On a warm September day, thousands of New Yorkers paraded down Fifth Avenue with banners declaring sentiments such as “Plutocracy Steals Our Souls and Then Calls Us the Great Unwashed.” One of the first mainstream critiques of the American Dream demanded higher standing for the majority of the population and commanded the attention of the public in order to reevaluate the state of labor.
No, we are not talking about Occupy Wall Street; rather, this is the scene from Labor Day, 1910. Yet it may as well have been from modern times. Just this year, Vice.com and Gawker announced that they would unionize, signaling a continued disbelief that companies have even white-collar employees’ best interests at heart. While a century ago Labor Day represented a mixture of both protest and celebration, today Labor Day has lost its meaning. Workers across the country are largely pessimistic.
Yet with unionization picking up speed and national debate over minimum wage sparking daily headlines, focus on the current state of labor is clearly still warranted. While metrics like “employee engagement” are increasingly valued, employees are at the same time subjected to intense pressure to work longer hours or increase sales.
The irony is that none of these tactics work towards enhancing either company longevity or societal health. Instead, we believe that an updated and constructive vision of Labor Day must acknowledge both employee wellbeing and economic prosperity through focusing on one of the most important factors in determining widespread societal health: productivity.
Productivity, rather than current GDP, is perhaps the most predictive metric of future GDP. Put simply, economic output is a function of input (human capital and monetary capital investment) multiplied by total factor productivity, or TFP. Much of our growth in the United States has been due to increases in TFP, in part due to more educated, skillful workers, and improved technology. However, TFP growth in the U.S. is actually decreasing. To understand TFP and how it relates to macroeconomic growth, let’s use the example of a lemonade stand.
Imagine that Mira and Jimmy both have lemonade stands on their street. They have both invested the same amount of money in lemons, sugar, water, cups, and equipment, yet somehow Mira is selling more lemonade in the same amount of time. This could be due to a number of factors; perhaps Mira learned a way to squeeze more juice from each lemon, or is more efficient with her time. Whatever the case, with the same amount of input, Mira’s output is greater than Jimmy’s output, despite having the same initial input. She has a higher TFP.
What does that do for Mira? Well, she can undercut her price, making her more competitive, or she can hire more people to further increase her output. She can work less, improving her quality of life, or she can invest more in research and development. Mira’s higher TFP leads to a positive feedback loop, causing her to outcompete other lemonade stands in the neighborhood and dominate the market.
This simple analogy can also be applied to companies and even entire countries. Companies track various forms of efficiency ratios (which really should be called productivity ratios) to do the same. Economists track TFP because it is one of the biggest indicators of long-term financial health. According to the World Bank, nearly half of cross-country income gaps can be attributed to differences in total factor productivity.
The Federal Reserve Bank of San Francisco has been tracking TFP for decades. Since at least the 1970s, the long-term trend for the growth rate of TFP has been decreasing. Even more alarming, the growth rate of TFP from services (non-equipment business output) has been decreasing even more rapidly. In other words, improvements to Jimmy’s lemonade stand are slowing down.
Economists aren’t sure why this is happening. Some say that TFP is an incomplete assessment of productivity, others posit that technology needs to be better harnessed, and others still believe that these decreases are merely a temporary issue. Yet there’s another factor that few are talking about: how we organize labor.
What if the root of the productivity paradox has to do with how we organize people at work?
A paradigm shift happened in the early 1980’s in how we manage organizations. Organizations began to value predictability above all else. Clockwork quarterly earnings became the sought after prize.
Unfortunately, the pursuit of predictability comes at a cost. In any variable, unpredictable, complex, and ambiguous (VUCA) environment, the more we try to design a predictable machine, the less that machine is able to adapt. After all, predictability requires an organization that sticks to its plan, while adaptability requires an organization that can diverge from its plan.
Think back to Mira and Jimmy’s lemonade stands. Maybe Jimmy’s parents told him that he has to pay them back at the end of every day for supplies and rent on their side-walk location. If he ever missed a payment, they would fire him and sell his business to Mira. How would Jimmy act? Would he take risks, test out new recipes, or explore new strategies? If tastes change, would he be prepared for it?
Researchers conducted a variation of this experiment, but instead of kids running simulated lemonade stands, the CEOs were 400 students at the Harvard Business School. One group of students were told they would earn a portion of the profits they made in all twenty rounds of the experiment, making them feel the importance of predictability. Another group was told they would earn nothing for the first ten rounds. Only during the last 10 rounds would they earn a percentage of the profits, encouraging adaptability.
By the final round of the lemonade game the more adaptive group earned 26% greater revenue than the more tactical group. Their advantage came from a willingness to experiment and refine their strategies, seeking a better way of working.
Unfortunately, the systems of performance in organizations today prize the tactical performance of predictability. When scaled to whole organizations, we are left with companies that have self-sabotaged their own ability to learn and adapt.
As a CEO, executive, or team leader, there are many things you can do to improve the adaptive performance and sense of loyalty among your people. Start by asking yourself the following four questions about your organization:
Are you tracking your productivity and, better still, your adaptability? Many large organizations focus primarily on the measures of their income statements and balance sheets, rarely tracking productivity or adaptability. One example of a measurement tracking adaptability is 3M’s NPVI—new product vitality index—which tracks how much of their revenue comes from products that are fewer than five years old.
Does your organization understand what adaptive performance is and how it is created? There are many resources that can help here, including our book on what drives adaptive performance Primed to Perform.
How are you helping your organization increase adaptability? We recommend using the total motivation(or ToMo) measurement and methodology, to measure and manage an adaptive culture.
What is the strength of your brand? In addition to being “satisfied,” customers should trust and love your company enough to buy a new product or pay a premium price.
Finally, treat Labor Day not just as a day off, but as an annual opportunity to reassess how your organization thinks of labor, performance, and growth. Through the lens of adaptive performance, we can enhance creativity, innovation, and productivity, leading to a more sustainable economy and labor force. With a more accurate model we can finally make the state of labor a cause for celebration—for both employers and employees.
Lindsay McGregor and Neel Doshi are co-authors of Primed to Perform (due out October 6th from HarperCollins), which explores the counterintuitive science behind high-performing cultures. They are also cofounders of Vega Factor, a company building technology to help organizations of all sizes and across sectors create high-performing cultures.