Perspectives from Around the World
Trust-based working time spurs innovation
Professor of International Economics, Kiel Institute for the World Economy
For Holger Görg's full bio,
Olivier N. GODART
Research fellow at the Kiel Institute for the World Economy and lecturer, Christian-Albrecht University Kiel
For Olivier N. GODART's full bio,
Lecturer, University of Kiel
For Aoife HANLEY's full bio,
Researcher, Kiel Institute for the World Economy
For Christiane KRIEGER-BODEN's full bio,
Many firms are replacing traditional working hours with more flexible arrangements, reflecting new thinking on employee motivation. This column presents evidence from Germany that trust-based working time is associated with increased innovation. However, trust-based working hours also contribute to the blurring of workers' professional and private lives, and may lead to excessive overtime. Careful design of trust-based working arrangements is required to reap the innovations gains while avoiding the health pitfalls.
The organisation of work has changed dramatically over the last few decades. In particular, the formerly rigidly regulated working time has been replaced by flexible working hour schemes in numerous firms around the world. Taking Germany as an example, in 2010, 36% of employees were entitled to some form of flexible working hours scheme (Figure 1).
While all these forms of working time arrangements offer increased flexibility to both workers and employers, they differ considerably with regard to the trust placed in workers - from merely allowing workers to decide about their starting and finishing times (so-called 'flexitime') to granting workers complete freedom to adjust their time schedules on condition that they achieve a predetermined and set output (so-called 'Vertrauensarbeitszeit', or trust-based working time).
This latter trust-based arrangement has particularly increased in importance, and has become particularly common in Germany, where roughly half of all firms offer some variant of trust-based hours to at least some of their employees - twice as many firms as in 2003 (see Figure 1). However, the number of employees actually involved in such arrangements remains rather limited.
Trust, flexibility, and employee motivation
This changing pattern of work organisation may reflect a changing perception of what motivates and drives human beings. Even economists acknowledge the growing view that workers do not merely respond in a mechanical way to material incentives and disincentives. These days it is no longer sufficient for employers to agree to pay increases - subject to higher innovation performance - in order to boost worker creativity. Rather, workers need some intrinsic reason to identify with their task of creating, improving upon, and commercialising products.
But how can firms provide a working environment that facilitates such deep-seated employee motivation? Trust could be a major determinant of such an environment, and trust-based working arrangements could hence be important for boosting worker creativity. This possibility is hinted at by an eclectic mix of recent studies from psychology (e.g. Amabile and Mueller 2008) and management science (e.g. Bloom and van Reenen 2010, Konrad and Mangel 2000).
Another, more 'traditional' argument has less to do with motivation but more to do with the flexibility that accompanies trust-based work arrangements. Flexibility comes particularly to the fore when firms encounter rapidly changing and uncertain environments. Here, any pre-arranged plans may falter, and the traditional hierarchical principle of order and worker compliance may fail. The traditional system may under these circumstances work less optimally than a more flexible concept that grants employees autonomy to adapt to new information (Dessein and Santos 2006). Innovations and the way innovations are arrived at by firms represent a good case study of a situation where environmental uncertainty prevails. Accordingly, if trust-based working time is seen to provide workers with the flexibility and autonomy required to tailor their actions to local conditions and to new information, then the adoption of such arrangements should be positively associated with a firm's innovation capability.
Evidence from Germany on the 'innovation premium'
In substantiating such links between trust and innovation success, Germany can be seen as an interesting case in point. Germany not only has a large number of firms that implement trust-based hours, but also a large number of export-oriented, internationally competitive, and therefore necessarily innovative firms. It is thus an excellent test case to examine whether there is an 'innovation premium' associated with trust-based work contracts. With this in mind, we use a panel data set comprising over 5,000 German establishments to investigate whether the introduction of trust-based working hours is related to the subsequent innovation performance of firms (Görg et al. 2014) (Note). Our analysis exploits information on two cohorts of firms that adopted trust-based working hours in 2008 and 2010 respectively, and compares their subsequent innovation performance to that of a control group of firms which are similar in terms of characteristics in the 'pre-adoption' period but which did not adopt trust-based working hours.
The results show that there is indeed an innovation premium to the use of trust-based working time. Roughly 12 to 15% of firms in the analysis adopt trust-based working time practices, and these firms are more likely to implement product or process innovations than non-adopters (Figure 2). Additionally, these firms are, on average, larger, more skill-intensive, more likely to be located in West Germany, and more likely to additionally use working time accounts (a further type of working time organisation). By applying appropriate estimation techniques (OLS, propensity score matching) and carefully controlling for such other innovation-enhancing factors, we find that adoption of trust-based working time increases the probability that firms claim to have introduced new or improved upon existing products by between 9 and 14%. These results hold even when the analysis additionally controls for an alternative flexible working time practice, namely working time accounts. Thus, the positive relationship between the adoption of trust-based working hours and innovation seems to be driven by worker empowerment over their working time, rather than by merely increasing worker-time flexibility within the firm. In sum, this research shows that flexible trust-based working arrangements benefit firm performance.
The dark side of flexibility
But there are considerable negatives attaching to trust-based working time. Flexible work arrangements are seen as blurring the lines between professional and private life. Think of 'home office' as one example of trust-based working time, which is often regarded as leading to conflicts between work and private life - particularly if combined with a never-ending 'availability' of the worker via e-mails and smartphones. Sociological and medical studies are still assessing the impacts of these work practices on workers (e.g. Caruso et al. 2004). They find evidence that trust-based working arrangements usually improve the work-life balance and increase the work satisfaction of most workers involved, but may also lead to excessive overtime, with well-documented negative health effects including burn-out, depression, and a heightened risk of cardio-vascular diseases. Increasingly therefore, there are calls from the public, from politicians, and from trade unions for limits to be set to such work practices that blur the boundaries between the workplace and home. In response, some corporations are initiating specific codes of conduct to restrict the availability of their workers during night-time and at weekends.
Trust-based working arrangements, by motivating workers, can raise the innovativeness of firms and contribute to the life satisfaction of their employees. Restrictions on the spread of such work arrangements might put a stop to these benefits. In order to reap the innovation benefits while avoiding the health pitfalls for workers, it is therefore worthwhile to invest time in designing carefully balanced trust-based arrangements that incorporate safeguards against the pitfalls of such contracts.
This article first appeared on www.VoxEU.org on July 8, 2014. Reproduced with permission.
- ^ Our data is based on the IAB Establishment Panel – a representative annual survey of approximately 16,000 plants located in Germany.
- Amabile, T M and J S Mueller (2008), "Studying creativity, its processes, and its antecedents: An exploration of the componential theory of creativity", in J Zhou and C E Shalley (eds.), Handbook of Organizational Creativity, New York: Lawrence Erlbaum.
- Bloom, N and J van Reenen (2010), "Human resource management and productivity", NBER Working Paper 16019.
- Caruso, C C, E M Hitchcock, R B Dick, J M Russo, and J M Schmit (2004), "Overtime and Extended Work Shifts: Recent Findings on Illness, Injuries, and Health Behaviors", National Institute for Occupational Safety and Health, DHHS (NIOSH) Publication 2004-143.
- Dessein, W and T Santos (2006), "Adaptive Organizations", Journal of Political Economy, 114: 956–995.
- Görg, H, O Godart, and A Hanley (2014), "Trust-based work-time and Product Improvements: Evidence from Firm Level Data", IZA Working Paper 8097.
- Institut der deutschen Wirtschaft (2013), "Auf dem Weg zu einer familienfreundlichen Arbeitswelt. Sonderauswertung des Unternehmensmonitors Familienfreundlichkeit 2013", Köln.
- Konrad, Alison M and Robert Mangel (2000), "The Impact of Work-Life Programs on Firm Productivity", Strategic Management Journal, 21(12): 1225–1237.
- Statistisches Bundesamt (2012), "Qualitat der Arbeit. Geld verdienen und was sonst noch zahlt", Wiesbaden.
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