Why the Fed Can’t Fix the Productivity Problem

Patrick Watson |

I’ve recently attended two important events.

One was our Mauldin Economics Strategic Investment Conference in San Diego, which was amazing as always. I heard some interesting economic ideas from top experts. (You can check the highlights in the SIC 2018 live blog.)

The other was gargantuan idea festival South by Southwest that’s loosely about technology—hard to describe, but always interesting.

Both events draw smart, creative people from many professions. This year, with the economy supposedly at “full employment,” I’ve paid extra attention to how people describe their work lives. I’ve picked up some useful insight, too.

Is this the so-called tight job market that might spark wage inflation? Maybe we should not blame the Fed and Trump.

The problem may be employers who don’t understand what makes their best workers tick.

Why Wage Inflation Won’t Spur Productivity

Flying to San Diego, I watched an old TED Talk on my phone by motivation expert Dan Pink. He discussed how people often don’t respond to rewards the way managers think they will.

This talk is from 2009, but I think it’s even more relevant today.

According to Pink, monetary incentives work best for repetitive, rules-based jobs. Yet, these motivators (“If you do this, then you get that”) often reduce productivity in cognitive and creative jobs.

Obviously, that’s not what managers want.

So why is this happening?

The reason, Pink says, is that bonuses, commissions, and the like make you narrow your focus. You concentrate on delivering the results that will get you the reward.

That’s fine in jobs involving manual labor, certain kinds of accounting, some computer programming, and financial analysis.

But those jobs are also the ones being most rapidly automated. So, a higher proportion of workers are now in more creative roles, where narrowing your focus to get your reward is counterproductive. The company needs you to look for answers in unexpected places. “If-then” pay systems don’t inspire that.

This is a problem. Businesses aren’t getting productivity, so they replace worker X with worker Y and get the same result. That costs money and disrupts lives.

What Motivates Employees

Dan Pink said this in his 2009 TED talk:



There is a mismatch between what science knows and what business does. And what worries me, as we stand here in the rubble of the economic collapse, is that too many organizations are making their decisions, their policies about talent and people, based on assumptions that are outdated, unexamined, and rooted more in folklore than in science. And if we really want to get out of this economic mess, if we really want high performance on those definitional tasks of the 21st century, the solution is not to do more of the wrong things, to entice people with a sweeter carrot, or threaten them with a sharper stick. We need a whole new approach.

If sweeter carrots aren’t the right motivator in today’s jobs, what is? Pink says we all want three things:

  • Autonomy—the urge to direct our own lives
  • Mastery—the desire to get better and better at something that matters
  • Purpose—the yearning to do what we do in the service of something larger than ourselves

If you wonder where money fits into that, it’s part of autonomy. People want to be comfortable and independent. Pink says wise employers get the money question off the table immediately. Pay people a fair wage, then start motivating them in other ways.

While that method may not succeed with every worker, employers who try it report good results.

Results Add Up

If the research and results are so clear, why don’t more employers do what Pink suggests?

Profit-focused executives may think everyone else is just like them: “I want more money, so they must want more, too.” But research says that’s not always the case.

Creative people do want more, but not necessarily more money. They want more autonomy, more self-improvement opportunities, more purpose in their jobs. They want to feel valued and respected.

Managers should love this—spend less cash and get better results—yet, for some reason, many are really bad at it.

As a result, a significant chunk of the economy is operating at low productivity. The output isn’t what it should be… and we see the results in low economic growth.

This isn’t something the Fed can fix. It will require a bottom-up change in the way business owners and managers think.

Yes, change is hard. And Dan Pink’s ideas aren’t necessarily right for every business. But if your company has a productivity problem—and the national stats suggest it probably does—then maybe you should try something different.

As the old saying goes: If you keep doing what you’ve always done, you’ll keep getting what you always got.

It’s Hard to Measure

As employers realize these non-traditional rewards can work better, it might start affecting our economic data.

Right now, economists look mostly at cash compensation: average hourly earnings, household income, etc. But when people get “paid” in other ways, it may not show up in those statistics, which could lead to wrong conclusions and policy errors.

In fact, it’s happening already as benefits like healthcare become a bigger part of compensation in many companies. Those are hard to measure in aggregate data.

That gets back to John Mauldin’s point: Our economic data is not as clear or reliable as it might appear. Evaluating it takes some thought... and we all ought to give it some.

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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