A long tradition in economic research suggests that learning through on-the-job experience has a substantial impact on productivity. Kenneth Arrow’s seminal 1962 paper on learning and productivity observed that “learning is the product of experience … [and] that learning associated with repetition of essentially the same problem is subject to sharply diminishing returns.”Research inspired by Arrow’s has looked at how on-the-job experience occurs at, and affects, both individual workers and companies as a whole.
A more recent stream of research has suggested that workers and organizations also likely suffer a degree of depreciation in learning—that is, forgetting. Individual workers obviously can forget things essential to their job (exhibit A: computer passwords).
But how significant is forgetting by the organization as a whole? Some economists believe the impact is substantial at the company level and for the broader macroeconomy. If a firm’s institutional memory fades due to production slowdown during a recession, for example, organizational forgetting could negatively impact productivity well beyond the recession itself.
However, a recent article by Minneapolis Fed visiting scholar Morris Kleiner of the University of Minnesota, Jerry Nickelsburg at UCLA and Adam M. Pilarski of AVITAS Inc., argues that the importance of organizational forgetting has been overstated and that empirically documented productivity declines attributed by past researchers to forgetting can instead be accounted for by other, simpler explanations.
“We show that previous outcomes of organizational forgetting analysis may be called into question,” write Kleiner et al. in “Organizational and Individual Learning and Forgetting,” forthcoming in Industrial and Labor Relations Review, “through a more thorough modeling of the production function … and through the addition of more detailed data.”
Producing a plane
The economists focus on aircraft manufacturing. This, too, has a long tradition: Arrow cites a 1936 article, “Factors Affecting the Cost of Airplanes.” But there are several other reasons for looking at airplane companies: (1) An influential piece of research documenting the importance of organizational forgetting studied Lockheed’s aircraft production, (2) many countries consider aircraft manufacturing a strategic industry deserving restrained antitrust policy, (3) marginal costs of airplane production do not always decrease over time, as learning theory predicts and (4) in the 1980s, Nickelsburg and Pilarski were economists at McDonnell Douglas where they worked on cost analysis of MD-80 aircraft.
The last fact provided them a clear picture of the actual manufacturing process. In particular, it clarified what really happens on the aircraft assembly line to both workers and management when production slows down: Do they forget, or do other disruptive factors explain productivity trends?
The economists first look at actual cost-of-production data for MD-80 airplanes and Lockheed’s L-1011 in the months before and after a labor strike. During strikes, workers forget—individual forgetting—but supervisors and management remain active as they replace workers on the production line. “If management has knowledge of production,” the economists write, “[organizational] forgetting is diminished.”
At both companies, costs increased slightly right before and after the strike, but then quickly resumed their typical levels. “In neither of the plane production lines is there evidence of organizational forgetting,” they write. “The small amount of increased costs associated with the previous three strikes is consistent with individual forgetting … leaving little room for the large organizational forgetting found by [others].”
The economists then build a mathematical model of the production process, with deliberate inclusion of factors neglected by previous studies. Specifically, they include variables for parts shortages, labor strikes and existing aircraft grounded for maintenance (which can affect production because airlines may demand that replacement parts be pulled from unfinished planes).
Their model tracks actual cost data on MD-80 aircraft with remarkable consistency, suggesting that these factors do an excellent job of explaining productivity trends, particularly during a period of higher costs as output ramps up in response to increased orders. “The concept of ‘organizational forgetting’ as the explanation of this cost increase is therefore not supported.”
They use the same model to study L-1011 production, substituting a proxy variable for parts shortages because data from Lockheed weren’t available. They again find that including variables for labor and part shortages diminishes the likely importance of organizational forgetting. In other words, leaving out important variables may lead to false explanations.
“A more fully specified model that takes into account previously omitted variables finds a much smaller role of forgetting,” the economists conclude. “That is, organizational forgetting, while important and interesting, is most likely not as influential as suggested by previous work.”