Management Practices, Workforce Selection and Productivity

59 Pages Posted: 21 Mar 2016 Last revised: 15 Apr 2016

See all articles by Stefan Bender

Stefan Bender

Government of the Federal Republic of Germany - Institute for Employment Research (IAB)

Nicholas Bloom

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

David Card

University of California, Berkeley - Department of Economics; Institute for the Study of Labor (IZA); National Bureau of Economic Research (NBER)

John Van Reenen

London School of Economics - Centre for Economic Performance (CEP); Stanford Graduate School of Business; Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR)

Stefanie Wolter

Government of the Federal Republic of Germany - Institute for Employment Research (IAB)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2016

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.

Suggested Citation

Bender, Stefan and Bloom, Nicholas and Card, David E. and Van Reenen, John Michael and Wolter, Stefanie, Management Practices, Workforce Selection and Productivity (March 2016). NBER Working Paper No. w22101. Available at SSRN: https://ssrn.com/abstract=2752306

Stefan Bender (Contact Author)

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

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Nicholas Bloom

Stanford University - Department of Economics ( email )

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David E. Card

University of California, Berkeley - Department of Economics ( email )

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Institute for the Study of Labor (IZA)

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National Bureau of Economic Research (NBER)

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John Michael Van Reenen

London School of Economics - Centre for Economic Performance (CEP) ( email )

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Stanford Graduate School of Business ( email )

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Institute for Fiscal Studies (IFS) ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stefanie Wolter

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

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