Frederico Finan: How to Attract More Qualified Employees
A Stanford scholar presents the first experimental evidence that employers get what they pay for.
It may seem like common sense that if you want to lure better workers, you should pay higher wages. Yet employers and economic theorists alike aren’t sure that’s true, since high pay might attract job applicants who are in it just for the money. So what’s an employer to do? A recent field study from development economist Frederico Finan and colleagues provides an answer: Their research offers the first-ever experimental evidence that higher wages attract workers who are highly skilled and who hold a true interest in the organization’s cause.
The opportunity to conduct a study on real workers applying for real jobs came when the federal government of Mexico, in an attempt to improve public services in areas of the country with weak municipal governments, rolled out a program to hire a network of community-development agents. These agents would live in their assigned area, and their job would be to assess local needs and report these back to the federal government, explains Finan. The community-development agents would be somewhat like Peace Corps volunteers, says Finan, but they’d be recruited from within Mexico and paid for their work.
The program organizers firmly believed that they needed to pay above-average wages in order to draw skilled workers to these jobs, which were often located in remote and crime-ridden areas. Yet the organizers worried that a salary that was too high would attract people who were in it just for the money and not for the cause. That’s a serious concern, since people who are highly motivated to work in the public sector are known to perform better on the job. “If you offer one penny, you know that whomever you chose is there because they love the job,” says Finan. “But if you offer $100,000, you’ll get not only a lot more applicants, but also applicants of the type who are in it for the wrong reasons.”
To help figure out the right wage, the program organizers turned to a trio of economists, including Ernesto Dal Bó of University of California, Berkeley, and Martín A. Rossi of the University of San Andrés, in Buenos Aires, Argentina.
The economists designed an experiment, offering a higher wage at a randomly selected half of the recruitment sites. This wage was in the 85th percentile of pay for all jobs in the given region. The lower-paying job, offered at the other half of recruitment sites, paid more than 65 percent of all jobs in the recruitment region. (For a more revealing test, the researchers had recommended offering a third wage, one below the median, but the program organizers didn’t want to risk missing out on higher-quality applicants by offering too little.)
How could the researchers tell what effect the different wages had on the kind of applicants attracted to the job? The application process included a series of tests, including an IQ test and a personality assessment, designed to measure the two desirable attributes: quality (particularly intelligence) and what the researchers call “public-service motivation,” which includes traits like being agreeable, outgoing, open to new experiences, and low on neuroticism.
As expected, the higher wage attracted more higher-quality workers than the lower wage did. Higher-quality workers were less likely to apply for the lower-wage jobs, presumably because they had better alternatives elsewhere, while lower-quality workers probably realized that the competition for the higher-wage job would make their application and subsequent testing a waste of time, says Finan.
More surprising was the effect of higher wages on the number of applicants with high public-service motivation. The researchers had expected that either there’d be no correlation between worker quality and motivation or that the relationship would be negative. But the data told a different story. “What we discovered from our results is there is no trade-off,” says Finan. In fact, higher-IQ applicants tended to be more personable, less neurotic, and so on. As a result, on average, the applicant pool in the higher-wage condition was higher on all desirable dimensions. Employers, therefore, needn’t worry about a high wage disproportionately attracting the wrong people.
Higher wages also helped make up for undesirable aspects of the job, including distance from home and work in a dangerous area. For example, in the low-wage condition, the farther the job was from an applicant’s home, the less likely the person was to accept the job offer. But in the high-wage condition, distance mattered very little, and after only about 80 kilometers (about 50 miles), distance didn’t affect acceptance rates at all. It’s as if San Francisco residents were as willing to relocate to Dallas or Miami as to San Jose, for the right amount of money. “The higher wage made people completely mobile,” says Finan.
“That may seem obvious, but it has very important implications,” he says. Some people have recommended offering higher wages as a way to attract doctors to rural areas and math teachers to inner-city schools; Finan’s research strongly suggests that these recommendations are right.
The study’s conclusions also apply to jobs outside of government, Finan believes, especially service jobs, in which a good attitude toward customers is paramount. But higher pay is obviously costly, so how much is worth spending ultimately depends on each organization’s values and resources.
Employers should also keep in mind that because higher wages attract more candidates, offering attractive salaries could raise the cost of evaluating applicants. If you lack the means to screen prospective hires quickly and accurately, then higher wages will almost surely bring a new set of problems. Any organization that values qualities that are easy to spot, like educational achievement, and harder-to-assess traits like customer-service orientation, says Finan, “has to think hard about the salary they set and the type of screening that they’re going to do.”
Frederico Finan is a former associate professor of political economy at Stanford Graduate School of Business.
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