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Does Economic Insecurity Make Employees Less Innovative? You Bet – And Here’s Proof.

November 13th, 2017

In a fascinating new research paper “Does Economic Insecurity Affect Employee Innovation,” three American economists offer up some cautionary advice  for those advocating that firms – and economies – must spend much more to foster innovation.

Unless those actually doing the innovating personally feel economically “safe,” warn the authors, the quality of their innovations will significantly suffer.

In the 7 years since my book SPARK came out, detailing the economic costs to companies of poorly-considered and far-too-often counterproductive layoff decisions, I have spoken at a lot of MBA schools and to groups of CEOs and executives from Newfoundland to California.

Especially from students, and increasingly over the years, I get questions along the lines of “what’s the big deal with your emphasis on steady work? It’s disappearing and we all just have to live with it.

Of course, these MBA students may “get it” at the personal level, to some extent, because many have experienced layoffs within their families and have seen the incredible pain and trauma that layoffs create.

But as executives-in-training, they seem to be increasingly internalizing layoffs (with the resulting economic insecurity) and the ebb-and-flow of their employee base as simply part of doing business in …. call it what you  want …. a 21st century economy of the precariat, an AI world, the gig economy, job-sharing for all, Uberization and on and on.

I sense they find it all pretty quaint when I put up this quote from 1944 by James Lincoln, co-founder of Lincoln Electric (the incredibly successful and profitable Fortune multinational that I profiled in my book, which, by company policy, hasn’t laid an employee off in nearly a century.)

It is no part of management responsibility to be merely kind to workers. Managers are  responsible for efficiency in their industry .. efficiency depends on human cooperation .. cooperation (demands that) the fear of losing income will be eliminated … this can only be done by guaranteeing no layoffs.

Lincoln was no social reformer. He was a tough businessman, entrepreneur and innovator. And he was convinced that the economic security of his employees was one of the key determinants of his firm’s successful growth and profitability.

The other key was relentless technological innovation. Lincoln also believed the two were inextricably linked.

Much of the focus on spurring economic growth these days emphasizes the need for firms, broad economic sectors and even nations to invest more heavily in innovation.

But what happens to innovation if the employees in those firms are overly worried about losing their jobs? Keeping up mortgage payments? Saving for retirement?

Innovation suffers. Significantly.

This new incredibly detailed analysis looks at the changes in an employee’s economic security (with the value of his home used as a proxy) over the past two decades in the US (through the 2008 financial crisis) and the changes in the rate of patents (i.e. innovations) granted to that employee. It indicates that the more employees are worried about their economic well-being, the less they innovate for the good of their employer.

In a nutshell:

* The larger the drop in the value of an employee’s home during the crisis, the fewer patents she or he earned and the lower the quality of those  patents.

* Those fewer patents were less likely to be in new technological areas for their firm and were less likely to reflect wider technological changes in their industry.

* Those patents were less likely to be in innovative and potentially high-impact new fields where a firm’s future might be guaranteed.

When innovation appears in the media these days, it almost invariably quotes the new VP-for-Innovation in a firm announcing a multi-million dollar commitment for research spending.

As the authors of this paper make clear, that VP would be well-advised to focus just as much on ensuring that her lower-ranked employees are feeling safe about their individual economic futures –through strategies including better compensation and increased job security.

Because these are the people actually doing the innovating.

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