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A Productivity Paradox

A Productivity Paradox

Economics is the study of people’s rational choices when they’re faced with scarcity and uncertainty.

The problem: people aren’t rational. They often act against their own economic interests—or appear to. So we have behavioral economics to figure out why.

Now, you might think businesses are different since they focus on the bottom line, not vague feelings. Yet companies can act irrationally just like individuals do… and they may be even less likely to realize it, much less admit it.

That’s a shame because everyone might be better off if they did.

Photo: Getty Images

Regular Hours

Not so long ago, work was a daytime, Monday-through-Friday thing for most people. Now much of the US economy runs 24/7.

As a result, millions of workers have unpredictable schedules. This is especially common in retailing. Chain stores use algorithms to match staffing with store traffic.

On the surface, that makes sense. Why pay workers to stand around and do nothing? The shareholders expect management to maximize profits. If it’s hard on the workers, well, they can get another job.

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But what if this hyper-precise scheduling is bad for the business too? One recent study says steady schedules can bring in more revenue.

University of California researchers worked with Gap stores in the Chicago and San Francisco areas to measure the impact of stable work schedules. Here’s how it worked, as reported in The New York Times:

The study randomly assigned about two-thirds of the stores to a so-called treatment group, in which managers were encouraged to provide workers with more consistent start and stop times from day to day, and more consistent schedules from week to week. Many managers were also authorized to slightly increase the total number of payroll hours that they could allocate to their workers. Scheduling at the remaining one-third of the stores continued largely as usual.

The result: The change in average sales during the experiment was 7 percent higher at the stores subject to the new policies than at the stores in the control group.

So, when managers let people work regular hours, sales rose 7%. Across a sizable company like Gap, that’s millions of dollars a month.

The study found much of the improvement came from reduced employee turnover. Stores with stabilized schedules had more experienced workers, who sold more products.

While it’s hard to measure every factor in a study like this, the results suggest something important: treating people as valuable members of the company, instead of as interchangeable parts, can bring better results.

Photo: Getty Images

Six Days a Week

For restaurants, then, there’s a direct connection between the hours they are open and the revenue they receive.

Or so you might think.

Consider Chick-fil-A, whose stores are closed on Sundays due to the founder’s religious beliefs. That turns out to be good business as well.

According to trade publication QSR, in 2016 the average Chick-fil-A brought in 73% more revenue in six days than the average McDonald’s did in seven days.

Nor is it just McDonald’s. Chick-fil-A sales were triple the average Wendy’s sales, again with one less day per week to do it.

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Against vigorous competition, Chick-fil-A easily wins the revenue fight with one hand tied behind its back, so to speak.

One reason: Chick-fil-A seems to treat its staff well—not so much with higher wages, but opportunities for education and advancement.

But there’s something else, too:  Chick-fil-A workers know they’ll always have Sundays off. I suspect it gives Chick-fil-A lower turnover and better-trained workers. They return the favor by going the extra mile to please customers. Revenue follows.

Could other chains do the same? Sure. Strong evidence says it would help productivity and sales. The rational move would be to copy Chick-fil-A’s practice. But they don’t, and some have even gone the other direction, expanding hours to stay open all night.

Photo: Getty Images

Paying Attention

You can probably guess my point. Treating workers as valuable assets instead of disposable tools isn’t just the right moral choice—it’s often the smart financial choice as well. Yet many employers irrationally choose not to.

This isn’t new information. In a now-famous 1920s experiment, Western Electric changed the lighting at its plant in Hawthorne, Illinois. It found making the room brighter improved productivity.

That makes sense, but then it got weird. They turned the lights down again, and productivity improved even more.

Western Electric also varied other employee benefits like break times. In each case, changes increased output. The effect faded with time, but something had obviously happened.

The conclusion: it wasn’t so much the changes, but that workers saw management paying attention to them. They worked more efficiently when they thought the company cared about their comfort. Imagine that.

Photo: Getty Images

Double Down on People

Today’s economists and central bankers know productivity is a problem, but they can’t seem to find a solution. Employers responded with measures like algorithmic scheduling in retail stores or all-night hours in fast food.

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Maybe these changes raise productivity sometimes, but the aggregate economic data suggests they usually don’t—at least not anymore.

The next idea: robots and AI. Reduce or even eliminate those pesky humans.

But if the Gap experiment and Chick-fil-A’s success mean anything, doubling down on humans might cost less and work even better. 

It’s something to consider if you own a business. And you don’t need the Fed’s help to do it.

See you at the top,

Patrick Watson

P.S. If you’re reading this because someone shared it with you, click here to get your own free Connecting the Dots subscription. You can also follow me on Twitter: @PatrickW.

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April 20, 2018, 4:01 p.m.

This ties in with the observations in “Love ‘Em or Lose ‘Em: Getting Good People to Stay”.

Management theory from the ‘80’s taught that people were disposable and interchangeable, and too many people from that era (and that kind of calcified thinking) are still in charge.  It was wrong then, but the focus was on short-term, first order effects which allowed them to focus on current payroll costs.  The second order effects meant higher turnover, lower employee loyalty and engagement, and higher overall expenses (when the negative productivity of new employees and the attendant training costs over time are factored in).

For “key” employees, it’s even worse, since the payroll cost (salary & benefits) of the new employee is likely to meet or exceed the existing employee’s payroll cost.  Then there’s also the hiring process cost of locating and obtaining the next “key” employee to replace the one that left.  Add to that the fact that new “key” employees are typically not “up to speed” on the company’s concerns / projects, and you have a higher inefficiency at a higher cost.

Most managers don’t understand that they would be better off performing an annual analysis of what they would pay a new employee with the skills, training, and experience of the existing employee, and ensure that the existing employee was paid at least at that rate.  That would also naturally reward employees for accelerating their training, certifications, and knowledge applicable for the given role.  Given the costs associated with replacement of the employee, a strong argument could be made for even paying them more (perhaps 10%) than what a new employee with all their talents would make.  Trying to underpay an employee just poisons the morale, and encourages the employee to leave, taking all their knowledge, contacts, and experience with them, and forcing higher costs on the company.
April 17, 2018, 11:34 a.m.

You start this article with a sentence that isn’t accurate, at least for an Austrian Economist, which I am.  That is: Economics is the study of people’s rational choices.  The starting place of Austrian Economics is “Human Action”.  I think von Mises left of the “rational” bit on purpose.  The only ones who make the assumption choices or actions are based in rationality is economists who haven’t gone back to first principles.  Yes, it is an economics of “rational beings” but this rationality can’t possibly be assume in every, or even most, cases.  Especially when another “rational being” is making their own assumptions about what is rational.

As a bit of an aside, I introduced “flex time” before it was a name in use (at least common use) in the early ‘60’s.  Did I have a happy work force?  Yes.  Did anyone leave while I was there (5 years)?  No.  Were they productive?  Well the competitor down the road had sales that were double ours but we were growing and they weren’t - and our ROIC went from twice theirs to four times theirs.  Not too long after I left, the flexitime was taken away and all the things named above decreased and the company was later sold - with none of the original employees remaining.

Where did the idea come from?  It just felt right to me.

Don Braswell
April 17, 2018, 9:17 a.m.

An interesting study would be the method in which a minimum wage depresses wages ion the local market.  What do I mean?  A company who pays over minimum wage may see itself at a disadvantage (rational or not) and therefore only pay minimum wage when the “prevailing rate” is above that rate.  So when Costco (another company that pays better wages), pays a premium, they get more loyalty and better employees.  Instead of allowing the market to set the wages, other companies pay minimum wage for entry level jobs.  BUT if they had to compete for the labor, they may set a higher rate…SO if bureaucrats set the wage artificially high, they depress the number of workers.  IF they set the wage artificially low (as it probably is now), they depress the wages of existing workers… Sort of a lose-lose proposition that is imposed from above for the workers. 

As a final comment, Chick-Fil-A encourages the helpful attitude in their employees.  I believe they have a metric which ties any advancement to your helpful attitude at the workplace.  Grousing = no promotion.  Happy = good evaluations and perhaps a pay raise…

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