Investing In Worker Welfare Increases Productivity And Firm Profits: Good Business Lab
There are positive returns in terms of productivity and profits if the firm invests in the welfare of its workers
Firms often try cost-cutting methods in order to increase profitability, however, there is empirical evidence to prove that there is a positive relation between firm welfare and worker welfare. This means that there are positive returns in terms of productivity and profits if the firm invests in the welfare of its workers. In an exclusive interview with BW Businessworld, the three co-founders of Good Business Lab, Achyuta Adhvaryu: Assistant Professor of Business Economics and Public Policy, University of Michigan, Anant Nyshadham: Assistant Professor of Economics, Boston College and Anant Ahuja: Head of Organizational Development, Shahi Exports discuss the research of Good Business Lab into showing this correlation, and why it is wise for firms to invest in its workers’ welfare.
How is there a positive relationship between firm welfare and worker welfare? Can you provide empirical evidence for the same?
Low-income workers face many constraints – both inside and outside the workplace. Female workers in particular often manage dual roles—as caregivers at home and as employees in the workplace, with great demands on their time and energy in both environments. Alleviating these constraints, even in small ways, might create big benefits for their welfare, and in the right circumstances, those benefits may generate better, more productive, and more loyal workers. Our research at the Good Business Lab on improving worker welfare is careful to create incentives for the key stakeholders – firms – to invest in workers by proving that these investments sometimes also translate into business returns.
Here’s an example from our work at the Lab of how worker welfare can be good for business. We recently completed a randomized evaluation of the impacts of a 'life skills' training program for female garment workers called P.A.C.E. (Personal Advancement & Career Enhancement), which was originally developed by Gap Inc. and has been implemented inside Shahi factories for ten years. We found that teaching these skills – things like effective communication, problem-solving and decision making, confidence, and time and stress management – made workers more productive by 20%. The results of this experiment established that providing training in life skills to women does not just create lasting changes in women’s personal lives (higher self-regard and more investment in their children) but it also makes them more productive employees. The most staggering statistic coming out of this program evaluation was from the cost-effectiveness analysis. The net return on investment to the firm from imparting this training to workers was over 250% and rising only 8 months after program completion. That stacks up against most high-powered incentive programs in the workplace and demonstrates the power of providing these basic skills.
What results have been yielded from improving the work atmosphere for workers for the company?
The Lab’s work on the work atmosphere has focused on estimating the consequences of better environmental conditions on factory floors.
In one study, we estimated that the adoption of LED lights in place of fluorescent lighting on the factory floor reduced energy consumption by roughly 85% and the average indoor temperature by roughly 2.4 degrees Celsius, vastly improving comfort levels for workers. On the firm’s side, this meant additional profit from increased worker productivity, which was 5x larger than energy cost savings, shifting the break-even point of the investment for the firm from three years to seven months. In another study, we found that exposure to high levels of air pollution significantly reduced worker productivity, reflecting both welfare reductions for the workers, and lost profit for the firm. Our research demonstrates the business gains from controlling environmental factors like temperature and pollution on the factory floor, and we call it the ‘no-sweatshop’ approach – ways for firms in the garment industry to subvert the conventional wisdom of factories in low-income being ‘sweatshops’ and become more profitable doing so.
Part of our work is focused on closing the skill gap, and it is in this context that our research has proven the importance of training workers in soft skills, which are often seen as secondary to technical skills. As just mentioned earlier, the results from our randomized controlled trial showed that investing in transferable soft-skills for workers like communication, time management, and stress management can go a long way in generating social and business returns. This propelled us to test the impacts of soft-skills training for line supervisors – factory employees that oversee the work of line-level workers who were a part of the P.A.C.E. experiment. The main questions we are aiming to answer through this experiment include how such training can, apart from providing business returns to the firm, reduce instances of verbal abuse and harassment of workers through cognitive-behavioral transformation. An insight such as this is crucial in an industry where over 80% of the workers are female, while over 80% of the supervisors are male.
How does the Good Business Lab bring together academic insight and scalability for its randomized controlled trials to see the correlation between the firm and worker welfare?
The randomized controlled trial approach to evaluation is widely credited as the most rigorous scientific way to assess impacts. The Lab’s philosophy is that this approach is necessary to create and disseminate effective policy innovation. The best way to convince others to adopt policies is to be absolutely sure that the impacts we have estimated are real. Any program, to be implemented at a wide scale, needs rigorous impact evaluation first to make sure that money is put in the right places.
Our model is to take promising ideas, rigorously test their impact in live manufacturing environments, measuring both social and business outcomes, and ultimately scale only those programs that generate improvements in both dimensions. This approach of measuring dual benefits enables scale and sustainability of innovations. If businesses view investments in workers as just that – investments – the case for widespread adoption can be made much more easily than when worker welfare initiatives are treated as CSR.
The fact that we ensure that we are armed with rigorous evidence on impact helps us convince businesses to implement these programs as essential business investments, giving them bang for their buck, rather than purely as social welfare initiatives. For example, we shared our results from the P.A.C.E. study with Gap Inc. to help inform the program’s expansion. In 2015, Gap Inc. set a target of reaching 1 million women and girls around the world through P.A.C.E. by the end of 2020, and our partner firm – Shahi Exports – committed to training 70,000 FGWs (Female Garment Workers) in P.A.C.E. by 2024.
What are some of the international organizations whose operations you have altered by providing them insight on the positive relation between firm profitability and worker welfare?
It’s always heartening to see how the evidence from our research impacts the lives of workers worldwide. One such example is that of P.A.C.E. and its scale-up. Buoyed in part by the results of our randomized controlled trial of the P.A.C.E. program in India, Gap, Inc., the company that spearheaded the program has set a target of reaching 1 million women all over the world through P.A.C.E. by the end of 2020. The head of the World Bank Gender Innovation Lab also blogged about our research findings, establishing its position as a policy innovation required in other developing countries as well.
How do you persuade small and medium enterprises to invest in social welfare, given that their revenues and profits are very marginal?
The evidence on the positive impacts of providing small business with skills or cash has been growing. For example, ILO’s SCORE (Sustaining Competitive and Responsible Enterprises) program, which trains small and medium-enterprise managers in soft skills, has helped small enterprises in Vietnam significantly increase the scale and efficiency of their operations. A really fascinating paper was just published in Science showing similarly large impacts of 'personal initiative' training for small businesses in Togo. The rationale here is that small enterprises are often the most constrained, which puts them in a position to make the most gains from such interventions. The trick is to find what works, which may be different than what works in larger firms.
What are some of the positive social outcomes to the worker's post investment in their social welfare?
Research often gets a bad rap – impacts are always framed in the uninspiring language of numbers, percentages, and statistical analyses. While of course, these are incredibly important, the real heart of our research is in the human stories of change, of women who have overcome odds to take advantage of these programs, and of the difference, it has made in their lives. One such woman is Dolly Kumari - she left her home in Jharkhand at the age of 18 to join as a tailor in a garment factory in Bangalore, and over two years, her salary has risen 66%, and she is now an assistant line supervisor on her factory floor, overseeing the work of 119 tailors. She attributes much of her career growth to P.A.C.E., and now speaks confidently of time management and empathizing with her fellow workers. Rajalakshmi, a tailor in Bangalore in the same garment factory recently lost her son to a car accident, a few days before her P.A.C.E. graduation. On the day of her graduation, she spoke tearfully about how the lessons imparted to her by her trainers helped her cope better with her grief and loss, and stay strong during a tough time in her life. We feel like these anecdotes help us, and those trying to understand our work, give a face to the statistics, and a purpose to what we do.
How does Good Business Labs work across the labour market to unlock female labour, close the skill gap and raise job quality?
Common constraints hold back workers and firms alike. Our aim is to develop shared solutions to these shared problems – delivering social returns to workers and business returns to firms. This involves intervening at several crucial points along the employment journey of workers, from getting them into the economy, to begin with to improving their skill and earning potential and providing them both with jobs worth keeping and opportunities for advancement.
With respect to the labor force, our emphasis is on female labor supply. The female labor force participation rate in India is 27%, one of the lowest in the world, and much lower than expected rates for India’s level of development. The natural pressing question then becomes: what is keeping so many women out of the workforce? More number of women being able to join the workforce would mean greater economic independence for women, and access to previously inaccessible labor for the firms.
However, to get a woman to work in the first place requires us to address practical and societal barriers. They must have access to both employment opportunities and training in the requisite skills; they must have the bargaining power in their households to be able to decide whether to work and command of their potential earnings to make working worthwhile; their households must be able to operate in their absence with other members of the household or market labor available to help with the myriad household responsibilities that often fall on adult women in India. We are designing and testing several interventions to address each of these barriers. For example, we are currently running a rural training centers impact evaluation project in 20 taluks in rural Karnataka, through which we wish to understand the impact of giving women technical training and migrant employment opportunities on female bargaining power, household economics activities and welfare, and village economies in general.
However, the success of female workers depends crucially on their ability to cope with their new environments and the pressures of the workplace. Our evidence shows that it is in the interest of increasing productivity and retention that firms ought to invest in the skills, satisfaction and career advancement of their workers. Going beyond technical skills to deliver soft skills can increase the earning potential of workers and generate a more skilled and productive workforce. For instance, we evaluated the impacts of P.A.C.E. (a life skills program for female garment workers developed by Gap Inc.) and found not only strong welfare impacts for workers but a net ROI of over 250% for the firm just 8 months after program completion.
Relatedly, most manufacturing sector firms across the developing world face high rates of attrition and absenteeism even once they manage to hire and train sufficient workers. We believe to retain workers, the firm must look at what it can do better inside the workplace to improve job quality – by building comfortable and supportive working environments conducive to worker satisfaction and their mental and physical well-being. We have already proven the relationship between productivity physical working conditions by studying heat stress due to high ambient temperatures and exposure to air pollution on the factory floor. We aim to now scale profitable working environment improvements informed by these completed studies in manufacturing industries across the developing world. We are designing additional studies to address major issues like living wages, flexible working hours, and mental well-being. We are also in the process of evaluating a soft-skills training program we developed for supervisors with the aim of reducing abuse and harassment of workers and improving communication and teamwork on the factory floor.
What is the outcome-driven methodology used to test potential ideas and scale them?
We use gold standard research methodologies from the academic frontier including randomized controlled trials when possible. The basic idea in case of the randomized controlled trial is to measure impact by doling out the intervention to a randomly chosen treatment group from the target population and keeping another observably identical group from the same population as a control group that does not receive the intervention. Randomizing the population into these two groups ensures they start out with similar characteristics, and any change after the intervention can be causally attributed to the intervention. With access to real manufacturing environments as live testing hubs, we ensure accurate measurement of social and financial returns and impartial and effective testing of solutions to some of the most pressing problems in the industry.