Economics 06/03/2010: Do friendships matter in a workplace?

An interesting article on workplace organization/networks and productivity of workers, forthcoming in the next month's issue of Review of Economic Studies, Vol. 77, Issue 2, pp. 417-458, April 2010 (link here; authors: Bandiera, Oriana, Barankay, Iwan and Rasul, Imran, Social Incentives in the Workplace).

The article shows evidence that social incentives in the workplace, namely the effect of the presence of those that workers are socially tied to on their own productivity, matter a great deal.
Controlling for possible workplace externalities, such as co-sharing of tasks and technology, the authors combine data on individual worker productivity with information on each worker’s social network of friends in the firm.

"We find that compared to when she has no social ties with her co-workers, a given worker’s productivity

• is "significantly higher when she works alongside friends who are more able than her", and
• significantly lower when she works with friends who are less able than her.
  

Social incentives imply that

1. workers who are more able than their friends are willing to exert less effort and forgo 10% of their earnings (in other words - they have 10% lower productivity);
   
2. workers who have at least one friend who is more able than themselves are willing to increase their effort and hence productivity by 10%.

The distribution of worker ability is such that the net effect of social incentives on the firm’s
aggregate performance is positive.

These are interesting results and have implications for organizational structure of the workplace. They suggest that

• workplace arrangements that reduce social interaction between heterogeneous workers (e.g. extremely dis-franchised workplaces with nomadic flows of temporary workers and workers who are not anchored to a specific location) might suboptimally reduce productivity;
  
• peer pressure within social networks is mean-convergent, with lower quality human capital being pushed up the quality chain and higher quality human capital being compressed downward;
• more heterogeneity in social networks would suggest a higher productivity mean; and
  
• workplaces that discourage social interactions are also potentially reducing productivity.

The aspects that are descriptive of the strength of social interactions used by the authors include pre-existing friends as co-workers, reciprocal friends, sharing in supermarket shopping, eating together, lending/borrowing money and sharing problems with each other.

Since social effects on productivity can counteract each other (e.g. due to mean convergence, better workers might reduce productivity while poorer workers might increase it), there is a clear need to align pay rewards structures with the nature of the workplace setting and the extent and nature of social interactions that can be supported by the workplace. The results suggest that:

• more depersonalized, less interactive workplace settings should use greater pay incentives geared toward lower quality workers (wage compression);
• less depersonalized and more socially interactive workplaces should reward higher performers more (to counter potential quality of worker compression through wage widening)