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Wednesday, August 03, 2011

Does Fear of Job Loss Work?

Chris Dillow:

Does fear work?, Stumbling and Mumbling: Oliver Letwin has been doing some blue sky thinking. The Guardian reports him as saying that it is

only through "some real discipline and some fear" of job losses that excellence would be achieved in the public sector.

I'm not sure Letwin really believes this. If he did, he would be also advocating introducing fear into corporate boardrooms, because there is at least some evidence that fines work better than bonuses in stimulating good performance. Funnily enough, though, he seems silent on this. He seems to subscribe to the asymmetric theory of motivation: bosses are motivated by big money, but workers are motivated by fear.

Sadly, though, there are three reasons to doubt the latter half of this theory:

1. The Yerkes-Dodson effect. Yes, sometimes fear can inspire great achievements. But it can also cause stress and choking.

2. Even if fear does induce more effort, this effort might be misdirected, unless the institutional structure is very carefully designed. Fear of job loss might simply lead to more gaming of the system. For example, if teachers are sacked if their students perform poorly, the result might not be better teaching, but rather teaching to the test, the expulsion of bad students, or a focus on students of borderline ability, to the neglect of most of the class. As Daniel Pink wrote in Drive - one of those fashionable behavioural economics books that the Tory party is supposed to be interested in:

Instead of restraining negative behaviour, rewards and punishments can often set it loose - and give rise to cheating, addiction and dangerously myopic thinking.

3. Sacking bad workers can crowd out other motives - be they a sense of vocation or the gift exchange arising from the invisible handshake. Workers who see an under-performing colleague sacked are as likely to withdraw goodwill from management as they are to be spurred to work harder. And if, say, a good teacher working in a bad school fears for his job, he's likely to just jump ship, causing the bad school to get worse.

It's not just Gneezy and Rustichini's well-known paper (pdf) on Israeli kindergartens that shows how explicit penalties can crowd out pro-social motivations. A study of Norwegian hospitals found the same thing.

All of this is consistent with one big fact about productivity (pdf) in the private sector - that lots of productivity growth (maybe almost all) comes not from incumbent suppliers upping their game, but rather by the fact of entry and exit. If Letwin had focused just on this point, I'd have little problem. But bringing class war and bad psychology into it is just silly.

    Posted by on Wednesday, August 3, 2011 at 12:33 AM in Economics | Permalink  Comments (32)


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