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Paying Higher Wages May Score Companies More Productivity: Study

The relationship between the rate of pay a job commands and the value of that job to an organization has long been the subject of study, debate and tortured contemplation. Ideally, a company hits the sweet spot between paying enough to confer the appropriate appreciation on a position; not so little that it discourages the worker from putting in meaningful effort, but not so much that it takes on the stench of an overinflated fat-cat post whose value could never align with the paycheque.

Tricky business, this.

But a new study from the US Department of Commerce confirms a home truth: there’s an undeniable link between pay rates and productivity.

The study, drawing from a special tabulation of data from a 2011 survey of manufacturers, finds that payrolls per employee rise in direct relation to value added per employee.

The study’s authors suggest three reasons for this reality:

  • the extension of higher wages tends to attract workers with more and better skills;
  • those companies with richer rates are better able to keep employees;
  • higher-paying firms adopt practices to increase the return from these skilled and motivated workers.

In statistical terms, says the research, the variables of payroll and value-add have a correlation coefficient of nearly 0.7, stronger for establishments in the bottom quartile (greater than 0.75) than in the top (about 0.55), indicating a closer link between productivity and wages among lower-paying than higher-paying establishments.

That different establishments in the same industry pay very different wages (workers in the computer and electronic product manufacturing industry, for example, earn an average of $34 per hour [as of May 2015], while those in apparel manufacturing earn just $17 per hour), says the study’s accompanying analysis, suggests more than one “production recipe” is viable.

In the so-called “high-road” recipe, firms harness the knowledge of all their workers to create innovative products and processes — and the higher wages are offset by workers’ higher productivity.

Easy peasy then. Bring on the raises.

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