September 27, 2011
Labor Mobility and productivity
To an economist, the idea that labor mobility increases productivity is fairly intuitive. It comes from at least two sources: First, a worker with increased skills in one setting can bring those skills to a new place, enhancing the productivity of that new place. Workers don’t work in isolation, and the people around them in both setting gain from learning. Both places emerge with higher productivity. Second, the skills learned in one specific place can lead to innovation in another. A worker with a specific skill in, say, commercial roofing, can bring new ideas in safety, efficiency and quality to residential roofing. Of course it works both ways, and both industries emerge better.
From a regional economic development standpoint, a certain level of labor mobility is required to bring about regional productivity growth. It is well understood that regional productivity leads to wage growth (i.e. individual wealth creation) but less clear if it leads to overall business profitability. This interesting study, published in spring 2011, settles the question. Labor mobility DOES lead to business growth, through higher return-on-assets (or ROA).
This has a dramatic effect on states with cultures that overly reward loyalty—such as a cultural mindset that prizes lifelong employment, steady-as-she-goes lifestyles or structural devices such as an over-emphasis on seniority protection in labor unions or “golden handcuff” contracts with executives. These states have lagged in productivity, in profitability and in wage growth.
Individual companies should enhance cross-training and rotation programs, and reward managers and employees who use those programs. Even a small firm can experience this by introducing small changes in the work environment that cause people to move, to have to re-evaluate, or to work near new people. When a company is looking to expand to a new area, they can consider the labor mobility personality of the various locations, and avoid settings where people simply get locked into place, and have slow growth.
