Abstract
The current paper is an attempt to find the connection between externalities and performance at work by analyzing a great amount of reliable literature review. The connection was done among several common aspects between both issues. First, it is explained the relation between human capital, productivity, and externalities to understand how these concepts can be approached to the human nature at workplace. Once the concepts are related, the relation between human capital and wages is displayed. After this, the relation between wages and job satisfaction is found, what becomes an important link of the chain that leads the research to complete the final relationship between job satisfaction and performance. Implications of the literature review can be used by scholars and researchers as a theoretical asset for future empirical studies regarding the connection among externalities, job satisfaction, and job performance.
Keywords: Externalities, Job Satisfaction, Wages, Human Capital, Performance.
Introduction
Externalities have turned into one of the most common phenomena to be adapted by developing countries. The occurrence of spillovers brings along market failures which mostly require a State’s intervention through public policies to protect or to take advantage of the third-party effects.
The current theoretical review allows to understand the connection between externalities and performance at work by threading a way among a number of relationships that leads to recognize how this market failure ends up providing a rich contribution to performance in terms of wages and human capital. Such relationships are human capital, productivity and externalities relationship, human capital and wages relationship, wages and job satisfaction relationship, and job satisfaction and performance relationship.
Purpose of the paper
The purpose of this theoretical review paper is to find the relationship between externalities and performance by connecting 4 relationships based on literature review.
Chart: Model of purpose
Source: Own Construction
Literature Review
Externalities
Externalities, together with public goods and monopoly, is one of the main market failure, (Mankiw, 1995, p. 157), which may be related either to production or consumption (Worthington, et al., 2005, p. 448). It is an effect received by a third party that has not profited or enjoyed in a specific transaction (Boyes & Melvin, 2008, p. 140) . Externalities can be positive or negative (Oakland, 1987, p. 496). A positive externality occurs when the product of an activity or service benefits third parties instead of harming them. In this case, the market will not reach an economically efficient level of production; in fact, the level of production will be too small (Worthington, et al., 2005, p. 362).
On the other hand, negative externalities are due to pollution. Cities pollute rivers, lakes and seas with their discharges and companies with their own. Automobiles, heaters, and industries pollute the atmosphere. These externalities create inefficiencies. In this event, a loss of welfare, that remains uncompensated, results by another or others’ effects (Worthington, et al., 2005, p. 448).
Unfortunately, markets may not come close to perfect efficient competition for many reasons. The three most important ones refer to imperfect competition -like monopolies-, to externalities -such as pollution-, and public goods -such as national defense and highways-. In both cases, positive and negative externalities, cause inefficient production or consumption, and the State could contribute significantly to correct the failures.
To illustrate how the intervention of the State can correct the failures, let us consider the next examples:
The growing smog caused by cars affects the health of people by polluting the air we all breathe, two measures the governments takes are to rule emissions standards to control the problem or impose high taxes to fuel to demotivate people of using cars.
Building restoration is not something in which building owners want to invest, it is more profitable making modern to attract tourists or guests, then, the State may stimulate restoration as part of safeguarding the historical architecture of the cities by granting owners tax breaks or approving laws to protect the historical urbanism.
Noisy pets are a common annoyance neighbors have to deal with, most pet owners do not consider this situation a real problem, so for the majority of the cases, governments must promulgate and implement laws which allow keep the peace in the residential zones.
Researching and inventing takes a lot of time consumption, but an effort return is not a fair pay off, what demotivates people, so measures as providing inventors with exclusive short term full patents are implemented by governments to attract people to do more research in fields as technology for instance. (Mankiw, 1995, p. 206)
As it is said before, externalities basically have to do with the environment and public good, nevertheless, a positive impact on human capital by externalities, as education and on-the-job-training, has pushed the development of nations.
Human Capital
There are 4 major determinants of economic growth at the present which its performance is determined by observing an increase in the real GDP.
Land (or natural resources) is everything that nature provides to the productive process as water, plants, tress, minerals, among others.
Labor has to do with the workforce in the legal age with intellectual capacities to perform productive activities.
Technology refers to innovative management trends, scientific discoveries, improvements and any technological developments achieved by the scientific community that help the production enhance.
Finally, capital is the combination of workforce and machinery to perform productive tasks. (Boyes & Melvin, 2013, pp. 362-366).
It is in this part where it is a must to make a difference between physical capital and human capital. The physical capital, formed by the plant or equipment, is, in fact, the only capital considered by the United States’ the national income accounts (Mankiw, 1995, p. 293). Nevertheless, a broader panorama has been recently studied, resulting in emerging of the human capital that denotes all the of knowledge and qualifications acquired by individuals through education and on-the-job training. Semantically, it is a need to differentiate between knowledge and human capital; while the first concept refers to the way people understand the reality, human capital refers to the efforts invested to share this understanding with the labor force (Mankiw, 1995, p. 298).
Human Capital, Productivity and Externalities Relationship
One element that enhances the importance of training provided by the organization lies on the idea that it is possible to think that the workplace is the area in which the human capital can generate externalities of more immediate and important way because of the productive complementarities and the greater facility of the diffusion of the knowledge. Although producing human capital requires investments in terms of teachers, libraries, and student time (Mankiw, 2015, p. 532) , there are some evidences that prove that these externalities in human capital, in form of training provided by organizations to employees, have represented positively impacts on productivity. A study conducted by Bartel, et al. (2014), in which the sample was taken from the data of the Veterans administration hospital system, researchers tried to understand how the human capital could affect productivity. Human capital was chosen according to their education and on-the-job training. The group of researchers could determine that a great amount of the human capital could highly enhance patient results. It was found that patients who were assisted by both types of human capital stayed in hospital a shorter length of time. Similarly, Backman (2014), conducted a study in the business service sector in Sweden; his findings demonstrated how the role of human capital inside and outside of the firm had a positive impact on the organization’s productivity. Researchers applied a multilevel model and found that that organizations with greater human capital, represented in education, experience, and cognitive skills, perform better than their competitors. Therefore, when companies could not retain skillful and qualified employees, their figures of productivity presented some declines.
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