Wednesday, August 24, 2016

Gift Exchange and Collegiality as the Basis for a High Productivity Work Environment

There is a rather large literature on "efficiency wages," where workers earn job rents (they are paid more than their opportunity cost) and this is done for productivity reasons.  There are a variety of explanations for this.   The gift exchange story gives one of those and is attractive, in part, because it is more sociology than economics.  (We clearly care about the welfare of others, but that conern is usually absent in the economics approach.)    The efficiency wage approach, in turn, followed a similar approach called "implicit contracts" where, in effect,  the employer and the workers have a mutual agreement of the sort, I'll scratch your back if you scratch mine.  When it's time for your own back to scratched, you earn a (quasi) rent.  The hero of the implicit contracts story is Arthur Okun.  He referred to the back scratching arrangement as "the invisible handshake."  Incidentally, implicit contracts can exist elsewhere than the labor market.  For example, a shop owner might very well have an implicit contract with her loyal customers.

The gift exchange model is the brainchild of  George Akerlof.  Given that Janet Yellen is now the Chair of the Federal Reserve, Akerlof may come to be widely known as her significant other.  But he is a first-rate economist in his own right.  Indeed, he is a Nobel Prize winner. 

Akerlof's theory is rather simple to articulate, as is the debate over the right way to provide incentives in the workplace.  The quintessential issue is whether pay should be performance based and hence vary from individual to individual who hold the same job or if instead pay should be position based and not feature such idiosyncratic variation, except perhaps on a seniority basis    Of course, even with fixed pay per job, performance matters.  But it is rewarded differently than when there is pay for performance.  The argument is that promotion should be the primary reward for exceptional performance.  Within a job classification, the workers need to be managed fairly, which provides the basis for equal treatment.  Fairness is more of a sociology concept than an economics one.  

The vision for why gift exchange produces superior performance was supplied by Dumas père in The Three Musketeers.  It is embedded in the relationship between Athos, Porthos, and Aramis (the workers doing the same job) and D'Artagnan (their manager) and is captured in the phrase, "All for one and one for all."  Akerlof crafts that vision and related ideas from sociology to make an economic model of it.  For the non-economist, it might be framed as collegiality-driven productivity.  Here are the model's basic elements.

There is a minimal performance standard below which the employee will get fired.  There is a performance norm, substantially above the minimal standard, that typifies what workers produce.  The difference between the minimal standard and the higher norm constitutes a gift that workers give to the firm.  Likewise, there is a minimal wage below which workers would quit and find work elsewhere and there is an actual wage above that minimum that the firm pays to workers.  The difference is a gift that the firm gives to its employees.  Gift giving demands reciprocation for it to be sustained.  When that happens all involved feel good about the place of work and productivity is high as a consequence.

There is one more piece to the puzzle.  This regards how productivity is observed and what explains variation in productivity from one worker to the next and for one worker over time.  From the worker's own perspective, this is mainly due to random factors - circumstances beyond the employee's control.  Or, in the case where there is clearly a drop off in a particular employee's performance, it can be attributed to outside of work stresses (e.g., a sick child at home) that are apt to be temporary in nature.  The correct response in this case is not to punish the employee but rather for co-workers to chip in and pick up the slack.  Sometime in the future, the employee who received such help will lend a hand when another co-worker has a similar problem.

Someone who favors pay for performance but comes to the issue of appropriate compensation with an open mind might grant that collegiality-driven productivity can be a good thing, as long as the fire burns within all the workers, but will argue that eventually a worker burns out and turns into dead wood.  That is not temporary.  It is a permanent change.  Then he will argue that the gift exchange approach sustains the dead wood, who act as a drag on the entire system.  One needs, instead, a time-consistent way to purge the system of the dead wood.  Performance based pay does that.  (This issue has been discussed quite a bit with regard to teacher pay and teacher tenure.)

Akerlof's model does not address that critique.  Before I provide my own answer, let me take a slight detour.  The Akerlof gift exchange model is essentially social in nature.  There is a different reason to depart from performance based pay that is intellectual in nature and is particular to knowledge work.  This other view is articulated by Daniel Pink in this RSA Animiate video and focuses on psychological explanations for productivity.  There can be performance anxiety or, if you prefer, writer's block. High performance is achieved when intrinsic motivation is strong and the individual becomes so involved in the work as to entirely lose a sense of self.  Making extrinsic rewards overt moves the individual's focus away from the intrinsic motivation and thereby lessons productivity.  Better to have the economic rewards provided up front so that one can put them out of mind when the real work commences.  While I have critiqued this video on how it represents the economics, I concur with its representation of the importance of intrinsic motivation. 

Burnout then can be thought of as the disappearance of intrinsic motivation.  The response to the critique is to look at the causes for why intrinsic motivation should disappear.  One possible cause is a sense of plateauing in the work.  There is little left to learn, no inherently new challenges.  For the most part it is a rehash of what's come before - been there, done that.  When it happens, it would seem to make sense that the worker should move onto a new challenge; do something else.  There is, however, a different cause that is also possible.  It is that the individual confronts organizational barriers that seem arbitrary and anti-productive and those barriers repeatedly thwart the individual's creative efforts.  Eventually, the individual wears down from not seeming able to accomplish sensible change.  Gallows humor becomes part of the routine as the individual loses the desire to fight the system.  This second cause might reasonably dictate that more fundamental organizational change is necessary.  The burden shouldn't be placed on the individual to accommodate organizational inertia.

It is this second cause that forms the basis of the response to the critique.  The Akerlof gift exchange approach must happen within a dynamic organization that makes organizational learning paramount.  (See Senge's The Fifth Discipline.)  Employee burnout might still happen in such organizations, but it would be far rarer.  When it does happen the appropriate organizational response should be job reassignment rather than immediate severance, this in accord with the gift exchange view.  Collegiality, in tone and actual practice, then characterizes good jobs and is at the heart of how the organization remains productive.

In my years working in learning technology, everyone I've encountered knows this implicitly, though I expect that the vast majority of them were not acquainted with Akerlof's gift exchange model.   I wonder if people reading this post with a prior disposition toward pay for performance might consider collegiality based alternatives instead. 

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