Do higher wages make you work harder? Do lower wages make you slack off?

The search for better economic policy.
March 18 2011 7:13 AM

Raises Don't Make Employees Work Harder

But pay cuts make them slack off.

(Continued from Page 1)

The experimenters checked in every 90 minutes to tabulate how many books had been logged. At the first check-in, the $20-per-hour employees had completed more than 50 books apiece, while the $12-an-hour employees barely managed 40 each. In the second 90-minute stretch, the no-gift group maintained their 40-book pace, while the gift group fell from more than 50 to 45. For the last half of the experiment, the "gifted" employees performed no better—40 books per 90-minute period—than the "ungifted" ones. The goodwill of high wages took less than three hours to evaporate completely—hardly a prescription for boosting long-term productivity. (Another study rewarded short-term employees with a surprise gift of thermoses, which seemed to generate longer-lived benefits—this may be why companies sometimes hand out baubles like mugs and T-shirts rather than $20 bills.)

Of course, wage cuts are a different story. In one recently released study, which arguably stretches the bounds of what can be (ethically) done to human subjects, temporary employees signed on to sell nightclub entrance cards on the street in two German cities. The sellers worked in pairs, covering two shifts over the course of a couple of weekends, and were told they'd be paid 12 euros an hour.  

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After the first weekend's shift, some of the workers were told—with no explanation—that they'd receive a 3-euro wage cut. Workers retaliated by selling 15 percent fewer cards in their second eight-hour shift, compared with a group of control employees who kept their 12-euro wage rate. Evidently, the sting of lower wages doesn't fade so quickly with time. (For a third group of employees, only one worker in each pair got a wage cut, again with essentially no explanation provided, beyond the manager's whim. In this case, the lower-paid worker sold 30 percent fewer cards.)

So it seems bosses are smart not to cut wages. It's bad for morale, which is bad for productivity.   Sending out pink slips might seem similarly demoralizing, and thus bad for productivity, but layoffs have a more complicated effect on the lucky employees who hang on to their jobs. Layoffs can even boost productivity by giving workers a bit of extra motivation to prove their value, in the same way that Ford's high salaries encouraged hard work. And it might not be so crazy for workers to respond to wage cuts with suspicion—in the current recovery, corporate profits have sprung back, even as wages have stagnated. What could be more unfair, from the worker's perspective, than a cut in wages accompanied by higher profits?

Yet this aversion to pay cuts isn't good for workers or the American economy more broadly. More people end up losing their jobs than if wages were more flexible, and there are serious long-term consequences for the workers who lose their monthly paychecks. The negative impact on a worker's earnings, health, and even the earning prospects of his children lasts decades beyond the pink slip's arrival. Creative solutions—like the furloughs that cut government salaries in California and elsewhere—might help to make lower pay more palatable, by presenting the cut as a temporary measure and by creating at least the illusion of a lower workload. If we can find other ways of overcoming the simmering resentment that naturally accompanies wage cuts, workers themselves will be better for it in the long run.

Ray Fisman is a professor of economics at the Columbia Business School and co-author of The Org: The Underlying Logic of the Office. Follow him on Twitter.

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