…because I’m an economist and a mom–that’s why!

Would You Work Harder If You Were Paid Less?

July 29th, 2008 . by economistmom

Yesterday’s Washington Post contained an interesting “Department of Human Behavior” column by Shankar Vedantam, called “When Play Becomes Work.”  It points to yet another unfortunate feature of “growing up” (and getting old):  that as grownups we start to expect to be paid for any exertion of effort, which can sap our internal motivation when the effort is no longer “just for fun” but instead is primarily for financial reward.  Shankar explains the scientific evidence behind the (perverse-to-economists) theory that suggests at least some of us might work “harder” if we were actually paid less:

Psychologists have long been interested in what happens when people’s internal drives are replaced by external motivations. A host of experiments have shown that when threats and rewards enter the picture, they tend to destroy the inner drives. Paychecks and pink slips might be powerful reasons to get out of bed each day, but they turn out to be surprisingly ineffective — and even counterproductive — in getting people to perform at their best.

More than three decades ago, Edward Deci, a social and personality psychologist at the University of Rochester, found the first experimental evidence of a phenomenon with wide relevance to the way most Americans conduct their personal, professional and social lives.

Deci tracked a bunch of college students who were solving puzzles for fun. He divided them into two groups. One group was allowed to keep solving puzzles as before. People in the other were offered a small financial reward for each puzzle they solved.

The psychologist later evaluated the volunteers: He found that people given a financial incentive were now less interested in solving puzzles on their own time. Although these people had earlier been just as eager as those in the other group, offering an external incentive seemed to kill their internal drive.

Beliefs about the utility of rewards and punishments in motivating human behavior are deeply ingrained, and most people don’t know that more than 100 research studies have shown that motivating people in this manner can have the unintentional effect of undermining their internal drives.

The striking thing about the research, said Roland Benabou, an economist at the Woodrow Wilson School of Public and International Affairs at Princeton University, is that it is so starkly at odds with bedrock economic principles.

“A central tenet of economics is that individuals respond to incentives,” Benabou noted in one research study. “For psychologists and sociologists, in contrast, rewards and punishments are often counterproductive, because they undermine intrinsic motivation.”

This pure, potentially adverse psychological effect of making rewards “too financial” in nature definitely is something new for economists to consider, as “starkly at odds” with what we are taught in our microeconomic theory courses.  (In economist’s lingo, it offers the rather startling possibility that the wage rate doesn’t just affect our budget constraint, but our utility function as well.  It sounds a bit like a case where the free market can transform us into “monsters”–or at least lazy “Pavlovian” humans.) 

But don’t get us economists wrong–we already understand that people get “utility” from (value) things other than what money can buy (yes, really).  When it comes to what people choose to do for a “living”, most people at least implicitly weigh the costs (pecuniary or not) versus the benefits (pecuniary or not) of accepting certain employment and do not just go work for the highest bidder.  (I’d even like to think that not everyone who earns gobs of money is doing it just for the money–and hence won’t be subject to the bad psychological transformation–but simply enjoys the good fortune of getting paid so much for doing what they would be willing to do for much less.)  It’s the economist’s concept of “compensating differential” that tells us that we often choose a job with lower pay but higher “quality of worklife” (assuming we can’t find that job with both higher pay and higher quality of worklife, that is). 

(Tip to employers:  don’t go throwing this “compensating differential” term around when trying to sell a potential employee on your lower-pay-but-higher-quality position you’ve offered him (unless the potential employee is a US-trained labor economist), lest you be misunderstood as offering to match the higher salary some other employer has offered him…. This advice is based on a true experience of my husband.)

Working mothers (UPDATE:  ok, maybe some working fathers, too), especially, understand the concept of “compensating differential” and often make the conscious tradeoff of accepting a lower salary for greater flexibilty and quality of (work and home) life.  (In fact, I just made that tradeoff in leaving Capitol Hill for the Concord Coalition.)  Because we have responsibilities to our families, it’s not simply a case of ”do what you love, and the money will follow” (which would say “don’t worry about how much you’ll get paid”)–but instead “can I afford to do what I love?” (which says “I want to do what I love, but I need to be able to pay the bills”).  In EconomistMom terms, the “income effect” of how high or low are the wages we command probably matters as much or more than the incentive (or “substitution”) effect, in terms of the positions we choose to accept, the tradeoff between the higher and lower paying jobs we’re willing to make.  The “price” of a higher-quality-but-lower-wage job is the differential between that lower wage and our higher wage alternatives (so the smaller the difference, the more attractive the lower-wage job), but the better quality job is a “luxury” good that we are better able to afford and more likely to choose the higher our overall household income (including our own (lower) wages).  And just like luxury goods, sometimes people see a higher price as a signal of higher quality (whether real or not), so that a higher price can sometimes create more demand, not less, for the product–or in this case, for the lower-wage job.  So both the incentive effects and income effects suggest that a higher wage offered on the higher-quality-but-(still) lower-wage job would make one more likely to choose such employment.

Once we’ve placed ourselves somewhere on the high wage vs. high quality employment possibilities frontier (chosen our job), the level of wages one receives on the job can matter as well for how “hard” we work at the job.  Whether the job is high paying or low paying, there’s a positive correlation between wages and effort.  If we’re ever cognizant of the fact that we’re earning less than our full market potential, then our wage rate can still matter for our on-the-job morale (”is that all I’m worth to them?”), and we might take advantage of opportunities to boost our ”effective wage” by effectively working fewer hours, for example, or by expending less effective effort by, for example, babysitting one’s son at the office.  (Not that I’d ever do that here at Concord…) 

That some people in fact choose their employment based on the “do what you love (as long as you can afford it)” model might in fact comfort employers who cannot afford but lower wages, but who want to know they’re recruiting a committed workforce.  It’s great from both the employer’s and employee’s perspectives if it’s true that the employee has so much passion about their work that they’d be willing to do their job for free or at least a lot less money–i.e., that the work feels like play.  …Well, as long as the boss doesn’t take you up on it.  ;)

12 Responses to “Would You Work Harder If You Were Paid Less?”

  1. comment number 1 by: kharris

    I think you have hit upon the error in standard economic thinking, but you kept right on driving. You differentiated between incentives and rewards, tacitly defining incentives as external. If that is the definition we want to use, then we need to start talking about positive motivation as coming from incentives and other stuff, rather than just from incentives. This is something that seems quite intuitive, and we work it into discussions of preference and choice, but in saying these findings are perverse-to-economists, you are saying we neglect to consider at some times what we do consider at others. Not very tidy.

  2. comment number 2 by: kharris

    And not to imply bias or anything, but you need to talk to a few more working dads to see what their motivations and choices might be. There is a good bit of diversity in both, in my experience.

  3. comment number 3 by: economistmom

    Well, yes, economics is a far-from-tidy “science.” The “perverse to economists” comment really refers to the bulk of economists who aren’t yet familiar with “behavioral economics”–and I would say I am a complete novice to that way of thinking, too, but I’m trying to learn!

  4. comment number 4 by: Hmmmmm

    NO. I work harder when I am paid more.

  5. comment number 5 by: Patrick R. Sullivan

    ‘ Working mothers, especially, understand the concept of “compensating differential” and often make the conscious tradeoff of accepting a lower salary for greater flexibilty and quality of (work and home) life. ‘

    Larry Summers must be smiling…but, I doubt NOW is.

  6. comment number 6 by: Jim Glass

    Income effect v substitution effect I believe accounts for the factual observation that increasing a tax on earned income has a much bigger impact on the supply of family “second job” labor in the market.

    That is, the family’s first earner pays the core bills. If after a tax increase less money is taken home, well, the first earner has to keep working and maybe even work more hours to keep all the basic costs covered. So the increasing tax doesn’t reduce the amount worked, might even increase it.

    But the family’s second job is much more of a trade off, working also means paying money for a housekeeper, afterschool program, nanny, and whatever else the second earner can’t do when working but would do if not.

    So when the tax lands on this second income it can make the tradeoff no longer worthwhile, with the earner saying “forget it, it pays more for me to stay home and do that stuff myself”, so the second earner leaves the job market and employment drops.

  7. comment number 7 by: donna

    I’m in the position where my time is now worth more to me than even making what I could be making in the market. My needs are taken care of, and my working typically just increases our taxes at this point. So I would definitely need for the work to be fun to be working at this point in my life. Instead, I spend my time mostly having fun. Could I get paid for some of that fun? Yup. And I do indeed sometimes turn down financially rewarding offers because then it wouldn’t be fun to do the things I’m doing.

  8. comment number 8 by: Denis Drew

    In the early 70s, I was working a temp job where a driver with two helpers were to switch truckloads of 120 lb. boxes of surgical gloves from a main warehouse to a satellite location.

    We all agreed that the job was fun (great to be young and strong) as long the company supervisor was not there and we also agree that he was the nicest, sweetest, easiest going supervisor that could ever be – but, we all agreed that when he was there we were doing it for him, not for ourselves: taking the fun out of it.

    On a psychological not, this gave me insight into the motivation of seriously hooked heroin addicts who I had seen mucho contact with in Manhattan in that period (and in parallel, heavy alcoholics). These dope fiends (they prefer: has more angst to it) were by leaps and bound the most paranoid, super self-conscious group of folks I had ever encountered.

    I got the insight that what heroin (or alcohol) does for the deeply addicted is shut out (as in anesthetize them from) the “super-critical attitude” of their world full of supervisors (you and me): allowing them to enjoy the gratifications that you and enjoy normally w/o chemical help. Ergo, asking them to just say “no” is asking them to live w/o gratification.

    Back to economics: if anybody doubts the existence of irrational motivations in purchasing decisions, just send them to Madison Ave. where they have been cataloguing truckloads of information of the subject since the early twentieth century.

  9. comment number 9 by: AAustin

    Many economists have been working on this problem for at least the past twenty years, and many papers have been published that address the economics of intrinsic motivation and incentives. It’s not clear at all that such effects result from “irrationality,” but rather may well stem from a careful consideration of incentives where internal and exernal motivations exist.


    David M. Kreps, Intrinsic Motivation and Extrinsic Incentives, American Economic Review, Vol. 87, No. 2, (May, 1997), pp. 359-364

    Bengt Holmstrom and Paul Milgrom, Multi- Task Principal-Agent Analysis. Journal of Law, Economics, and Organization, Special Issue 1991, 7, pp. 24-52.

  10. comment number 10 by: Denis Drew

    Different angle: economists treat choices as if they were the stuff of rational forebrain calculations when motivations, as in instinctive preferences, are formed in the pea sized midbrain — or reptilian brain. By definition, evolved behavior (the need for privacy, territory, rule by consensus, etc.) is preset. The logical forebrain exists to pursue the preset goals of evolution.

  11. comment number 11 by: economistmom

    whoa…. cool. So if we all got in touch with the “reptile” inside us, would we be “happier”?

  12. comment number 12 by: Denis Drew

    If I knew how to answer that I could charge you for the answer. :-)

    Was thinking of another “reptilian response” today — not related to economics:
    Two drivers in two cars — two social borderlines — don’t think twice of flipping the bird to the “other”, the outsider.
    Same two drivers on the same campus — within one common social border — feel obligated to be friendlier.

    Last time I visited NYC the crowds reminded me of the crowds in last scenes of The Invasion of the Body Snatchers — as a native I understood feeling the need to ignore the overwhelming numbers or I will forget who I am.
    MidWest rules: you can talk to persons you don’t know on a bus stop — you are also perfectly free not to ever acknowledge their presence again — like two kids in the same school. Must be a program in there somewhere.

    BTW, when in S.F. I figured out that so-called oriental inscrutability may just be the same thing native New Yorkers do — developed in millenia overcrowded China.
    I imagine myself returning to NYC and feeling funny walking out the lobby of my apartment building, and having to ignore the folks I just got off the elevator with lest they become confused by talking to them. :-)