The Role of Career and Wage Incentives in Labor Productivity: Evidence from a Two-stage Field Experiment in Malawi

Work incentives are essential tools for improving labor productivity. Firms try to recruit productive workers and motivate existing employees to exert more effort through work incentives. Career incentives (tenure and promotion) and financial incentives (higher wage, cash bonus, and employee stock option) are common examples of work incentives. There are two channels through which work incentives can affect labor productivity: selection and incentive effects. A better understanding of how different incentives affect labor productivity would enable firms to design optimal hiring and compensation strategies that maximize labor productivity and reduce the need for costly screening processes.

This paper investigates how career and wage incentives affect labor productivity through self-selection and incentive effect channels using a two-stage field experiment in Malawi. First, recent secondary school graduates were hired with either career or wage incentives. After employment, half of the workers with career incentives randomly received wage incentives, and half of the workers with wage incentives randomly received career incentives. Career incentives attract higher-performing workers than wage incentives do, but they do not increase productivity conditional on selection. Wage incentives increase productivity for those recruited through career incentives. Observable characteristics are limited in explaining selection effects of entry-level workers.