How setting the right goals can boost business productivity

business goalsBusinesses require motivated and productive employees. Monetary incentives, such as pay-for-performance schemes are a popular tool to encourage better employee performance. Another effective and much cheaper tool that has proved to lift employee performance is smart goal setting.

Whether assigned by management or self-chosen, goals are powerful motivators for workers, with the potential for boosting productivity in an organization. They work both with and without monetary incentives. However, if not chosen carefully or if used in unsuitable situations, goals can have undesired and harmful consequences, as Sebastian J. Goerg explains in a new IZA World of Labor article.

The economics of goal setting

Goals are everywhere in human life and organizations. In our private life we set goals for saving money and losing weight. At work, we may face sales goals, project milestones and production goals. Psychological research on goal setting has consistently shown that goals affect our behavior and that, if chosen wisely, goals can boost individual productivity.

More recently, economists have jumped on the goals bandwagon, adding formal theories to model the functioning of goals and bringing goals more in the focus of business managers. In particular, large technology firms such as Google, Intel, and Twitter have started to use goal-setting approaches to provide real-time feedback to their workers.

Economists agree that the two main drivers of employee motivation are their wages and the ambition to reach personal goals. Consequently, goals provide a reference point against which workers can compare their performances. Consequently, not reaching a personal goal reduces a workers satisfaction and utility.

Field experiment shows the effectiveness of goals

To prove the effectiveness of goals, Sebastian J. Goerg (Florida State University) and Sebastian Kube (University of Bonn) conducted a field experiment on goal setting in the library of the Max Planck Institute in Bonn. During the experiment roughly 35,000 books had to be found and moved from one shelf to another. Temporary workers hired for this one-time-only job did not know that they were part of an experiment.

The study revealed that workers who were assigned specific goals for the number of books to be located and re-shelved during a shift were 15% more productive than workers without goals. This experiment confirmed what many other studies on performance goals have documented: Specific and challenging goals lead to better performance than easy goals or do-your-best rules. Goals boost performance by motivating increased effort, a stronger focus on the task, and a reduction in on-the-job leisure.

Combining goals with monetary incentives

The library field experiment also investigated whether the impact varied, once goals were combined with monetary incentives. In one case, workers with self-chosen goals received the same piece-rate pay as in the baseline experiment while goals were chosen independently from this payment scheme. In another case, self-chosen goals had monetary consequences: workers received a bonus only if they reached their goal.

In both experiments with goals, whether workers were paid more for reaching their goals or not, workers were faster right from the start and needed significantly less time to find a book than those without goals. Thus this field experiment confirmed: Even when monetary incentives are already high, complementing those incentives with goal setting can improve performance.

Beware of negative side effects

But the goal-setting tool should be applied with caution. Setting the wrong goals can narrow one’s focus too much, thereby losing sight of other work aspects. Goals can also reduce cooperation in the workplace, increase risk taking and encourage unethical behavior. Nearly all studies on the negative side effects of setting goals have observed improved performance on the main task, but at the cost of adverse behavior in other dimensions.

One possible way to avoid adverse behavior is to include strong monitoring along with goal setting. However, workers could interpret increased monitoring as a sign of distrust and reciprocate by reducing their effort. So while monitoring might reduce the negative effects of goal setting, it might also reduce workers’ motivation and thereby the positive effects of goal setting.

Complex work environments call for SMART goals

Goal setting becomes especially tricky in complex working situations. In simple work environments, where output is determined by a single measurable input and where chances for adverse behavior are low, goals are both easy and effective. In more complex environments, goals need to be tailored to the specific situation. They should be specific, measurable, attainable, relevant, and timed (SMART).

  • Specific means a well-defined goal in an explicitly established unit of measurement (such as euros for revenue, pieces for output, and pounds for weight loss) as opposed to a simple “do your best” rule.
  • Measurable refers to the ability to observe progress so that an individual (and observer) knows how close goal attainment is.
  • A goal should be attainable, which means that an individual has a realistic chance of achieving the goal.
  • To be relevant, a goal needs to be meaningful and worth achieving for the individual or the organization.
  • And finally, timed implies that there should be some time limit for reaching the goal (for example, lose five pounds by the end of the month, or increase revenue by €100,000 in the first quarter of the year).

SMART goals should be embedded in broader organizational objectives that are communicated to workers. Clear communication between management and employees might help to calibrate goals so that they do not become too challenging and do not narrow the focus of attention too much. If managers take these aspects into account, goals can be a powerful tool to improve both productivity and employee satisfaction.

Read the complete article in IZA World of Labor:

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African Americans discriminated against in access to U.S. local public services

black-senderRequests for information from local public services, like sheriffs’ offices, school districts and libraries, across the United States are less likely to receive a reply if signed by ‘black-sounding’ names, according to new paper by IZA Research Director Corrado Giulietti, co-authored with IZA fellows Mirco Tonin and Michael Vlassopoulos from the University of Southampton.

The study finds that e-mail queries coming from senders with distinctively African American names are less likely to receive an answer than identical e-mails signed by ‘white-sounding’ names. Responses to ‘black-sounding’ senders were also less likely to have a ‘cordial’ tone, that is, respondents were less likely to address the sender by name or with a salutation (such as “Dear” or “Hello”).

“Despite the fact that prohibition of racial discrimination by the government is a central tenet of U.S. law, our finding shows that not all citizens are treated equally by local public service providers,” says Corrado Giulietti. “Local services constitute the majority of interactions between government institutions and citizens and perform central functions, for instance in education. The discriminatory attitude that our study uncovers could be one of the factors behind the disadvantaged position of black people in American society and could be a major obstacle towards addressing racial inequality.”

Jake Mueller and Greg Walsh vs. DeShawn Jackson and Tyrone Washington

The authors conducted what is known as a correspondence study, a well-established approach of detecting discrimination that has previously been used in contexts like job applications and the housing market.

Using this strategy, the researchers sent e-mails soliciting information relevant to access a public service, such as office opening hours or documentation needed for school enrollment, from 19,079 local public offices around the country. Targeted services include school districts, local libraries, sheriff offices, county clerks, county treasurers and job centers in every U.S. state. Four correspondent names (two to represent each ethnicity) were chosen as most distinctively recognizable to each group, based upon information from previous studies.

While emails signed by ‘white-sounding’ names received a response in 72 percent of the cases, identical emails signed by ‘black-sounding’ names received a response 68 percent of the time – a four percentage-point difference. The difference was the largest for sheriff offices (seven percentage points), while small and statistically insignificant for county clerks and job centers.

There was also a difference in the tone of the response; 72 percent of responses to people with ‘white-sounding’ names addressed the sender by name or with a salutation, as opposed to 66 percent of responses to people with ‘black sounding’ names.

No differences by region or socio-economic background

While discrimination is often thought of as being stronger in different regions of the country, the gap in the response rate is not concentrated in a specific area of the U.S. Mirco Tonin explains: “We find similar levels of discrimination in each of the four regions defined by the Census Bureau (North-East, Mid-West, South and West). We do find a stronger racial gap in rural rather than urban counties. Moreover, it appears that discrimination is not solely due to the perceived lower socio-economic background of black senders. We obtain very similar results when we indicate the very same profession (real estate agent) in the signature of black and white senders.”

Regarding possible interventions to address the problem, Michael Vlassopoulos comments: “When trying to identify the race of the respondent, we find suggestive evidence that black respondents are less likely to ignore e-mails from black senders than white respondents. This suggests that increasing diversity among the public sector workforce, particularly in the services where we detect higher discriminatory attitudes, could be an effective way of addressing discrimination.”

Download the complete study (IZA Discussion Paper No. 9290):

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The long shadow of Stasi spying

spyMany countries monitor their citizens using secret surveillance systems. According to the Democracy Index 2012, published by the Economist Intelligence Unit, 37 percent of the world population lives in authoritarian states. In many of those countries, large-scale surveillance systems are installed that constantly monitor societal interactions and identify political opponents. Despite the prevalence of surveillance systems around the world, there is little empirical evidence on the social and economic costs of spying.

In a new IZA Discussion Paper, Andreas Lichter, Max Löffler and Sebastian Siegloch aim to estimate the effect of state surveillance on social capital and economic outcomes by using official data on the regional number of spies in the former socialist German Democratic Republic (GDR). The official state security service of the GDR, the Ministry for State Security (Ministerium für Staatssicherheit), commonly referred to as the Stasi, administered a huge network of spies called “unofficial collaborators’” (Informelle Mitarbeiter, IM). These spies were ordinary people, recruited to secretly collect information on any societal interaction in their daily life that could be of interest to the regime.

stasi_mapCorrelation or causal effect?

The authors use the substantial regional variation in the spy density across GDR counties (Kreise) to estimate the effect of surveillance on long-term outcomes of social capital and economic performance after the fall of the Iron Curtain and Germany’s reunification. The key challenge to isolate the causal effect of spying is to rule that the allocation of spies was driven by factors that also influenced social and economic outcomes after reunification.

The researchers address this challenge in two ways. First, they compare counties at GDR state borders. These counties were similar in observable characteristics except for the intensity of spying, which was (partly) administered by the Stasi offices at the state level. Second, they collect measures of social capital and economic performance from the 1920s and 1930s, hence prior to the existence of the GDR. In the econometric panel analysis, they use these pre-treatment data to demonstrate that the allocation of Stasi spies was not higher in regions that were traditionally more liberal, progressive or productive.

Trust in people and institutions is undermined

Overall, the authors find a negative and long-lasting effect of spying on both social capital and economic performance. Using data from the German Socio-Economic Panel (SOEP), they show that more government surveillance leads to lower trust in strangers and stronger negative reciprocity – two measures that have been used as proxies for interpersonal trust in the literature. Moreover, they demonstrate that institutional trust, as measured by electoral turnout, is significantly lower in higher-spying counties. The findings imply that an abolition of all spying activities would have led to an increase in electoral turnout of 1.8 percentage points.

Other research has documented that trust in strangers is particularly important for entrepreneurs, given that it is very difficult to successfully run a business if people do not trust clients, trading partners or stake holders. In line with this mechanism, the IZA paper shows that self-employment rates as well as the number of patents per capita are significantly lower in higher-spying counties.

Economic slowdown and population decline

Last, the authors show that more general measures of economic performances are affected as well. Counties with a higher number of spies per capita experienced persistently higher unemployment rates post reunification. The authors further find significantly negative effects of the spy density on county population: Stasi spying appears to be an important driver of the tremendous population decline experienced in East Germany after reunification. For both out-migration waves (1989-1992, and 1998-2009), population losses were relatively stronger in higher-spying counties.

Overall, the paper documents that more intense state surveillance had negative and long-lasting effects on both social capital and economic performance. The findings are well in line with other studies on the relationship between the quality of political institutions, social capital and economic performance. While the study compares different East German counties to each other, it is likely that the findings are at least transferable to other countries of the former Warsaw pact that operated similar mass surveillance systems, such as Poland or the Czech Republic.

Read the complete paper (IZA DP No. 9245):

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Measuring historical happiness through digitized books

old-booksWhat are the historical drivers of happiness? To answer this question, a research team from the University of Warwick built an index of subjective well-being for the last 250 years, based on sentiment analysis of millions of digitized books.

By Thomas Hills, Eugenio Proto and Daniel Sgroi

Aiming at national accounts of subjective happiness instead or in addition to traditional measures of economic growth has been promoted by many different actors, like the UN World Happiness Report, the OECD’s Better Life Index, among a number of economists and politicians. While there is a general consensus to better understand subjective well-being and happiness, subjective well-being is a rather young indicator, the systematic measurement of national happiness has only begun in the 1970s.

More traditional indicators of economic well-being like the national accounting of the gross domestic product (GDP) started off in the 1930s, with successful projects to roll back GDP even further, such as the Madison Historical GDP Project. No such attempt has been undertaken so far for national happiness. Still, knowing about greater historical trends in happiness would allow us to better understand how well-being responds to key historic events, such as expansionary monetary policies, education, and longevity.

Going back in time, thanks to digitization

How can we extend existing subjective well-being measures when direct survey evidence was only initiated in the 1970s? We argue that language conveys sentiment, and that the growing availability of digitized text provides unprecedented resources to construct a quantitative history of well-being based on historical language use. We combine multiple large corpora of natural language going back two centuries with state-of-the-art methods for deriving public mood (i.e., sentiment) from language.

The recent large-scale digitization of books, newspapers, and other sources of natural language represent historically unprecedented amounts of data on what people thought and wrote over the past few centuries. These databases have already proved fruitful in detecting large-scale changes in language, which in turn correlate with social and demographic change.

These data offer the capacity to infer public mood using so-called sentiment analysis. Deriving sentiment from large collections of written text represents a growing scientific endeavor. Examples include recovering large-scale opinions about political candidates, predicting stock market trends, understanding diurnal and seasonal mood variation, detecting the social spread of collective emotions, and understanding the impact of events with the potential for large-scale societal impact such as celebrity deaths, earthquakes, and economic bailouts. Applying the same methods to historical text, we can begin to produce more quantitative accounts of national happiness.

Word usage shows how people feel

The approach is based on valence norms, large-scale survey-based ratings of how certain words make people feel.  In the present case, valence norms based on the Affective Norms for English Words have already been collected for five languages: English, French, Spanish, Italian, and German. We combine these valence norms with frequencies of these words extracted from the large historical database of Google Books to derive proxies for subjective well-being going back to 1776.

Comparison between survey measures of life satisfaction and residuals (after controlling for country fixed effects) for our measure based on sentiment from historic text.  The grey area represents the 95% confidence interval.

Comparison between survey measures of life satisfaction and residuals (after controlling for country fixed effects) for our measure based on sentiment from historic text. The grey area represents the 95% confidence interval.

An initial comparison with survey-based subjective well-being is shown in the figure on the right. Accounting for potential time-invariant differences in happiness, the measure based on historic language and the self-reported measures are closely related.

Based on this observation for periods where both language-based and subjective measures exist, we roll back the text-derived measures of subjective well-being back to 1776. This  reveals a quantitative picture of how public sentiment has historically changed across the six countries.

How conflicts and other historic events affect subjective well-being

The figure below displays the reaction of this historical measure of well-being on short-term events, such as the exuberance of the 1920s, the depression era, and World War I and II show clear and distinguishable influences on subjective well-being. Sharp declines follow internal and external conflicts, recessions and political turmoil.

For all countries the vertical red lines correspond to 1789, the year of the French Revolution, to World War I (1915-18) and to World War II (1938-45). In the 5 european countries a line is draw in 1848, the year of the revolutions. Moreover, in the US, the vertical lines represent: the Civil War (1861-65), the Wall Street Crash (1929), the end of Korean War (1953) and the fall of Saigon (1975). In the UK, the Napoleonic Wars (1803-15). In Spain, the starting of Civil War (1936). In France, the Napoleonic Wars (1803-15), the end of the Franco-Prussian War (1870). For Germany, the vertical lines represent the Napoleonic Wars (1803-15), the Franco-Prussian War and unification (1870), Hitler's ascendency to power (1934), the reunification (1990). In Italy, the unification (1861-70)

For all countries the vertical red lines correspond to 1789, the year of the French Revolution, to World War I (1915-18) and to World War II (1938-45). In the five European countries a line is drawn in 1848, the year of the revolutions. Moreover, in the US, the vertical lines represent: the Civil War (1861-65), the Wall Street Crash (1929), the end of Korean War (1953) and the fall of Saigon (1975). In the UK, the Napoleonic Wars (1803-15). In Spain, the starting of Civil War (1936). In France, the Napoleonic Wars (1803-15), the end of the Franco-Prussian War (1870). For Germany, the vertical lines represent the Napoleonic Wars (1803-15), the Franco-Prussian War and unification (1870), Hitler’s ascendency to power (1934), the reunification (1990). In Italy, the unification (1861-70).

Why is a quantitative history of well-being important?

The fledgling state of well-being data has limited the collective ability to understand how subjective well-being responds to different historic events. This has in turn limited the use of subjective well-being as a target for public policy, health initiatives, and financial decision making. In practice, if subjective well-being is to become a key factor in guiding collective behavior, then we need accounts of well-being on par with those of GDP.

Using well-being as a measure to guide behavior, however, takes more than the desire to simply improve well-being. As noted by Daniel Gilbert in Stumbling on Happiness, people have problems understanding what is called affective forecasting—the ability to understand how one will feel in the future—and with this also comes a limited capacity to understand how prior events and decisions influenced our past happiness.

To overcome this, especially at the level of government, we must develop our capacity to predict how well-being responds to both deliberate and unexpected events. Better predicting economic fortunes was the motivation of the national income accounting following the depression in the 1930s, which later became the GDP. Of course, now numerous decisions are based on the GDP, despite a near global acceptance that, in the words of Robert F. Kennedy, “it measures everything, in short, except that which makes life worthwhile”.

Thus, like GDP, governments and other agencies recognize the importance of this additional ‘emotional accounting’ and, by all accounts, they want to understand how better to use it to improve future well-being. But to do that, we need historically informed accounts of what this means.

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Color discrimination remains a big problem in the U.S. — Interview with new IZA JoLE Editor Joni Hersch

A year after the fatal shooting of an unarmed black 18-year-old by a white police officer in Ferguson, the U.S. is still engaged in a difficult debate about race, color and class. The debate goes beyond the question of police violence and is also concerned with issues like housing and jobs. We wanted to know whether discrimination by race or skin color still stands in the way of equal treatment and opportunity – and, by extension, an efficient use of resources – in the labor market.


Joni Hersch

IZA Research Fellow Joni Hersch, an expert on discrimination who does cutting-edge research at the intersection of law and economics at Vanderbilt University, answered our questions:

Five decades after the Civil Rights Act – and six years into the first black presidency – is color discrimination still an issue in the U.S.?

Joni Hersch: The Civil Rights Act of 1964 protects workers against discrimination in employment on the basis of sex, race, color, national origin, and religion. And yet, discrimination – on the basis of race and color, which are often related but need to be distinguished – remains an important problem in the U.S. today.

Has discrimination litigation increased?

We are indeed seeing an increase in charges of color discrimination filed with the U.S. Equal Employment Opportunity Commission (EEOC). There were 374 charges filed in 1992. The number of charges has doubled between the 2003 and 2013 period, with 1,550 charges filed in 2003 and 3,146 in 2013.

Does public opinion towards immigration play a role?

Color discrimination has certainly become even more important than in the past because of concerns over immigrants entering the U.S. My research shows that even legal immigrants to the U.S. experience a large pay penalty to darker skin color that is not due to differences in productivity characteristics and that arises in addition to the separate influences on pay of ethnicity, race, and national origin. I also show that even with longer time in the U.S., the penalty to darker skin color among immigrants persists. But the problem is not confined to immigrants. In my work examining color discrimination for African Americans, I likewise find that those with darker skin color experience a pay penalty.

Why is the distinction between race and color relevant?

Legal protection against color discrimination in employment as a separate basis from race or national origin may be most relevant when parties are the same identified race or of the same national origin. Prominent color discrimination lawsuits have been between parties of the same race or national origin but of different skin shade.

How common is this?

My analysis of EEOC charge data shows that, although most color discrimination charges also include a charge of race discrimination, about 15 percent of color discrimination charges do not include race. And in nearly one-third of EEOC charges of color discrimination, the charge also includes a claim of discrimination on the basis of national origin.

But not all immigrants to the U.S. are dark-colored…

My research shows that immigrants have on average darker skin color than those who are white U.S. native born. Several states have passed laws requiring police to determine the immigration status of anyone arrested or detained if the police have ‘reasonable suspicion’ that the individual is not a legal immigrant. Darker skin color of immigrants is likely to contribute to creating this type of profiling.

What other forms of discrimination persist in the labor market?

Pay disparities that are unexplained by differences in individual productivity characteristics on the basis of race and sex are persistent and large, and employment discrimination clearly plays an important role. Sexual harassment is a persistent form of sex discrimination and one-third to one-half of sex-based discrimination charges filed with the EEOC include sexual harassment as a basis. Workers are not protected against sexual orientation discrimination.

Does this mean we need stricter laws?

As our experience in the five decades following the 1964 Civil Rights Act has shown, anti-discrimination laws alone are not enough to eliminate discrimination in the labor market. In part, lawsuits are hard to win, and complainants are rightfully concerned about retaliation.

What else can be done?

We should aim at increasing social mobility, so that a large share of the decision makers at the highest levels are themselves from the groups that are subject to discrimination. For example, I have shown that women who are graduates of elite colleges and universities have weaker labor market attachment than their counterparts from non-selective institutions. Elite employers preferentially hire elite graduates, and there are fewer women graduates of elite institutions in the pipeline to reach the highest levels and implement changes that could reduce employment discrimination.


Editor’s note: Joni Hersch has been newly appointed as Editor of the IZA Journal of Labor Economics (IZA JoLE), replacing Joe Hotz, who has done an excellent job in this capacity since 2012. With Joni’s broad research agenda, including topical issues like discrimination and inequality, she will certainly make a great contribution to IZA JoLE. We wish her, along with the journal, every success.

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International Youth Day: IZA World of Labor helps create better policies for youth

InternationalYouthDay_2015The theme of this year’s International Youth Day, celebrated on August 12th, is “Youth Civic Engagement.” According to the UN, the engagement and participation of youth is essential to achieve sustainable human development. To create better opportunities for youth to engage politically, economically and socially, and to prevent a “lost generation”, improving the labor market prospects of the world’s youth must become a top policy priority.

To help in formulating good policies and best practices, IZA World of Labor provides decision-makers with relevant and succinct information based on sound empirical evidence.

Read these selected IZA World of Labor articles on youth topics:

Read also IZA Director Klaus F. Zimmermann’s new post on LinkedIn:

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Vanishing effect of religion on the labor market participation of European women

religionReligion and the traditional role model it conveys affects female labor market participation: Studies show that the likelihood of employment is lower for Catholic, Christian-Orthodox, and Muslim women compared to their Protestant peers. However, the influence of religious-conservative values may well change as society and economy transform. A changing society might imply changes in attitudes, or changes in child upbringing technology and household duties – either might pose internal and external restrictions on labor market access for married women.

A new IZA paper by Justina A. V. Fischer and Francesco Pastore analyzes whether the impact of religious denomination on employment of married women in Europe differs a) by time period, b) over the female life cycle, and c) by cultural regions within Europe. Using the World Values Survey 1981-2013, the authors exploit information on 44,000 married women aged 25 to 60 years in about 40 countries. They distinguish between OECD and non-OECD countries to account for modernization and democratization processes in OECD countries.

The two figures below provide a scatter plot relating female employment and distribution of religion in the female married population, aged 25-40 years: The share of employed is depicted on the Y-axis and the share Catholics on the X-axis; this correlation analysis is for those European countries only where there is a share of at least 5% of Catholics. Figure 1 refers to the period 1981-1996 and Figure 2 to the period 1997-2013. Inspection of the two figures shows that the sign of the correlation under consideration turns from negative in the first period to null in the second period.



The multivariate analysis shows that in European OECD member states the impact of religion on married women is not persistent, but vanishes over time: Behavioral differences by religion disappear during the more recent years (after 1996), for both young and old women likewise (except for Muslim wives).

In non-OECD Europe, however, even in recent times, religion still determines labor market participation of married women. This effect appears to be driven by women younger than 40 years. A possible explanation is the upbringing under communist regimes that promoted female labor market participation for ideological reasons.  Only Muslim women are less likely to be gainfully employed, across all time periods, in both regions, across all life years.

In sum, cultural differences within Europe can possibly explain contradictory findings of various preceding studies. In a broader perspective, the analysis suggests that the impact of religion on female employment changes with a country’s history and institutions.

Read the complete paper:

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