Economics of Human Resources

Nick Bloom (Stanford Economics)

Lecture 1: Management and firm Performance

Nick Bloom, Economics of Human Resources, 2011

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Why care about management and productivity?

Measuring management

Nick Bloom, Economics of Human Resources, 2011

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2011 3 . materials Nick Bloom. more capital or labor) or higher Total Factor Productivity (TFP) GDP = Inputs + Total Factor Productivity (TFP) e.g. capital. Economics of Human Resources.Productivity • Gross Domestic Production (GDP) per capita – basically Income per person – is a key indicator of economic wellbeing • GDP per capita increases by growth of inputs (e.g. Labor.

Economics of Human Resources. 2011 4 .Productivity “Facts” • Macro: Productivity varies across nations and over time – Robert Solow: TFP growth at least as important as growth of inputs in explaining economic growth – Cross country: GDP/capita differences largely due to TFP differences – US Productivity slowdown 1973-1995 and broadbased “productivity miracle” post 1995 • Micro: Productivity varies hugely across firms Nick Bloom.

In long-run most countries have enjoyed catch up Growth with the GDP/head leader (US) but not all Source: Maddison (2008) Data is smoothed by decade Nick Bloom. 2011 5 . Economics of Human Resources.

2011 6 . US=1 Nick Bloom.Productivity explains most of these income gaps Source: Jones and Romer (2009). Economics of Human Resources.

g.Why does productivity and GDP matter for policy • Increasing productivity (TFP) means that the economic pie is bigger so more room for – Consumption increases – Tax cuts – Increases in public goods (e. Economics of Human Resources. Environmental quality) • Harder to achieve if productivity stagnant • But what can be done to increase productivity? Nick Bloom. 2011 7 .

Factors increasing productivity – any guesses? Nick Bloom. Economics of Human Resources. 2011 8 .

g. Research & Development) – Skills (e. Expansion of college education) – Management (a technology & a skill?) • Some deeper factors “driving” the above – Competition – Globalization – Regulations & government policies – Culture Nick Bloom. 2011 9 . Economics of Human Resources.g.Factors increasing productivity • Proximate factors: – “Hard” technology (e.

g... 2004) • Not just mismeasured prices: in detailed industries (e. Economics of Human Resources. boxes. 2011 10 .) • These firm-level productivity differences could account for large part of cross country differences. Nick Bloom.Productivity Differences across firms within countries is huge • US Census data on population of plants – Plant at 90th percentile productivity 2x plant at the 10th percentile (Syverson. concrete.. bread.. plywood. etc. block ice.

mean=1 Nick Bloom. 2011 . Economics of Human Resources.Distribution of plant TFP differences: US-Indian productivity gap related to US having far fewer low productivity plants Source: Hsieh and Klenow (2008).

new technology spreads quickly to all firms.g. 2011 12 . more jobs) & low TFP firms contract (e. like Internet) • Between Firms (“Schumpeterian” view) – Low TFP firms exit and resources are reallocated to high TFP firms • High TFP firms expand (e. Economics of Human Resources.How Total Factor Productivity increases • Within Firms (Traditional view) – The same firms become more productive (e.g.g. less jobs) • Exit/entry Nick Bloom.

Economics of Human Resources. 2011 13 .These two effects are well known to cricket fans Within batsman (each batsman improves) Between batsman (more time for your best batsman) Nick Bloom.

2011 14 . Economics of Human Resources.Example of How Total Factor Productivity increases –Firm A twice as productive as firm B Period 1 A Productivity -output/jobs Jobs 2 10 B 1 10 20 Total Output Aggregate productivity 20 10 30 1.5 (=30/20) Aggregate (weighted) productivity is 1.5 Nick Bloom.

2011 15 . Economics of Human Resources.5 10 Period 2 B 1.5 (=30/20) 25 15 40 2 (=40/20) Aggregate productivity increases from 1.5 to 2 (one third) Nick Bloom.5 10 20 Total Output Aggregate productivity 20 10 30 1.How Total Factor Productivity increases: both firms increase TFP by 0.5 Period 1 A Productivity Jobs 2 10 B 1 10 20 Total A 2.

5 10 Period 2 B 1. Economics of Human Resources.5 to 2 (one third) Nick Bloom.5 (=30/20) 25 15 40 2 (=40/20) Aggregate productivity increases from 1.5 Period 1 A Productivity Jobs 2 10 B 1 10 20 Total A 2.How Total Factor Productivity increases: both firms increase TFP by 0. 2011 16 .5 10 20 Total Output Aggregate productivity 20 10 30 1.

How Total Factor Productivity increases reallocate all jobs & output to firm A Period 1 A Productivity Jobs 2 10 B 1 10 20 Total A 2 20 Period 2 B 1 0 20 Total Output Aggregate productivity 20 10 30 1. Economics of Human Resources.5 (=30/20) 40 0 40 2 (=40/20) Aggregate productivity increases from 1. 2011 17 .5 to 2 (one third)! Nick Bloom.

How Total Factor Productivity increases reallocate all jobs & output to firm A Period 1 A Productivity Jobs 2 10 B 1 10 20 Total A 2 20 Period 2 B 1 0 20 Total Output Aggregate productivity 20 10 30 1.5 (=30/20) 40 0 40 2 (=40/20) Aggregate productivity increases from 1.5 to 2 (one third)! Nick Bloom. Economics of Human Resources. 2011 18 .

Some Empirical Evidence on reallocation • Need large-scale database of many firms/plants • Reallocation appears to be an important factor: – In aggregate US productivity growth: ~half of aggregate TFP growth in a 5 year period in typical industry due to reallocation – For certain sectors: In retail trade. 2006) Nick Bloom. almost all of labor productivity growth is due to exit/entry of stores (Foster et al. Economics of Human Resources. 2011 19 .

What about management? • Case studies of management: – Toyota and British Leyland – Goldman Sachs and Lehman Brothers • Obviously management matters but – how to generalize? – how much does it matter? – what causes the differences? Nick Bloom. 2011 20 . Economics of Human Resources.

Economics of Human Resources. 2011 21 .Why care about management and productivity? Measuring management Nick Bloom.

etc. targets and incentives practices •≈45 minute phone interview of manufacturing plant managers 2) Obtaining unbiased comparable responses (“Double-blind”) •Interviewers do not know the company’s performance •Managers are not informed (in advance) they are scored •Run from London. 2011 22 . •Run by 78 MBAs types (assertive with business experience) Nick Bloom. with same training and country rotation 3) Getting firms to participate in the interview •Introduced as “Lean-manufacturing” interview. PBC. no financials •Official Endorsement: Bundesbank. Economics of Human Resources. CII & RBI.The Survey Methodology 1) Developing management questions •Scorecard for 18 monitoring.

Example question: “how is performance tracked?” Score (1): Measures tracked do not indicate directly if overall business objectives are being met. Certain processes aren’t tracked at all (3): Most key performance indicators are tracked formally. Tracking is overseen by senior management (5): Performance is continuously tracked and communicated. to all staff using a range of visual management tools Nick Bloom. both formally and informally. 2011 23 . Economics of Human Resources.

Economics of Human Resources. 2011 24 .Study question: “Do you think you can measure management practices?” Nick Bloom.

2011 Management score management 3 4 25 5 . Economics of Human Resources.Management practices and performance Productivity (log(sales/employee) -6 -4 -2 4 0 2 labp 1 2 Nick Bloom.

Economics of Human Resources.Study question: “Do you think this research proves that differences in management cause differences in firm performance?” Nick Bloom. 2011 26 .

Economics of Human Resources.2 mean of management Country Management Score 3.8 Average 3 3.6 2.Management practices across countries US Germany Sweden Japan Canada France Italy Great Britain Australia Northern Ireland Poland Republic of Ireland Portugal Brazil India China Greece Nick Bloom. 2011 Distinct groups 2.4 .

2011 28 .Study question: “What are the factors that are most important in leading to differences in management practices across firms and countries?” Nick Bloom. Economics of Human Resources.

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