How an Economics Thought of Work Influences Research and Practice

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Much has been written about the changing nature of work, but frequently overlooked is the more fundamental question of what is work in a conceptual sense. This is a troubling oversight because unstated definitions of work shape research and practice. As an example, mainstream economic thought implicitly sees work as a lousy activity tolerated only to obtain goods, services, and leisure that provide utility. Early economists saw work as a painful physical or mental exertion while modern economists are more likely to simply assume that whatever the actual nature of work, leisure is more desirable. In either case, work itself is assumed to reduce utility. So why work? To be able to obtain goods, services, and leisure.

Though frequently unstated, this definition of work underlies economic scholarship on work-related topics. Research on labor supply assumes that workers will sell their labor in the labor market until the additional pain or opportunity cost of additional work hours exceeds the additional utility generated by the additional work income. What about economic research looking at work-related topics within organizations? As recognized by Karl Marx, an employer buys the potential effort of workers and must figure out how to get workers to exert this effort. In the absence of perfect contracting and monitoring, economic scholarship focuses on the role of monetary incentives to elicit effort because work is seen as only tolerated to earn income.

Specifically, using basic economic analysis it is straightforward to show that if an employer pays a fixed wage independent of effort, employees will exert the least amount of effort that avoids being fired--that is, employees are predicted to shirk. This assumption of shirking is so pervasive in economic thought that we ought to call this the First Fundamental Theorem of Personnel and Organizational Economics. As a consequence, economic research is full of rich models analyzing the optimal incentive schemes under various assumptions. For example, if workers are risk neutral then the optimal compensation scheme is to sell the worker a franchise in his or her job for a fixed fee, and allow the worker to capture the entire output s/he generates. This is what happens when a hair salon rents chairs to stylists or a taxi company rents taxis to its drivers and allows the stylists and drivers to keep all of the income they bring in.

When such an arrangement is not feasible, the optimal incentive scheme is a commission-based system with revenues shared equally. But if workers are risk-averse, then this is an excessively-risky compensation scheme, and some combination of a fixed salary and variable pay is better. Another incentive mechanism prominent in the economics literature is tournaments. If a prize such as a promotion is awarded to the employee with the highest performance relative to his or her peers, then the prospect of enhanced income can provide an incentive to exert additional effort.

These theoretical approaches guide a rich empirical literature that analyzes a variety of pay-for-performance and tournament situations. Perhaps the most famous is Edward Lazear's study of an auto glass company that switched from hourly wages to piece-rate pay. A careful examination of worker output before and after this change found that changing to piece-rate compensation increased the average output per worker by 44 percent. Other research has looked at pay-for-performance and tournaments among bus drivers, school teachers, tree planters, fruit pickers, shoe makers, military recruiters, and professional athletes in many sports. This research provides important insights into the importance of monetary desires and alternative uses of one's time when employees decide how much and how hard to work.

Whether or not one agrees with the need for incentives for eliciting work effort, it is important to recognize that a specific definition of work underlies economists' almost religious promotion of incentives--that is, work as a lousy activity tolerated only to obtain goods, services, and leisure. Alternative definitions of work focus attention in other directions. Sociological scholarship on work effort focuses on the role of social norms and social dynamics, while psychological scholarship emphasizes eliciting effort through job satisfaction.

And these definitional choices are not purely intellectual affairs. Rather, they have important consequences for how work is experienced in practice. The widespread use of incentive pay packages is rooted in the economics view of work and fear of shirking. The idea that workers are prone to shirking also justifies hierarchical work structures and deflects pressures for granting workers greater autonomy over their work. In the public policy arena, the economics definition of work yields concerns that unemployment benefits and government welfare programs create incentives for people to withhold their labor supply and avoid working. Unemployment insurance programs therefore provide partial income replacement for a limited duration while workfare has replaced welfare.

Whatever one's views on work, the definitions of work need to be explicitly identified and debated. Definitions of work matter for how work is analyzed, legislated, adjudicated, and experienced, so these definitions are too important to be taken for granted. It is time to think more carefully about work.

I initially published this as "What is Work?" in the Winter 2012 edition of the American Bar Association's Labor and Employment Law newsletter.

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About this Blog

Whither Work? is a blog about work created by John Budd. I am a professor of Work and Organizations in the University of Minnesota's Carlson School of Management, and the author of several books including The Thought of Work. Follow me on Twitter: @JohnWBudd.