Thursday, December 09, 2004

Market Forces and Effort

System Diagram - Supply and Demand Causally Linked to PriceIn a rational world, we might expect people to work harder when there is more demand for their labour, and take a rest when there is less demand. A recent study focused on taxi drivers because they have considerable autonomy over the number of hours they work. (Many other workers have rather less autonomy, and so their preferences are less easy to discern from their behaviour.)

We may suppose there is more demand for taxis when it is raining. Although taxi fares are fixed, economic theory still predicts some rebalancing of supply and demand. The total cost of a taxi ride to the passenger is higher when it is raining. This is because it takes longer to find a taxi, and it takes longer for the taxi to reach your destination (because of other traffic). The taxi-driver earns more money in an hour, because the cab is occupied most of the time. (On a sunny day he might drive around empty while people prefer to walk.) We should expect supply to go up, as taxi drivers work longer hours to take advantage of the higher demand. We might also expect taxi drivers to find leisure a more attractive option when the weather is good.

But this is not how taxi drivers behave. Many set themselves a daily revenue target, and they work until they have reached this target. On a rainy day, they reach this target more quickly and therefore go home earlier. They actually work longer hours on sunny days when business is slow.
source: BBC Radio Four
The Economy on the Couch
(December 2nd, 2004)

We can draw several important lessons from this.
  1. People's behaviour cannot always be explained by economic theory. (Empirical observation of people and organizations may produce surprising results.)

  2. In particular, economic incentives to work harder are not always effective. (Arguments for higher remuneration are almost always based on moral persuasion or political power rather than rational economics. This applies equally to executive pay and to shopfloor pay.)

  3. The behaviour of a system may depend critically on the policies by which people choose to govern their behaviour. (In our example, the daily revenue target acts as a personal policy for each driver.)

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