Although recent US labour market statistics show favourable employment numbers, wage stagnation is ongoing and contributes to recent discussions about minimum wage standards. Wage increases counteract inflation and allow employees to meet increasing costs of living, but their dynamics also have potentially important performance effects.
A new study by Dirk Sliwka, at University of Cologne, and Peter Werner, at Maastricht University, examined how workers' performance was affected by the timing of wage increases. Participants were assigned to one of two roles: the principal (that is, ‘employer’) selected from one of four income schedules on which to pay the agent (‘employee’) as compensation for repeatedly performing a tedious task. They found that a small, continuously increasing wage profile resulted in higher consistent productivity gains than either a single sizeable increase or steady payments, but only when they were not anticipated in advance. Crucially, total wages earned were the same across all conditions. These findings are consistent with a model that adjusts performance with respect to an evolving reference wage, informed by recent earnings, and echoes work in psychology on hedonic treadmills.
Although this study suggests that the timing and frequency of wage increases affect productivity, it also shows an effect of absolute wage levels, suggesting a potential rationale for higher wages as well as steady wage increases.
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Constantino, S. Economics: Slow and steady. Nat Hum Behav 1, 0090 (2017). https://doi.org/10.1038/s41562-017-0090