Bad management

Managers are strong complements to workers; with bad managers, everyone's productivity goes down the toilet.

Eli Dourado reckons the cost of managerial complements makes a case for zero marginal product workers: the worker might be producing more value than he's taking home in pay, but not enough to cover the cost of the manager that lets the worker produce positive-value products. Read the whole excellent post.

And we can see this when the managerial complement goes awry. Case in point: Mexico. 

Mexico City’s Buena Vista Walmart is the first super-market I’ve ever seen paralised by a trolley-jam. It is not more busy than any other large city supermarket, and not understaffed. No: the reason it takes ten minutes to walk from one side of the store to the other every single night is because they have no baskets—only large trolleys. To my sample of Mexican Walmarts, this is unique; most Mexican Walmarts have trolleys and baskets. And so the error must have been made by the managers of that particular outlet. Of course, this is only a small example of inept management in Mexico, but it’s sadly representative—labour productivity in Mexico is about a third of that in the US. If Mexico were as well managed as the US, it would be as rich.

This all raises a few questions: why are managers in Mexico (and the developing world in general) so terrible? why are those in the US so good? and how much of the difference is able to be affected by policy?

James Savage chalks it up to Mexico's caste system, nepotism / seniorism, and an awful school system. If your first worry is about hiring somebody who won't steal from you, you'll weight connections over competence. But again, read the whole post and despair at the morass of interlocked problems that reinforce each other and make solutions difficult. Foreign firms coming in and bringing with them stronger demand for competence has to be part of the solution, but the Walmart example suggests it might take a while.

Air Canada provides a different problem. Here's Josh Gans, lamenting just how awful Air Canada is compared to what he's been used to in Australia. Where Virgin in Oz had in-flight face painting for the kids at the back of the plane - effectively in-flight child entertainment far away from the parents - Air Canada seemed determined to make sure his family of 5 were separated throughout the plane. Josh very nicely explains the obvious points about just how terrible it is for all fliers that Air Canada made it impossible for him to sit beside his kids; it would be surprising if Air Canada's gains in forcing families to book through the Air Canada system outweighed the losses they get from ruining everybody else's flight.

The less sinister explanation is that Air Canada have a very poorly executed booking and flight reservation system. Someone, somewhere forgot about families and deep in the code there is no way for Air Canada to sort out the mess. My bias is on incompetent planning rather than evil attempts at price discrimination in these matters.

This is observationally equivalent to my hypothesis, formed about a decade ago and now potentially out of date: a too-large proportion of Air Canada staff actively hate the passengers.

I don't think Josh's explanation is sufficient; Air Canada could always choose to release third-party booked seat allocations more than 24 hours ahead of flights. And my "they hate the passengers" explanation is not only more plausible than that it's profit maximizing to impose potentially massive costs on full-fare paying flyers to keep price-sensitive families from using aggregators, it's also parsimonious, explaining much of the overall Air Canada experience.

Again, like James's Mexico problem, we've got a set of interlocking issues: this time around union rules, seniority, effective domestic monopolies, and government bailout backstops making for soft budget constraints. But this one seems easier to unravel. Canada could unilaterally allow cabotage on its routes instead of waiting for a bilateral agreement with the States. Let Virgin America run intra-Canada flights, drive Air Canada into bankruptcy, sell off the planes to new entrants, and start over with new management that doesn't hate passengers.

I'll continue to be very happy with Air New Zealand (regardless of changes to its AirPoints upgrades system), and even more happy with Emirates on the Trans-Tasman.

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!