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When the Axe Swings, Your Worst Employees Will Outperform

Conventional wisdom suggests that companies have been able to maintain output with fewer employees because bosses took care to fire the worst workers and keep their stars. A new study is turning that logic on its head.
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Bad economic times have a way of turning your worst employees into your best.

Economists have been scratching their heads at how companies have been able to be so productive even though they were forced to get rid of so many employees. Indeed, data from the Labor Department show that, from 2007 to 2009, output fell 7.16 percent, but the aggregate hours worked for nonfarm employees fell 10 percent. So companies were doing a lot more with fewer workers.

The conventional wisdom has been that companies were able to maintain output with fewer employees because bosses took care to fire the worst employees and keep their stars. That means that, during recessions, companies had trimmed the fat off their work force.

But that's not so, according to a new study by Stanford University economists Ed Lazear (who was chief economic adviser to President George W. Bush) and Kathryn Shaw, and Christopher Stanton at the University of Utah.

In fact, the data suggest it doesn't matter who gets canned. Everyone who is left will simply work harder.

“The quality of the work force hardly changes,” the authors wrote. “Instead the increase in productivity comes because workers work harder.”

Why? Well, it seems that employees work better when they run the risk of losing their jobs. The efforts put in by workers are highest in areas with high unemployment rates.

And it is the least productive worker who provides the biggest jump in a company's productivity. They rise to the occasion, likely driven by a knowledge of how poor their performance has been and a lack of other job prospects. “It appears the less productive workers are the most responsive to recessions and increases in local unemployment rates, perhaps because their alternatives diminish the most during weak economic times.”

So, how should business owners interpret this? Well, for one thing, it might change the game plan for how layoffs should occur when business goes sour. Businesses have been known to use performance evaluations as the key determinant for deciding for who goes and who stays. Keep the stars and fire the laggards. Or, they have a first-in, first-out approach, where the newest employees are fired first.

Economically, though, neither of those strategies gives the most bang for the buck. In theory, better workers and employees with longer tenures are paid more. So layoff strategies that focus on the bottom rungs don't give as many cost savings.

Related: 5 Changes I Made to Improve My Productivity While Traveling

Does that mean that it's time to fire your best workers? Hardly. But it does suggest that some workers can do better, provided with the right motivation. Being threatened with the unemployment line seems to focus the mind, but there are other studies that suggest better compensation can have the same effect.

Still, it is food for thought. You can do more with less, provided you figure out a way to motivate employees to work harder.