The Downside of Hiring Lower Wage Workers

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I recently came across a very interesting article in the Harvard Business Review.

In this article, the author reveals that when companies hire lower-wage workers, the productivity of both its current employees who are paid higher wages and the new workers who are paid lower wages, are negatively impacted. This leads to an overall decrease in productivity in the longer term.

According to the study that was led by two Indiana University researchers, the study revealed that current workers who are paid higher wages will scale back their efforts, leading to a drop in overall productivity, because they felt it was unfair for the new hires to be paid lower wages. In addition, the new workers who are paid lower wages will also put in less effort.

So this is a double-whammy for companies that favor hiring lower wage workers.

Unfortunately, it is a common practice for companies to replace existing workers with lower wage workers in an attempt to reduce costs and increase their profit margins. However this study seems to indicate that the belief about reducing costs and increasing profits may just work against your organisation in the longer term.

I believe this study is also applicable to countries and governments who import lower wage workers into their economy in the hope of increasing competition and controlling rising wages.

For instance, Singapore has been importing lower wage workers for some years now. The premise behind the import of lower wage workers is to help companies here in Singapore contain their cost, and at the same time, increase competition in the labour market.

However, Singapore has been struggling with increasing overall productivity, even with the import of more lower wage workers. Looking at the situation in Singapore through the lens of this study, it makes you wonder if the lower productivity is the direct result of importing too many lower wage workers, and in the process, inadvertently caused existing workers here to reduce their effort, impacting productivity as a result.

Whatever the case may be, this would probably take years to unwind.

What do you think?

Does your country or organisation favor importing lower wage workers?

How has that worked out for you?

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July 21, 2015

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