From Absenteeism to Efficiency: How Managerial Networks Shape Productivity

In their recent publication, “Absenteeism, Productivity, and Relational Contracts Inside the Firm“, Achyuta Adhvaryu, Professor of Economics at UC San Diego, Jean-Francois Gauthier, Assistant Professor of Economics at HEC Montreal, Anant Nyshadham, Professor of Business Economics at Michigan Ross, and Jorge Tamayo, Assistant Professor of Business at Harvard Business School and faculty co-director at D^3’s Digital Reskilling Lab, consider relational contracts in the ready-made garment industry. 

In this highly competitive sector, efficient production is critical for profitability, yet worker absenteeism presents a major challenge. In the study sample, the average daily absenteeism rate among workers was 11%, and each production line experienced absenteeism rates of 20% or higher at least once every 10 days. Managers in garment factories must make daily decisions to mitigate these disruptions, often relying on informal agreements to borrow workers, which lead to suboptimal outcomes. Adhvaryu and his team consider how managers navigate these challenges in order to suggest improved performance models that would increase competitiveness in this vital industry.

Key Insight: Relational Contracts as a Solution

“Managers form relationships mainly through being on the same floor and understanding that cooperation is mutually beneficial.” [1]

To combat absenteeism, managers often rely on informal agreements, or relational contracts, where they lend and borrow workers to manage daily fluctuations in attendance. These contracts are not formally mandated but are driven by a mutual need. The trust and relationships built over time among managers allow for the flexible allocation of workers where they are needed most.

Key Insight: Limitations in Worker Borrowing

“While managers do indeed exchange workers in this manner, many potentially beneficial transfers are left unrealized.” [2]

Despite the potential for improving productivity through worker sharing, the study found that many beneficial trades remain unrealized. The finding suggests that managers tend to rely on a small, tight-knit circle of trusted colleagues, with 72% of all worker trades occurring between managers who maintained active relationships with only two or three other managers out of a possible 20-22. This gap, between the potential and actual borrowing, results in productivity losses during high absenteeism periods, as managers are limited by the small number of relationships they maintain.

Key Insight: Physical and Demographic Barriers to Worker Sharing

“Managers tend to exchange workers with lines that are within a short distance on the factory floor [and …] managers tend to trade with managers who are similar to them in terms of demographic characteristics.” [3]

The research reveals that managers who are located closer to each other on the factory floor are more likely to engage in worker trades, as are managers who share similar gender, education, and age characteristics. In fact, 72% of trades happen within a 20-foot radius on the factory floor and 80.2% of trades occur between managers of the same gender. These barriers suggest that expanding the pool of managers with whom one can trade requires deliberate efforts to foster more inclusive and diverse relationships.

Key Insight: The Financial Impact of Missed Borrowing Opportunities

“We trace out a concave function that shows that productivity would increase substantially (by as much as 1.3%) if workers could be traded centrally without any frictions.” [4]

Without the limitations of informal relational contracts, worker reallocation could increase productivity by as much as 1.3%, which would translate into $1.45 million in annual profit for the firm. As one potential intervention, the research team suggests promoting a more inclusive environment or using technology, such as a low-cost messaging app, to facilitate communication between managers across physical and demographic lines. They also suggest hiring a ‘buffer stock’ of floating workers who would be optimally distributed across production lines each day to respond to absenteeism

Why This Matters

For C-suite executives and business professionals, the insights from this research provide a strategic lens on workforce management and productivity. In labor-intensive industries, absenteeism is inevitable, but its impact can be mitigated through the implementation of relational contracts or even more formalized worker-sharing systems. By fostering stronger and more numerous relationships between managers, firms can increase operational flexibility, enhance productivity, and generate significant financial gains. For decision-makers, investing in systems or technologies that reduce the friction in these interpersonal collaborations can unlock new levels of efficiency and profitability within the firm.

References

[1] Achyuta Adhvaryu, Jean-François Gauthier, Anant Nyshadham, and Jorge Tamayo, “Absenteeism, Productivity, and Relational Contracts Inside the Firm”, Journal of the European Economic Association 22, no. 4 (August, 2024): 1628–1677, 1643.

[2] Adhvaryu, et al., “Absenteeism, Productivity, and Relational Contracts Inside the Firm”, 1631.

[3] Adhvaryu, et al., “Absenteeism, Productivity, and Relational Contracts Inside the Firm”, 1653.

[4] Adhvaryu, et al., “Absenteeism, Productivity, and Relational Contracts Inside the Firm”, 1632.

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