Hidden human capital and cost of staff turnover

More than century ago Henry Ford made an unusual offer. He guaranteed pay $5 per day (around $150 per day in today’s dollars) for eight hours of assembly line work for all workers at his production plant. At the time the offer was surprising and created a lot of hype. It was quite generous, roughly doubled workers’ pay. It went against common wisdom—labour is abundant, you could fire and replace workers in no time. Ford had his own views, based on the issue he faced. Ford standardised products and production processes at plants. The workers were not, turnover was high, and quality of products varied. Generous wage offer aimed at reducing workers turnover and maintaining this hidden human capital. Arguably, it paid off in a long run.

Century later economists got data to confirm Ford’s intuition and quantify the hidden cost of worker turnover. Recent article in Management Science “The Hidden Cost of Worker Turnover: Attributing Product Reliability to the Turnover of Factory Workers” combined data on weekly workers turnover at major electronic producer plant, and data on field failures of their electronic products. Result? For Each percentage point increase in the weekly rate of workers quitting from an assembly line, field failures increase by 0.74%–0.79%. These extra failures could total to striking 10.2% in the high-turnover weeks following paydays. The associated costs amount to hundreds of millions of U.S. dollars.

The issue seems to be even worse in new sectors economy, knowledge based. Search Cloud provider Sinequa published findings from a survey of 1,000 IT managers at large organizations in the UK and US to explore the impact the Great Resignation has on employee experience, productivity, and organizational risk. It showed that 64% felt that their organization already has experienced loss of knowledge due to people leaving the company. There is a concern that turnover could have a cumulative effect—56% of surveyed managers agreed it will hurt the organization’s ability to onboard new employees. Hidden human capital is not that visible, highly underappreciated, and could be quite costly to replace.

If data are not persuasive enough, here is a nice meme on newbie dealing with legacy products.

“When Nature Helps Scientists: Natural Experiments of History” ed Jared Diamond

Human history and societies left many question open—why Haiti and the Dominican Republic, which share the very same island of Hispaniola, are so radically different in their level of development? Why expansion of Western Territories in USA in 19th century was so explosive? Is it unique? What condition level of political development in Polynesian societies? How slave trade has affected long-term development perspectives of Africa?

Social scientists find themselves in disadvantaged position, comparing to natural scientists, physicians, or chemists—they have no luxury to run a controlled laboratory experiments, often considered to be the hallmark of the scientific method. On the one hand, they often deal with past. On the other hand, even if they could design such an experiment, it would be immoral and illegal. To make things even worse, social phenomena often are hard to measure (for instance, what are the measures for “happiness”, “development” or “stability”?) and involve many variables, which affect outcome. (Back in 1987 Jared Diamond wrote an excellent article “Soft sciences are often harder than hard sciences”, where he touch upon some of the issues).

However, Mother Nature often times offers her helping hand, in the form of “natural experiments”—serendipitous situations, when systems or groups are similar in many respects, but are affected differently by a treatment, random or quasi-random. This allows comparing two systems or groups and studying influence of the treatment factor. “Natural Experiments of History” is a collection of eight comparative studies drawn from history, archeology, business studies, economics, economic history, geography, and political science.

Book is easy to read and it is extremely thought-provoking. It offers broad sample of approaches to comparative history, using range of methods—from nonquantitative to statistical, range of compared subjects—from two in development Hispaniola island case to 233 areas in India, range of temporal comparisons—from past to contemporary societies, and wide geographic coverage. Behind all cases there is one simple idea—comparative analysis of natural experiments can be applied to the messy realities of human history, politics, culture, economics and the environment.

Short summary of all chapters is available on-line. Many chapters in this book are based on research papers, which could provide additional information about research methods used.