Insider econometrics: modeling management practices and productivity.

• Author: Shaw, Kathryn L.

Which management practices raise the productivity of workers within firms and by how much? Why does this occur, and what types of firms benefit the most from adopting new management practices? While this line of research tests microeconomic models, the results are of interest to policymakers who wish to model economic growth, and to managers who seek evidence to support or refute their views.

Labor Management Innovations are Ongoing

Over time, firms have changed the ways they manage people. Firms are using more incentive pay or rewards, teamwork, training, careful hiring, flexible job assignment, information sharing, and greater delegation of authority to lower levels within the firm. Figure 1 shows the increased use of teamwork, training, and incentive pay within a longitudinal sample of firms in the U.S. and U.K. valve-making industry. Among these small manufacturing firms, workers now do more problem-solving in teams, they are more highly trained, and their performance-based pay replaces hourly pay. These trends seem to prevail across the U.S. economy. (1) According to Lemieux, MacLeod, and Parent (2008), from 1976 to 1998 the percent of workers who were classified as "working in performance pay jobs" grew from 33 percent to 40 percent. (2)

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While there is only limited time-series data that measure management innovations into the current decade, it appears that significant people management innovations are ongoing. Case study examples provide extensive and impressive evidence that firms continue to invest in new human resource (HR) management practices, and that many of these practices are combined with information technology innovations. (3)

Recent International Research on Management Practices

Over the last six years, the Alfred P. Sloan Foundation has sponsored an NBER project that delves deeply inside firms to examine the adoption and impact of innovative management practices, both within and across U.S. and European firms. Three NBER books summarize arc the result of this project. (4)

In Freeman and Shaw (2009), the authors of the seven studies of multinationals conclude that even when multinational firms make similar products in similar plants across countries, any differences in capital or in the quality of their managers will result in different productivity levels across plants. There are country-specific differences in the rules and regulations of labor practices, but they have only modest effects on workers' productivity relative to the other sources of productivity differences. Across all countries, there is evidence that "new" HR practices are being adopted widely by firms. Also, when firms put in new practices, such as incentive pay, their workers respond in comparable ways across countries.

In Lazear and Shaw (2009), eleven teams of researchers from Europe and the United States examine the distributions of wages within and across firms, revealing international differences and similarities in the structure of wages.

Insider Econometrics is Used to Model...