Financial Strain and Worker Productivity

How are economic and psychological stress linked?

In this direction, we know that financial hardship is psychologically taxing: even a

temporary inability to meet expenses can create anxiety, worry, and stress.

But what about the other direction?

If the stress of dealing with a cash shortfall hinders one’s ability to focus or think

clearly, then the feeling of financial strain itself may have adverse economic consequences.

This paper studies that question in the context of productivity.

Does alleviating a worker’s financial strain allow them to better focus at work and therefore

be more productive?

The authors conducted a field experiment in rural Odisha, India, in which they employed

over 400 workers for a two-week period making disposable leaf plates for restaurants.

This took place during the lean season when agricultural work is scarce and such short-term

jobs are common.

Workers were paid a piece rate for each plate they produced and were highly motivated to

be productive as these earnings were their primary source of income during the experiment.

Notably, workers in this sample have high levels of financial burden.

At baseline, 71% have outstanding loans, nearly 50% have outstanding credits with local shops,

and 68% report low levels of cash-on-hand.

Correspondingly, the level of financial strain is also very high.

86% are “very” or “quite” worried about their finances, and, on a given day,

53% report thinking about their finances while at work.

To test whether this financial strain affects workers’ productivity, the authors experimentally

varied the timing of when workers received their wages.

While Control workers received their accrued earnings in a single payment at the end of

the contract period, Treatment workers received their earnings in two installments: an interim

payment of their earnings-to-date at the end of Day 8 and a final payment on Day 12.

This creates a four-day window in which some workers have received a large cash infusion

while others have not, and the authors estimate the causal effect of financial strain by comparing

Treatment and Control workers during this period.

Two details of this design are worth highlighting.

First, payment schedules were not a surprise.

On the morning of the fifth workday, each worker was individually informed of his exact

payment schedule.

Second, aside from the timing of their pay, all other factors – including the piece

rate and overall levels of compensation – were kept constant.

As such, the experiment isolates the effect of easing financial constraints while holding

fixed both the incentive to work and individuals’ wealth.

And the results show that the cash infusion did alleviate workers’ financial strain.

Immediately after receiving the interim payment, Treated workers were 40 percentage points

more likely to repay a loan, and increased their household spending by 70%.

They also appear to become more focused at work.

Treated workers report being more focused on their work task and are less likely to

have been thinking about financial worries after receiving the infusion.

More objectively, there are large effects on productivity.

In the days following the interim payment, Treated workers increased their output by

7.1% relative to the Control group.

These effects are immediate and persistent, and are concentrated among workers who were

poorer at baseline.

Interestingly, the cash infusion also changed how the Treatment group worked.

Leaf plates are produced by stitching together irregularly sized leaves to form a clean circle,

a task that requires planning and focus.

Inattentiveness leads to inefficiency as an irregularly shaped plate takes time to fix:

either by removing stitches or adding additional leaves.

Importantly, finished plates contain traces of how attentive a worker was in making them,

and, unbeknownst to workers, the authors measured these indicators.

They find that the cash infusion reduced the number of mistakes made by Treated workers,

with the effects again concentrated among poorer individuals.

And so, workers with more cash-on-hand not only work faster, they also work more attentively.

These effects appear to be, at least in part, subconscious.

In an additional randomization, the authors experimentally varied the piece rate and found

that higher rates motivated workers to increase their output but had no effect on the rate

of mistakes.

This suggests that the effect of financial strain on a worker’s attentiveness is transmitted

through a mechanism that is not fully in their control.

This is consistent with psychological channels such as worry or stress.

Finally, to rule out other explanations, note that the effects on productivity only appeared

after the payments had been disbursed.

If workers had changed their behavior out of a sense of fairness or goodwill toward

their employer, the effects should have manifested after payment schedules were fully announced

on Day 5.

There is also no evidence that the results are driven by changes in nutrition or caloric

intake.

Thus, this paper argues that financial strain can reduce productivity, in part by amplifying

mental burdens that make it harder to focus at work.

This implies that individuals may be less productive precisely when they are under the

greatest financial hardship and money is most needed, and reinforces the links between economic

and psychological stress and the dynamics of poverty.

To read more on this topic, you can check out the paper’s references to other related

work.

This includes research on the psychological impacts of economic conditions, the determinants

of productivity, and asset transfers to the poor.