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There's More To Wage Cuts Than Just Lost Pay


Let me ask you a question. How much money do you need to be a happy and productive worker? Now, there is a rational way to answer that question. You know, you could add up all your expenses, come up with some kind of number that you need to cover those expenses, think about what your value is the workplace. You could come up with some rational amount to be paid. But NPR social science correspondent Shankar Vedantam has come across some research suggesting that that is not actually the amount that you really want, whether you realize it or not. Hi, Shankar.


INSKEEP: What is the salary that people really want?

VEDANTAM: Well, a lot of it has to do with how much their coworkers are getting, Steve. We've known for a very long time that people prefer situations where, for example, they make $50 and everyone else makes $40, than a situation where they make $60 and everyone else is making $70.

INSKEEP: Wait a minute. So it's not about how much money you're making or whether you can pay your bills? It's whether you're being treated fairly in your mind.

VEDANTAM: That's right. Many of us prefer to be worse off in absolute terms so long as we're better off in relative terms. A group of economists recently ran an experiment along these lines. Researchers at the University of Zurich and the University of Nottingham worked with a company that was looking for short-term workers. The company agreed to have the researchers run an experiment where pairs of workers received a pay cut while other teams received a partial pay cut. The researchers then examined the effects on productivity.

INSKEEP: Oh, so you show up to work the next day. And you know that now you're making 100 bucks less than the person right next to you.

VEDANTAM: That's right. Now, it does sound really cruel, Steve. In fairness to the researchers, the workers were told that this was a short-term assignment with no chance of becoming a permanent job. Alain Cohn (ph), Ernst Fehr (ph), Benedikt Herrmann (ph) and Frederic Schneider (ph) find that the effect of having your pay cut when your partner doesn't suffer a pay cut, the effect on your morale and productivity is two to three times larger than the effect of suffering an identical pay cut but in a situation where your coworker also suffers a pay cut of the same size.

INSKEEP: Now, it seems obvious. But why would that be?

VEDANTAM: I think it goes back to the idea that you talked about at the start of the story, which is that we have this drive for equality and fairness, that we really want things to be fair. And it matters so much to us that we will actually choose sometimes not to work at all if we feel like we're not being treated fairly.

INSKEEP: You know, I'm being reminded of a quote from the writer Tocqueville, who travel across America of course and wrote about democratic societies. And one of the things he said was that in a democratic society, people demand equality. The quote even says, "they will demand equality and freedom. But if they can't get that, they will demand equality and slavery."

VEDANTAM: Wow. You know, I'm reminded of another thing from 25 years ago. Two economists described how this desire for fairness can actually produce unemployment because workers would rather quit than work for pay that they consider unfair. One of the authors of that paper, Steve, Janet Yellen, who's currently the head of the U.S. Federal Reserve.

INSKEEP: Wow. Shankar, thanks very much.

VEDANTAM: Thanks, Steve.

INSKEEP: That's NPR's Shankar Vedantam. He regularly joins us to talk about social science research and also explores the psychology of the workplace among other ideas on his new podcast, Hidden Brain. Transcript provided by NPR, Copyright NPR.

Shankar Vedantam is the host and creator of Hidden Brain. The Hidden Brain podcast receives more than three million downloads per week. The Hidden Brain radio show is distributed by NPR and featured on nearly 400 public radio stations around the United States.