Tim Harford's Trust Me, I'm an Economist Part 3: Work

How do you get ahead at work? How would you be able to cash in on your talent and reach the optimum level fulfillment in your professional life? But most importantly, how would you be able to stay ahead of your slouching colleagues and beat your boss in his own game?

Fear not, the answer is here. Tim Harford has the key to life at he workplace and he will show you the economic analysis that would pave a pathway to your success. In the third episode of Trust Me. I'm an Economist, Harford focuses on the workplace and how to succeed there with the help of economics.

One of the basic principles of the workplace is that everyone wants to be at the top and there are only a finite number of top positions. Workers compete among themselves and are encouraged by the boss to do so because they all want to be in his shoes one day. All this competition performance is good for the company because that gives them maximum yield in employee productivity. But is that an optimum level of welfare for the workers?

How do you demonstrate your worth at the workplace? How would your boss know how valuable you are as an employee? The main problem involving those questions concerns information. Your biss simply does not have enough information about you or your colleagues to make an optimal evaluation about you.

Using the second-hand car market, Harford illustrates the problem that is known as information asymmetry. How do you know that a used car is either a “peach” or a “lemon”? The dealer knows but he won't share that information with you. Because of you lack of information and his having that information, the dealer therefore has an advantage over you. However, because you don't know whether the car is a lemon or not, you may choose to walk away from the deal, leaving the seller with the problem of unsold goods.

It's all down to what economists call “signaling”. Employers suffer from information asymmetry and you hold the information. What you can do to rectify the situation is to signal to the employer your seriousness in achieving things. You can tackle academically challenging subjects like philosophy and mathematics and prove to the employer that you have genuine analytical skills. Or you can coach a team and prove your mettle fro team work. Either way you can demonstrate to an employer that since you have managed to be productive on your own, you can be equally or more productive in the workplace given the right incentives.

Often employers look for inquisitive, confident and articulate employees and they are more than willing to help them acquire skills. What they are interested is not what you learned at school but what you proved at school. This is the best of signaling: showing the employer the proof of your worth.

How would you measure performance in a world of information asymmetry? How would you pay the right person person the right kind of incentive to maximize productivity? What, essentially must be the rewards for performance?

There can be the flip side of the performance pay: the wrong person can get the rewards. Witness the corporate scandals on the early 2000s when Enron executives lied about how well the company was doing. They did so because they were rewarded on the basis of the increase in stock prices- the better the company looked on paper, the better their reward. No wonder they cooked the books!

But ultimately, success in work would always depend on how much you like what you do. Nothing would be a good enough substitute for passion as a recipe for for success. The key is to love what you do.