Fairness and Productivity

Tax and regulatory changes in Britain have had few discernible positive effects on productivity. This commentary offers an explanation for the failure of productivity to respond to tax cuts and other changes:

Britain overlooks productivity factor, by Michael Prowse, Financial Times: After Labour transferred responsibility for price stability to the independent monetary policy committee in 1997, raising productivity growth ... became the Treasury’s central preoccupation. Gordon Brown, the chancellor, attacked the new microeconomic agenda with an almost religious zeal, unveiling dozens of tax and regulatory changes... His quest resembled that of a medieval knight in search of the grail...

Yet after nearly nine years, the results look meagre. The Treasury claims that output per worker has grown slightly faster since 1997 ... But other experts cannot discern any change. Output per hour worked is arguably a better measure of productivity ... And on this measure, figures ... show ... UK output per hour grew faster ... during the 1970s, a decade of labour unrest and macroeconomic instability. After allowing for differences in purchasing power, output per hour worked remains lower in Britain than in France, Germany, Belgium, the Netherlands and Ireland... In supposedly sclerotic France, productivity is still about 20 per cent higher than in Britain. ...

Mr Brown’s strategy may yet be proved right because time lags on the supply side are notoriously long. Yet he may also be failing to allow sufficiently for cultural and social factors. Productivity depends on work effort – but that of all employees rather than just that of a few highly remunerated board members. ...

Market theory suggests the key to productivity lies in performance-related pay ... Yet this just reflects its assumption that people are motivated solely by their command over goods and services. Modern behavioural economics and evolutionary psychology suggest ... that people’s response depends on how they are doing relative to others, and how fairly they believe they are treated – which ought not to be surprising. ...

So, within reason, a productive workplace is likely to be one in which the average band member feels justly treated as a member of a social group. But this implies that reforms ... which enhance businesses’ capacity to treat people like commodities to be bought and sold as market conditions fluctuate, may sometimes be counter-productive. The dramatic widening of differentials between boardroom and shop floor pay may have boosted the work effort of directors, although this is unproven. But what has it done for rank-and-file morale? And why should the average employee work his heart out for an employer who refuses to contribute to decent pensions and sacks staff in downturns? ...

What neo-Darwinian biology and behavioural economics suggest is a direct link between fairness and productivity. People give their best when they feel justly treated relative to others. It is as simple – and difficult – as that.