"Efficiency wages" mean pay rises can pay for themselves : Planet Money : The Indicator from Planet Money Today's jobs report found that workers received a small raise last month. And, yes, higher pay is great for attracting workers and boosting morale, but sometimes it can even pay for itself.

Jobs Friday: The case for better wages

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

STACEY VANEK SMITH, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

DARIAN WOODS, HOST:

And I'm Darian Woods. And, Stacey, the monthly jobs report is out this morning

VANEK SMITH: It is Jobs Friday. That is true. This, of course, is when the Bureau of Labor Statistics releases the jobs report for the previous month. And officially, in November, the economy added 210,000 jobs.

WOODS: Also, there were jobs added back in September and October that the Bureau of Labor Statistics missed in their jobs reports back then, so there was, like, all these missing workers that they found. There was another 82,000 jobs added in those months, more than what they'd previously reported.

VANEK SMITH: But, Darian, even with the extra 82,000 people, this was not an awesome jobs report.

WOODS: No. I mean, it's not a disaster, but it's not this booming comeback month that we were all hoping for.

VANEK SMITH: It sort of breaks my heart to say this, but I think this is just a non-air-horn month.

WOODS: No, we'll leave the air horn in the cupboard.

VANEK SMITH: Yeah.

WOODS: (Laughter).

VANEK SMITH: I'm sorry, everybody. We love the air horn. It's coming back in 2022. I have a good feeling.

WOODS: (Laughter) But, you know, the jobs report is quite deep. It's not just about the number of workers that are coming back into the economy. It's also about how much those workers are getting paid, and workers got a raise - a tiny one. In November, the average worker's hourly pay went up 12 cents to $26.40 an hour. That's up from just under $25 a year ago.

VANEK SMITH: And, of course, you know, a lot of businesses and companies might grumble about paying staff more or even struggle a little bit to pay more. But many businesses are discovering that when they pay more, they get better employees. And this is a theory that economists have a term for called efficiency wages, and they've been studying this since way before the pandemic made pretty much every company and business rethink how it was compensating its employees.

WOODS: So after the break, we take a look at why some companies are finding that giving staff a raise will sometimes pay for itself.

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VANEK SMITH: So, Darian, you know that workers like each other when they choose to have breakfast together (laughter).

WOODS: Yeah, not a forced bagel meeting.

VANEK SMITH: Not the forced bagel meetings that NPR sometimes has (laughter).

WOODS: Like, a proper breakfast.

VANEK SMITH: Take Jennifer Laverde (ph). She works for her father's trucking company, Laverde Trucking, in Los Angeles.

JENNIFER LAVERDE: Everybody takes turns bringing bread or tamales.

WOODS: What's your favorite flavor?

LAVERDE: I like the shredded beef with, like, the red sauce. Not too spicy, though, not too spicy - I can't handle it.

VANEK SMITH: But Laverde Trucking went through a really difficult period in the early days of the pandemic. On the one hand, their trucking services were in great demand, needed more than ever.

LAVERDE: We're essential, and a lot of the stuff that we were moving were gloves, masks, hand sanitizer. But everyone, including myself - we were afraid to get hit with COVID-19.

WOODS: The workers of Laverde Trucking, pretty understandably, were concerned about the risks of the virus. Also, pandemic unemployment insurance was pretty attractive. It covered most of their wages, so the company realized, we've got to pay our workers more. So they worked with their main client, a clothing, health and food-packaging importing company, and they shared the cost of a decent wage increase for their truckers and workers.

VANEK SMITH: And Laverde noticed that this increase in pay actually improved morale, and it improved productivity among workers too. And that has become really important given all of the supply chain disruptions and the huge logjams at the ports of Long Beach and LA right now.

LAVERDE: I mean, we've been working around the clock, and, you know, everybody's happy.

VANEK SMITH: And at Laverde, worker retention is actually up.

LAVERDE: They're less likely to leave if they're getting paid a little bit more. And then not only that, but with the incentives, they give us their time. And we give back as well.

WOODS: And yeah, the reason they raised wages was out of necessity. Companies are really trying to attract workers right now. But the effects that they were seeing were even better than expected. What Jennifer was observing was something that economists have studied for a long time - efficiency wages. Tatiana Sandino teaches business administration at Harvard.

TATIANA SANDINO: If you're paying higher wages, you're more likely to attract a broader pool of employees from which you can pick employees that are more capable and more able to produce or perform at a higher level.

VANEK SMITH: Tatiana says this efficiency wage effect has always been a factor, not just when there's a labor crunch like we're seeing right now, because higher wages will often help workers think less about their outside options.

SANDINO: Employees that are paid more have greater incentives to work hard because they don't want to lose that job. And so it's an economic proposition. It's not behavior, at least not because I feel like I need to reciprocate to the employer for that the wage that they are paying me. But instead, it's a calculation, right?

VANEK SMITH: So this efficiency wage theory - it sounds so great, right? I mean, you know, you pay workers more, you get better workers. You get better work out of those workers. Everyone wins. But, you know, there is a question. Does this hold up in the real world? Does it make actual economic sense for the businesses doing all of the wage-paying? So Tatiana and her co-author, Clara Chen, have actually quantified efficiency wages in the real world. Specifically, they looked at a bunch of convenience stores about 20 years ago.

SANDINO: We were looking at employee theft, more or less inventory shrinkage, depending on how people were compensated.

WOODS: I like that euphemism - inventory shrinkage.

SANDINO: Yes. Like, OK, so it's inventory disappearing from the stores.

WOODS: Disappearing - I don't know where it went.

SANDINO: (Laughter) We don't know where it went.

VANEK SMITH: So Tatiana and her co-author looked at this one convenience store chain that usually paid a little bit more - about a dollar more per hour than the competitors. And they compared the rates of so-called inventory shrinkage and money going missing from the cash register at the end of the night to the stores that were paying their workers less.

SANDINO: And what we found is, like, if their wages were, let's say, $1 above the market wage, that that would reduce the theft by about 40 cents, so it wouldn't pay by itself just on these two accounts.

WOODS: On theft alone.

SANDINO: Not just on the theft alone - but 40% of it is a big percentage.

WOODS: It is a big percentage. The company had higher wages, and 40% of this paid for itself in less employee theft. And Tatiana says that there are likely even more advantages.

SANDINO: We didn't quantify all the other benefits that there could be - right? - that they would be more productive, that they would sell more.

WOODS: But two economists did look at productivity. Natalia Emanuel and Emma Harrington were doctoral researchers at Harvard. Tatiana said they got data from a big online retailing company.

SANDINO: They had some workers that were in the warehouse, and so they were able to measure the number of boxes that they were able to process.

VANEK SMITH: This was back in 2019, so their findings were not affected by the wild labor market we've seen lately. The entry-level workers at the time were getting paid about $16.20 an hour, and those workers moved an average of five boxes per hour.

WOODS: Then that year, the warehouse raised entry-level wages to $18 an hour. Straight away, workers moved 7% more boxes.

SANDINO: And that was more than paying off the raise in pay.

VANEK SMITH: They estimate that for every dollar the company spent on increased pay, it got back a $1.44 in higher productivity.

WOODS: So it's not all virtue signaling.

SANDINO: It's not.

VANEK SMITH: But it's not all, you know, a free lunch with efficiency wages. You know, this idea that if you pay people more, you'll get higher productivity and happier employees and the world will be in harmony...

WOODS: (Laughter) No.

VANEK SMITH: Not quite, not quite.

WOODS: The efficiency wages' effect has its limits. Like, you can't just keep raising pay forever. But the most worrying part of efficiency wages is that efficiency wages leave people behind. The higher wages might mean that companies hire fewer people, especially lower-skilled workers. So companies might prefer to pay a little bit more, but there might be this permanent group of people left out of the workforce.

SANDINO: A little bit of a dark side if you want to describe it that way.

VANEK SMITH: But for Jennifer Laverde at her family trucking business, she says the higher wages were a no-brainer. The higher productivity they saw a couple of months ago inspired them to, in fact, give another round of raises. And now, all told, when you add up overtime and bonuses, Jennifer says the employees are now bringing home 40% more pay than they were before the pandemic.

WOODS: That's not bad. That's very high.

VANEK SMITH: I know. Maybe we're in the wrong business, Darian.

WOODS: What happened? Did you guys go out for drinks?

LAVERDE: (Laughter) No, we didn't. We didn't go out for drinks, not when that happened. We were too tired. We've been working 12 hours.

WOODS: (Laughter) So that's the downside.

VANEK SMITH: That's the downside, exactly - just stick to breakfast tamales.

(SOUNDBITE OF MUSIC)

VANEK SMITH: This show was produced by our senior producer Viet Le with help from Gilly Moon. It was fact-checked by Taylor Washington. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.

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