What determines productivity? The management practices hypothesis

Both as part of the third year labor group with David Card and the macro reading group with Yuriy Gododnichenko, we’ve been thinking a lot about productivity and why some firms are more productive than others.

This issue is key to understanding why we observe similar people being paid very different amounts at different firms, why the economy grows and fluctuates, and how and why firms decide to enter, exit, and hire.

One of the more prominent stories for productivity growth focuses on management practices. Here are a couple papers emphasizing this story:

1. What Determines Productivity?Lessons from the Dramatic Recovery of the U.S. and Canadian Iron Ore Industries Following Their Early 1980s Crisis [Schmitz  JPE 2005]

Great Lakes iron ore producers had faced no competition from for- eign iron ore in the Great Lakes steel market for nearly a century as the 1970s closed. In the early 1980s, as a result of unprecedented developments in the world steel market, Brazilian producers were offering to deliver iron ore to Chicago (the heart of the Great Lakes market) at prices substantially below prices of local iron ore. The U.S. and Canadian iron ore industries faced a major crisis that cast doubt on their future. In response to the crisis, these industries dramatically increased productivity. Labor productivity doubled in a few years (whereas it had changed little in the preceding decade). Materials productivity increased by more than half. Capital productivity in- creased as well. I show that most of the productivity gains were due to changes in work practices. Work practice changes reduced over-staffing and hence increased labor productivity. By increasing the fraction of time equipment was in operating mode, changes in work practices also significantly increased materials and capital productivity.

2. Why Do Management Practices Differ across Firms and Countries? [Nicholas Bloom and John Van Reenen JEP 2010]


A long-standing question is whether differences in management practices across firms can explain differences in productivity, especially in developing countries where these spreads appear particularly large. To investigate this, we ran a management field experiment on large Indian textile firms. We provided free consulting on management practices to randomly chosen treatment plants and compared their performance to a set of control plants. We find that adopting these management practices raised productivity by 17% in the first year through improved quality and efficiency and reduced inventory, and within three years led to the opening of more production plants. Why had the firms not adopted these profitable practices previously? Our results suggest that informational barriers were the primary factor explaining this lack of adoption. Also, because reallocation across firms appeared to be constrained by limits on managerial time, competition had not forced badly managed firms to exit.

4. Americans Do IT Better: US Multinationals and the Productivity Miracle [Bloom et al AER 2012]

US productivity growth accelerated after 1995 (unlike Europe’s), particularly in sectors that intensively use information technologies (IT). Using two new micro panel datasets we show that US multina- tionals operating in Europe also experienced a “productivity mira- cle.” US multinationals obtained higher productivity from IT than non-US multinationals, particularly in the same sectors responsible for the US productivity acceleration. Furthermore, establishments taken over by US multinationals (but not by non-US multination- als) increased the productivity of their IT. Combining pan-European firm-level IT data with our management practices survey, we find that the US IT related productivity advantage is primarily due to its tougher “people management” practices. (JEL D24, E23, F23, M10, M16, O30)

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
This entry was posted in Uncategorized and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s