[SERI COLUMN] An invisible influence on productivity

The term “peer effect” refers to the influence of the behavior and way of thinking of those around you.

For example, the preference for top school districts reflects a belief that students will study harder if they are with peers with better school records. The peer effect occurs when one tries to abide by a norm and follows a role model. Abiding by a norm occurs when a peer’s actions are followed to avoid social penalties, such as being ostracized. In following a role model, actions and behaviors of an exemplary peer are adopted. For example a student may use the same reference book as an outstanding classmate.

In a company, the peer effect can explain different levels of productivity. This process was described in a Journal of Labor Economics report in 2006 titled “Clean Evidence on Peer Effects.” In the study, 24 high school students in Switzerland were assigned the task of stuffing letters in envelopes.

The testing was done in pairs and individually: 16 students were paired up, while eight students worked alone in separate rooms. Those who worked alone stuffed an average of 190 envelopes in four hours. Those working in pairs stuffed an average of 221 envelopes each, 16.3 percent more than the solo students. The 31-envelope difference indicates that positive peer effect can lead to greater productivity.

To facilitate peer effect, three factors are needed: an optimal mix of workers who can collectively maximize peer effect, a work environment in which peers can observe each other, and encouragement or evaluation and compensation.

In terms of peer combination, workers with different productivity levels - rather than those with similar productivity levels - should be put together. Such a workforce mixture enables employees with low productivity to study the work habits of colleagues with higher productivity. There is also peer pressure on each worker to raise individual productivity levels. In “Peers at Work,” published in the American Economic Review in 2009, Alexandre Mas and Enrico Moretti investigated how cashiers influenced each other in supermarkets. One of the seven cashiers at the store was replaced by someone with high productivity. The overall productivity of the other six cashiers subsequently increased.

The second factor for an ideal mix of personnel is to consider intimacy among peers. Enhancing the closeness of peers facilitates a higher sense of mutual responsibility and forms a mutual norm, thereby raising team performance.

An organization can use team sports competition to enhance unity and productivity. There are also studies that if one has a friend on the team then the person’s productivity levels align with those of the friend.

It is necessary to consider relationships among colleagues in order to prevent negative peer effect. If a substitute relationship exists, work can be completed even if an employee does not do his or her share. Thus, a high level of productivity from one employee can lead to a decline in the productivity of a co-worker. Let’s compare two situations at a bank. In the first one, a customer stands in line to receive service at a specific bank window. In the second scenario, a customer takes a number and waits for it to be called, not knowing which window she will eventually go to (the latter being a substitute relationship). The first scenario will more likely lead to an increase in productivity. Meanwhile, if workers are in a complementary relationship (a task cannot be completed when an employee fails to perform), productivity enhancement by one worker can lead to higher team productivity.

An analysis of Major League baseball statistics reflects peer effects stemming from complementary and substitute relationships, as is described in “Interactions Between Workers and the Technology of Production: Evidence from Professional Baseball” published in the Review of Economics and Statistics in 2009.

A player’s batting performance significantly increases to match the batting performance of other players on the same team, but it decreases with the pitching quality of the pitcher of the same team.

The second condition is having a work environment where observation among co-workers is possible. To foster a positive peer effect, one should be able to see how others work. This allows employees to learn from each other, which in turn can induce a sound peer pressure. This was also the case in the supermarket case cited in Peers at Work, where a cashier who was far away from a highly capable cashier didn’t improve productivity due to an absence of peer pressure.

The third condition is proper motivation, a system whereby one evaluates a co-worker spurs positive peer effect. When there is a mutual evaluation, there will be higher incentive to help one’s co-worker, which will result in higher team productivity. To create greater positive peer effect, a company should take advantage of such evaluations and team compensations.

Peer effect is an effective means to raise productivity without making huge monetary investments. An organization should attempt to maximize positive peer effect by addressing the three necessary conditions. A wrong mix will result in a negative peer effect. At the same time, it is necessary to examine ways to prevent peer effect from declining due to the emergence of new trends such as telecommuting.

*The writer is a research fellow at Samsung Economic Research Institute. For more SERI reports, please visit www.seriworld.org.

By Cho Hyun-Kuk