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Do Higher Wages Pay for Themselves?

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Do Higher Wages Pay for Themselves?

An Intra-Firm Test of the Effect of Wages on Employee Performance

University of Bern,

5 min read
5 take-aways
Audio & text

What's inside?

New evidence sheds light on the relationships among wages, productivity and profitability.

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Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

Setting wage levels has always been tricky for employers, because gauging whether higher pay motivates employees to make a measurably positive impact on the bottom line is difficult. In this first-of-its-kind research report, academics James Hesford, Nicolas Mangin and Mina Pizzini draw significant conclusions about the connections among higher wages, productivity and profitability from a US hotel chain’s actual results. getAbstract recommends this scholarly study to anyone charged with making compensation-related decisions.

Summary

Economists, sociologists and businesspeople have long debated theories about the costs versus the benefits of raising employees’ wages. According to the “efficiency-wage hypothesis,” employers will lift pay to the point where the gain in worker productivity offsets the added wage cost. Under this reasoning, firms that pay higher wages upfront should expect greater output from employees and attract better candidates.

Other economic models posit that offering higher than average compensation encourages workers to make greater efforts, because...

About the Authors

James Hesford is an associate professor at the Ecole Hôtelière de Lausanne, where Nicolas Mangin is an assistant professor. Mina Pizzini is an associate professor at the Naval Postgraduate School in Monterey, California.


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