Does Money Really Make the World Go Around?
As Economists, we are constantly trying to understand the concept of incentives. Particularly, we are interested in how behavior is influenced by monetary incentives. Whether it is governments who use changes in interest rates to achieve macroeconomic goals, or a dad who pays his child $2 to do a couple chores around the house, it seems that money is the leading incentive in our lives. A whiff of money causes society to chase its tails, following any path to reach that precious goal of more and more money. While our society seems wired to follow this wild goose chase for a simple buck, it's perhaps worthwhile to reflect whether money is truly the best incentive to motivate people in today’s world.
The focus of this investigation is on the workplace and how monetary incentives influence an employee’s performance. Multiple studies suggest that “good money” does not always mean “good job”. According to a meta-analysis published in the Journal of Vocational Behavior, the correlation between salary and job satisfaction is very weak, a meta-analysis being a form of statistical analysis which combines the results of various studies. In fact, the correlation coefficient was reported to be r=0.14, indicating a less than 2% overlap between amount of pay and job satisfaction. A further cross-cultural comparison study portrayed that the relationship of earnings against both job satisfaction and pay satisfaction remained low, everywhere in the world, suggesting that this is a universal phenomena and cannot be attributed to cultural differences.
While this research highlighted that money was not as important an incentive at the workplace, some research went as far as to say that money could even act as a disincentive for the desired behavior. A day care center conducted a study in which they charged parents a fine for not picking up their children on time. The hope was that the fine will act as a disincentive for parents to be late, however the reverse results were seen. Now, instead of being on time, parents were more likely to be late to pick up their children. But the big question is ‘why’? This is because now, picking up the children was a business transaction and therefore the guilt from picking up their child late was replaced as the time was now paid for .
From these studies, it is clear that money is not the best way to incentivize human behavior as either it has no effect, or in some cases, the reverse effect. Naturally, the next question is ‘what is the best incentive to influence behavior?’ Research by Sodexo Engage highlighted that there are in fact two major factors that come into play when dealing with human behavior in the workplace . On one hand we have the market norms, which center themselves around monetary incentives such as wages, interest rates, and cost-benefit schemes. These incentives are business-like but what many people fail to remember is that social norms impact the workplace as well. These include things such as power, internal motivation and reciprocity. These incentives play with human emotion and compassion and can actually drive behavior more than market norms. Nevertheless, we have got stuck in a society where the rules are set by market norms, yet behavior is controlled by social norms.
To further understand how social norms work, we can look at a study published in the Journal of Economic Psychology. This study analyzed how emotion might play into the desire to have a tangible alternative rather than money. Participants were asked to choose between cash, a high definition TV or a cruise (all of equal monetary value). Almost two third of the participants chose money. However, when the researchers altered the question to incorporate emotion, different results were seen. The researchers asked participants how happy or satisfied they would be to receive a bonus of money, a HDTV or a cruise. This time, the TV and cruise were consistently picked over the money. It was theorized that receiving a gift that one wouldn’t necessarily purchase for oneself creates more excitement and therefore acts as a bigger incentive than money.
Internal motivation can also be considered to be a big influencer of behavior. This is often considered to be the driving force of productivity. For example, take the case of people who choose to work in NGOs. Clearly it is not the attractive salary that draws people to this field. It is the internal motivation or the passion for the cause that drives them to volunteering . In some cases people have a sense of indebtedness to society for their own privileges that leads them to work in the service of others. This leads very nicely into another social incentive: reciprocity.
Reciprocity is the behavior in which two parties give each other some benefit. What makes this such a big influencer of behavior is that it taps into the human sense of obligation to ‘return the favor.’ It appears that obligation and a growing sense of guilt can create a large incentive for people to act a certain way, or to make a certain economic decision. For example, if a company only offers the employee a salary, the individual will only feel obligated to return that same value of product back to the company. However, if the employee is made to feel respected and offered non-monetary perks, they will feel obliged to bring that same respectful and positive attitude to the workplace and therefore would drive up productivity due to the improved attitude of the workers in the company.
Another big incentive for people that overshadows money is, in fact, power and the hopes of achieving that power. In Freakonomics, authors Levitt and Dubner write of a street gang where hundreds of street kids join the illegal drug sale industry at below the minimum wage. The question is, why? In this case, it is not always the money itself that is attractive - it is also the opportunity to move up and gain power. The ‘top dogs’ in these drug gangs make more money than other lucrative professions, and it is the aspiration to reach this position that coerces individuals to withstand the horrible conditions of terrible pay, in hopes of a better future with greater power. These kids hope that one day they will gain that power and success which would compensate for the deplorable conditions now.
At first glance, everything in our economy seems to be driven by money, which makes us believe that everything should be driven by money, when in fact there are bigger human emotions that are at play. At the end of the day, we need to understand that social norms play a greater role in our decisions than market norms and accordingly we can adapt the policies used to achieve more effective results. While money incentives tend to work in the short term, for longer-term and sustainable changes we need to tap into the raw emotions of people in society. For greater results, we need a greater understanding of human beings.
Written By Aditi Rudra, Undergraduate Economics Student
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