Does more satisfaction with earnings lead to higher productivity?

Published on: 3 May 2024

Current issues related to economy, (responsible) investment, pension and income: every week an expert from APG gives a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, on whether greater satisfaction with earnings leads to higher productivity.


Gross hourly wages rose an average of 7 percent last year. That is the biggest increase since 1978, reports the Central Bureau of Statistics (CBS). And more than 1 percent more than collective bargaining wages, which rose by 5.9 percent.


The latter, by the way, is not unusual; in times of labor market shortages, departures from the CAO wages are more frequent. Employers hope with an extra plus on the salary to attract employees and keep them satisfied. But does that work? And does greater satisfaction with earnings lead to higher productivity?


There is a correlation

“Economic theory says that in a labor market with free choice, wages should equal marginal productivity (the number of products produced by one additional worker, ed.). If you don’t pay that as an employer, then people will look for another job,” Knaap says. But, he says, it is a very simple model. “After all, you assume that people have fixed productivity and convert that into money. Therefore, it is certainly not the only model. In fact, it can also work the other way around. Not: work harder and then get more pay, but rather that people get more pay and therefore work harder.”


Here Knaap is referring to Stiglitz and Shapiro’s “efficiency wage theory” from 1984. “That theory makes it clear that if you take the imperfections of people and the labor market into account and pay a little more than you should, it can be useful. Then people might try harder even when you’re not looking. They are more motivated. And people want to keep their jobs.”


Equipping expensive people with technology

But there are two other models that Knaap touches on when it comes to the issue of wages and productivity. One is the added value of labor-saving technology. “If labor is expensive, then it becomes interesting to use innovations to increase productivity. Take the painter who earns 40 euros an hour. He would be better off using a latex sprayer instead of the brush to give walls and ceilings a sleek coat of paint. For a painter who works for 10 euros an hour, that advantage is not as great.”


The other model Knaap proposes is that if everyone gets paid more, there will also be more money in circulation. And this stimulates demand for products. “Companies sell more because those workers spend more money with them, thus productivity also increases.”

Pay a little more than you should, can be useful. Then people might try harder even when you’re not looking

Opposite track

The intriguing thing about the latter two models, according to the APG macroeconomist, is that they make it clear that wages can be raised without increasing unemployment. In fact, it actually creates a more productive economy. “In the Netherlands we have been on the opposite track for a long time. It was always said that higher wages would lead to more unemployment, and therefore wage moderation was necessary. There has been a change in that in recent years. There is more support for higher wages.”


Not a bad development, Knaap believes. Research supports him in that thought. “In the American state of New Jersey, they raised the minimum wage from $4.25 to $5.05 an hour in the early 1990s. To evaluate the impact of the law, over four hundred fast food restaurants in New Jersey and in the neighboring state of Pennsylvania - where the minimum wage was not raised - were then surveyed before and after the increase. What did they find out? Compared to the fast food restaurants in Pennsylvania, employment in New Jersey increased by 13 percent because people there had more to spend, so they could buy more hamburgers.”


Dutch policy

It is a study that has not gone unnoticed in the Netherlands either, Knaap tells us. “We have seen this reflected in Dutch policy via a long detour. The previous cabinet, Rutte IV, had in the coalition agreement that they wanted to raise the minimum wage by 10 percent. That was based on the Kansrijk Labor Market Policy study, which referred to this research.” It also fits with the picture painted by the state’s Demographic Development Commission 2050. Indeed, that commission suggests that, when it comes to migrant workers, there is no place in a future Netherlands for companies that can only exist by the grace of (under) paid workers. “We have turned 180 degrees in the Netherlands: from wage moderation, until say a decade ago, to the situation now, where we say wages are not high enough because higher wages create productivity and benefit the economy.”


But do people also become happier with higher wages? Knaap knows that they do. “Recent research indeed shows this. Unless you belong to the group that is chronically dissatisfied.”