Raising wages can actually save money—here's why

Six factors directly tied to higher pay that contribute to improved workforce productivity.

5 minutes

Young professional standing and looking contemplative while holding a cup of coffee in her home office

In 1914, Henry Ford made a historic announcement. During that year of widespread unemployment, he decided to double his workers' wages from $2.34/day to up to $5/day

Competitors scratched their heads and the press gasped. He's crazy, isn't he? Don't you think he's crazy?" – a question The New York Times' financial editor hissed at his staff after Ford's announcement. But was he?

The company had to combat high turnover and productivity struggles somehow. The year prior, Ford had hired more than 52,000 people, yet his company only required 14,000. What happens when turnover rates are that high? Productivity crashes. Ford's assembly line would often bottleneck as workers walked off the job.

The results of Ford's doubling of wages? The company produced nearly 19% more cars than the year prior and sold 308,000 Model Ts, more vehicles than all other carmakers combined. Ford said it best: “The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made."

6 Reasons Why Increasing Wages Can Increase Productivity

When wages are higher, workers tend to stick around longer and work harder. Not only do employers save on turnover costs, but they also foster a more engaged and productive workforce. Why? It comes down to inspiring employees to improve their work quality and output while also reducing the factors that detract from productivity.

We explore six factors directly tied to higher pay that contribute to improved workforce productivity.

1. Employees stay longer, and a more tenured workforce is often more productive.

When you pay higher wages, your employees tend to stick around. This not only reduces the cost of turnover related to hiring and training replacements, but it also means you spend less time onboarding and constantly getting your workforce up to speed. In other words, a greater portion of your employee population can perform the jobs they were hired to do at full capacity. Plus, tenured workers retain and grow institutional knowledge within your organization. In fact, a Gallup study found that one factor which all high-performing employees have in common is long tenures with their companies.

2. Happy, engaged workers are 12% more productive.

Despite sayings to the contrary, more money can help lower stress and, as a result, make people happier. In fact, pay has been documented as one of the top five drivers of employee happiness.

3. Better paid employees tend to work harder.

Several studies have shown that when you pay people more, they put in more effort at work. This is most likely due to a stronger desire to keep their well-compensated job—after all, wouldn't you be less likely to shirk responsibility at work if you had more to lose. Beneficiaries of unexpected raises are often inspired to work harder than required.

4. Higher-paying companies attract quality talent.

One study showed that when job descriptions advertised higher salaries, applicants who responded to those ads not only had higher IQs but also proved to be better suited for the position based on personality and motivation scores.

5. Higher pay reduces absenteeism and disciplinary distractions.

Several studies and surveys have shown that when you pay more, you may have less workplace strife on your hands. In fact, in manufacturing plants that offered higher pay than similar employers in their area, fewer disciplinary actions were required. Another study showed that when employers raised their wages, they enjoyed a decrease in disciplinary issues.

6. Better paid workers exhibit improved focus at work.

People who earn higher wages are often healthier than those with low incomes, improving their stamina and productivity. They're also less concerned about covering their expenses, an important factor when you consider that work performance slips when people consistently worry about their lack of finances. In fact, one study found that when low-income people were asked to consider an unexpected expense, their performance on several cognitive tests suffered. Another study tied compulsive actions to the constant stress of poverty. Pay people more, and you stand a strong chance of freeing up their minds to naturally perform better while on the job.

When it comes to boosting productivity via wages, there is the occasional anomaly—specifically instances caused by wages not rising enough to offset productivity issues, or combinations of factors such as workplace conditions, culture, and skills gaps. But in the vast majority of cases, and when considering the above evidence, it becomes a fairly simple journey to connect the dots between better wages, improved retention, and increased productivity.

Are your wages competitive? More than competitive? And what effect are they having on your company’s productivity? The time to ask yourself these questions is now.