Human-Capital Investments and Productivity

Author(s): Sandra E. Black and Lisa M. Lynch

Source: The American Economic Review , May, 1996, Vol. 86, No. 2, Papers and
Proceedings of the Hundredth and Eighth Annual Meeting of the American Economic
Association San Francisco, CA, January 5-7, 1996 (May, 1996), pp. 263-267
Published by: American Economic Association

Stable URL: https://www.jstor.org/stable/2118134

REFERENCES
Linked references are available on JSTOR for this article:
https://www.jstor.org/stable/2118134?seq=1&cid=pdf-
reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

is collaborating with JSTOR to digitize, preserve and extend access to The American Economic
Review

This content downloaded from

34.192.2.131 on Sun, 22 Aug 2021 21:23:39 UTC
All use subject to https://about.jstor.org/terms
 Human-Capital Investments and Productivity
By SANDRA E. BLACK AND LISA M. LYNCH*
There have been few studies in the United
States on the impact of human-capital in-
vestments, such as education and employer-
provided training, on productivity. Some of
the researchers who have been able to ex-
amine the linkage between training and pro-
ductivity (e.g., John Barron et al., 1987; John
Bishop, 1994) have used a subjective mea-
sure of productivity such as the answer to the
survey question: "on a scale of 1-4 how
has your productivity changed over the last
year?" The main problem with subjective
measures of productivity is that they are not
comparable across firms or even within firms
over time. However, given these caveats,
Bishop (1994) concludes that employer-
provided training raises this subjective pro-
ductivity measure by almost 16 percent.
Ann Bartel (1989) has linked data from a
survey of human-resource management prac-
tices at the establishment level with firm-
level data from Compustat on productivity
and financial performance. However, this ap-
proach is also problematic because most of the
establishments in the survey used by Bartel
(1989) were part of multiple-establishment
firms. Therefore there is a discrepancy in the
unit of analysis of inputs and outcomes, since
the Compustat data refer to the firm as a whole,
not to specific establishments. This problem,
along with a low overall response rate in the
survey used by Bartel ( 1989) (6 percent), lim-
* Department of Economics, Harvard University, Cam-
bridge, MA 02138, and Fletcher School of Law and
Diplomacy, Tufts University, Medford, MA 02155, re-
spectively. The work reported herein was supported under
the Education Research and Development program, agree-
ment number R17QOOO11-91, CFDA 84.117Q, as ad-
ministered by the Office of Educational Research and
Improvement, U.S. Department of Education. The funding
was administered through the National Center on the Ed-
ucational Quality of the Workforce (EQW), University of
Pennsylvania. The findings and opinions expressed in this
paper do not necessarily reflect the position or policies of
the U.S. Department of Labor, the U.S. Department of
Education, or the Bureau of the Census.
263
This content downloaded from
34.192.2.131 on Sun, 22 Aug 2021 21:23:39 UTC
All use subject to https://about.jstor.org/terms
its the reliability of the productivity analysis.
Nevertheless, Bartel finds evidence that re-
turns to training investments increase produc-
tivity on the order of 16 percent. In a follow-up
study using longitudinal data on manufactur-
ing firms, Bartel (1992) found that lagged
training investments rather than current train-
ing yield positive effects on productivity.
Our paper, using unique data from the Na-
tional Center on the Educational Quality of the
Workforce (EQW) National Employers' Sur-
vey, presents findings on the impact of human-
capital investments on business productivity.
The survey was designed to overcome some
of the limitations of previous studies and col-
lect more precise data on human-capital inputs
and establishment output. Part of the survey
(see Lynch and Black [1995 ] for more details)
was designed to replicate the questions asked
in the Annual Survey of Manufacturers (ASM)
on the dollar value of sales, receipts or ship-
ments, the book value of the capital stock,
and the cost of materials (including energy)
used in production during calendar year 1993.
Given the survey design, these variables can
then be augmented with worker characteristics
(such as education and training), other estab-
lishment characteristics (such as the age of the
capital stock), and workplace practices (such
as TQM [total quality management], bench-
marking, etc.) to estimate a much richer
production function than has been possible
before. In addition, since we have collected
sales, materials, and capital data specifically
for the establishment we are not forced to
match establishment-level workplace prac-
tices with enterprise-level sales information.
The EQW National Employers Survey (de-
signed by Lynch in collaboration with EQW Co-
Directors Robert Zemsky and Peter Cappelli)
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 Standard Statis-
tical Establishment Listing (SSEL) data base
of private establishments with more than 20
 264 AEA PAPERS AND PROCEEDINGS MAY 1996

employees. The survey oversampled establish- ployed at the establishment for less than one
ments in the manufacturing sector and those with year, whether or not grades or communication
over 100 employees. Public-sector employers, skills are considered important for recruitment
not-for-profit institutions, and corporate head- purposes, dummy variables for the use of
quarters were excluded from the sample. Of the TQM or benchmarking, a dummy variable
4,633 eligible employers contacted by the Cen- equal to 1 if the establishment exports any
sus Bureau, 1,275 refused to participate in the sales of its principal product, a dummy vari-
survey. This represents a 72-percent response able equal to 1 if there is an R&D center any-
rate, substantially higher than many similar em- where in the enterprise, controls for capacity
ployer surveys. Of the 3,358 establishments that utilization, and whether or not the establish-
participated in the survey, not all respondents ment is unionized. Since the values of sales,
completed all parts of the'survey by the inter- capital stock, and materials need to be deflated
view cutoff date of October 1, 1994. The final by the appropriate price deflators, we use
number of employers who completed all parts dummy variables for the two-digit standard in-
of the survey was 1,621 in the manufacturing dustrial classification of the establishment in
sector and 1,324 in nonmanufacturing. This rep- our cross-section estimation.
resents a 64-percent overall "completed" sur- As shown in Table 1, human capital is an
vey response rate. important determinant of establishment pro-
Using these data we are able to estimate ductivity. The average educational level of the
the impact of human-capital investments on establishment has a positive and significant ef-
productivity. We assume a standard Cobb- fect in both the manufacturing and nonmanu-
Douglas production function where facturing sectors. The estimated coefficient in
the unrestricted Cobb-Douglas model implies
(1) log(Yi) = constant + a'Xi that a 10-percent increase in average education
in the establishment (approximately one more
+ b log Ki + c log Mi year of school) will lead to an 8.5-percent in-
crease in productivity in manufacturing and a
+ d log(LH)i + e log(LQ)i. 12.7-percent increase in nonmanufacturing.
In results reported in Lynch and Black
Output Yi is proxied by the dollar value of (1995) we also estimated a model with two
sales, receipts, or shipments for calendar year additional restrictions. The first restriction
1993 for establishment i, denoted by Si; Ki is tests (in the spirit of Dale Jorgenson and Zvi
the 1993 book value of the capital stock; Mi Griliches [1967]) whether or not the coef-
is the total cost of goods and services used in ficients on labor quality (average education)
the production of 1993 sales, including en- and labor hours are equal. If this is the case,
ergy; LHi are total labor hours for 1993, andthen we can consider the labor input to be
LQi is a measure of labor quality, which we adjusted for quality, where the adjustment
proxy with the average educational level of the factor is proportional to the average educa-
establishment, denoted by ED. The vector Xi tional level of the establishment. In addition
includes whether or not the establishment is we test to see whether the restriction of con-
part of a multi-establishment enterprise, the stant returns to scale is accepted by our data.2
age distribution of the capital stock, total num- Both of these restrictions are accepted. In the
ber of workers trained in 1990 and 1993, ' the
percentage of formal training that occurs off
the job, dummy variables for three specific
2Most studies on the determinants of productivity of U.S.
types of training activities, the percentage of establishments using cross-section data find constant re-
the full-time workforce that has been em- turns to scale. One difference between our results and
those of other studies is that the coefficient on materials
is much lower than what has been found elsewhere. We
believe that this is because respondents had more difficulty
' We have also included training in the form of the answering this question in a telephone interview than the
proportion of workers trained, but the reported results do questions on sales, capital, or labor. Therefore, there is
not change. probably significant measurement error for materials.

This content downloaded from

34.192.2.131 on Sun, 22 Aug 2021 21:23:39 UTC
All use subject to https://about.jstor.org/terms
 VOL. 86 NO. 2 TECHNOLOGY, HUMAN CAPITAL, AND THE WAGE STRUCTURE 265

TABLE I-DETERMINANTS OF LOG SALES restricted model (see Lynch and Black, 1995)
(COBB-DOUGLAS PRODUCTION FUNCTION)
the implied coefficient on education would
suggest that for a 10-percent increase in edu-
Dependent variable = log(sales)
cation, productivity would rise 4.9 percent in
Independent variable Manufacturing Nonmanufacturing
manufacturing and 5.9 percent in nonmanu-
Constant 0.341 -1.252 facturing. These values combined with those
(0.317) (-0.659)
presented in Table 1 set the range of educa-
Log capital 0.25* 0.36*
(11.304) (9.957)
tion's impact on productivity. Although the
Log materials 0.26* 0.06*
range is somewhat large, the impact of edu-
(11.812) (2.958) cation on establishment productivity is sub-
Log hours 0.47* 0.628* stantial, especially in nonmanufacturing. Since
(12.45) (10.948)
the nonmanufacturing sector is expanding much
Multiple 0.13* -0.05
more rapidly than manufacturing in the United
establishments (2.257) (-0.382)
States, this result may shed some light on the
Percentage of -0.003 0.005
equipment <1 (-1.331) (1.249) widening college-high-school wage gap that
year old occurred during the 1980's.
Percentage of 0.003* -0.0003 Training has a more complex impact on the
equipment 1-4 (2.153) (-0.155)
years old
productivity of establishments. Unfortunately,
we are only able to measure the number of
log (average 0.86* 1.29t
education) (2.028) (1.793) workers involved in training at two points in
log (trained in 1993) -0.12 0.08 time: 1990 and 1993. This means that we do
(-1.294) (0.39) not have a measure of the accumulated stock
log (trained in 1990) 0.09 -0.11 of training for all workers; instead we are only
(0.994) (-0.515)
able to capture training that occurred during
Percentage of formal 0.002* -0.001
training outside (2.104) (-0.461)
two particular years. Thus our estimates of the
working hours impact of training are likely to underestimate
Computer training 0.05 0.26t the true returns. We find that the number of
(0.714) (1.895)
workers trained, especially in 1993, has no ap-
Teamwork training 0.07 -0.20
parent impact on productivity. In manufactur-
(0.983) (-1.617)
ing, the number of workers trained at the two
Supervisor training -0.03 0.20
(-0.336) (1.392) points in time is not statistically significant,
Grades a priority in -0.08 0.27t although the point estimates suggest that cur-
recruitment (- 1.226) (1.655) rent training lowers productivity, while past
Communication a 0.09 0.14 training raises current productivity. This is
priority in (1.52) (0.962)
recruitment
very similar to what we see happening with
Percent workers -0.003 -0.008*
the age of the capital stock in manufacturing.
employed < 1 (-1.61) (-2.692) Capital equipment less than one year old low-
year
ers productivity (although the effect is not sta-
Unionized -0.05 0.35*
tistically significant), while capital stock aged
(-0.793) (2.494)
1-4 years raises current productivity. This
TQM -0.02 -0.01
(-0.347) (-0.121)
suggests some sort of adjustment story, where
Benchmark 0.03 0.08
initially there are adjusted costs associated
(0.539) (0.621) with the introduction of new skills and capital
R&D center -0.01 -0.05 into the workplace which are then followed by
(-0.200) (-0.334)
positive improvements in productivity.
N: 821 525 When we include other dimensions of train-
Adjusted R2: 0.8387 0.6512
ing we see more compelling evidence about
the impact of training on productivity. For
Notes: The estimated equation also includes two-digit SIC industry controls,
capacity utilization, unionization, age of the establishment, and a dummy vari- manufacturing, the greater the proportion of
able for whether the primary product is exported. Numbers in parentheses are
time spent in formal off-the-job training, the
t-test results.

t Statistically significant at the 10-percent level. higher the productivity. There are two pos-
* Statistically significant at the 5-percent level. sible reasons. First, training workers outside

This content downloaded from

34.192.2.131 on Sun, 22 Aug 2021 21:23:39 UTC
All use subject to https://about.jstor.org/terms
 266 AEA PAPERS AND PROCEEDINGS MAY 1996

TABLE 2-RELATIVE RANKING OF FACTORS grades are for most employers. Yet the results
IN MAKING HIRING DECISIONS presented in Table 1, at least for nonman-
ufacturing, suggest that those employers who
Applicant characteristic Rank
do focus on grades experience significantly
Applicant's attitude 4.6 higher productivity than their competitors.
Applicant's communication skills 4.2
Other interesting results in Table 1 include
Previous work experience 4.0
Recommendations from current employees 3.4
the negative impact that high labor turnover
Previous employer recommendation 3.4 has on productivity, especially for nonmanu-
Industry-based credentials 3.2 facturing. Although it is not news that turnover
Years of completed schooling 2.9 is high in nonmanufacturing, this table sug-
Scores on tests administered as part of the
gests that establishments pay quite a high
interview 2.5
Academic performance (grades) 2.5 price for this turnover in terms of lower sales.
Reputation of applicant's school 2.4 In nonmanufacturing, unionization has a pos-
Teacher recommendations 2.1 itive and rather large effect on establishment
productivity.
Note: Rank is based on a scale of 1-5, where 1 = not
important or not considered, 5 = very important.
At the same time, the use of TQM or bench-
Source: Lynch and Zemsky, 1995. These data come from marking does not seem to have any impact on
the answer to the following question: "When you consider current productivity of establishments. One
hiring a new non-supervisory or production worker (front- possible explanation of why these variables do
line worker), how important are the following in your de-
not enter significantly is that we have not con-
cision to hire?"
trolled for the timing of the introduction of
these practices. If an employer has only just
introduced these practices we would expect to
working hours lowers the output loss associ- see a delay in their impact on productivity, just
ated with on-the-job training. Second, those as in the introduction of new physical capital.
employers that train their workers off the job In addition, crude measures of the incidence
may be investing in more advanced and time- of TQM or benchmarking do not capture
intensive skills development. Unfortunately, how these programs are actually being im-
our survey does not allow us to explore this plemented. Perhaps what is most important
issue in more detail. is not the introduction of TQM, but rather
For nonmanufacturing, the content of the how it is introduced, when it is introduced,
training programs provided by employers seems and how it has been implemented. This issue
to have an important impact on productivity. In has been examined in much more detail in
particular, computer-skills development has a Casey Ichniowski et al. (1993) where, using
significant and positive impact on establishment more detailed industry information obtained in
productivity, even controlling for industry. Thispersonal interviews, they find the effect on
finding is consistent with evidence presented in productivity of high-performance work sys-
Alan Krueger (1993) of higher wage premiums tems depends on how they were actually im-
associated with workers who use computers on plemented. Therefore, future data-collection
the job. This result suggests that it is not so much efforts should focus on obtaining more infor-
whether you train workers, but rather what you mation on the content, timing, and implemen-
train the workers in that affects establishment tation of programs such as employer-provided
productivity. training and total quality management.
Recruitment strategies of establishments While the results in Table 1 highlight the
also play an important role in their productiv- importance of human capital, especially edu-
ity. In nonmanufacturing, those establishments cation and certain types of employer-provided
that cite grades as an important priority in hir- training, for establishments' productivity, there
ing also have higher productivity. Table 2 are several limitations with these findings. First
shows the ranking in importance by employers and foremost is the problem of endogeneity. The
of different applicant characteristics for re- presence of unobserved establishment character-
cruitment and selection. What is striking about istics that are time-invariant is likely to bias our
this table is how low priority an applicant's estimated coefficients. Although we have a

This content downloaded from

34.192.2.131 on Sun, 22 Aug 2021 21:23:39 UTC
All use subject to https://about.jstor.org/terms
VOL. 86 NO. 2 TECHNOLOGY, HUMAN CAPITAL, AND THE WAGE STRUCTURE 267

richer specification for the production function

than most researchers, we may still not be cap-
turing all establishment characteristics linked to
productivity. Our estimated coefficients may
also be affected by measurement error. If we had
longitudinal data on the establishments in our
survey we could try to address the first problem
of unobserved heterogeneity using "within"
estimators to control for time-invariant, un-
observed employer characteristics. Generalized
method-of-moments estimation of the model in
first differences would also allow us, in princi-
ple, to address the issue of measurement error.
Longitudinal data on training inputs would also
allow us to examine how the accumulation of
training over time within a business affects cur-
rent productivity. Finally, our results suggest that
it is important to move beyond simple measures
of the incidence of workplace practices such as
training or TQM in order to understand how
these types of workplace strategies/investments Krueger, Alan. "How Computers Have Changed
actually pay off for employers.
REFERENCES
Barron, John; Black, Dan and Loewenstein, Mark.
"Employer Size: The Implications for
Search, Training, Capital Investment, Start-
ing Wages, and Wage Growth." Journal of
Labor Economics, January 1987, 5(1), pp.
76-89.
Bartel, Ann. "Formal Employee Training Pro-
grams and Their Impact on Labor Produc-
tivity: Evidence from a Human Resource
Survey." National Bureau of Economic Re-
search (Cambridge, MA) Working Paper
No. 3026, 1989.
. "Productivity Gains from the Im-
plementation of Employee Training Pro-
grams." National Bureau of Economic
Research (Cambridge, MA) Working Pa-
per No. 3893, 1992.
Bishop, John. "The Impact of Previous Train-
ing on Productivity and Wages," in L.
Lynch, ed., Training and the private sector:
International comparisons. Chicago: Uni-
versity of Chicago Press, 1994, pp. 161-99.
Ichniowski, Casey; Shaw, Kathryn and Prennushi,
G. "The Effect of Human Resource Manage-
ment Practices on Productivity." Mimeo, Co-
lumbia University, July 1993.
Jorgenson, Dale and Griliches, Zvi. "The Expla-
nation of Productivity Change." Review of
Economic Studies, July 1967, 34(3), pp.
249-83.
the Wage Structure: Evidence from Micro
Data, 1984-1989." Quarterly Journal of
Economics, February 1993, 108(1), pp.
33-60.
Lynch, Lisa M. and Black, Sandra E. "Beyond the
Incidence of Training: Evidence from a Na-
tional Employers' Survey." National Bureau
of Economic Research (Cambridge, MA)
Working Paper No. 5231, August 1995.
Lynch, Lisa M. and Zemsky, Robert. "EQW Na-
tional Employers Survey: First Results."
Mimeo, National Center on the Educational
Quality of the Workforce, University of
Pennsylvania, February 1995.

This content downloaded from

34.192.2.131 on Sun, 22 Aug 2021 21:23:39 UTC
All use subject to https://about.jstor.org/terms