The falling audience for ITV’s Daybreak highlights a failing in the labour market.
ITV hired Christine Bleakley and Adrian Chiles on multi-million pound salaries in the belief that they had the talent to attract viewers and advertising revenue. But it seems they don’t have such a talent. Their popularity at the One Show was due not to their own skills, but to organizational factors: the fact that the One Show’s viewing figures have increased since they left corroborates this.
And here’s the thing. ITV’s error is a widespread one. Employers often mistake individual talent for organizational talent, and so pay huge salaries which are in fact unjustifiable. This is a form of the fundamental attribution error.
Here are some other examples of how "talent" (or lack thereof) exists in organizations rather than people:
1. Football coaches often go from idiot to genius or vice versa as they change team. Fabio Capello seemed a great manager for most of his career - until he arrived in England. Ian Holloway was a mediocrity at Leicester but a massive success at Blackpool, and so on.
2. Boris Groysberg has shown that when Wall Street star equity analysts change firm, their performance plummets. This shows that their success is due to organizational features: corporate culture, colleagues and so on.
3. Traders at investment banks owe their success not (just) to their individual skills, but to their employers’ assets: the ability to borrow cheaply and proprietary knowledge about order flows. This is why so few go off to trade on their own account.
4. This paper (pdf) shows that cardiac surgeons’ performance changes when they move hospital:
The quality of a surgeon's performance at a given hospital improves significantly with increases in his or her recent procedure volume at that hospital but does not significantly improve with increases in his or her volume at other hospitals. Our findings suggest that surgeon performance is not fully portable across hospitals.
The message, then, is simple. What looks like individual skill is often, in truth, an artefact of organizations. However, because employers fail to appreciate this, they over-pay for “talent”. And this causes wage inequality to be greater than is rationally warranted.
This in turn has adverse effects. Some new research (pdf) shows that when workers know the distribution of pay within an organization, the worse-paid workers feel less job satisfaction, whilst the better-paid ones don’t feel happier. In this sense, wage inequality - or at knowledge of it - reduces utility.