Wednesday, 10 August 2011

Horrible Bosses

Consider a model of individual labour supply, and make the following assumptions:
  • all else equal, workers prefer a higher wage to a lower one;
  • all else equal, workers prefer to work in a region that is culturally and linguistically familiar to them;
  • all else equal, high-human-capital workers prefer to work in an intellectually exciting environment close to other high-human-capital workers;
  • workers hold these preferences to different degrees, which implies variable willingness to trade-off one attribute for another.
Do any of these assumptions seem outrageous? I would claim that so far, this is just a statement of the bleeding obvious.

Now place these workers in a small, isolated country like New Zealand with no large (2 million plus) cities, a country with a well-functioning education system, but with productivity lower than a number of other countries with very similar culture and language. It is an automatic result of the above assumptions that wage differentials between the small economy and the larger, richer, but culturally similar countries would drive an exodus of skilled workers. It is also an automatic result of those assumptions that the supply of such workers would not be perfectly elastic implying that the wage differentials would be narrowed but not eliminated by foreign competition.

And, it is an unfortunate implication of these assumptions that the small country will face an unpleasant trade-off: Retaining high-quality workers will require competitive after-tax remuneration, which, given the overall lower productivity relative to similar countries, will require greater income inequality. A strong preference for unique cultural non-pecuniary attributes of staying in the country will mitigate some of that effect, but the desire of high-human-capital workers to be closer to intellectually exciting hubs will exarcebate it.

With that background, consider this article about bad New Zealand management practices in the most recent, Sunday Star Times.
Auckland University Business School economics associate professor Dr Rhema Vaithianathan said Kiwi bosses are “strikingly bad” and better training is needed to halt the monthly exodus of thousands of workers.

She said a Ministry of Economic Development survey of 152 firms revealed our managers were among the worst in the world for their inability to recruit, promote and keep "high talent" staff.

“New Zealand's management scores are not good – in fact they might be the most significant reason for losing so many people to Australia – and it’s time we accepted the fact and did something about it,” Vaithianathan said.
This article was picked up by Chris Trotter in yesterday’s Press (not online yet), suggesting that the study shows that we should turn our attention away from the prescriptions of the right and focus on our bad managers if we want to increase productivity.

But what did the MED study actually say? It describes “people management” as being “the weakest area for New Zealand” and that “its practices around addressing poor performers, promoting and retaining high performers trail the most in terms of global ranking”. Exhibit 23 here shows what these bad management practices are. It seems that New Zealand is not good at promoting the best performers, rewarding them well, moving weak performers out of important areas, and doing “whatever it takes to retain top talent”. In all but one of these categories considered, the top country for this is the U.S. Put simply, the conclusion seems to be no different from that implied by the simple labour market model above: if we want to retain top talent in New Zealand, we need much more US-style inequality within organisations.

I’m not sure if this conclusion is correct; I suspect that the unpleasant arithmetic of the labour market model implies that there wouldn’t be the same payoff to New Zealand firms seeking to retain talented staff as would apply in larger, richer countries, which might explain the results of the MED survey. But it does seem surprising to see a commentator like Chris Trotter recommending greater inequality as a prescription from the left!



  1. What on Earth was Trotters solution? Legislate better management?

  2. What on Earth was Trotters solution? Legislate better management?

    Perhaps German-style worker participation in management.

  3. @ kiwi dave

    If you take the MED study as the basis for your prescription, then, although Germany ranked much higher than New Zealand, their score in terms of "best practice" was well behind the U.S., which would seem to imply that we need to institute U.S.-style human resource policies, whatever they are. But of course, that depends heavily on the "if" at the start of the sentence.

  4. @ Seamus

    Hey, it's not my prescription, I was just trying to interpret what Trottersky was thinking

  5. @ kiwi dave.

    I figured that that was almost certainly not your view; I was just noting what the riposte to that view would be.