Organizational innovation and US productivity

Lisa Lynch 06 December 2007

a

A

The sustained productivity growth in the United States that began in the mid 1990s has surprised and befuddled economists. Whether you believe there has been a permanent change in the growth rate of the productive capacity in the US or that this is just a temporary phenomenon has significant implications for monetary policy. The rise in productivity during the later half of the 1990s and the first half of this decade has been mainly attributed to investments in information and communication technology. However, if you examine the various studies that have attempted to disentangle the contributions from capital deepening, labour quality and total factor productivity on average productivity, ones sees that total factor productivity has been extremely important for the growth in labour productivity in the US over the past decade (Jorgenson, Ho and Stiroh 2004).

Although total factor productivity is something of a black box, in Black and Lynch (2001, 2004) we analyze data from two unique surveys of workplace practices conducted by the US Census Bureau during the 1990s and argue that organization innovation is an important component of this black box. We define organizational innovation as including human resource management practices such as organizing workers in teams – either self managed or groups meeting on a regular basis to discuss workplace issues; job rotation; training for non-managerial workers; and reengineering. Table 1 shows the extent to which US employers have adopted various dimensions of organizational innovation.

Table 1: Incidence of Workplace Practices in 1997
Workplace Practice Manufacturing Non-Manufacturing
Production Workers Receive Training 76.6% 85.58%
Production Workers Meet Regularly to discuss workplace issues 74.2 72.6
Workers organized in self-managed teams 31.7 28.0
Job Rotation 49.6 39.8
Establishment has been Re-engineered in past 3 years 12.3 9.0

 

There have been numerous studies using individual company data, intra-industry data, and more representative data from national surveys that have established a significant relationship between various measures of organizational innovation and performance of firms (see Ichniowski and Shaw (2003) for a recent review of this literature). Most of the studies using data from intra-industry or nationally representative surveys find that the adoption of a coherent system of human resource management practices such as flexible job definitions, training, work teams, and incentive pay results in substantially higher levels of productivity than more traditional human resource management practices. Many of these studies have also found evidence of the existence of synergies among workplace practices – the total impact is greater than the sum of the parts. In Black and Lynch (2001, 2004) we find for the manufacturing sector that implementing these organizational innovations in a unionized setting resulted in higher productivity than doing the same thing in a non-unionized setting. We also find that what is more important for productivity is the diffusion of a practice inside an organization rather than the simple adoption of the practice. For example, the fraction of workers meeting on a regular basis to discuss workplace issues has a positive impact on labour productivity while just controlling for whether or not any workers meet is always insignificant.

We use our estimates of the impact of organizational innovation on productivity in a growth accounting framework to see how much of the growth in output from 1993-1996 in US manufacturing might be accounted for by organizational practices. The results are presented in Table 2. As shown in this table, it appears that workplace practices and re-engineering efforts accounted for as much as 30 percent of output growth over this period of time.

Table 2: Average Annual Rates of Growth in Output, Manufacturing
  BLS BLS BLS BLS Black/Lynch
  1979-90 1990-95 1995-98 1993-96 1993-96
Output 2.0% 3.8% 4.9% 4.2% 4.7%
Combined Inputs
(capital, labour, materials)
0.8 2.1 2.3 2.3 3.2
Multifactor Productivity 1.1 1.7 2.5 1.9 1.6
Contribution of R&D 0.2 0.2 0.2 - -
Workplace Practices - - - - 1.4
Remaining Residual - - - - 0.2

Source: Black and Lynch (2004). Data sources include Bureau of Labor Statistics, Multifactor Productivity Trends, 1998 released September 21, 2000 and calculations by Black and Lynch using Educational Quality of the Worker Employer Surveys 1994 and 1997. The contribution of R&D to multifactor productivity is for all private nonfarm businesses, not just manufacturing.

 

But if organizational innovation is so good why isn’t every employer doing this? Unfortunately, the research work on the determinants of the adoption of organizational innovation is not as well developed as the research on its relationship with firm performance. There are a variety of factors that the economics, industrial relations and sociology literature point to as possible “enablers” for organizational innovation. These include employer networks, external focus of managers, human capital already in place in a firm, and past investments in information technology and R&D. Factors that may inhibit innovation include entrenched management, lack of knowledge of best practice, and certain groups of workers who might feel threatened by these practices such as lower level managers and supervisors. The role of past profits and unions in the adoption decision is ambiguous. On the one hand, those firms with higher past profits can afford to invest in these relatively expensive organizational changes. However, if a firm is in financial difficulty it may be relatively easier to overcome internal resistance to organizational change. Workers in unionized firms may be more willing to participate in problem solving teams because they believe the union will protect their employment security, if not their specific job security. On the other hand, employers may adopt these practices as a way to avoid unionization or unions may resist the adoption because of concerns that this undercuts their power.

Using data from the US Census Bureau surveys on workplace practices matched to historical data on operating profits and past investment I (see Lynch 2007) examine the relationship between a variety of employer characteristics and the incidence and diffusion of organizational innovation over the 1990s in the US. I find that past profitability is positively associated with current investments in organizational innovation in addition to past investments in physical capital, IT, R&D, and human capital. Firms with a more external focus and more networks are also more likely to invest in organizational innovation. However, older firms and those that are unionized are less likely to have invested in organizational innovation, even after controlling for a wide range of characteristics including industry.

This analysis has some potential implications for US trend productivity growth in the medium term. The goods news is that in spite of the summer’s credit crunch, balance sheets of many US firms still have money on hand and their managers are increasingly outward focused as they search for new ways to improve business productivity. Investment in information technology has certainly backed away from the pace seen in the 1990s but it has not gone away completely. These factors suggest that in the medium term overall labour productivity growth in the US economy will likely settle around 2-2.5 percent (but higher in manufacturing). This is not as high as what we saw over the period of time 1995-2005 but is not as low as the rate of earlier decades. A concern for employers and policy makers, however, is the skills of the workforce. As shown in the OECD Adult literacy survey, US employers may have difficulty in finding the skills they need in the future when one in four young entrants into the US labour market have difficulty in reading and one in five have difficulty with basic arithmetic calculations. This may have significant negative consequences for the nature of future investments in organizational innovation.

Finally, the lack of systematic data collection in the United States on organizational innovation means that policy makers are left to rely on evidence from older surveys or stories on individual businesses to infer what is happening more broadly in businesses today. In this respect European policy makers have a potential advantage over their US counterparts given the availability of data on organizational innovation from surveys such as the Community Innovation Survey. As data on organizational innovation obtained in the 2005 CIS are analyzed to refine future questions for this survey, it may be useful to consider that in the US what seems to be critical to measure is the diffusion of practices within a firm rather than just incidence. More generally, our understanding of the impact of organizational innovation on firm performance and workers’ incomes would benefit from more longitudinal data that would help us better understand how and why firms adopt and drop practices.

References

Black, Sandra E. and Lisa M. Lynch. (2004). “What’s Driving the New Economy? The Benefits of Workplace Innovation,” The Economic Journal, vol. 114, February, pp. 97-116.
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, August, pp. 434-445.
Ichniowski, Casey and Kathryn Shaw. (2003). “Beyond Incentive Pay: Insiders’ Estimates of the Value of Complementary Human Resource Management Practices.” The Journal of Economic Perspectives, vol. 17(1), pp. 155-178.
Jorgenson, Dale M., Mun S. Ho, and Kevin J. Stiroh. 2004. “Will the US Productivity Resurgence Continue?” Current Issues in Economics and Finance, Federal Reserve Bank of New York, December.
Lynch, Lisa M. (2007). “The Adoption and Diffusion of Organizational Innovation: Evidence for the US Economy,” NBER working paper 13156, June.

a

A

Topics:  Productivity and Innovation

William L. Clayton Professor of International Economic Affairs, Fletcher School at Tufts University

Events

CEPR Policy Research