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Study: Cash-on-hand can raise productivity for low-income workers

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People understand that earning less money makes you materially poorer. That’s an uncontroversial statement; it’s simple math. Less well understood, however, is the equation’s converse: How does being poor affect what you earn?

Frank Schilbach, an associate professor of economics at MIT, has given a lot of thought to this question. He has worked with low-income workers in India and other countries trying to understand how poverty and its attendant worries intrude on their day-to-day lives. “Perhaps unsurprisingly, financial concerns loom really large: How will I pay for school fees? Will I have enough to feed my children? Can I pay health care bills?” he said. “And the more we’ve heard this the more we’ve wondered how these concerns might affect behavior, particularly at work.”

A new study with three colleagues — Supreet Kaur from University of California Berkeley, Suanna Oh from the Paris School of Economics, and Sendhil Mullainathan from the University of Chicago — gets to the heart of this question: Do the pressures of poverty impair worker productivity?

The upshot: yes. In an experiment, the researchers found an average 6.2% jump in productivity when workers were paid partway through a job instead of when the job was complete. The results are detailed in the working paper “Do financial concerns make workers less productive?

The researchers conducted the field experiment with 408 workers in the state of Odisha, India, during the agricultural off-season, when many people face financial straits. The workers were hired to create a disposable plate made of leaves that is commonly found in local restaurants. Though manual and repetitive labor, this task is also cognitively demanding, as good planning and careful execution can dramatically improve productivity and, subsequently, wages. (Inefficiencies arise when workers have to, for example, undo stitches or use excess leaves.) In the control group of the experiment, workers were paid at the end of their 12-day contract. Treatment workers instead received earnings to-date either eight or nine days into their contract, with the balance paid after 12 days. Schilbach and his colleagues observed not only the number of plates produced in each group, but also the number of errors made in production.

In a new study, productivity increased an average of 6.2% when workers were paid earlier in a project.

Those who received an early infusion of cash boosted productivity by an average of 6.2% and reduced their error rates for the remainder of their contract. “Once workers were cash rich, they made more plates and fewer mistakes, with these effects concentrated among the poorer half of the sample,” Schilbach said. “This strongly suggests that attention plays an important role — that people are able to focus on their work instead of thinking about school fees, health care, and so on.”

Schilbach noted that these results could, however, be interpreted as a product of motivation. That is, workers who were paid early weren’t more attentive; they simply pushed themselves to do a better job. To rule this out, he and his colleagues ran a supplementary experiment in which they doubled the payment for each completed plate. In theory, this monetary incentive should motivate people to be more productive. And while they did see a small bump in the number of plates people produced when offered greater compensation, the rate of mistakes remained constant. To Schilbach, this suggests a mechanism at work that is beyond worker control, operating in the psychological background: When people have money on-hand, the distracting noise of poverty is temporarily quieted and they are more able to focus.

The researchers ruled out several other competing explanations as well. To name two: Could it be that paying employees early buys their goodwill, and so they want to do a better job? Schilbach and his colleagues tested this by probing whether worker productivity reacted positively to an announcement of the early payment days before the payment actually occurred. It didn’t. Or, alternatively, could it be that early payment improves worker nutrition? Surveys on food intake indicated this was not the case.

Current implications: stimulus payments, unemployment benefits

Though Schilbach was careful to note it’s not clear how far these results generalize, the implications appear immediately relevant given current debates in the U.S. over the value of stimulus payments and unemployment benefits. “What we seem to find is that the potentially positive effect of this kind of support not only improves well-being by reducing financial strain on people, but, in addition, it might help them become more attentive and productive, and so earn more money,” Schilbach said. “When you’re talking about something like unemployment insurance, you’re easing this strain on people which may help them find work at a time when they are at their most vulnerable.”

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Returning to the core result — an average productivity boost of 6.2% — Schilbach made two points. First, while that figure may not seem particularly large, worker productivity is difficult to improve. Even straightforward incentives like increased wages often only lead to relatively small increases in output. (And, as noted in this case, incentives did not increase work quality.) Second, when added to the myriad other side effects of poverty, this 6.2% could become one part of a much larger figure.

“Being poor means more than not having money; it means being disproportionately affected by anxiety, stress, depression, physical pain, or trouble sleeping,” Schilbach said. How might the long-term alleviation of these issues affect workers?

“All of these things added together could lead to severe consequences in the persistence of poverty among so many. I hope for this work to demonstrate that these factors deserve much more scrutiny,” he said.

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