E-mail address: omasakure@wlu.ca

2. Theoretical links between loyalty and wages

3.1. Empirical analysis

ln Wij ¼ a þ ^Lij s þ Xij b þ Kj c þ lij ð1Þ

Lij ¼ a þ Rij d þ Xij b þ Kj c þ eij ð2Þ

Notes: t statistics in parentheses.

(1) (2) (3) (4) (5)

(continued on next page)

(1) (2) (3) (4) (5)

(1) (2) (3) (4) (5)

(continued on next page)

(1) (2) (3) (4) (5)

4.1.1. Alternative estimation strategies

(1) (2) (3) (4) (5)

(continued on next page)

(1) (2) (3) (4) (5)

Panel A Prob = 1 Prob = 2 Prob = 3 Prob = 4 Prob = 5 Prob = 6 Prob = 7

Notes: Robust standard errors are clustered at the firm level.

ln Wij ¼ a þ Lij s þ Xij b þ lij ð3Þ

ln W0ij ¼ a þ Xij b0 þ l0ij ð6Þ

ln W1ij ¼ a þ Xij b1 þ l1ij ð7Þ

See Appendices 1, 2, 3a and 3b.

(1) (2) (3) (4) (5)

(continued on next page)

(1) (2) (3) (4) (5)

(1) (2) (3) (4) (5)

(1) (2) (3) (4) (5)

N 10,230 10,230 10,230 10,197 9950

Prob = 1 Prob = 2 Prob = 3 Prob = 4 Prob = 5 Prob = 6 Prob = 7

(continued on next page)

Prob = 1 Prob = 2 Prob = 3 Prob = 4 Prob = 5 Prob = 6 Prob = 7

Notes: Robust standard errors are clustered at the firm level.

Prob = 8 Prob = 9 Prob = 10 Prob = 11 Prob = 12 Prob = 13 Prob = 14

Prob = 8 Prob = 9 Prob = 10 Prob = 11 Prob = 12 Prob = 13 Prob = 14

Notes: Robust standard errors are clustered at the firm level.

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