When the economy stumbles, so too does an employee’s interest in thinking outside the box.

A disruption in the housing market triggered a decline in groundbreaking patents.| Reuters/Yuriko Nakao

It’s no secret that economic insecurity can wreak havoc on a person’s bank account, household wealth, and state of mind. But a recent study concludes that uncertainty in the economy can leave in its wake another victim: innovation among lower-level employees at technology companies.

The working paper (“Does Economic Insecurity Affect Employee Innovation?”) by professors Shai Bernstein and Timothy McQuade at Stanford Graduate School of Business — together with Richard Townsend at the University of California, San Diego — also finds that the effects of an economic slump are more pronounced among employees who had little equity in their homes before the crisis began and therefore fewer buffers to help weather the economic storm and avoid mortgage default.

“It was eye-opening to explore the effects of widespread disruptions in the housing market,” Bernstein says. “When confidence in household wealth collapsed, creativity suffered as well.”

To compile data, researchers compared employees who worked at the same firm and lived in the same metropolitan area but experienced different housing wealth declines during the 2008 financial crisis. Employees who experienced significant declines in house values subsequently pursued less innovative projects.

Bernstein says that the most likely explanation of the change in employee behavior during the disruption of the housing market is the possibility of mortgage default. The more employees were worried, the less likely they were to successfully pursue innovative projects at work, particularly projects that could be described as high-impact, exploratory, or complex.

“If the value of your house declines and it pushes you closer to defaulting on your mortgage, the last thing you would want is to experience job loss,” he says. “We find that most employees who found themselves in this situation didn’t push to innovate but instead backed off from risks, spending more energy focusing and concentrating on the immediate tasks at hand.”

Does Wealth Breed Complacency?

Interestingly, the authors also found that run-ups in housing prices before the 2008 financial crisis did not affect employee innovation.

Bernstein says he expected to discover that if employees are becoming wealthier, they might take more risks and become more innovative. In reality, data indicate wealth fluctuations only impacted employee innovation and productivity during economic downturns, suggesting that perhaps employees get complacent when things go well.

“You would think employees would have become more innovative when they were wealthier, willing to take more risks,” he says of the boom cycle before the financial crisis hit. “Still, during the good times, housing wealth had no effect on productivity at all.”

The Link Between Patents and Home Equity

Bernstein and his colleagues measured innovation through the number of patents a company obtained and the number of citations each patent received.

It was eye-opening to explore the effects of widespread disruptions in the housing market. When confidence in household wealth collapsed, creativity suffered as well. Shai Bernstein

The more citations a patent receives, the greater the number of future innovations and new technologies that rely on it. When inventors in the tech industry file for patents, they list the names of the employees who worked on the project. These names become part of the patents themselves, recorded forever. Thus, oft-cited patents not only have the greatest economic value to a company, but also can help identify which employees are generating the greatest amount of innovation.

By looking at patents, then, Bernstein and the other researchers were able to gauge the frequency with which certain employees were cited. Those who experienced declines in housing wealth appeared on fewer patents or did not appear on any patents at all.

What’s more, employees who experienced declines in housing wealth and did appear on patents appeared on patents with lower economic value — those that weren’t cited frequently. Bernstein explained that these patents likely represented incremental advances instead of high-impact innovations that revolutionized a product.

“Breakthrough patents are likely to be cited by a broad range of technologies because they’re so important and they innovate significantly,” he says. “Less-cited patents just aren’t as big of a deal — they’re more incremental.”

Researchers also noted that their study offers a new perspective on the organization of creativity. Previously, experts have postulated that top executives set the innovation policies of a firm. But the fact that household wealth shocks affecting low-level employees led to a change in projects pursued, Bernstein says, makes a strong argument that an important part of innovation in the tech industry happens from the bottom up, and not only from the top down.

Taking Preemptive Measures

Perhaps the biggest takeaway from this research is the simplest observation of all: Periods of financial crisis are stressful for lower-level employees, and the combination of heightened job insecurity and financial instability on the household level can be challenging in many ways.

Bernstein and his colleagues likened the scenario to employees feeling “squeezed” on both sides — a mental state that creates anxiety and distress and hampers a worker’s ability to focus on long-term innovation.

To counterbalance this scenario, companies may consider creating assistance programs to help vulnerable employees navigate challenging financial times.

Researchers also contemplated how to extrapolate their findings to other sectors of the economy and to other potential impacts of economic insecurity. Bernstein notes that economic instability may affect mental health problems and anxiety — two conditions that can bring productivity to a halt.

“There’s much more to understand about the effects of a downturn on employee productivity,” he says. “Ultimately, we view that as a first step that may help companies prepare for economic downturns preemptively, before they become problems in the first place.”