Wages, fairness & productivity

Do higher wages motivate workers to work harder? A recent experiment conducted on Swiss newspaper distributors suggests the answer's yes, but only partially so:

Workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance.

This suggests that people are motivated not so much by the cold cash nexus as by feelings of reciprocal fairness*.

You might interpret this as an argument for a living wage (pdf): if it causes poorly-paid workers to raise their productivity, it might pay for itself. I'm not sure, for two reasons.

First, I'm not sure how great is the overlap between actual pay and the feeling of being unfairly paid. Anyone who's been in an investment bank at bonus time will know that there's a difference between the two. It could be that the just world illusion mitigates self-serving biases, causing some low-paid workers not to feel unjustly treated.At the last general election, 31% of people in the DE social class voted Tory.

Secondly, even if a living wage does raise productivity, it could still destroy jobs. If it causes a chambermaid to clean an extra room per shift, the living wage might merely allow hotels to employ fewer chambermaids.

Efficiency wage models, remember, are models of unemployment.  

* Of course, higher wages might be necessary to attract workers in the first place, but this is not the same as motivated them to work harder once they're in the job.

Comments

[Luis Enrique]

Interesting. The question of whether wages motivate workers is usually applied to performance related pay, but this is something different. I suppose in addition to comparing their pay to broader comparisons - a nurse comparing their effort and reward to that of a banker - people feel particularly badly done by if they are paid less than a comparable peer group - so will CEOs shirk if they feel unfairly treated being paid only £1m whilst others on the same grade are getting paid £5m? If so, is that another argument for anti-high pay legislation, co-ordinating the peer group pay downwards?

[Greg vP]

> If it causes a chambermaid to clean an extra room per shift, the living wage might merely allow hotels to employ fewer chambermaids.

Fixed market fallacy, a.k.a Lump of Labour..?

Increasing the chambermaid's income increases her discretionary income and her spending, thus employing more people in the industries that supply things chambermaids demand.

A living wage...it's turtles all the way up.

[Arnol]

Interesting Topic.

Different people are motivated in different ways.

I think wages do not motivate people. Wages prevent people from being demotivated.

Fairness do motivate most people. Perhaps, when those workers who perceive being underpaid at the base wage received an increase, it is not the amount of wage increase that led to their increase of performance; it is the feeling of being treated "fairly."

So those who don't feel being unfairly treated never increase their productivity even when they receive wage increase. Perhaps again, they need a different approach to be motivated, perhaps emotional empowerment is one way to motivate them and therefore increase their productivity.

[chris]

@ Greg vP "Increasing the chambermaid's income increases her discretionary income and her spending, thus employing more people in the industries that supply things chambermaids demand."
Sadly, no. A higher living wage would reduce tax credits, which mitigate the increase in the chambermaid's income, tending to cut aggregate demand.

[Churm Rincewind]

Chris's suspicions are right. There's considerable evidence that those in work are primarily motivated by the approbation of those whose opinions they respect. This could include bosses, co-workers, customers, or indeed public opinion. Absolute levels of pay are only the roughest of proxies, and are generally an ineffective mechanism for motivating people to work harder or better.

[Tim Hunt]

This is just Herzberg The Dual Structure Theory (See, for example http://en.wikipedia.org/wiki/Frederick_Herzberg. It was published in 1959.) It is a staple of every management training course these days. Is there meant to be something novel here?

[harold]

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