Employers use performance pay to incentivise their workers to work harder. However, that increases workers' stress and uncertainty, both of which may in theory lead to an increase in workers' use of alcohol and drugs as a coping mechanism. In a new article published in the Journal of Population Economics (ungated earlier version here), Benjamin Artz (University of Wisconsin-Oshkosh), Colin Green (Norwegian University of Science and Technology) and John Heywood (University of Wisconsin-Milwaukee) test this theory, using data from the U.S. National Longitudinal Survey of Youth 1997 (NLSY). The NLSY collects data on whether the respondents received performance pay ("tips, commissions, bonuses, incentive pay, and a small “other” category") in each wave, as well as marijuana or alcohol use within the previous 30 days, and other drug use (which they refer to as 'hard drugs') within the last year. The sample size is over 60,000 observations.
The problem with a simple analysis here is that the types of people who are more likely to accept a job with performance pay (i.e. younger people, and people who are less risk averse) are also those who are more likely to consume alcohol and drugs. So, a positive correlation between performance pay and alcohol and drug use is to be expected because of 'selection bias'. Artz et al. use a number of techniques to get around this bias:
First, we include proxies for risk preferences, ability, and personality incorporating sophisticated error structures... Second, we use the survey’s panel structure to hold constant time-invariant worker fixed effects that could include unmeasured risk preferences or ability. Third, we recognize that changes in unmeasured worker characteristics can lead to both job change (and so performance pay receipt change) and to a change in substance use. We respond by controlling for job match fixed effects. Thus, we examine the change in individual workers’ substance use when their employer changes their performance pay status (even as they remain in the same detailed occupation).
So, they control for risk preferences (albeit imperfectly - I'll come back to that point), and then in their most restrictive specification the fixed effects reduce their comparisons to the same worker, working for the same employer. Essentially, they look at what happens when a worker goes from not having performance pay, to having performance pay (or vice versa), while still working for the same employer. In the first specification (excluding risk preferences and the fixed effects), they find that:
The main estimates of interest reveal large, positive, and statistically significant, relationships between performance pay and all types of substance use. The odds ratio... indicate that holding other determinants constant, performance pay workers have odds that are 29% higher for marijuana use, 35% higher for hard drugs use, and 45% higher for alcohol consumption.
The inclusion of risk preferences (which are measured only in the 2010 wave) do not change the estimated relationships greatly. Then, in their most restrictive specification (with worker-employer-job fixed effects), they find that:
The results indicate a 29% increase in the odds ratio for marijuana use, a 26% increase in the odds ratio of hard drug use, and a 34% increase in the odds ratio alcohol use... In sum, the results... indicate that the relationship between PRP receipt and marijuana, hard drugs, and alcohol use persists despite worker sorting on time fixed unobserved worker characteristics, or worker sorting across employers.
A potential problem with these analyses is that risk aversion decreases as people get older, and alcohol and drug use also decrease, and so even though they control for risk aversion measured at a single point in time, or control for job-match fixed effects, they still potentially don't fully eliminate the selection bias. However, it's difficult to see how this research design could be much improved upon. While jobs can be randomised to receiving performance pay, researchers couldn't force workers to accept the performance pay condition, so a randomised experiment would not work.
Performance pay does increase incentives for work effort in some jobs, but that doesn't mean that it comes without cost. Some of the cost is of course borne by the employer, but workers also must endure a more uncertain and stressful work environment. The results of this study are consistent with that story, and that some workers respond by self-medicating with alcohol and drugs.
[HT: Marginal Revolution]
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