Marina Krakovsky

Marina Krakovsky

Secrets of the Moneylab

More workers satisfied with their pay in a worse economy?

The paradox of higher pay satisfaction during a time of salary freezes.

Posted Aug 24, 2010

A recent Gallup poll reported that a surprising number of US workers were happy with their pay: 53% of the part-time and full-time workers surveyed believed they are paid “about right” (with 43% saying they are underpaid).

What’s more, the proportion of workers satisfied with their pay was actually higher than in 2008, when Gallup conducted a similar poll. (In 2008, only 46% of US workers thought that their pay was “about right” and 51% believed that they were underpaid.)

This impressive improvement in worker satisfaction happened during one of the worst downturns in US history—a period during which the unemployment rate jumped from 6.1% to 9.5%, and when a startling number of employers froze salaries. 25-40% of organizations reported a salary freeze in 2009, compared to a typical 2% historically, according to a McGladrey report, and salary increases dropped to the lowest level since tracking began over 30 years ago.

What’s going on? Why would people whose pay had stayed constant at best be more satisfied than ever with how much they were earning?

You might think the answer has to do with falling prices, but the fact is that those years never saw much deflation at all. In fact, with the exception of 2009, when prices dropped by four-tenths of a percentage point, workers still faced mild inflation—from 3.8% in 2008 to 1.2% so far in 2010.

Here’s a better explanation: social comparison. As we discuss in our book, people have a well-established tendency to judge their material well-being in relation to others—even after taking buying power into account. Some of the satisfied workers may not have been earning as much as they had the year before, but we would bet many were happy to just have a job at all—all the more so after seeing rising unemployment numbers, stories of people losing their homes, and perhaps layoffs at their own workplace. We’re social creatures, and just hearing and seeing the misfortune of others can make many of us feel we’re coming out ahead.

This satisfaction with pay has a surprising effect that harkens back to something else we explain in the book: gift exchange. When workers feel they’re treated well by their employer, productivity goes up. Workers interpret their employer’s extra wages (above what the rest of the market is getting) as a kind of gift—and they reciprocate the gift by working harder.

Sure, workers would naturally do anything to keep their jobs in a difficult economy—but the reciprocity effect provides an additional boost to productivity beyond that.

Copyright Kay-Yut Chen and Marina Krakovsky,

About the Authors

Kay-Yut Chen
Kay-Yut Chen is a principal scientist at Hewlett-Packard Laboratories. He established behavioral economics research at HP Labs in 1994, a first in any corporation.
Marina Krakovsky

Marina Krakovsky has reported for Scientific American, the Washington Post, and the New York Times Magazine.

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