Does Poverty Lower Productivity?

Project Outcomes Statement

Development economists have long been interested in poverty traps: feedback loops that make it difficult for individuals to escape poverty. New work at the intersection of psychology and economics suggests a focus on psychological micro-foundations. In particular, worries about financial problems may capture individuals' attention and therefore decrease their available cognitive resources; this in turn can create behaviors that further worsen poverty. While previous work has explored these ideas, there is scant evidence of these channels impacting real economic outcomes. This project seeks to provide the first piece of evidence on the impact of financial strain related to poverty on economic field behavior: worker productivity. It is a first step toward a more thorough integration of psychology within development economics, with important implications for public policy and the wellbeing of the poor.

The study uses a two-week field experiment to examine whether income directly affects labor productivity by changing cognitive function. The experiment directly and cleanly tests whether poverty affects productivity by experimentally inducing variation in financial constraints -- via large lump-sum wage payments. Randomization of the timing of workers' income receipt creates some days in which some workers have more cash-on-hand than others, allowing cash-rich workers to pay off loans and meet expenses. The manipulation holds constant wages and piece rates, as well as human and physical capital. On cash-rich days, average productivity increases by 0.11 standard deviations (6.2%); this effect is concentrated among relatively poorer workers. Workers' attentiveness also increases on these days -- an effect that is again concentrated among poorer workers. Having more cash-on-hand thus enables workers to work faster while making fewer errors, suggesting improved cognition. We argue that mechanisms such as gift exchange, trust, and nutrition cannot account for our findings. Instead, our results suggest a range of psychological mechanisms wherein alleviating financial concerns allows workers to be more attentive and productive at work.

If the results from our study extend to other settings and over longer horizons, then impediments to productivity would occur precisely at times when individuals face the greatest financial trouble and therefore face the greatest need for cash. This implies that reducing volatility or mitigating financial vulnerability could have direct productivity benefits. In addition, transfer or public workfare programs could have productivity benefits that are unmeasured to-date. Finally, such feedback effects of poverty could be an underlying determinant of persistent inequality and reduced social mobility.