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| Prepared by the Office of the Chief
Economist |
September 10, 1996 |
Investments in education and training payoff in terms of higher productivity
and noninflationary wage growth. In a previous paper, Sandra Black and Lisa
Lynch find that raising the educational level of employees by a year results in
8-13 percent higher labor productivity. In addition, they find evidence to
support the view that employers who invest in computer training, especially in
the non manufacturing sector, have significantly higher productivity then their
competitors.
But investing in human capital is not the only way in which employers can
improve productivity. In a new paper summarized in this report, Black and Lynch
find that while simply adopting a Total Quality Management system does little
to improve overall productivity, the use of bench marking, increasing the
proportion of workers involved in discussing workplace issues, and having a
union all raise labor productivity in the manufacturing sector. In addition,
they find some managerial employees have higher labor productivity.
Computer technology is generating many well-paid high-skilled jobs and has
raised the productivity of many businesses. Alan Krueger (1993) has found that
workers who use commuters in their jobs are paid 15 percent more than similar
workers who do not work with computers. The challenge remains to ensure that
more workers are equipped with the skills that allow them access to these
better jobs so that they can enjoy a rising standard of living and firms can
achieve higher productivity growth. In addition, as the August 1996 Monthly
Labor Review shows, information technology has also resulted in job
displacement. Therefore, investments in education and training for incumbent
workers, especially for dislocated workers, are critical to minimize the costs
of this displacement.
Productivity in the United States is still the highest of any nation in the
world. However, as shown in Figure 1, average annual productivity growth since
1973, after smoothing for cyclical fluctuations, has remained at a steady 1.1
percent. This is significantly lower than the 2.9 percent average annual growth
rate of productivity between 1960 and 1973. Although manufacturing productivity
growth has improved recently to 4.2 percent, it remains of the utmost
importance to understand the determinants of productivity growth.
Investments in education and the skills development of workers are a way to
ensure higher labor productivity growth without igniting wage inflation. This
report summarizes new research that uses detailed establishment level data to
examine the respective contributions of human capital investments, workplace
practices, and computers on labor productivity.
While there have been many studies on the impact of capital investments and
R&D on firm productivity, there has been very little direct analysis of the
impact of workplace practices on productivity. In addition, while there have
been many studies done of the impact of human capital investments on
individuals' wages, much less is known about the direct effect of human capital
on the productivity of specific businesses. In a series of recent papers,
economists Sandra Black and Lisa Lynch examine the link between labor
productivity and a variety of workplace practices, human capital and computers
for a representative sample of establishments in both the manufacturing and
non-manufacturing sectors.
Black and Lynch use data from a unique survey called the Educational Quality
of the Workforce National Employers Survey (EQW-NES). The EQW National
Employers Survey was administered by the U.S. Bureau of the Census as a
telephone interview in August and September 1994 to a nationally representative
sample drawn from the Census database of private establishments. The survey
oversampled establishments in the manufacturing sector and those with more than
100 employees. Businesses with less than 20 employees, public sector employers,
not-for-profit institutions, and corporate headquarters were excluded from the
sample.
In a recently published paper in the American Economic Review, Black and
Lynch use data from the EQW-NES to examine the impact of human capital
investments and workplace practices on productivity, controlling for a variety
of factors including the size of the business, age of the business, labor
inputs, material inputs, book value of the capital stock, age of the capital
stock, experience of workers, capacity utilization, and industry. They find
that:
- Increasing the educational level of employees in an establishment by one
year raises productivity by as much as 8.5% in manufacturing plants and almost
13% in non- manufacturing establishments.
- Formal training done off-site increases manufacturing productivity.
- Training employees in computer skills greatly enhances the productivity of
non- manufacturing establishments.
While this analysis provides new insight into the role of human capital on
productivity, it only examined productivity at a point of time and was unable
to control for unobserved characteristics of the employers.
In a study released today entitled, "How to Compete: The Impact of
Workplace Practices and Information Technology on Productivity," Black and
Lynch examine a subsample of manufacturing plants from the EQW-NES that they
can match with longitudinal data from the Census Bureau for the period
1987-1993. In this way they are able to examine the factors that determine a
plant's labor productivity over time, controlling for the size of the capital
stock, the use of materials, unobserved characteristics of the plant that do
not vary over time, and observed workplace practices such as the use of
computers, human capital investments, the use of high performance work systems,
employee representation, profit sharing, and recruitment strategies. Major
findings from this study are summarized in Figure 2 and include:
- Increasing the average educational level of employees within a
manufacturing plant by one year would increase labor productivity by 8 percent,
everything else held constant.
- Increasing employee voice either through unionization or employee
participation in decision making raises productivity. More specifically, simply
adopting a Total Quality Management system has an insignificant effect on
productivity but raising the proportion of workers involved in decision making
within the plant either through regular meetings or unionization has a
significant positive impact on labor productivity. In other words, it is not so
much what you say you do, but how you do it that counts.
- Those manufacturing plants with profit sharing plans for non-managerial
employees had 7 percent higher labor productivity than their competitors.
Although there is a great deal of attention paid to the profit sharing
arrangements of managers and CEOs of companies, this new study indicates that
extending profit sharing to non-managerial workers has a more significant
effect on productivity than even profit sharing plans for managerial employees.
- Those employers who had a research and development facility in their firm
had on average 6 percent higher labor productivity.
- The use of benchmarking raised labor productivity by 6 percent. Previous
work on the effectiveness of benchmarking has largely focused on the specific
experience of certain firms in particular industries. This analysis shows that
what has been found in case studies holds up in a more nationally
representative sample of manufacturing establishments.
The current economic recovery has been led by investment growth (see Figure
3) in which computers have played a significant role. Investments in equipment
have grown by 55% during this recovery and have accounted for 12% of the output
growth. This is in contrast to the 1980s when equipment investment accounted
for less than 7% of output growth. Investment in computers and other
information technology has accounted for more than a third of the private
sector's investment in equipment in the 1990s.
Given the dramatic expansion of the use of computers there should be a
corresponding increase in productivity. But one of the paradoxes of the impact
of computers on productivity is that in spite of the billions of dollars that
companies have spent on computers, aggregate productivity growth has not
responded in kind. As Robert Solow has said "You can see the computer age
everywhere but in the productivity statistics." (NYTIMES Book review,
1987)
Oliner and Sichel (1993) argue that part of the reason why computers'
contribution to overall economic growth is small because computing equipment
has been a very minor share of the total capital stock. They argue evidence
that adding in software and computer-services labor would roughly double the
contributions that computer hardware makes to output growth.
When we switch from aggregate measures of productivity to analyses that use
firm level data, a much different picture emerges of the importance of
computers for productivity growth. For example, Brynjolfsson and Hitt (1993)
find that computers have a large positive impact on the productivity of firms.
This finding is also confirmed in new research by Sandra Black and Lisa Lynch.
- Black and Lynch find that raising proportion of nonmanagerial workers
using computers (in the manufacturing sector) from a third to two-thirds would
increase labor productivity by 5.4 percent (see Figure 2).
- As mentioned earlier, Black and Lynch find that non-manufacturing firms
that provided computer training to their workers have significantly higher
productivity than similar competitors.
- In spite of the positive impact of computers on labor productivity, Black
and Lynch (1995) find that not all employers are equally likely to provide
computer training to their employees. For example, establishments with less
than 250 employees are much less likely to offer computer training than larger
businesses. Businesses with more educated and experienced workers are more
likely to offer computer training as are those who use high performance work
practices such as Total Quality Management systems or benchmarking.
Investments in education and training payoff in terms of higher productivity
and non- inflationary wage growth. Black and Lynch find that raising the
educational level of employees by a year results in 8-13 percent higher labor
productivity. In addition, they find evidence to support the view that
employers who invest in computer training, especially in the non- manufacturing
sector, have significantly higher productivity than their competitors.
But investing in human capital is not the only way in which employers can
improve productivity. In a new paper released today, Black and Lynch find that
while simply adopting a Total Quality Management system does little to improve
overall productivity, the use of benchmarking, increasing the proportion of
workers involved in discussing workplace issues, and having a union all raise
labor productivity in the manufacturing sector. In addition, they find some
evidence that those manufacturing employers who provide profit sharing plans
for their non- managerial employees have higher labor productivity.
Computer technology is generating many well paid high skilled jobs and has
raised the productivity of many businesses. Alan Krueger (1993) has found that
workers who use computers in their jobs are paid 15 percent more than similar
workers who do not work with computers. The challenge remains to ensure that
more workers are equipped with the skills that allow them access to these
better jobs so that they can enjoy a rising standard of living and firms can
achieve higher productivity growth. In addition, as this month's issue of the
Monthly Labor Review shows, information technology has also resulted in job
displacement. Therefore, investments in education and training for incumbent
workers, especially for dislocated workers, are critical to minimize the costs
of this displacement.
Black, Sandra and Lynch, Lisa M. (1995) "Beyond the Incidence of
Training: Evidence from a National Employers Survey, NBER working paper no.
5231.
Black, Sandra E. and Lynch, Lisa M., (1996a) "Human Capital Investments
and Productivity, " American Economic Review Papers and Proceedings, May.
Black, Sandra E. and Lynch, Lisa M. (1996b), How to Compete: The Impact of
Workplace Practices and Information Technology on Productivity," working
paper, U.S. Department of Labor, Office of the Chief Economist.
Brynjolfsson, Eric and Hitt, Loren (1993). "New Evidence on the Returns
to Information Systems," working paper, Sloan School of Management, MIT.
Krueger, Alan (1993), "How Computers have Changed the Wage Structure:
Evidence from Micro Data 1984-1989." Quarterly Journal of Economics, Feb.
pp. 33-60.
Oliner, Stephen and Sichel, Daniel (1994) "Computers and Output Growth
Revisited: How Big is the Puzzle?", Brookings Papers on Economic Activity,
no. 2, pp. 273-317
U.S. Department of Labor, Bureau of Labor Statistics, (1996) Monthly Labor
Review, special issue on Computers and Employment, August.
Total nonfarm business and manufacturing sectors, 1973:4 - 1996:2
Productivity Increase
Gross Equipment Investment as a Share of GDP, 1973 - 1996
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