Firing Aversion: A Cross-Cultural Study
By Bryan Caplan
Thanks to EconLog readers, I’ve finally located some real empirics on what I call “firing aversion” (see here, here, and here). My favorite piece so far: “Cultural Influences on Employee Termination Decisions” (European Management Journal, 2001). The authors analyze a survey of about 300 managers from financial institutions in England, France, Germany, Italy, and Spain. Key idea: The survey describes four hypothetical workers, and tells each manager he has to fire one. Who do they pick – and why?
Here are the worker profiles each manager sees:
1. Young, good performance, cheap
2. Young, average performance, cheap [but not as cheap as #1 – B.C.]
3. Middle-aged, average performance, expensive
4. Older, excellent performance, expensive
Who gets fired? Almost half the respondents make what sounds like the profit-maximizing decision – firing #3. But #2 is almost as popular, and almost 15% fire the older but excellent performer. (See the bottom row of Table 2 for details). More strikingly, though, answers vary radically by country:
What are these managers thinking? The authors explain that “Only two justifications are consistently cited within the top five reasons for each country.”
The first takes advantage of the existence of early retirement programs that are commonly implemented in many countries and industrial sectors. This is clearly an easy choice fitting very well with the organizational justice reasoning provided above. The older employee is ‘given a gift’ as some French respondents put it. He no longer must trudge into the office and work but happily retains a large part of his salary. No hard decision must be made which would attack the sense of self-worth of someone who was being fired because he was no longer sufficiently productive. Only a few, largely Anglo-Saxon respondents, were concerned about the organizational impact of ‘throwing someone out at their peak’.
In short, many managers prefer to fire the person who will suffer the least – or actually benefit. Of course, this isn’t the only motive. Plenty cite profitability (and/or desert) as well:
The second ranked reason however is a much tougher justification. Someone should be fired if his performance longer merits his salary. This was respectively the first and second criteria used by the English, German, and Spanish respondents. This justification appears to reflect the consequences of classical economic theory more than the social justice model. If you are under-performing (relatively) you must go (when times are tough). Your commitment and years of service are not sufficiently important to your colleagues or company.
Other common rationales for firing include: “good chance to find a new job because of youth,” “good chance to find a new job because of skills,” and just “age.” On the latter, check out this neat graph of “Average Age of Dismissed Employee By Country.”
What does all this have to do with firing aversion? Plenty. The premise of the hypothetical is that the manager’s firm is losing money so it must let someone go:
The company lost 5 million pounds last year and will probably lose more next year. The firm’s economic problems started several years before the recent recession but it was always able to avoid staff reductions. However now this is no longer possible and some employees must be sacrificed.
The scenario gives the managers a great excuse to fire on the basis of profitability alone. But most don’t. Instead, they act like normal human beings. They consider the effect on the welfare of the worker as well as the profitability of the company. Why bother? Because firing someone makes them feel bad – and the more the discharged suffers as a result, the worse they feel. Imagine how few people they’d fire in an easier scenario where the company was fairly profitable but could be even more profitable if it trimmed some fat.
Many economists will dismiss this paper on methodological grounds: “You can’t learn anything by asking people about their behavior in hypothetical scenarios.” I say these economists are being insufferably dogmatic. Yes, people exhibit social desirability bias; they overstate their virtue when they don’t have to put their money where their mouth is. But that’s a lame reason to ignore their words entirely.
Indeed, it’s possible that the survey overstates managers’ focus on profitability. A manager is supposed to act in his company’s best interest. It is his fiduciary responsibility. So social desirability bias could easily lead managers to exaggerate their willingness to put personal feelings aside for the good of the company. (“Sure, I work for the stockholders. But what is to become of poor, poor Jimmy Jones?”)
Bottom line: Put yourself in the shoes of someone who has to fire someone. Can you honestly say that profitability is the only factor you’d consider? Even if your answer is yes, think about how typical you are. Can you honestly say that virtually everyone who makes firing decisions is as unconflicted as you are?