A fair day’s pay?

15th April, 2006

Dear Economist,

I’m hiring a cleaner to help around the house. I understand the going rate is GBP5 or GBP6 an hour, but that seems low. Should I offer more?

Your sincerely,

Harriet Trent, Highgate, London

Dear Harriet,

Classical economics says that you should not. If GBP5 an hour is the market-clearing rate then that is what you need to offer. You should raise the rate only if you cannot get the vacancy filled for less.

Fancier economic theories disagree. “Efficiency wage theory” suggests stinginess, but the idea is the reverse. Advertise the job at, say, GBP10 an hour and therefore reduce turnover, increase the number of applicants and perhaps boost effort from a cleaner who knows he or she has a lot to lose from dismissal. In the long run you may do better.

Recent laboratory experiments suggest a stranger notion: advertise at GBP5 an hour but then pay GBP10. Economist psychologists argue that such an unexpected bonus will induce gratitude and extra effort.

If true, traditional economics can safely be chucked out of the window. But beware putting too much weight on laboratory work, because gratitude can be short-lived…

Continued on ft.com.

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