Financial Wellness & Productivity: Financial Stress Makes Workers Less Productive

WHAT: Financial stress makes workers less productive suggests a new study of workers at a factory in Odisha, India.

BACKGROUND: Sendhil Mullainathan, a behavioral economist at the University of Chicago Booth School of Business, and his co-authors randomly gave a group of workers a large portion of their compensation earlier in their work period rather than at the very end.

The workers who were paid upfront were significantly more productive, making 6.2% more plates per hour. The biggest effect was seen with the poorest workers and the plates they made were less likely to include mistakes, indicating increased performance on the job.

The findings suggest giving workers cash upfront, $20 on average, reduced the mental burden of their financial problems, many used the money to pay off debts, and freed them to be more productive. What’s novel about this study is that it looked at the effects of financial stress and direct cash payments at a real job rather than in a laboratory setting.

These findings echo other studies on the psychological consequences of poverty for people who deal with stressors such as low income, discrimination, limited access to health care, unhealthy housing, and crime. They experience disproportionate rates of physical and mental disorders, low educational attainment, and low IQ scores. The cognitive load of poverty hampers poor people from escaping poverty, manifesting in smaller hippocampal volume among poor children and adolescents compared with wealthier peers.

“Surveys have shown that a very common view about why poor people are poor is that they don’t try hard enough, they’re irresponsible, they make poor decisions, they don’t stay in school, et cetera,” said Columbia University cognitive neuroscientist Kimberly Noble. “But … neurons don’t deserve blame or credit.”

LOOKING AHEAD: Policymakers and small business owners should be aware of this growing body of research as they explore reforming welfare programs, working with the private sector to reimagine compensation and benefits for the 21st century. Giving poor people cash without conditions, as in stimulus checks, could help them earn more cash on their own and be more productive.

Dr. Mullainathan’s paper adds to the literature on financial wellness and productivity suggesting that investing in Employee Financial Wellness Programs (EFWPs) offers a competitive advantage and can lead to improved productivity, reduced distractions, increased engagement, and enhanced organizational commitment.