Unintended consequences

I once read a great quote that I can no longer find. The gist was that there is no such thing as an unintended consequence, only a consequence you failed to understand. Economists, with a methodology centred on individual actions in response to incentives, are pretty good at picking the consequences of policies. That’s sometimes hard to persuade people of so it’s important to savour good examples like this when they come around:

Performance assessments are an important aspect of a healthy company. In order to maintain fighting weight, an organisation must honestly assay its employees’ contributions and cull the dead wood. … But Microsoft’s implementation plunged the company into internecine fights, horse trading, and backstabbing.

…every unit was forced to declare a certain percentage of employees as top performers, then good performers, then average, then below average, then poor…For that reason, executives said, a lot of Microsoft superstars did everything they could to avoid working alongside other top-notch developers, out of fear that they would be hurt in the rankings.

Employees quickly realised that it was more important to focus on organisation politics than actual performance.

In their pursuit of effective performance measurement Microsoft clearly forgot the effect that the act of measurement has upon employees.

Is Getting an Advanced Degree a Good Idea in this Economy?

This is a guest post by Kate Manning, an independent writer.  Her bio is at the end of the piece.

As a note, this post is focused exclusively on the situation in the United States – the trends in other countries (such as New Zealand) have been significantly different.

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Layoffs have costs, too

With the Ports of Auckland industrial dispute and the layoffs in the public sector, restructuring in the face of financial pressure seems very fashionable at the moment. Executives are quick to point to the cost savings of having fewer staff, or the potential productivity improvements. As the government says:

In a restricted funding environment we must find new ways to do more with less.

Of course, it is really only possible to do less with less, unless some staff are actually reducing what can be done. That seems unlikely, even though there may be some who are not providing value-for-money, as in any organisation. But there’s no point making a song and dance about obvious holes in what is more window dressing than substance. More interesting is to ask what the costs of these layoffs are. The short-term monetary costs to the organisation have been discussed by Danyl at Dim-Post:

…months of stop-work meetings, losing hundreds of millions of dollars in customers, sacking the entire work-force, paying millions more in redundancy and being placed on a global black-list is also going to compromise the efficiency and profits of the port, and its ability to return a dividend to the people of Auckland

The costs to those who have been laid off varies widely in monetary terms: some people will find jobs rapidly, while others languish on the unemployment benefit. But the real costs I want to discuss are the non-monetary costs to people’s wellbeing and self-worth. They’re the things you see on the front page of the newspaper, but aren’t often mentioned by economists talking about the macroeconomic impact. A recent NBER paper finds:

For those who are unemployed, the subjective well-being consequences can be divided into income and non-income effects, with the latter being five times larger than the former. This is similar to what has been found in many countries, as is our finding that the non-income effects are lower for individuals living in areas of high unemployment. …At the population level the spillover effects are twice as large as the direct effects, making the total well-being costs of unemployment fifteen times larger than those directly due to the lower incomes of the unemployed.

So the costs to society of the loss in self-worth from layoffs are huge. However, though these costs are large, it is worth asking ourselves how much account we want society to take of them. When thinking about non-monetary costs, it’s important to remember that a large part of the loss in welfare from unemployment is loss of social status. Now, loss of status isn’t something that affects everyone equally because people don’t start out with the same status prior to becoming The Unemployed. That manifests itself in ways that aren’t immediately obvious. For example, unemployment programmes that force a former accountant to work in fast food because they haven’t been able to find work elsewhere probably aren’t socially efficient: the loss in social status that the former accountant would suffer has large, long-term costs for their sense of self-worth. Since people are loss averse and work from the anchor of their current status, a reduction in their employment status is hugely costly to them. Because of that, it is hard to account for the social costs of unemployment without recognising that they are relative costs, and fall most heavily on those that were previously of high social status. That may not be something that an egalitarian society wants to take account of, given that the greatest absolute hardship is felt by those from poorer backgrounds who don’t have the same financial resources to fall on in difficult times.

Competing with the stars

Isn’t it wonderful to have role models around? Superstars in your firm that you can aspire to emulate! Well, maybe… Jennifer Brown recently published a paper suggesting that the presence of superstars in a competition actually decreases the effort that everyone else puts in to win. She uses data from Tiger Woods’ period of domination in professional golf to test the hypothesis that rivals will optimally put in less effort when playing Woods and finds:

  1. The presence of a superstar in a tournament reduced performance from other competitors, particularly the ones closest to Woods in skill.
  2. Reduced performance isn’t attributable to players closest to Woods adopting risky strategies in an attempt to beat him.
  3. The effect varies depending upon Woods recent success and how far ahead of his rivals he is perceived to be.

So, in a competition where only one person can win and there is somebody obviously head-and-shoulders above the rest, most others won’t put in much effort to win. It seems intuitively obvious but it’s always nice to have a bit of empirical evidence to back up your intuitions, especially when its a golfing example perfectly packaged for dinner-table trivia 😛

There are too few smart people in the world

I know you’ve all thought it at some time of your life, but Chris Dillow thinks it really is true:

It could be that the reason why so many “top jobs” are done badly is not that second-raters do them, in which case the problem would be solved by hiring the right people. Instead, it could be that the jobs are so demanding that no amount of brains and ability would suffice. …Humans just lack the skills to do many complex tasks.

It does seem unlikely that many high-pressure, and highly paid, jobs would have only incompetent applicants. Or that the interviewing panel wouldn’t care enough about the future of their firm to put some effort into finding the right person for the job. Yet it is common to hear people complain about how terrible this politician or that CEO are. So perhaps the job really is just too much to expect of a human.

Dillow’s solution sounds like a good one: design jobs that humans can do rather than looking for super-humans to do them. It probably makes sense even if there are some super-humans out there. Not only would the search costs to find them be immense, but so would the salaries that they command! Of course, you have to wonder why, if the solution’s so obvious, someone hasn’t done it before? Maybe the (meta-)problem’s just a bit harder than Dillow is giving credit for.