Monkey pay? Monkey do

Financial Rounds points out a really really cool article that shows for the zillionth time that economics works.

The blog entry is a review of a paper by Boyle who examines issues within academia. Now it has become my trademark to mention whenever pay issues come up that there are two key points to every pay issue: the form of pay and the level of pay. Form of pay is what creates incentives, whereas the level of pay determines the pool of candidates for the job.

It is this paper, Boyle largely examines the level of pay. What makes the paper is that in New Zealand university pay is independent of field. Thus in areas where the market rate is higher, the New Zealand schools lose the better employees to other schools whereas in fields where the market rate is lower, they get a better selection of candidates (and by extension employees).

The Unknown Professor (at FinancialRounds) summarizes it perfectly:

"In New Zealand, faculty receive the same salary regardless of their academic discipline (with a few exceptions - the medical and dental fields). So, a high-quality researcher in finance would give up a lot to go to New Zealand as an academic, since academic finance salaries are higher elsewhere. In contrast, an English professor considering a position in New Zealand has lower opportunity costs, since English professor salaries are relatively low outside of New Zealand."

Boyle introduces the main points very succiently:

"Even if non-financial phenomena such as pride and enjoyment are important motivators, the insights of personnel economics and efficiency wage theories suggest that there are still good reasons for believing that low remuneration should have an adverse effect on average worker quality.

• First, there is a sorting effect: offering low remuneration discourages applications from high-ability workers.....
• Second, there is an incentive effect: for given worker ability, high remuneration motivates greater effort due to the greater competition for such positions and hence the greater threat of termination in the event of under-performance....
• Third, there is an appreciation effect: low pay may make workers feel less valued"
  

The findings? Again in Boyle's own words:

"more valuable opportunities have a significantly adverse effect on discipline research quality; on average, a one standard deviation increase in the average difference between US and NZ salaries lowers a discipline's average quality score by about 13%. A higher salary shortfall also reduces the percentage of high grades achieved by a discipline, and increases the number of low grades."

In other words, by and large labor markets do work. Of course, there are exceptions (people willing to accept less pay to be near family, work more flexible hours, or whatever), but by and large, if people are paid a below market rate, the employees will not be as "good" as if they were paid more.

Or as Boyle so aptly puts it: "paying peanuts attracts mainly monkeys"

Too informal for you? Ok, another Boyle quote: "pay levels do matter in determining the available pool of quality workers." (which says it better, but is not nearly as much fun).


Cite of paper:
Boyle, Glenn, "Pay Peanuts and Get Monkeys? Evidence from Academia" (August 2006). Available at SSRN: http://ssrn.com/abstract=922180