Management Practices, Workforce Selection and Productivity

Abstract

Recent research suggests that much of the cross-firm variation in measured productivity is due to differences in use of advanced management practices. Many of these practices -including monitoring, goal setting, and the use of incentives -are mediated through employee decision-making and effort. To the extent that these practices are complementary with workers' skills, better-managed firms will tend to recruit higher-ability workers and adopt pay practices to retain these employees. We use a unique data set that combines detailed survey data on the management practices of German manufacturing firms with longitudinal earnings records for their employees to study the relationship between productivity, management, worker ability, and pay. As documented by Bloom and Van Reenen (2007) there is a strong partial correlation between management practice scores and firm-level productivity in Germany. In our preferred TFP estimates only a small fraction of this correlation is explained by the higher human capital of the average employee at better-managed firms. A larger share (about 13%) is attributable to the human capital of the highest-paid workers, a group we interpret as representing the managers of the firm. And a similar amount is mediated through the pay premiums offered by better-managed firms. Looking at employee inflows and outflows, we confirm that better-managed firms systematically recruit and retain workers with higher average human capital. Overall, we conclude that workforce selection and positive pay premiums explain just under 30% of the measured impact of management practices on productivity in German manufacturing.

Management Practices and Productivity in Germany

“…Bender et al . () using similar WMS data for Germany also show such a positive relationship. However, these surveys only include a small number of establishments per country, for example around 700 for the United States and around 300 for Germany.…”

“…Bender et al . () provide evidence for such self‐selection in German linked employer‐employee data. Unfortunately, with our data we are not able to dig deeper into these channels.…”

Opening the Black Box of the Matching Function: the Power of Words

“…In fact, the literature on management shows that one of the distinctive features of good management is hiring the right people (Bender et al, 2017). Overall, our findings suggest that manager and senior jobs are sensitive, so hiring the right worker in in these positions can make a substantial difference to firm productivity.…”

Firms’ global engagement and management practices

“…As more structured management is related to higher productivity (Bender et al, 2016;Broszeit et al, 2016;Bloom and van Reenen, 2013), our findings suggest a mechanism for the productivity enhancing effects of exporting or FDI often found in the literature: firms need to improve their management performance to withstand stronger international competitive pressure, and this improves productivity performance as well. A more thorough analysis of this mechanism is high on our future research agenda.…”