Homo Economicus Sings the Blues, And We All Suffer For It

 In last month’s post, I contrasted the positive, intrinsic view of work that underlies high-road HR strategies with the negative, instrumental view of work frequently seen in songs about work. Continuing with the theme of how we think about work, varying perspectives on work often correspond with assumptions about work embedded in different academic disciplines. In general terms, economics treats work as a commodity and as a lousy activity endured because of a need for money, whereas psychology focuses on personal fulfillment, and sociology on social norms.

Most songs on work are consistent with how most economists think about work. And thus, work songs are a revealing way to illustrate the dominant assumptions about work inherent in economic analyses—work as a commodity, as a pain cost, and as an opportunity cost.

In a commodity conceptualization of work, labor is an abstract quantity of productive value governed by the impersonal forces of supply and demand. We can see this reflected in songs that lament factory closings due to cheaper labor elsewhere, such as Billy Joel’s Allentown or Harry Chapin’s The Day They Closed the Factory Down:

      So they're moving somewhere else now
      With their cloths and fabric press
      They found themselves another town
      Where they'll make shirts for less

In terms of the actual work experience, the mainstream economics view of work is that it’s the opposite of something that brings you positive utility. That is, the direct experience of work makes you worse off. Traditionally this was seen as a pain cost. We can see this reflected in songs about long hours, hot and dangerous working conditions, or, as in Dolly Parton’s 9 to 5, bad bosses and disrespect:

      Workin' 9 to 5, what a way to make a livin'
      Barely gettin' by, it's all takin' and no givin'
      They just use your mind and they never give you credit
      It's enough to drive you crazy if you let it
 
      9 to 5, for service and devotion
      You would think that I would deserve a fair promotion
      Want to move ahead but the boss won't seem to let me
      I swear sometimes that man is out to get me
 
      They let your dream, just watch 'em shatter
      You're just a step on the boss man's ladder
      But you got dreams he'll never take away

In modern economic theorizing, work doesn’t have to be inherently bad (a pain cost), but working can still make you worse off it reduces the amount of time you can spend doing things that you find more enjoyable (an opportunity cost):

      It's always better on holiday, so much better on holiday
      That's why we only work when we need the money
      It's always better on holiday, so much better on holiday
      That's why we only work when we need the money
      (from Jacqueline by Franz Ferdinand)

So why work? To earn money to live. That is, Workin’ for a Livin’ in the words of Huey Lewis & The News. But don’t oversimplify and take this to mean that economics predicts that people won’t work hard. Rather, economics predicts that people will work hard when the pay is worth it, as captured by Gretchen Wilson’s Work Hard, Play Harder.

While songs can usefully illustrate these perspectives on work that underlie economic approaches to work, perhaps they run the risk of normalizing these approaches. If the nature of work is seen as beyond our control, then instead we might just focus on Working for the Weekend. But there ought to be better ways. Partly this entails increasing our demands for better work. But we also need to dig deeper. In particular, making work into a commodity in our collective imaginations dehumanizes it, reducing workers to productive inputs tracked in headcount analyses and income statements. This sterile conceptualization is not innocuous—in contrast, it’s a key conceptual step towards exploitation. That is, it’s harder for leaders to exploit workers who they see as human rather than as numbers in spreadsheet.

      I work my back till it's racked with pain
      The boss can't even recall my name
      I show up late and I'm docked, it never fails
      I feel like just another, spoke in a great big wheel
      Like a tiny blade of grass in a great big field
 
      To workers I'm just another drone
      To Ma Bell I'm just another phone
      I'm just another statistic on a sheet
      To teachers I'm just another child
      To IRS I'm another file
      I'm just another consensus on the street
      (from Feel Like a Number by Bob Seger)

Also, economics perspectives on work implicitly or explicitly emphasize individual free choice. If you don’t like your job, tell your boss to Take this Job and Shove It, and then find something better. But we need to recognize that labor markets don’t always work as nicely as mainstream economics wants to assume. There can be power differential in societal institutions and discrimination. Not everyone has the same options. Not everyone is rewarded fairly. Economic theorizing on work (e.g., personnel economics), and mainstream economics more generally, often sanitizes this by ascribing different outcomes to different personal choices or productive characteristics rather the systemic inequalities.

Unsurprisingly given their roots in real life experiences, there are songs that can remind us of the imbalances that workers must navigate. Class-based inequalities are evident in Worker's Song by Dropkick Murphys:

      We're the first ones to starve, we're the first ones to die
      The first ones in line for that pie in the sky
      And we're always the last when the cream is shared out
      For the worker is working when the fat cat's about

Margo Price’s Pay Gap and Cher’s Working Girl address gender inequality. And Nina Simone’s Backlash Blues starkly reminds us of race-based inequalities and discrimination which must not be overlooked:

      You give me second class houses
      And second class schools
      I know you think that all colored people
      Are just second class fools
      Mr. Backlash, I’m gonna leave you
      With the blues, yes I am
 
      When I try to find a job
      To earn a little cash
      All you got to offer
      Is your mean old white backlash
      But the world is big
      Big and bright and round
      And it’s full of other folks like me
      Who are black, yellow, beige, and brown
      Mr. Backlash, I’m gonna leave you
      With the blues, yes I am

In conclusion, then, the economics assumption about work being lousy is richly illustrated in a wide range of songs about work. But as a society, we should challenge why work is so lousy while also questioning the implications of other longstanding hallmarks of traditional economic thought—seeing work as a commodity, defaulting to assumptions of competitive markets, and embracing self-interest as the fabric of societal interactions. Homo economicus has many reasons to be singing the blues, and we all pay the price.

Video Blog on Worker Incentives

As I wrote about in my previous post, I've been working on a foundation HR "course" that will be part of four Massive Open Online Courses (MOOCs) on Human Resource Management Principles for People Managers. This course provides a foundation for managing employees by illustrating alternative human resource management (HRM) strategies, introducing the importance of the legal context, and thinking about what motivates employees. This last part involves some economics, some psychology, some sociology, and other things. Here is a taste of one of the economics videos: Incentives, Incentives, Incentives.

I'm excited by how this shaping up, and the course will contain a lot of material that is unique to HRM courses. Look for "Preparing to Manage Human Resources" on the Coursera website in early February. 

Update (1/30/2016): On Coursera, my course is here. A complete list of videos for this course is on my MOOC page.

Update (2/14/2016): It only took a couple weeks for my online enrollment to exceed the total number of students I've taught in person in 25 years at Minnesota. Enrollment as of today is exactly 2,000! From over 100 countries!

To Tip or Not to Tip, That is the (HR Policy) Question

I often think that us Americans know how to take a good thing and push it too far (e.g., youth sports, St Patrick’s Day, the size of burritos). Maybe tipping is next? Just as tipping seems to be expanding, a leading New York City restauranteur has announced an end to tipping in his restaurants. Why? With larger tips being given to servers and front-of-the-house workers but not shared with cooks, dishwashers, and other back-of-the-house workers, income differentials have widened. Ending tipping and raising menu prices is seen as a way to raise the pay of the back-of-the-house workers.

From an academic perspective, this could be seen as a contest of economic versus psychological approaches to human resources (HR). A system of tipping is consistent with an economics mindset—that is, the prospect of receiving a larger tip is believed to provide an incentive for providing better service to the customer. This is because economics assumes that workers are motivated by money, and need money to be motivated. As with many incentives, there can be additional effects. Some servers might expect that certain customers will be stingy tippers (like economists at a conference!), and provide weaker service from the start. And the prospect of tips provides an incentive for servers to turn over tables, which can also be good for the business but not necessarily for the diners. And if tipping prevents higher wages for back-of-the-house staff, then this makes those jobs less attractive, which can be a challenge for restaurants (to be frank, it’s not clear to me why tipping prevents raising back-of-the-house pay, but that’s the story the restaurant industry seems to believe, or wants us to believe).

Economic theory predicts that replacing tips with a higher charge that can be distributed to all employees will weaken these incentives and reduce customer service. From a different perspective, however, this shift is seen as creating greater levels of workplace fairness. Consistent with simple psychological theorizing (which is also taking hold in behavioral economics), greater levels of fairness should promote cooperation among employees. A manager at a Twin Cities restaurant with a no-tipping policy was quoted in the paper as saying “Without that giant pay disparity, the front-of-the-house/back-of-the-house dynamic is definitely different here” (StarTribune, October 22, 2015) And if employees are motivated intrinsically and value fairness, then customer service shouldn’t suffer. Tipped workers also bear the psychological burden of variability and unpredictability (e.g., some shifts are slower, and thus tips lower, than others) so eliminating tips can have other benefits for workers which can, in turn, benefit customers.

As an aside, traditional economic theory also suggests that pooling tips to share and replacing tips with higher menu prices distributed to all workers are essentially the same, and incentives will be weakened in either case. But psychological and behavioral economics thinking suggests that these are not the same if there is a psychological process involved with a server earning the tip and then being forced to share it. So there are many layers to this issue.

So what will happen in practice? Time will tell, and the responses and outcomes will probably vary—after all, workers are heterogeneous and bring different values, goals, and outlooks to their work. But I think this is a good example of the issues that HR professionals need to wrestle with, and it illustrates how critically important it is for HR professionals to have a deep understanding of the complex drivers of human behavior. It should also serve (no pun intended) as a reminder that managing people is not just about leadership (which is all the rage these days), but is also about wise policy design and implementation. Bon appétit!  

What Theory Can and Cannot Do in (HR) Practice

the·o·ry \ˈthir-ē\ : an idea or set of ideas that is intended to explain facts or events (Merriam-Webster)

I’m gearing up to again teach my course on Personnel Economics to graduate and advanced undergraduate students interested in human resources (HR). Each time I teach this course, I’m struck by the difficulty that students have in understanding the role of theory in HR practice. I’m not talking about understanding the actual theories—that’s a story for another day; rather, I’m talking about what theory can and cannot do.

For starters, theory doesn’t  make something true. Standard theory in personnel economics assumes that work is lousy (but endured to earn income), workers are self-interested and rational, and money is an important motivator. I then cringe when someone says that personnel economics teaches us that work IS lousy, workers ARE self-interested and rational, and money IS an important motivator. It doesn’t. Someone who uses or favors a particular theoretical paradigm certainly hopes that the underlying assumptions are realistic to a certain degree, but assuming something doesn't make it true.

Similarly, it’s important not to confuse theoretical assumptions with what someone thinks should be the correct behavior (“normative prescriptions” in academic jargon). To assume that organizations are focused on profit maximization, as is common in economic theorizing, does not mean that organizations should be focused on profit maximization. To assume that workers are motivated by money does not mean that workers should be motivated by money. Unfortunately, it’s easy for a bedrock assumption to become so ingrained that people start to think of it as the desired behavior. Maybe it should be, or maybe not, but simply because it’s a theoretical assumption or a theoretical emphasis doesn’t automatically make it a desirable normative prescription.

Moreover, theory doesn’t cause things to happen in practice. The standard assumptions in personnel economics yield a number of theoretical predictions. For example, standard economic theorizing rooted in these assumptions predicts that a worker who is paid a fixed salary will shirk (that is, will exert the least amount of effort required to keep their job). Workers in teams are predicted to free ride. Workers in tournaments or contests are predicted to do things that increase their chance of winning but that don’t create value for their employer. I then cringe when someone says that personnel economics causes workers to shirk or that tournament theory caused someone to undermine a co-worker. Theory doesn’t make anyone do anything. A certain behavior might be consistent with a theory, but the theory didn't create this behavior.

So what can theory in HR do? Theory should help us think about, and therefore understand, behavior in the workplace. Personnel economics theorizing says that IF work is lousy, IF workers are self-interested and rational, and IF money is an important motivator, then workers are predicted to do certain things depending on the context (for example, shirk if the context is a fixed wage compensation system). So to the extent that these assumptions accurately capture a segment of an organization’s workforce, this theorizing can help predict behavior and therefore inform the design of HR policies (for example, using pay-for-performance instead of a fixed wage). But maybe these assumptions do not accurately characterize some workers. Then a different set of assumptions and a different theory is needed for understanding behavior and designing policies.

For this reason, it’s important to be very clear about the underlying assumptions in all of the different theoretical paradigms that are used to guide HR practice, whether rooted in economics, psychology, sociology, or other disciplines. Jobs are diverse and people are complicated. No one theory accurately captures all workers or all jobs. And theorizing something does not make it true. But thinking carefully about assumptions and theoretical predictions can provide deep insights, help make sense of observed behavior and patterns in data sets (big or otherwise; see my earlier posting "Moving Past the "Gut Feeling" Rhetoric in HR Analytics"), and when used appropriately, foster the creation of better HR policies and the construction of desirable normative prescriptions. So theory can be powerful, when used correctly.

As one of my former students said, "Personnel economics is not a rule book, it is a tool kit." The same is true for all theoretical frameworks in HR. HR professionals should understand what theory can, and cannot, do. 

Will the Real HRM Please Stand Up, or the Problem with Hard Unitarism

Think of what would make for a lousy job. Low wages, long hours, little autonomy, autocratic managers. Scholars call this a low-road or hard human resource management (HRM) approach. But is low-road HRM really HRM? In a practical sense, yes it is--it’s certainly one way for managing human resources, so in a definitional way, it's a form of HRM. But intellectually, I think it’s better to reject low-road HRM as HRM so that we can better appreciate the differing assumptions and implications of varied approaches to managing people. For practice-oriented readers, think of this as an opportunity to think about what HRM really means. For scholarly readers, this allows us to see the hard unitarism frame of reference as the oxymoron that I assert it is.

The British industrial sociologist Alan Fox is widely-credited with first identifying the unitarist and pluralist frames of reference in industrial relations, and then adding a third, radical frame. In my own work, I’ve added a fourth: an individualistic, egoist frame that focuses on individual self-interest. In the forthcoming Finding a Voice at Work? New Perspectives on Employment Relations (Oxford University Press), edited by two UK employment relations scholars, Stewart Johnstone and Peter Ackers, I was pleased to see Bruce Kaufman use my four frames of reference. But two chapters continue to use Fox’s three-dimensional framework.

I think this is problematic because both low-road and high-road HRM strategies are forced into the unitarist frame of reference. This is done by distinguishing between hard and soft unitarism. In the words of Johnstone and Ackers (p. 2),

Old fashioned ‘hard’ unitarists assume that...the best approach is for management to command and control the organization. Work rules and strong management are believed to be needed to ensure workers perform as required.

To me, this contradicts the central premise of unitarism that the employment relationship is largely characterized by a unity of shared interests among employers and employees. That is, if workers need to be aggressively controlled and commanded, then there isn't a set of shared of interests. Unilateralism is not unitarism. Admittedly, unitarism can have an element of unilateralism because human resource management is often determined with little employee input. But unitarist human resources practices are designed with the objective of benefitting employees and their organization through high-commitment policies that create win-win interest alignment. A low-road employer that unilaterally slashes wages or benefits simply because it can is exercising a very different kind of unilateralism—a kind that I don’t think warrants the label “unitarism.” Indeed, a command-and-control management strategy is probably better seen as emerging from a radical frame of reference in that this employment relationship is highly conflictual and rooted in hierarchical power differentials.

A second description of hard unitarism in Finding a Voice at Work? is seemingly more congruent with my requirement that unitarism involve shared interests:

There is a ‘hard unitarism’, which typically is grounded in economics and which is most fully developed in the ‘the new economics of personnel’. In this formulation it is the capacity of managers to offer financial incentives on both an immediate and a deferred basis that produces the congruence of interests between workers and employers” (Ed Heery, pp. 21-22).

But this, too, is problematic because financial incentives do not really produce a congruence of interests. Rather, incentives are designed to provide the worker with a self-interest to act in the interest of the employer. Indeed, the need for incentives in the first place comes from a belief that workers and organizations are each selfish and will act in their own self-interest. 

Admittedly, this is a subtle distinction, but ultimately this is a different way of thinking about the employment relationship than what underlies the high-road HRM model. So I think it is better replace Heery's version of hard unitarism with an individualistic frame of reference. I call this an egoist frame of reference in which the egoist employment relationship is rooted in the pursuit of individual self-interest by rational agents in economic markets. Employers and employees engage in voluntary, mutually-beneficial transactions to buy and sell units of productive labor based on the what the market will bear. If the organization’s HRM policies are not in the worker’s self-interest, she will quit.

The need for this frame of reference is reinforced by the confusion that can come from mistakenly equating unitarism to neoliberalism. Neoliberalism embraces laissez-faire economic policies and the operation of so-called free markets. So forms of human resource management that emphasize adherence to markets, such as imposing wage cuts when unemployment is high, are consistent with neoliberalism. But they are not rooted in unitarism. So maybe there should be hard egoism (emphasizing markets) and soft egoism (emphasizing incentives), but not not hard unitarism.

This might seem like an esoteric academic debate, but I think it gets to the heart of how we want to define HRM. We can certainly define it as any strategy for managing people. But I think it’s better to distinguish among the key principles that underlie these strategies. In this way, hard unitarism is a problematic oxymoron and low-road HRM is self-interested unilaterism, not true HRM that seeks alignment of shared interests (which has its own problems, but that's a story for another day).

HR Pros Ignore Economics at Their Own Peril

While the students in my personnel economics course were taking their exam recently, I was browsing my twitter timeline. In close succession, two tweets jumped out because of their direct relevance to this course. The subject of each tweet was a failed HR policy, but after only a half-semester of personnel economics, every student in my course should have been able to easily predict the risks of these HR policies based on a basic understanding of the economics behind human behavior. These are two more examples, then, of the importance of equipping HR professionals with an understanding of economics principles.

Here is first tweet:







This story from Salon (Ayn Rand-loving CEO destroys his empire), describes how the CEO of Sears, former fund manager Eddie Lampert, ruined this venerable retailer:

Lampert took the myth that humans perform best when acting selfishly as gospel, pitting Sears company managers against each other in a kind of Lord of the Flies death match. This, he believed, would cause them to act rationally and boost performance.

My students should instantly recognize this as a form of an economic tournament. Tournament theory in personnel economics reveals that the drive to win an economic contest can motivate higher levels of productive effort, but also provides an incentive to engage in influence behaviors (that is, unproductive activities that enhance one's own chance of winning at the expense of organizational goals). So the result was predictable:

Instead of enhancing Sears' bottom line, the heads of various divisions began to undermine each other and fight tooth and claw for the profits of their individual fiefdoms at the expense of the overall brand.

And then the second tweet:

This story from the Daily Mail (Desperate delivery men ditch your Christmas gifts in the BIN) begins with

Couriers paid per parcel they deliver are desperately dumping Christmas gifts in wheelie bins [a wheeled trash can in America], under doormats and in plain sight of the street....These workers, thousands of whom are temporarily employed at this time of year, are given as little as five minutes to drive to an address and drop off a parcel before starting the next order. They are expected to deliver 100 packages in a day -- and will get between 80p to £1 for each one successfully left (though drivers in rural areas will get slightly more). Many are self-employed and have to use their own car or van, and must then deduct all their costs, including fuel, from their pay. They are paid nothing if they leave a 'Sorry you're not in' card. If they have to return the following morning, this trip is usually made in addition to the parcels they need to deliver that day.

This is an example of a simple piece-rate performance-based compensation plan. Basic theorizing in personnel economics indicates that such incentives can be a good motivator. But a basic understanding of economics principles also teaches us to be cautious because poorly-designed incentives can lead to adverse outcomes by self-interested workers as they respond powerfully, perhaps over-powerfully, to these incentives--for example, by pursuing quantity at the expense of quality.

Again, the results of this case are predictable to anyone with an understanding of the economics of human behavior:

As a result, delivery men feel under pressure to find any means possible to empty their vehicles. In some cases, parcels are being abandoned in dustbins -- only for them to be emptied by the bin men. They have been thrown over fences and locked gates, chucked out of moving vans, left in the rain, put in plain sight by a front door, wedged underneath cars parked in driveways and badly hidden under bushes and between shrubs. It means that parcels frequently disappear or arrive damaged.

As both of these unfortunate cases illustrate, it is important that HR professionals develop an understanding of basic economics principles and how they apply to HR issues. This is the domain of personnel economics. As in much of economics, the models used in personnel economics research can seem quite stylized to students and HR practitioners. There are only one or two types of workers, there are only one or two types of tasks. Effort directly yields saleable output either with or without a random error term. And then graphs (or worse, equations!) are used to find optimal outcomes where marginal cost equals marginal benefit. And so forth.

It can be difficult to grasp these stylized models if one tries to understand them by searching for direct examples from real-world applications. My advice is to instead try to understand these models at face value. They are meant to be stylized portrayals of key issues, not literal reflections of real-world complexities. In this way, the key results are clearer, rather than clouded by confounding complexities.

Once this understanding is achieved, then the critical step is to apply the insights in real-world settings. So the value of personnel economics for HR professionals is not in the literal application of stylized economic models; rather, the goal is to develop the ability to translate the insights of the models to real-world applications in ways that reflect a nuanced understanding of employee and employer behavior. The Sears example is not a literal application of a simple tournament theory model, but the insights generated by tournament theory provide important warnings about the behaviors that would be expected to result. The package delivery example also has complexities beyond a basic economics model--there are issues of training, monitoring, bonuses, temporary work--but again, the insights generated by a stylized model greatly help us understand what happened in this messier case.

With that said, it is important to appreciate not only the power of personnel economics, but also the limitations. There are other factors that also help us better understand what happened in these cases. For example, in the Sears case, managers were humilated and spied on. As insightfully noted by the Salon article,

Employees are not just competitive beings -- they benefit from cooperating with each other and perform better when they are respected, rather than beaten down and driven by fear.

So the goal of developing an understanding of economics principles for HR professionals should not be to provide the basis for a dogmatic application of stylized economic theories--the two cases here clearly demonstrate the pitfalls of that approach. But these cases also illustrate that HR professionals should only ignore economics principles at their own peril. Ultimately, workers are very complex beings driven by economic, psychological, social, and other concerns. So HR professionals must develop sophisticated ways of thinking in order to analyze real situations and design policies in a holistic way. This includes, but should not be limited to, thinking rooted in economics.