FRBSF Economic Letter
2004-10; April 16, 2004
Workplace Practices and the New Economy
CSIP Notes appears
on an occasional basis. It is prepared under the auspices
of the Center for the Study of Innovation and Productivity
within the FRBSF's Economic Research Department.
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Since the second half of the 1990s, the growth rate
of labor productivity has been faster than at any time since the
1960s, especially in
the manufacturing sector. This turnaround in labor productivity
had led many to wonder whether there is something "new" going
on in the U.S. economy, and, if so, whether it is sustainable.
The
productivity growth surge is commonly associated with significant
investments in capital, especially in information technology (IT)
equipment and software. But, in fact, there is more to the story
than just capital investments. Another part of the story is innovations
in workplace practices. Over the past decade, more firms have adopted
work processes in which non-managerial workers are involved in
problem solving and identifying opportunities for innovation and
growth.
This Economic Letter looks at how increased managerial
focus on employee involvement, quality management, continuous innovation,
and incentive-based compensation has boosted labor productivity
and draws out some implications for future productivity gains.
The research summarized here indicates that the combination of
investment in new technology along with workplace innovation has
had especially high payoffs to U.S. firms in the 1990s, and, with
the continued reorganization of firms, high productivity growth
may continue into the future.
Workplace innovations
Based on earlier empirical literature on
workplace innovation, Black and Lynch (forthcoming) describe four
broad components of
this type of innovation that are associated with productivity and
wages. These components include employee voice, work design, workforce
training, and incentive-based compensation.
Employee voice includes
organizational structures that give workers, especially non-managerial
workers including lower-level production
workers, a voice in making decisions about the design of the production
process, as well as greater autonomy and discretion in the structure
of their work. As employee voice increases, firms are better able
to tap into the knowledge of non-managerial workers. The means
of increasing employee voice can range from the employee suggestion
box to self-managed teams of production employees.
Work design innovation
includes using cross-functional production processes, so that managers
can have more flexibility in allocating
and reallocating labor in the firm. Some examples include reengineering
efforts that reduce the number of workers per supervisor or the
number of levels of management within the firm, self-managed teams,
and introducing or extending job rotation and job share arrangements.
As work design innovations, such as teamwork, are put into place,
employees need additional training to help them work effectively
in a more interactive group environment.
Finally, incentive-based
compensation plans, such as stock options, profit sharing, and
bonuses, play an important role in firms' ability
to reorganize their workplaces. By increasing the proportion of
total compensation that is "at risk" and is linked to
firm performance, employers hope to help realign workers' interests
towards those of shareholders. In addition, such compensation plans
give non-managerial workers an incentive to come forward with ideas
that would improve the production process but put their own jobs
at risk.
Research has shown that these broad components of workplace
innovation have important links and synergies. For example, Boning,
Ichniowski,
and Shaw (2001) find strong evidence of complementarities between
employee voice and incentive-based compensation; that is, each
component enhances the effectiveness of the other. Bresnahan, Brynjolfsson,
and Hitt (2002) find evidence of complementarities among the level
of technology, organizational changes, and the level of worker
skills.
 Black and Lynch (2003) show that, by the mid-1990s, many
U.S. employers reported using a variety of practices that would
fit this description
of workplace innovation. Figure 1 summarizes the evidence. For
example, in 1996, almost half of all U.S. employers reported that
three-quarters or more of their employees were involved in regular
meetings to discuss workplace issues. In addition, over 40% of
employers had some form of profit sharing or stock option plan
for employees, and 17% reported that a quarter or more of their
employees worked in self-managed teams. During the 1990s, many
employers revamped their organizational design; more than a quarter
reported that they undertook significant reengineering of their
workplace over the period 1993-1996. The figure also shows that
employers are investing in computer technology, with over 40% reporting
that three quarters or more of their production or frontline employees
used computers in their job. Given all the changes in workplace
practices and investments in new technology, it is not surprising
that the majority of employers reported that the skills required
to perform production or support jobs at an acceptable level increased
between 1993 and 1996; only 6% reported that skill levels fell.
Boost
to productivity
Researchers have examined the impact of workplace
innovation on productivity using several approaches. One involves
conducting
detailed studies of firms within an industry and comparing the
productivity of firms that use these innovations to the productivity
of firms that do not. Such intraindustry studies avoid many of
the problems associated with underlying differences in production
processes. Some of the most careful work in this area is by Ichniowski,
Shaw, and Prennushi (1997). The authors examine the relationship
between workplace organization and productivity in the steel industry.
Their findings are consistent with those of other intraindustry
studies, namely, that productivity levels are substantially higher
in firms that adopt a coherent system of new management practices,
such as flexible job definitions, crosstraining, and work teams,
along with extensive reliance on incentive pay, than they are in
firms that follow more traditional management practices (less flexibility,
close supervision, hourly pay).
To explore the impact of workplace
innovations on productivity for the broad economy, rather than
only for one industry, Black
and Lynch (2001) use an alternative approach and examine a more
representative sample of firms. The data used are from the Educational
Quality of the Workforce-National Employers Surveys (EQW-NES),
two comprehensive and representative surveys of U.S. establishments
conducted in 1994 and 1997 by the U.S. Bureau of the Census. The
information from the 1994 survey on manufacturing establishments
includes a variety of workplace organization measures, worker characteristics,
and establishment-level investments in IT, and the authors merge
this with longitudinal information on past establishment employment,
output, and capital investments from 1988-1993. Using this approach,
the authors can estimate the impact of workplace practices on labor
productivity while controlling for a wide range of other factors,
including capital investments like IT. The results highlight an
important feature of workplace innovation: it is not what an establishment
reported it did, but how it actually did it, that matters in terms
of productivity. For example, in some cases, firms claimed to adopt
a "Total Quality Management" system (in which the firm
uses a formal system to change the corporate culture or organizational
structure), but, in fact, did not implement important components
of the program, such as involving a high fraction of non-managerial
workers in regular decisionmaking within the plant; in such cases,
the impact on productivity was insignificant or even negative.
In addition, although the proportion of managerial workers who
use computers had no impact on labor productivity, the proportion
of non-managerial workers who use computers did have a significantly
positive effect on productivity.
The impact of workplace innovation
also varies depending on the type of relations between labor and
management within the plant.
Within the manufacturing sector, the results show that that firms
having more traditional unionized labor-management relations and
a traditional workplace structure with little or no employee participation
in decisionmaking had significantly lower labor productivity than
unionized establishments that had adopted the kinds of workplace
innovations discussed here. In fact, those unionized firms that
did adopt such workplace innovations had higher productivity than
even the non-unionized firms with those innovations. This finding
may be due in part to the job security unions provided that enabled
the workers to speak freely about potential improvements in the
production process without fear of losing their jobs. These results
suggest that management practices that encourage workers to think
and interact in order to improve the production process, combined
with the job security guaranteed by unions, are strongly associated
with increased firm productivity.
In a follow-up study, Black and
Lynch (2004) explore the possibility that these results may be
driven by factors not previously accounted
for, such as managerial quality. For example, if establishments
with more workplace innovation also happen to have better managers,
it may appear that the innovations are the source of higher productivity
when in reality the source is better managers. That study uses
two waves of data on workplace organization for manufacturing plants,
and it looks at changes in workplace organization to see how they
are related to changes in productivity. If managerial quality and
any other omitted characteristics do not change over time (in this
case, three years), then the possibility that the earlier results
are biased will be eliminated. If, however, significant unobserved
time-varying characteristics of firms that are related to productivity
are present, then it is not possible to control for this remaining
potential bias.
After estimating the impact of changes in workplace
organization on labor productivity, while controlling for changes
in the capital
stock, materials, IT investment, and employee characteristics,
the original conclusions remain relatively unchanged. The proportion
of non-managerial workers using computers is still positively related
to labor productivity, again suggesting that IT is important. In
addition, workplace organization continues to have an impact; firms
that reengineer their workplaces experience higher labor productivity,
even after controlling for any time-invariant establishment effects.
Finally, the results continue to show synergies between workplace
practices and labor-management relations; as before, the firms
that perform best are those that are unionized and that have adopted
greater employee participation in decisionmaking.
Conclusion
The results described here, along with those from many
detailed industry-level studies, suggest that there has been a
dramatic
change in the organization of workplaces and that these changes
are associated with increased labor productivity. Whether these
gains in labor productivity are sustainable, however, is still
an unanswered question. Our results suggest that what matters for
productivity is the extent to which workplace innovation has been
integrated into the daily operations of a firm. In particular,
as more workers are involved in problem solving, productivity improves.
We speculate that this type of employee involvement will not necessarily
have just a one-time impact on productivity. Given the capacity
for firms to continue to restructure their workplace and learn
from their employees, these results suggest that productivity gains
could persist into the future. This may be what is "new" about
our so-called new economy.
Sandra E. Black
Assistant Professor, Department of Economics,
UCLA, and CSIP Visiting Scholar
Lisa M. Lynch
Academic Dean and William L. Clayton Professor
of International Economic Affairs,
The Fletcher School, Tufts University
References
Black, Sandra E., and Lisa M. Lynch. 2001. "How to Compete:
The Impact of Workplace Practices and Information Technology on
Productivity." Review of Economics and Statistics 83(3) (August)
pp. 434-445.
Black, Sandra E., and Lisa M. Lynch. 2003. "The
New Economy and the Organization of Work." In The Handbook
of the New Economy, ed. Derek Jones. New York: Academic Press.
Black,
Sandra E., and Lisa M. Lynch. 2004. "What's Driving
the New Economy? The Benefits of Workplace Innovation." Economic
Journal (February).
Black, Sandra E., and Lisa M. Lynch. Forthcoming. "Measuring
Organizational Capital in the New Economy." In Measuring
Capital in the New Economy, eds. Carol Corrado, John Haltiwanger, and Dan
Sichel. Chicago: University of Chicago Press.
Boning, Brent, Casey
Ichniowski, and Kathryn Shaw. 2001. "Opportunity
Counts: Teams and the Effectiveness of Production Incentives." NBER
Working Paper 8306 (May).
Bresnahan, Timothy, Eric Brynjolfsson,
and Loren Hitt. 2002. "Information
Technology, Workplace Organization, and the Demand for Skilled
Labor: Firm-Level Evidence." Quarterly Journal of Economics 117(1) pp. 339-376.
Ichniowski, Casey, Kathryn Shaw, and Gabrielle
Prennushi. 1997. "The
Effects of Human Resource Management Practices on Productivity." American
Economic Review 87(3) pp. 291-313.
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