Business/Management

Do Minimum Wage Hikes Drive Some Restaurants Out of Business?

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From a recent NBER paper (quoting from an earlier draft): 

As theory would suggest, we find robust evidence that the impact of the minimum wage depends on how close a restaurant is to the margin of exit, proxied by its rating. Looking at city-level minimum wage changes in the San Francisco Bay Area (the “Bay Area”), we present two main findings. First, at all observed minimum wage levels, restaurants with lower ratings are more likely to exit, suggesting that they are less efficient in the economic sense. Moreover, lower rated restaurants are disproportionately affected by minimum wage increases. In other words, the impact of the minimum wage on exit is most pronounced among restaurants that are closer to the margin of exit. 

…Our results suggest that a $1 increase in the minimum wage leads to an 14 percent increase in the likelihood of exit for the median 3.5-star restaurant, but no impact for five-star restaurants (the point estimate is in fact negative, suggesting that the likelihood of exit might even decrease for five-star restaurants, but the estimate is not statistically different from zero). These effects are robust to a number of different specifications, including controlling for time-varying county characteristics that may influence both minimum wage policies and restaurant demand, city-specific time trends to account for preexisting trends, as well as county-year fixed effects to control for spatial heterogeneity in exit trends.

…Overall, our findings shed on the economic impact of the minimum wage. Basic theory predicts that the minimum wage will cause firms that cannot adjust in other ways to cover their increased costs to exit the market. We find that lower rated firms (which are already closer to the margin of exit) are disproportionately impacted by the minimum wage. After a minimum wage increase, they are more likely to exit the market altogether and more likely to raise their prices (pg. 2-5).

This matches previous research, which finds that labor-intensive restaurants tend to exit and make room for capital-intensive restaurants.[ref]This same research finds that consumers bear the costs of minimum wage hikes (as my last post also showed). Lastly, the authors found “a short-run disemployment effect of just under −0.1 that likely grows by three to five times in the long run” (pg. 71).[/ref] 

Does Good Management Produce More Equal Pay?

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Nicholas Bloom–whose research on the economics of management I’ve relied on in my own work–and colleagues have an interesting article in Harvard Business Review:

For 2010 and 2015, the U.S. Census Bureau fielded the Management and Organizational Practices Survey (MOPS) in partnership with a research team of subject matter experts, including one of us (Nick), as well as Erik Brynjolfsson and John Van Reenen. The MOPS collects information on the use of management practices related to monitoring (collecting and analyzing data on how the business is performing), targets (setting tough, but achievable, short- and long-term goals), and incentives (rewarding high performers while training, reassigning, or dismissing low performers) at a representative sample of approximately 50,000 U.S. manufacturing plants per survey wave. We refer to practices that are more explicit, formal, frequent, or specific as “more structured practices.” From the MOPS and related data, researchers have demonstrated just how important the use of these structured management practices is for companies and even entire economies, since firms that implement more of these practices tend to perform better.  We wanted to know what effect these management practices have on workers.

We found that companies that reported more structured management practices according to the MOPS paid their employees more equally, as measured by the difference between pay for workers at the 90th (top) and 10th (bottom) percentiles within each firm.

The authors fully admit, “To be honest, it surprised us…If anything, we expected the opposite…We hypothesized that more structured management would lead to rewarding high-performers over others, therefore leading to a rise in inequality inside of the firm. As the chart above shows, the reality is exactly the reverse – and that remains true even after controlling for employment, capital usage, firm age, industry, state, and how educated the employees are.” They continue,

Our research finds that the negative correlation between structured management and inequality is driven by a strong negative correlation between the use of structured monitoring practices and inequality. By contrast, higher usage of structured incentives practices was positively correlated with inequality, albeit weakly. In other words, our finding seems to suggest that companies that collect and analyze specific and high-frequency data about their businesses tend to have a smaller gap between the earnings of workers at the top of the income distribution and the earnings of workers at the bottom of the distribution.

The authors offer several possible explanations:

Previous research shows that firms with more structured management practices are more profitable on average, and there’s long been evidence that when companies make extra profits they share some of them with workers. Perhaps companies with more structured practices allocate these profits such that less well-paid workers get more of the pie.

The relationship could also result from increased efficiency. Maybe firms with more structured practices have more efficient low-paid workers, as a response to training or monitoring practices, and their pay reflects that extra efficiency.

Finally, it could be that firms with more structured practices are more focused on specific tasks and rely more on outsourcing. More and more companies are outsourcing tasks like cleaning, catering, security, and transport. If outsourcing is more common for firms that use more structured practices, workers performing tasks outside of the companies’ core tasks would no longer be on those companies’ direct payrolls. If the jobs that are outsourced are lower-paying than the jobs that are held by employees, the companies’ pay data will become more equal.

Other research finds that paying employees higher wages

  • Motivates employees to work harder.
  • Attracts more capable and productive workers.
  • Lead to lower turnover
  • Enhance quality and customer service
  • Reduce disciplinary problems and absenteeism
  • Require fewer resources for monitoring
  • Reduces poor performance caused by financial anxiety

Looking forward to Bloom et al.’s published work.

Is Contract Enforcement Important for Firm Productivity?

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Contract enforcement is a major player in measuring the ease of doing business in a country. A new working paper demonstrates the importance of enforceable contracts to firm productivity:

In Boehm and Oberfield (2018) we study the use of intermediate inputs (materials) by manufacturing plants in India and link the patterns we find to a major institutional failure: the long delays that petitioners face when trying to enforce contracts in a court of justice. India has long struggled with the sluggishness of its judicial system. Since the 1950’s, the Law Commission of India has repeatedly highlighted the enormous backlogs and suggested policies to alleviate the problem, but with little success. Some of these delays make international headlines, such as in 2010, when eight executives were convicted in the first instance for culpability in the 1984 Bhopal gas leak disaster. One of them had already passed away, and the other seven appealed the conviction (Financial Times 2010)

These delays are not only a social problem, but also an economic problem. When enforcement is weak, firms may choose to purchase from suppliers that they trust (relatives, or long-standing business partners), or avoid purchasing the inputs altogether such as by vertically integrating and making the components themselves, or by switching to a different production process. These decisions can be costly. Components that are tailored specifically to the buyer (‘relationship-specific’ intermediate inputs) are more prone to hold-up problems, and are therefore more dependent on formal court enforcement.

…Our results suggest that courts may be important in shaping aggregate productivity. For each state we ask how much aggregate productivity of the manufacturing sector would rise if court congestion were reduced to be in line with the least congested state. On average across states, the boost to productivity is roughly 5%, and the gains for the states with the most congested courts are roughly 10% (Figure 3).

Management Still Matters

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I’ve said it before: management matters. I even published a paper on it. Harvard’s Raffaella Sadun lays out the case once more:

What we found was quite consistent across sectors and countries, namely a large and significant correlation between management and organizational performance. Figure 1 (Source), for example, shows the relationship between management and a variety of metrics for firm performance—including productivity, profitability, growth, and survival—among US manufacturing plants.

The correlation between management and performance appears to be similar across countries and (to our surprise) even in “public” sectors such as health care and education. For example, well-run hospitals appear to have lower mortality rates from Acute Myocardial Infarction (AMI, i.e heart attacks), and well-run schools enjoy better test scores among their pupils.

In subsequent research, my colleague Nick Bloom and colleagues set up a management “experiment,” in which a random set of Indian manufacturing firms were provided with a “dose” of management consultancy and compared to a control group. Their experiment showed that the relationship between management and firm performance appears to be causal.

Other researches have argued that the role of management may extend well beyond the performance of individual firms, and extend to whole economies. For example, Pellegrino and Zingales argue that people management gaps among Italian firms may be responsible for the weak productivity performance experience by the country since the early 90s by delaying the adoption of complementary and productivity enhancing technologies. In a recent paper, Schivardi and Schmitz extend this argument to Southern Europe more generally.

She identifies four major mechanisms for why management practices are so diverse across different countries:

1. There seem to be large informational barriers. Those prevent managers from having a clear understanding of the quality of their own practices, as well as the potential benefit that modern management practices could accrue to their organization. For example, when we asked managers to self-evaluate the quality of their own practices on a scale between 1 and 10, most managers rated themselves an 8. Their own scores were typically uncorrelated with our arguably more objective management score. 

2. Management adoption is strongly related to the education of the workforce, which, in turn, is shaped by differences in skill supply. This is not surprising, given the fact that many “best-practices” require significant numeracy and literacy skills.

3. Even when well-informed and with plenty skills available, managers may not be motivated to invest in new management practices, as the adjustment may be costly to the firm or to them personally (for example, relying on management practices may require less of their direct and personalized control, references). Research has shown the presence of a correlation between competitive pressure and management quality, which is in line with the classic idea in economics that competition reduces organizational slack.

4. Introducing new management practices in a firm requires a substantial buy-in from the employees, as its adoption rests on significant co-investments (i.e. learning new behavioral routines) that are hard to monitor and incentivize through standard contracting solutions. However, organizational frictions may prevent such co-investments from happening. For example, Susan Helper and Rebecca Henderson attribute GM’s decline and inability to fully implement productivity-enhancing managerial practices such as lean management to a fundamental lack of trust between managers and employees (employees suspected that the productivity improvements generated by lean would result in layoffs rather than generalized gains). This latter category points to the importance of softer aspects of organizations, such as corporate culture and leadership behavior, which may be able to overcome this type of resistance to change.

She concludes,

While much remains to be done, the evidence so far suggest that variations in this key factor of production may have large implications for performance, at both the firm and country level. Understanding why management quality varies across organizations will help us advance the field and develop better policies for improving management and productivity.

What Innovative Cultures Are Really Like

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Image result for innovation

Innovation is a must for both organizations and economies. At least, if one cares about the continued well-being of both. When it comes to creating an innovative organizational culture, several factors stand out. Gary P. Pisano at Harvard Business School lists some of the more popular ones:

  • Tolerance for failure: “Given that innovation involves the exploration of uncertain and unknown terrain, it is not surprising that a tolerance for failure is an important characteristic of innovative cultures. Some of the most highly touted innovators have had their share of failures.”
  • Willingness to experiment: “Organizations that embrace experimentation are comfortable with uncertainty and ambiguity. They do not pretend to know all the answers up front or to be able to analyze their way to insight. They experiment to learn rather than to produce an immediately marketable product or service.”
  • Psychological safety: “Psychological safety is an organizational climate in which individuals feel they can speak truthfully and openly about problems without fear of reprisal. Decades of research on this concept by Harvard Business School professor Amy Edmondson indicate that psychologically safe environments not only help organizations avoid catastrophic errors but also support learning and innovation. For instance, when Edmondson, health care expert Richard Bohmer, and I conducted research on the adoption of a novel minimally invasive surgical technology by cardiac surgical teams, we found that teams with nurses who felt safe speaking up about problems mastered the new technology faster. If people are afraid to criticize, openly challenge superiors’ views, debate the ideas of others, and raise counterperspectives, innovation can be crushed.”
  • Collaboration: “Well-functioning innovation systems need information, input, and significant integration of effort from a diverse array of contributors. People who work in a collaborative culture view seeking help from colleagues as natural, regardless of whether providing such help is within their colleagues’ formal job descriptions. They have a sense of collective responsibility.”
  • Flat hierarchy: “In culturally flat organizations, people are given wide latitude to take actions, make decisions, and voice their opinions. Deference is granted on the basis of competence, not title. Culturally flat organizations can typically respond more quickly to rapidly changing circumstances because decision making is decentralized and closer to the sources of relevant information. They tend to generate a richer diversity of ideas than hierarchical ones, because they tap the knowledge, expertise, and perspectives of a broader community of contributors.”

Much of this is appealing to the liberal[ref]I mean this in a more general, philosophical way, not the American partisan sense.[/ref] mind. It touches on a number of Western democratic values: tolerance, openness to new experience, equality. One might even see echoes of social justice activism: “come as you are,” safe spaces, communalism, anti-establishment. However, Pisano couples these elements with others that may seem rather old school:

  • Intolerance for Incompetence: “[Innovative organizations] set exceptionally high performance standards for their people. They recruit the best talent they can. Exploring risky ideas that ultimately fail is fine, but mediocre technical skills, sloppy thinking, bad work habits, and poor management are not. People who don’t meet expectations are either let go or moved into roles that better fit their abilities…The truth is that a tolerance for failure requires having extremely competent people. Attempts to create novel technological or business models are fraught with uncertainty. You often don’t know what you don’t know, and you have to learn as you go. “Failures” under these circumstances provide valuable lessons about paths forward. But failure can also result from poorly thought-out designs, flawed analyses, lack of transparency, and bad management.”
  • Highly Disciplined: “A willingness to experiment…does not mean working like some third-rate abstract painter who randomly throws paint at a canvas. Without discipline, almost anything can be justified as an experiment. Discipline-oriented cultures select experiments carefully on the basis of their potential learning value, and they design them rigorously to yield as much information as possible relative to the costs. They establish clear criteria at the outset for deciding whether to move forward with, modify, or kill an idea. And they face the facts generated by experiments. This may mean admitting that an initial hypothesis was wrong and that a project that once seemed promising must be killed or significantly redirected. Being more disciplined about killing losing projects makes it less risky to try new things.”
  • Brutal Candidness: “We all love the freedom to speak our minds without fear—we all want to be heard—but psychological safety is a two-way street. If it is safe for me to criticize your ideas, it must also be safe for you to criticize mine—whether you’re higher or lower in the organization than I am. Unvarnished candor is critical to innovation because it is the means by which ideas evolve and improve. Having observed or participated in numerous R&D project team meetings, project review sessions, and board of directors meetings, I can attest that comfort with candor varies dramatically. In some organizations, people are very comfortable confronting one another about their ideas, methods, and results. Criticism is sharp. People are expected to be able to defend their proposals with data or logic…When it comes to innovation, the candid organization will outperform the nice one every time. The latter confuses politeness and niceness with respect. There is nothing inconsistent about being frank and respectful. In fact, I would argue that providing and accepting frank criticism is one of the hallmarks of respect. Accepting a devastating critique of your idea is possible only if you respect the opinion of the person providing that feedback.”
  • Individual Accountability: “[T]oo often, collaboration gets confused with consensus. And consensus is poison for rapid decision making and navigating the complex problems associated with transformational innovation. Ultimately, someone has to make a decision and be accountable for it. An accountability culture is one where individuals are expected to make decisions and own the consequences…Accountability and collaboration can be complementary, and accountability can drive collaboration. Consider an organization where you personally will be held accountable for specific decisions. There is no hiding. You own the decisions you make, for better or worse. The last thing you would do is shut yourself off from feedback or from enlisting the cooperation and collaboration of people inside and outside the organization who can help you.”
  • Strong Leadership: “Lack of hierarchy…does not mean lack of leadership. Paradoxically, flat organizations require stronger leadership than hierarchical ones. Flat organizations often devolve into chaos when leadership fails to set clear strategic priorities and directions. Amazon and Google are very flat organizations in which decision making and accountability are pushed down and employees at all levels enjoy a high degree of autonomy to pursue innovative ideas. Yet both companies have incredibly strong and visionary leaders who communicate goals and articulate key principles about how their respective organizations should operate.”

I remember making a point to my therapist–who uses a lot of Brene Brown’s work–that authenticity can be easily warped. “You are enough” is absolutely true if we are talking about the inherent dignity of people. However, when it used as license for “take me as I am” and “I don’t have to change,” it becomes a moral cancer. The same can be said of concepts like empathy or mindfulness. Similarly, focusing on only a few select traits of an innovative culture can be undermine the very innovation they are meant to promote.

Transformation is a balancing act. And a hard one at that.

Economic Growth and Corruption

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In my latest paper in Economic Affairs, I wrote,

Drawing on the EFW Index, Brennan (2016a)…points to a strong positive correlation between a country’s degree of economic freedom and its lack of public sector corruption. Granted, a lack of corruption could very well give rise to market reforms and increased economic freedom instead of the other way around. However, recent research on China’s anti-corruption reforms (Ding et al. 2017; Li et al. 2017) suggests that markets may actually pave the way for anti-corruption reforms (pg. 425).

Furthermore,

Market liberalisation can also have indirect effects on war and violence. For example, Neudorfer and Theuerkauf (2014) explore the effects of public sector corruption on ethnic violence by analysing 81 to 121 countries between 1984 and 2007. They find that corruption has a robust positive effect…on the risk of ethnic civil war. When the evidence provided in the previous sections by Brennan (2016a) and Lin et al. (2017) is considered, we find that market liberalisation deters corruption and, consequently, ethnic violence (pg. 429).

Research suggests that economic growth may reduce corruption:

The traditional explanation for this relationship has been the theory articulated by Wolfenson above – corruption increases the cost and risk of business activity, thereby deterring investment and depressing growth that could have lifted citizens out of poverty (Mauro 1995, Wei 1999).

However, there is an alternative possibility that has received less attention among development practitioners and academics. The strong relationship between income and growth may result from exactly the opposite causal relationship – countries may be growing out of corruption (Tresiman 2002). Over time, economic growth reduces both the incentives for government officials to extract bribes and firms’ willingness to pay them. Some scholars of developed countries have discussed this possibility in terms of a ‘life cycle’ theory with corruption peaking at early stages of development and declining as countries industrialise (Huntington 1968, Theobald 1990, Ramirez 2013). However, there has been little work either testing for this empirical link from growth to corruption, or laying out the specific mechanisms that could generate the link.

The authors continue:

The key theoretical insight of our argument is that the share of bribes that officials will choose to extract as rents depends on a firm’s ability to move and set up business in a different location. Ask for too much, and firms that have the ability to do so, will simply pull up anchor and head to safer harbours. Because officials know this, they are likely to set a bribe amount that is just below the cost of moving.

Building on that insight, we show that as firms grow the cost of moving should decline relative to firm size. The fixed cost of moving becomes less expensive relative to revenue, and more and more firms have the opportunity to escape the bribe requests of officials in their locality. Corrupt officials faced with a sudden growth surge must lower their bribe rates, or face losing their key providers of employment and tax payers to competitors.

…The theory we propose has important policy implications. To the extent this theoretical mechanism is important, rather than focusing on politically difficult institutional changes to combat corruption, resources might be better spent on policies that facilitate capital mobility across subnational jurisdictions. Providing clear titles to business premises, for instance, enables entrepreneurs to sell and recoup the full market value of land. Such businesses are more mobile than renters or owners with insecure titles, who risk significant losses if they try to escape corruption by fleeing across the border.

Drawing on “an annual survey funded by USAID and administered by the Vietnamese Chamber of Commerce and Industry,” the researchers find “that the average bribe rate decreases as GDP per capita increases” and “that large firms actually pay lower bribe rates, which is what our theory predicts. Firms with higher revenues are more put out by a high bribe rate, since it increases the amount of bribes they must pay dramatically. To retain them then, officials must push their bribe rate lower.” 

Then, using “a census of firms conducted by Vietnam’s General Statistical Office (GSO) [to] calculate aggregate employment at the province-industry-year level,” the authors

show that exogenous industry-wide performance is indeed a strong predictor of a firm’s performance. A doubling of total employment in the industry is associated with a 1.6 percentage point reduction in the bribe rate, or about 42% of the mean level. Moreover, the effect is more pronounced for highly mobile firms. The magnitude of the effect of growth on bribe reductions is 17% larger for firms in possession of a Land Use Rights Certificate, which facilitates the sale of their business premises. Similarly, the effect is 20% greater for firms that already have branch operations in other provinces, and therefore possess knowledge and experience that could facilitate movement.

These effects survive a battery of robustness tests and alternative specifications, providing compelling evidence that growth can directly reduce corruption.

In short, economic growth can decrease corruption by undermining the power of officials to extract bribes. But this is likely part of a virtuous feedback loop. For example, a 2017 paper 

exploit[s] spatial variation in randomized anti-corruption audits related to government procurement contracts in Brazil to assess how corruption affects resource allocation, firm performance, and the local economy. After an anti-corruption crackdown, regions experience more entrepreneurship, improved access to finance, and higher levels of economic activity. Using firms involved in corrupt business with the municipality, we find that two channels explain these facts: allocation of resources to less efficient firms, and distortions in government dependent firms. The second channel dominates, as after the audits government dependent firms grow and reallocate resources within the organization (pg. 31). 

As I state in the beginning of my paper,

Of course, it is far easier to demonstrate correlation than causation, and while some studies do find markets playing a causal role in moral development, most simply establish a positive relationship. However, findings that ‘merely’ demonstrate positive correlations should be interpreted in light of the feedback loops: even if moral behaviours are foundational and give rise to market systems (instead of vice versa), market systems in turn reinforce these virtues by imbuing them with value. As Paul Zak (2011, p. 230) explains, ‘Markets are moral in two senses. Moral behavior is necessary for exchange in moderately regulated markets, for example, to reduce cheating without exorbitant transaction costs. In addition, market exchange itself can lead to greater expression of morals in nonmarket settings’ (pg. 423).

Violence Is Bad For Business

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From my paper in Economic Affairs:

The…act of seeking out mutually beneficial exchanges with others expands what Michael Shermer (2015) calls the ‘moral sphere’. As this sphere diversifies, our attitudes regarding the vulnerable and disenfranchised tend to alter for the better. This moral expansion is likely why economic globalisation has been linked to fewer governmental violations of human rights, namely torture, extrajudicial killings, political imprisonment, and disappearances (De Soysa and Vadlammanati 2011). An analysis of 117 countries between 1981 and 2006 also found ‘positive effects of market-economic policy reforms on government respect for human rights’ (De Soysa and Vadlammanati 2013, p. 180) as defined above. While these studies seem to imply the market’s influence on human rights, there is also evidence that human rights boost market liberalisation. Utilising the CIRI Human Rights Data Project (which reports on extrajudicial killings, disappearances, torture, political imprisonment, freedom of speech and government censorship, freedom of religion, freedom of movement and migration, freedom of assembly and association, free and fair elections, workers’ rights, and women’s rights), a 2010 study finds that human rights abuses ‘actually reduce the pace of economic liberalization’ (Carden and Lawson 2010, p. 12). These studies seem to confirm that morals and markets create a positive feedback loop regarding human rights.

…[T]rade and business openness largely reduces the incentives of war and brutalisation. People become more valuable alive and able as potential partners, lenders, investors, and customers…After analysing data spanning from 1970 to 2005, De Soysa and Fjelde (2010) find that higher economic freedom lowers the risk of civil war, more so even than democracy and good governance. This remains true after variables such as income per capita, growth rates, total population, ethnic fractionalisation, and oil exportation are controlled for. Yet these results likely underestimate the total impact of economic freedom on civil war. ‘In reality’, write De Soysa and Fjelde (2010, p. 293), ‘the effect of economic freedom on peace is likely to be larger if we also take into account the indirect effect of economic freedom through its impact on income growth’. These findings correspond with a later study by De Soysa and Flaten (2012), which controls for the same variables and finds that higher levels of globalisation (particularly economic globalisation) reduce the risk of civil war as well as state violations of human rights. Other research finds that free-market conditions and economic liberalisation are associated with lower levels of various societal insecurities, including open armed conflict, violent crime, murder, societal militarisation and political instability (Stringham and Levendis 2010; De Soysa 2011, 2016; Bjornskov 2015). Various organisations from the World Economic Forum (2016) to the UN Global Compact (2014) are recognising the power commerce has to decrease conflict and establish peace (pg. 426-429).

A brand new study looks at the relationship between violence and business by examining Columbia’s reduction in violence between 1995 and 2010. 

The author explains,

To precisely measure the effects of violent crime on firm behaviour, I use the large reductions in violence caused by increased security expenditures of the Democratic Security programme under Uribe’s administration. According to the Uribe’splan published in 2003, the Democratic Security programme aimed at restoring police presence in all municipalities; dismantling terrorist organisations; reducing kidnappings, extortion, and homicides; preventing forced displacement; and fighting the illegal drug trade (Ministerio de Defensa 2003). Uribe’s government intended to achieve these goals by increasing spending on military infrastructure, personnel, and intelligence. High spending on security led to decreased violence in municipalities that voted for Uribe in the presidential elections of 2002 (when he was elected for the first time) as he was looking for re-election in 2006 (he was re-elected).

…I combine unique plant-level and rich consumer pricing data with homicide rates and electoral results in Colombia. Using these data, I compare the prices and market size of Colombian municipalities that showed higher and lower support for Alvaro Uribe in the presidential election of 2002. These correlations were subsequently reflected in larger or lower changes in homicide rates.

I find large effects due to changes in violent crime: 

– When violence decreases by 1%, firm aggregate production increases by approximately 0.4%. This is partly explained by higher production per firm but also explained by the entrance of new firms into the market.  

– Real income increases in areas with less violence. These changes are explained by higher nominal wages, which are larger in size than the documented increases in the general price levels. 

– Consequently, areas with lower violent crime have higher incomes. This condition may further reduce social unrest and violence.  

In conclusion, a “48% decline in homicide rates between 1995 and 2010 in Colombia increased aggregate production by 19.6%. My estimates, however, are a lower bound of the total social costs of violent crime, as they are do not include the costs of mortality or the long-run impacts of violent crime reductions. The benefits of reducing violence, consequently, are even higher. Investments in security improvements are thus an effective way to boost economic development.”

Violence, it seems, is antithetical to business. As I note in my paper, “findings that ‘merely’ demonstrate positive correlations [between markets and morality] should be interpreted in light of the feedback loops: even if moral behaviours are foundational and give rise to market systems (instead of vice versa), market systems in turn reinforce these virtues by imbuing them with value” (pg. 423).

Diversity Is A Strength

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Earlier this year, I highlighted some research on diversity and its relation to the immigration question. The Washington Post had a recent piece on Fox News anchor Tucker Carlson’s less-than-subtle anti-diversity views. Within the article, the author highlighted several studies on how diversity contributes to organizational well-being. I thought I’d dive into these studies for your reading pleasure.

One study from Cloverpop, as reported in Forbes, 

analyzed approximately 600 business decisions made by 200 different business teams in a wide variety of companies over two years, using the Cloverpop decision-making database. The full research results on inclusive decision making are available for download if you’d like to dive in. To topline it, our research shows a direct link between inclusive decision making and better business performance:

• Inclusive teams make better business decisions up to 87% of the time.

• Teams that follow an inclusive process make decisions 2X faster with 1/2 the meetings.

• Decisions made and executed by diverse teams delivered 60% better results.

… According to the research, teams outperform individual decision makers 66% of the time, and decision making improves as team diversity increases. Compared to individual decision makers, all-male teams make better business decisions 58% of the time, while gender diverse teams do so 73% of the time. Teams that also include a wide range of ages and different geographic locations make better business decisions 87% of the time.

… We also found that diverse groups are more likely to encounter operational friction when executing business decisions. In short, less diverse teams make worse decisions, and then diverse teams struggle to put their decisions into action. The worst situation is to have an all-male team make a decision that is executed by a gender-diverse group. This worst-of-both-worlds combination underperformed by 15%. In contrast, our analysis found that the most inclusive decision-making and execution teams performed 60% better than average.

A 2014 study reviewed the relevant literature and found the following benefits of diversity (while admitting that managing diversity is difficult, but doable):

Diversity stimulates innovation and productivity and creates a world class culture that can outperform the competition.

A multicultural organization is better suited to serve a diverse external clientele in a more increasingly global market. Such organizations have a better understanding of the requirements of the legal, political, social, economic and cultural environments of foreign nations (Adler, 1991).

In research-oriented and hi-tech industries, the broad base of talents generated by a gender-and ethnicdiverse organization becomes a priceless advantage. “Creativity thrives on diversity” (Morgan, 1989).

Multicultural organizations are found to be better at problem solving, possess better ability to extract expanded meanings, and are more likely to display multiple perspectives and interpretations in dealing with complex issues.

Organizations employing a diverse workforce can supply a greater variety of solutions to problems in service, sourcing, and allocation of resources.

Employees from diverse backgrounds bring individual talents and experiences in suggesting ideas that are flexible in adapting to fluctuating markets and customer demands.

A diverse collection of skills and experiences (e.g. languages, cultural understanding) allows a company to provide service to customers on a global basis.

A diverse workforce that feels comfortable communicating varying poitns of view provides a larger pool of ideas and experiences (pg. 83).

Finally, a 2016 Harvard Business Review article provides a nice rundown of several important studies on diversity:

A 2015 McKinsey report on 366 public companies found that those in the top quartile for ethnic and racial diversity in management were 35% more likely to have financial returns above their industry mean, and those in the top quartile for gender diversity were 15% more likely to have returns above the industry mean.

In a global analysis of 2,400 companies conducted by Credit Suisse, organizations with at least one female board member yielded higher return on equity and higher net income growth than those that did not have any women on the board.

… People from diverse backgrounds might actually alter the behavior of a group’s social majority in ways that lead to improved and more accurate group thinking. In a study published in the Journal of Personality and Social Psychology, scientists assigned 200 people to six-person mock jury panels whose members were either all white or included four white and two black participants. The people were shown a video of a trial of a black defendant and white victims. They then had to decide whether the defendant was guilty. 

It turned out that the diverse panels raised more facts related to the case than homogenous panels and made fewer factual errors while discussing available evidence. If errors did occur, they were more likely to be corrected during deliberation. One possible reason for this difference was that white jurors on diverse panels recalled evidence more accurately.

Other studies have yielded similar results. In a series of experiments conducted in Texas and Singapore, scientists put financially literate people in simulated markets and asked them to price stocks. The participants were placed in either ethnically diverse or homogenous teams. The researchers found that individuals who were part of the diverse teams were 58% more likely to price stocks correctly, whereas those in homogenous groups were more prone to pricing errors, according to the study, published in the journal PNAS. Diverse teams are more likely to constantly reexamine facts and remain objective. They may also encourage greater scrutiny of each member’s actions, keeping their joint cognitive resources sharp and vigilant.

… Greater diversity may also change the way that entire teams digest information needed to make the best decisions. In a study published in the Personality and Social Psychology Bulletin, Katherine Phillips of Northwestern University and her team divided sorority or fraternity members into four-member groups, each of which had to read interviews conducted by a detective investigating a murder. Three people in every group, referred to as “oldtimers” in the study, came from the same sorority or fraternity, whereas the fourth, the so-called “newcomer,” was either a member of the same sorority or fraternity or a different one. The three oldtimers in each group gathered to decide who was the most likely murder suspect. Five minutes into their discussion, the newcomer joined the deliberation and expressed their opinion as to who the suspect was. It turned out that although groups with out-group newcomers felt less confident about the accuracy of their joint decisions, they were more likely to guess who the correct suspect was than those with newcomers who belonged to the same group.

…In a study published in Innovation: Management, Policy & Practice, the authors analyzed levels of gender diversity in research and development teams from 4,277 companies in Spain. Using statistical models, they found that companies with more women were more likely to introduce radical new innovations into the market over a two-year period.

In another study, published in Economic Geography, the authors concluded that increased cultural diversity is a boon to innovativeness. They pooled data on 7,615 firms that participated in the London Annual Business Survey, a questionnaire conducted with the UK capital’s executives that asks a number of questions about their companies’ performance. The results revealed that businesses run by culturally diverse leadership teams were more likely to develop new products than those with homogenous leadership.

Though you may feel more at ease working with people who share your background, don’t be fooled by your comfort. Hiring individuals who do not look, talk, or think like you can allow you to dodge the costly pitfalls of conformity, which discourages innovative thinking.

“How, precisely, is diversity our strength,” you ask, Tucker? See above. And see here, here, and here.

Career, Community, Cause

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That’s what most employees want out of their place of work, according to a recent Harvard Business Review blog post. The authors write,

If [Abraham] Maslow were designing his pyramid from scratch today to explain what motivates people at work, beyond the basics, what would it look like? That’s a question we set out to answer at Facebook, in collaboration with our people analytics team.

We survey our workforce twice a year, asking what employees value most. After examining hundreds of thousands of answers over and over again, we identified three big buckets of motivators: career, community, and cause.

Career is about work: having a job that provides autonomy, allows you to use your strengths, and promotes your learning and development. It’s at the heart of intrinsic motivation.

Community is about people: feeling respected, cared about, and recognized by others. It drives our sense of connection and belongingness.

Cause is about purpose: feeling that you make a meaningful impact, identifying with the organization’s mission, and believing that it does some good in the world. It’s a source of pride.

These three buckets make up what’s called the psychological contract — the unwritten expectations and obligations between employees and employers. When that contract is fulfilled, people bring their whole selves to work. But when it’s breached, people become less satisfied and committed. They contribute less. They perform worse.

Here are a few interesting bits from their survey:

  • “Contrary to the belief that Millennials are more concerned with meaning and purpose, we found that younger people cared slightly less about cause — and slightly more about career — than older people. In fact, people ages 55 and above are the only group at Facebook who care significantly more about cause than about career and community. This tracks with evidence that around mid-life, people become more concerned about contributing to society and less focused on individual career enhancement.”
  • “Our engineers care a lot about community, giving it an average rating of 4.18 on a 1-5 scale. And just as we saw with age and location, across functions people rated career, community, and cause as similarly important.”
  • Career ekes out ahead in virtually every group, except among Latin Americans (just barely), Western Europeans (career and community are almost identical), and those 55 and above.

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The DR Book Collection: Catch-Up #5

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This is part of the DR Book Collection.

I’m once again behind on my book reviews, so here’s a list of the books I’ve read recently, their descriptions, and accompanying videos.

Image result for a universe from nothingLawrence M. Krauss, A Universe From Nothing: Why There Is Something Rather Than Nothing (Free Press, 2012): “Bestselling author and acclaimed physicist Lawrence Krauss offers a paradigm-shifting view of how everything that exists came to be in the first place. “Where did the universe come from? What was there before it? What will the future bring? And finally, why is there something rather than nothing?” One of the few prominent scientists today to have crossed the chasm between science and popular culture, Krauss describes the staggeringly beautiful experimental observations and mind-bending new theories that demonstrate not only can something arise from nothing, something will always arise from nothing. With a new preface about the significance of the discovery of the Higgs particle, A Universe from Nothing uses Krauss’s characteristic wry humor and wonderfully clear explanations to take us back to the beginning of the beginning, presenting the most recent evidence for how our universe evolved—and the implications for how it’s going to end. Provocative, challenging, and delightfully readable, this is a game-changing look at the most basic underpinning of existence and a powerful antidote to outmoded philosophical, religious, and scientific thinking” (Amazon).

Image result for alive at workDaniel M. Cable, Alive at Work: The Neuroscience of Helping Your People Love What They Do (Harvard Business Review Press, 2018): “In this bold, enlightening book, social psychologist and professor Daniel M. Cable takes leaders into the minds of workers and reveals the surprising secret to restoring their zest for work. Disengagement isn’t a motivational problem, it’s a biological one. Humans aren’t built for routine and repetition. We’re designed to crave exploration, experimentation, and learning–in fact, there’s a part of our brains, which scientists have coined “the seeking system,” that rewards us for taking part in these activities. But the way organizations are run prevents many of us from following our innate impulses. As a result, we shut down. Things need to change. More than ever before, employee creativity and engagement are needed to win. Fortunately, it won’t take an extensive overhaul of your organizational culture to get started. With small nudges, you can personally help people reach their fullest potential. Alive at Work reveals:

  • How to encourage people to bring their best selves to work and use their greatest strengths to help your organization flourish
  • How to build creative environments that motivate people to share ideas, work smarter, and embrace change
  • How to enhance people’s connection to their work and your customers
  • How to create personalized experiences that help people feel a deeper sense of purpose

Filled with fascinating stories from the author’s extensive research, Alive at Work is the inspirational guide that you need to tap into the passion, creativity, and purpose fizzing beneath the surface of every person who falls under your leadership” (Amazon).

Image result for saints slaves and blacksNewell G. Bringhurst, Saints, Slaves, & Blacks: The Changing Place of Black People Within Mormonism, 2nd ed. (Greg Kofford Books, 2018): “Originally published shortly after the LDS Church lifted its priesthood and temple restriction on black Latter-day Saints, Newell G. Bringhurst’s landmark work remains ever-relevant as both the first comprehensive study on race within the Mormon religion and the basis by which contemporary discussions on race and Mormonism have since been framed. Approaching the topic from a social history perspective, with a keen understanding of antebellum and post-bellum religious shifts, Saints, Slaves, and Blacks examines both early Mormonism in the context of early American attitudes towards slavery and race, and the inherited racial traditions it maintained for over a century. While Mormons may have drawn from a distinct theology to support and defend racial views, their attitudes towards blacks were deeply-embedded in the national contestation over slavery and anticipation of the last days. This second edition of Saints, Slaves, and Blacks offers an updated edit, as well as an additional foreword and postscripts by Edward J. Blum, W. Paul Reeve, and Darron T. Smith. Bringhurst further adds a new preface and appendix detailing his experience publishing Saints, Slaves, and Blacks at a time when many Mormons felt the rescinded ban was best left ignored, and reflecting on the wealth of research done on this topic since its publication” (Greg Kofford).

Image result for out of poverty powellBenjamin Powell, Out of Poverty: Sweatshops in the Global Economy (Cambridge University Press, 2014): “This book provides a comprehensive defense of third-world sweatshops. It explains how these sweatshops provide the best available opportunity to workers and how they play an important role in the process of development that eventually leads to better wages and working conditions. Using economic theory, the author argues that much of what the anti-sweatshop movement has agitated for would actually harm the very workers they intend to help by creating less desirable alternatives and undermining the process of development. Nowhere does this book put ‘profits’ or ‘economic efficiency’ above people. Improving the welfare of poorer citizens of third world countries is the goal, and the book explores which methods best achieve that goal. Out of Poverty will help readers understand how activists and policy makers can help third world workers” (Amazon).