NEW REPORT: Production spillovers are often undervalued by employers
A new IZA World of Labort report publishing today shows that workers who bring out the best in others do not necessarily have the highest levels of productivity themselves. Firms therefore often undercompensate workers for their indirect impact on team outputs.
Workers can contribute to total firm production directly through their own output or indirectly through their influence on the output of co-workers. Workers with positive productivity spillover effects cause individuals around them to perform better and increase overall team production. According to recent research summarized by the economist Joseph Price of Brigham Young University the workers with positive productivity spillovers may not be the workers with the highest levels of personal output. Such productivity spillovers are important for team success even though they play only a minor role in determining worker pay.
A recent study using Data from the National Basketball Association (NBA) ranked players according to three measures: (i) their ability to score; (ii) their ability to defend; and (iii) their ability to help others score. These rankings were then compared with estimates of team production when spillovers were ignored. Ignoring spillovers had a substantial effect on assessing the overall contribution of specific players, causing previous approaches to underestimate the contribution of “team” players.
The estimates used for the NBA also suggest that teams will have higher outputs when they have the optimal mix of high-productivity players combined with spillover players. As such, some teams will value particular players more than others, based on the current composition of their team. Similarly, most firms have various teams within their organizations and have the ability to reassign workers across them.
Finally, the NBA study also found that players are primarily compensated based on their direct contributions to team production, with little weight given to their ability to increase the productivity of their teammates. This misalignment of incentives might reduce the incentive for players to invest or engage in actions that increase their positive effects on the productivity of their teammates, especially in cases where compensation is based on relative performance. A number of studies indicate that these findings are also valid in “real” work/life settings, where productivity spillovers may be observable within a firm but not to outsiders.
According to Price, firms that find ways to accurately identify the productivity and spillover parameter of each worker will be able to optimally assign groups within the firm to maximize team output. Those firms that can better identify high-spillover workers will be able to adjust their compensation in ways that encourage positive spillovers and retain high-spillover workers who may be overlooked when using traditional performance measures.
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Established in 1998, the Institute of Labor Economics (www.iza.org) is an independent economic research institute focused on the analysis of global labor markets. Based in Bonn, it operates an international network of about 1,500 economists and researchers spanning more than 45 countries.