“Six” or “Half a Dozen”?
There are multiple ways to pay people. Hourly, yearly—what difference does it make? A big one. According to recent research by Common Cents Lab, the way people get paid, even controlling for other factors, shapes their financial worldview in ways that have important implications for their future.
The majority of U.S. workers were paid hourly last year, according to the Bureau of Labor Statistics. Hourly wage earners typically have low incomes and are vulnerable to economic shocks. But does being paid hourly, in and of itself, somehow change the way people view themselves and their work? According to the psychological principle known as “construal theory,” the answer is yes.
People understand the distant future abstractly but the near future concretely. We pursue ambitious goals when thinking in the long run, but more modest ones when thinking about the short term. That principle is key to construal theory. Common Cents Lab was interested to see whether income framing is affected by construal theory: that is, whether using short-term language (i.e., hourly rate of pay) would foster short-term thinking and conversely, whether using longer-term language (i.e., that same rate of pay, annualized) would foster longer-term thinking. If so, construal theory might help to explain why nearly half of all households in the U.S.—where, remember, most workers are paid hourly—lack any retirement savings account assets.
To better understand Common Cents Lab’s experiments, imagine the following. You are starting a new job and you are given one of two different hiring letters confirming your pay. In one version of the letter, you are told you will earn $35 per hour. In the other, you are told you will earn $70,000 a year. You are then asked to budget your salary and make all kinds of allocation decisions, including the all-important question of how much to put into your retirement account. Do you think you would budget your savings differently according to how your income was framed?
In Common Cents Lab’s study, the actual income was the same: the only difference was whether it was expressed hourly or annually. People primed with the hourly wage allocated a smaller percentage of their income to retirement and other savings than did individuals primed with the annualized figure. The decisive factor appeared to be how the compensation had been framed, not an inability to do the math necessary to reframe it. Study participants were also asked to estimate without using a calculator: “In total, how much money would you make if you earned $35 per hour at work this year?” or, “Per hour, how much money would you make if you earned $70,000 at work this year?” Hourly wage estimations were not significantly better or worse than yearly wage estimations.
Do Hourly Workers Save Less Because of Job Instability?
Construal theory aside, it does seem reasonable to believe that hourly paying jobs are less stable than yearly paying jobs. If so, people paid by the hour may not trust that they will have money to spare to set aside for the long-term future. Conversely, people with a yearly salary may believe they will have time to save later. To observe the relationship between job stability and savings, Common Cents Lab ran another experiment.
Hourly and yearly subjects were now told the job “is a very unstable workplace and you can be terminated with only two weeks’ notice,” or, “is a very stable workplace and your job is guaranteed with a five-year contract.” Analysis revealed that job stability did not affect savings allocations. Yearly paid subjects still allocated more to savings than did hourly wage subjects. These results help further our understanding of savings—but do little to address a lingering concern.
Do Hourly Workers Think Less About the Future?
To test this, we decided to split savings into two categories: “short-term savings” and “long-term, retirement savings.” When hourly workers and yearly workers had to allocate their savings, they had a decision to make: Do they save for today, tomorrow and next week? Or do they save for the long term? As construal theory would have predicted, the yearly paid participants thought about their goals and desires and allocated significantly more to long-term, retirement savings than did hourly paid participants. Income framing alone promoted greater long-term savings behavior.
Taken as a whole, the research suggests that the way people think about their income (as hourly or yearly) can make a big difference in their long-term savings behavior. This is troubling, not only because so many low-income employees in the U.S. are paid on an hourly basis but also because there has been such a large increase in the number of workers employed as temporary contractors.
The reality is that the U.S. is moving away from full-time permanent employment and toward employment that looks and feels more temporary—and is thus likely to foster more short-term financial mindsets and behaviors. The issues with savings are going to become more complex and more challenging for individuals and for society as a whole.