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Does Poverty Lower Productivity? Evidence on the Cognitive Effects of Financial Constraints

Colloquium | April 12 | 4-5:30 p.m. | 2538 Channing (Inst. for the Study of Societal Issues), Wildavsky Conference Room

Supreet Kaur, Assistant Professor, Department of Economics, UC Berkeley

Institute for the Study of Societal Issues

Recent work at the intersection of psychology and economics posits that the condition of being financially constrained induces cognitive load, leading to potentially lower cognitive function among the poor. If true, this has the potential to lower labor productivity among the poor—providing a channel through which poverty could directly reinforce itself. We design a field experiment with Indian piece rate manufacturing workers to examine a link between financial constraints and worker productivity. We induce exogenous variation in both the extent of financial constraints as well as their salience among workers. Initial results indicate that increasing the salience of workers’ financial condition sharply lowers worker productivity and take home earnings when workers are cash poor, but not when they are cash rich. These findings support a link between poverty and productivity., 510-642-0813