Economic Growth and Higher Productivity through Raises and Higher Wages

​Economic growth is seen as the primary means of fostering business development, new job creation, and income growth.  Because increases in productivity, or worker output per hour, impact economic growth, the likes of Federal Reserve Vice Chairman Stanley Fischer have emphasized the need to increase productivity in order to address weak economic growth and an expanding income gap.  From 1949 to 2005, US productivity grew on average 2.5% yearly; whereas, from 2006 to 2015, US productivity grew on average 1.25% yearly.   Given that productivity has increased 73% from 1973 to 2015, yet worker compensation has only increased 11%, payroll practices have clearly played a role in discouraging productivity growth.
 
People are motivated by their economic, social, and emotional interests.  A pleasant work environment and a sense of pride in one’s work can do a great deal to motivate an employee.  After all, people may work for a paycheck, but they work hard because they care.  That said, income determines how well people live.  With costs continually growing and new expenses arising, people need to see an increase in their incomes in order to maintain a healthy standard of living.  They also need motivational raises on a regular basis to feel a sense of accomplishment and appreciation.  Faced with budget constraints, business owners and managers need to set pay and reward raises with productivity in mind.

Through new employment opportunities or raises, employees must continually grow their incomes to maintain and improve their standards of living.   Although some raises are scheduled periodically, others may be rewarded under special circumstances.  Because employers want to retain seasoned employees, raises are also necessities for employers. In general, this is why raises are given retroactively for increased productivity and more reliable performance that comes with the experiences of seasoned workers. Consequently, most employees have already done something to earn their raises.
 
Unfortunately, businesses cannot simply request a raise to cover these additional costs, thus some employers expect higher productivity from their employees following a raise.  In most cases, however, employers cannot rightfully expect higher productivity on top of what improvements have already been made, because the employees have already “paid” for their share of the costs associated with the raise. On the other hand, a reward can also be an excellent motivator, so a raise may well inadvertently result in higher productivity. What raises do is help sustain productivity. 
 
When additional work has been mounded onto employees, a preemptive raise in anticipation of increased productivity is appropriate. Whether a promotion or the result of a shrinking workforce, a preemptive raise can be necessary to help motivate employees when they have more incentives to seek alternative employment than to take on increased workloads.  From the employee's perspective, there is no reason or justification for an employer to expect more out of an employee for the same pay, so a little extra pay for an overloaded worker can actually help employers cut costs without weakening performance. Taking such a step can also help ease resentment over the new responsibilities that have been forced upon seasoned employees.
 
Beyond monetary rewards, praise from supervisors and daily perks can have a far more meaningful impact on productivity than raises. Where non-monetary rewards are immediately applied during the workday, paychecks come long after the work is done.  As such, raises should be part of an incentive protocol to motivate employees, not an end-all solution that employers can implement when they have asked too much of their employees or the company needs a boost in output.  This is exactly why most raises are given to reinforce an employer's praise and maintain good employee-employer relations while a preemptive raise may be used to combat negative sentiments toward the employer, which are highly demotivating.
 
In the face of economic decline or budgetary issues, however, cost cutting measures must be implemented for a business to remain viable. Human resources are pricy and, more often than not, consume a large portion of a company's budget.  For employers, ensuring the company can keep the doors open likely means reducing the number of employees or slashing pay. In this way, pay cuts actually better represents the dynamic value of labor, yet the instability created by fluctuating incomes creates greater economic instability that hurts overall commerce. As such, employers need to understand setting high wages and salaries is indirectly necessary for their future growth.  To maintain a viable workforce in lean times, employers should, therefore, try to reduce hours instead of pay.
 
Corporations and small businesses alone cannot value the labor they consume, because they will tend to undervalue labor and create imbalance in the broader economy.  This can contribute to instability, which is similar to any situation where an essential product is undervalued and over consumed, i.e. employees can be overworked and paid too little to support a healthy lifestyle. On the other hand, the interests of businesses are to reduce payroll costs, so balancing the needs of the broader economy with the interests of individual businesses requires setting employee wages and salaries in line with competitive demand and employee expectations.
 
Like all commodities, labor needs to be valued. Every time a company offers a certain amount of compensation for a particular position, it is helping to define the value of a person's labor. Across entire industries and within specific regions, businesses should use these standards to determine what demand for labor justifies a specific base pay rate.  Because the value of labor is defined over an entire workforce, ensuring labor is properly valued requires industry wide bargaining that helps balance the influences of demand and supply, yet individuals must also help set standards when they accept jobs with a particular level of compensation. For highly productive fields, the base pay rate will obviously be higher.
 
As such, employers must set pay based on what an employee's work is worth to that business on average.  In other words, the profits from that employee's labor are the first factor in setting a fair wage.  Unfortunately, industrial sectors like manufacturing have seen their labor values undercut by outsourcing and shifts away from some product lines as well as the realization of expenses like environmental costs through tougher regulations, health issues, and the emerging fallout of climate shift. Taking this reality into account, as well as the quality of an employee's work, employers can help set a decent wage or salary. Although an employer cannot pay an employee more than the business can afford, it is important to recognize underpaying employees will eventually attract lower quality employees and lead to weaker performance.