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Are Happy Employees Really that More Productive?

 

HappyPhoto courtesy of Wikimedia Commons, Author, Magnus Manske

Unquestionably measures of well-being, popularized by the term happiness, are beginning to play greater roles in policy making and Caribbean countries should take heed. The Caribbean performs relatively mediocre in the recently released 2015 World Happiness Report which measures subjective well-being using data from the Gallup World Polls that have the sample population rate their quality of life on a scale of 1-10. The data in this report supports the Princeton study that high income improves evaluation of life given the relatively strong role GDP per capita played in explaining subjective well-being. Yet on the Happy Planet Index (2012), which places heavy weight on environmental factors, most Caribbean countries fare very well, with Belize ranking in 4th followed by Jamaica in 6th.

Regardless of the measure used and each measure’s limitations, one article compelled me to ponder on this happiness topic a bit more. A CEO of a credit card company is cutting his nearly $1 million dollar salary to $70,000. Over the next three years, he will be increasing the paychecks of his 120-person staff to a minimum salary of $70,000. Let me catch your jaw. You can read that article to delve into his logic for doing so and have the capitalist/socialist debate elsewhere but let’s ponder a bit on the laudability of a link between happiness and labor productivity.

Let us start with the typical Econ 101 assumption that a salary of around $75,000, based on the Princeton study, equals happiness but faces diminishing returns after $75,000. Yes we are equating money to happiness and for now, keeping out hard to measure variables. Our underlying question then becomes do higher salaries equate to higher labor productivity, keeping all other variables constant?

Interestingly enough, the World Bank reviewed a case study that found that unexpected wage increases can trigger a productivity dividend. In the experiment, a higher wage did not generate higher productivity for two groups that were offered $3 or $4 per hour. A third group was offered $3 an hour then told right before they started work that they would earn an increase to $4 instead due to an unexpected budget increase. The third group had higher output than the two other groups despite making the same amount as the $4 group.

Our CEO mentioned above may actually experience an increase in the productivity of his workers but what happens in the long run?

Productivity may actually decline.

The key is to design an incentive structure that triggers and then maintains happiness in the long run in order to impact worker output into the long run, thus impacting productivity. Removing the money equals happiness assumption, a look at other factors that contribute to worker happiness reveal the strong role that cognitive, psychological, and social factors play in productivity In the Caribbean, cultural factors and industry set-up are different at the local context and would require experimenting to see what incentive system works best. Pure speculation as a Belizean leads me to hypothesize that prestige takes precedence over many variables, especially money. Recognition and title, which are typically found in Government or Bank positions, reign supreme and thus may be key cultural factors to take into consideration.

Essentially it boils down to understanding the cultural environment and making your employees feel like valuable members of the team. Government and Employers, if we want boost productivity, seems like we may have some happiness work to do.

 

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    January 12, 2016 Reply

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