The Effects of Human Resource Management on Workers' Wages and Firm Productivity

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1 The Effects of Human Resource Management on Workers' Wages and Frm Productvty ROA-RM-2003/9E Andres de Grp, Inge Seben Research Centre for Educaton and the Labour Market Faculty of Economcs and Busness Admnstraton Maastrcht Unversty Maastrcht, December 2003

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3 Contents Page Abstract Acknowledgement 1 Introducton 1 2 Pror Research Studes of the Effects of Human Resource Development Studes on the Effects of Human Resource Management Measures of Productvty 6 3 Data 7 4 Econometrc specfcatons and estmaton results Human Resource Management Systems 14 5 Conclusons and dscusson 17 References 19

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5 Abstract We analyze whether the effects of human resource practces on workers wages and frm productvty are smlar or dfferent. We fnd that frms wage polces overestmate the relevance of sector-specfc sklls and underestmate the productvty enhancng effect of computer sklls. Moreover, only the frm benefts from performance related pay, whereas only the workers beneft from performance evaluaton ntervews. Fnally, our estmaton results show that n small frms a more advanced HRM system may not result n a convergence of nterests between workers and the frm. Acknowledgement We would lke to thank Lex Borghans, Bart Dephus, Arnaud Dupuy, Ben Krechel, Phlp Marey, Wendy Smts, Danelle Van Jaarsveld and Bas ter Weel for ther helpful comments on an earler draft of ths artcle.

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7 1 Introducton In ths study we examne to what extent human resource practces affect workers wages and frm level productvty. Ths nvestgaton allows us to examne the extent to whch the frm as well as ts workforce beneft from partcular human resource management (HRM) practces. Or to put t n dfferent terms: Whether the wage polcy of the frm stmulates a convergence of the nterests of the workforce wth frm nterests. We wll present an nsder-econometrc analyss (Ichnowsk & Shaw, 2003) of the effects of HRM practces n Dutch pharmaces at the ndvdual frm level, controllng for both workforce and frm characterstcs. Our analyss focuses on the core workers n the pharmaces: the pharmacst s assstants. 1 The advantage of ths jobs-based approach (Lazear, 1995) s that we are able to analyze a category of workers that s homogeneous wth respect to ther occupaton as well as ther educatonal background. 2 We wll analyze the effects of specfc HRM practces as well as the effects of more consstent HRM systems, rangng from tradtonal workplace relatons to a Hgh Involvement Management (HIM) system. We dstngush between varous HRM polces related to recrutment, human captal (.e. human resource development), employablty, ncentve pay and frnge-benefts offered to employees. We constructed lnked employer-employee data, relatng the data of an employers survey we conducted among pharmaces n the Netherlands to admnstratve data on the workforce and the productvty of the frms. The admnstratve data enable us to use a physcal measure of productvty related to the pharmaces sector. 3 the number of prescrpton-lnes delvered to customers. These prescrpton-lnes drectly measure a pharmacy s producton, as there are only mnor dfferences n the workload between delverng dfferent medcnes. Our study contrbutes to the lterature on the effects of HRM n several ways. Frst, our study s the frst to systematcally analyze lnked employer-employee data to determne whether the effects of varous HRM practces on frm performance dffer from the effects on the remuneraton of the workforce. Second, our analyss allows us to test whether workers wages are more affected by nsttutonalzed practces n salary scales than by workers real contrbuton to frm performance. From ths perspectve, we can examne whether tradtonal proxes of workers sklls acqured on the job, such as workers age and job tenure, really affect workers 1. See Arthur (1992), Osterman (1994, 2000) and Batt (2002) for a smlar approach. Osterman defnes these core workers as the largest group of non-supervsory, non-manageral workers at the establshment of a frm who are drectly nvolved n makng the product or provdng the servce. 2. In the Netherlands a person s only allowed to work as a pharmacst s assstant f he or she s a graduate from a pharmacst s assstants school. 3. Arthur (1994), MacDuffe (1995) and Ichnowsk et al. (1997) also use physcal measures of productvty related to the branch they analyze. These knd of sector specfc performance measures can be consdered as relatvely hard data on the performance of a frm (Ichnowsk, Kochan, Levne, Olson & Strauss, 1996). 1

8 productvty or merely reflect nsttutonalzed practces n salary scales. Thrd, wth respect to the human captal of the workforce, other studes of the effects of HRM practces merely focus on workers partcpaton n tranng. In ths study we wll also take account of the actual stock of sklls (.e. workers scores on the varous relevant competences) by whch the human captal embedded n a frm s workforce may contrbute to frm performance and workers wages. Fourth, the lnked employer-employee data facltates an analyss of the extent to whch the sklls of the workers are rewarded accordng to ther relevance to the frm. Ths allows us to analyze whether frms could gan from algnng ther wage polces wth a worker s contrbuton to frm performance. Ffth, our analyss of the effectveness of more advanced HRM systems n pharmaces contrbutes to the extenson of the fndngs on the effects of HIM/Hgh Performance systems n manufacturng plants to the servce sector, where a growng majorty of the workng populaton s employed (cf. Batt, 2002). Fnally, we focus on the core workers n small frms, whereas almost all studes of the effectveness of HRM practces are set n large frms. Therefore, our analyss contrbutes to the understandng of the thresholds n the dffuson of more advanced HRM system among smaller frms. 2 Pror Research In the lterature on the effects of HRM practces at the frm level, two avenues of research exst. Frst, the human captal lterature focuses on the effects of tranng at the frm level. Although emprcal human captal research tradtonally focuses on the earnngs functon of the ndvdual worker, a stream of research s emergng that analyzes the effects of human captal nvestments at the frm level. The second lne of research has developed from the HRM or personnel economcs lterature (see Wood, 1999; Ichnowsk & Shaw, 2003 for an overvew of these studes). In ths lterature, the effects of mscellaneous HRM practces are analyzed, although most authors attempt to focus on the effects of consstent HRM systems (e.g. Arthur, 1994; Ichnowsk, Shaw & Prennush, 1997), wth a specal nterest n the so-called Hgh Performance Workplace (Ichnowsk & Shaw, 2003). 2.1 Studes of the Effects of Human Resource Development In the human captal lterature, many studes have analyzed the effects of tranng on workers wages. Several studes found consderable returns on workers partcpaton n tranng (e.g. Lynch, 1994). However, after controllng for selectvty, Goux & Maurn (2000) found that tranng has no real effect on workers wages. It should be noted, however, that studes analyzng the effects of tranng on wages could underestmate the effect of tranng on productvty. As human captal theory has shown, the productvty effects of tranng are only fully reflected n workers wages when the tranng s general, and assumng a perfectly compettve labor market. 2

9 The relatonshp between wage ncreases and productvty ncreases vares based on whether the frm or the worker pays the costs of tranng, whch s related to the structure of the labor market. If the labor market s characterzed by mperfect competton, barganng and rent-sharng may occur (cf. Stevens, 1994; Acemoglu & Pschke, 1999). Moreover, apart from ther wages, workers may receve some knd of non-fnancal remuneraton, and part of the returns to ther human captal may be backloaded towards the end of ther careers to ensure ther loyalty to the frm (Lazear, 1979). In the human captal lterature, t s broadly recognzed that apart from workers partcpaton n tranng, workers acqure many work-related sklls by means of nformal on-thejob tranng or experence (cf. Mncer, 1974). In emprcal analyses ths nformal human resource development s measured by proxes such as a worker s tenure (an ndcator of the frmspecfc sklls a worker has acqured on the job) and a worker s age (an ndcator of the general sklls a worker has acqured on the job) (e.g. Brown, 1989; Acemoglu & Pschke, 1998). These emprcal studes generally show that workers experence contrbutes to ther productvty, n as far as ths s ndcated by the wages they earn. One mght, however, wonder whether workers experence really contrbutes to ther productvty. Ths queston was already posed n the early human captal lterature (Mncer, 1974). Workers lfe-cycle earnngs growth mght reflect nsttutonal arrangements n salary-scales rather than productvty gans, and need not necessarly reflect the productvty enhancng effects of the varous sklls workers have (cf. Medoff & Abraham, 1980, 1991; Brown, 1989). The studes mentoned above analyze the effects of tranng and nformal human resource development on workers wages. Far fewer studes exst that analyze the effects of these factors on the productvty of the frm. Moreover, the results of these studes are hghly dependent on the estmaton technque, the defnton of tranng and the measure of productvty (cf. Ballot, Fakhfakh & Taymaz, 2001). Some authors have found postve effects of tranng on the productvty of the frm Holtzer, Block, Cheatham & Knott (1993), Bartel (1994) and Dearden, Reed & Van Reenen (2000). Black & Lynch (2001), however, dd not fnd an effect of the number of employees traned on the productvty of the frm, whereas Barrett & O Connell (2001) found that general tranng has a postve effect on productvty growth whereas specfc tranng has no effect. Dearden, et al. (2000), meanwhle, found that the effects of tranng on wages are about half the sze of the effects on ndustral productvty. However, they dd not focus on the productvty of ndvdual frms, but on the productvty of the sector of ndustry. 4 It s mportant to note that, wth respect to the human captal embedded n the workforce of a frm, studes of the effects of human resource development (HRD) on frms productvty merely focus on partcpaton n tranng, and do not nclude aggregate measures of workers stock of tranng nvestments nor the level of the relevant sklls of the workers (cf. Lynch, 1998). 4. They combne Labor Force Survey data on ndvdual workers wth data on the value added per sector of ndustry n manufacturng. 3

10 As the exstng human captal lterature s not conclusve regardng the effects of HRD on workers wages and frm productvty, the followng alternatve hypotheses can be stated: Hypothess 1a: Human Resource Development wll have postve effects on both frm productvty and workers wages. Hypothess 1b: Human Resource Development wll have dfferent effects for workers and the frm that employs them. 2.2 Studes on the Effects of Human Resource Management In the HRM or personnel economcs lterature, several arguments can be found for the expected postve relaton between HRM practces and a frm s productvty (cf. Wolf & Zwck, 2002). Frst, as has been dscussed above, nvestments n the human captal of the workforce may ncrease the productvty of workers (e.g. Bartel, 1994). Second, as the lterature on the Hgh Performance Workplace emphaszes, good HRM polces may ncrease the motvaton of workers (Ichnowsk et al., 1997; Wood, 1999). Thrd, ncreasng the autonomy and responsbltes of the workers may dmnsh waste and neffcences because t enables the frm to take advantage of the specfc knowledge of non-manageral workers (Appelbaum, Berg, Baley & Kalleberg, 2000; Preuss, 2003). Fourth, good HRM polces may contrbute to workers commtment to ther tasks and wllngness to do a better job (Ichnowsk et al., 1997). Batt (2002) supports ths argument and ts applcaton to the servce sector. She found that hgh commtment of the workforce contrbutes to the effectveness of employee-customer nteracton n servce-sector frms. Ffth, good HRM polces reduce qut rates, whch, n turn, decreases recrutment and selecton costs, and ncreases the benefts of nvestments n frm-specfc sklls. Moreover, n the servce sector, employee turnover mght nduce customer turnover (Arthur, 1994; Huseld, 1995; Batt, 2002). Fnally, gvng more responsblty to the work floor enables the frm to delayer the organzaton, thereby reducng the costs of the mddle management (Appelbaum et al., 2000). Several studes have found that HRM practces have a postve effect on a frm s productvty, although there s usually no clear effect attrbutable to specfc practces (Youndt, Snell, Dean & Lepak, 1996; Ichnowsk et al., 1997). The latter mght be due to multcollnearty among the varous HRM practces, as several practces are strongly correlated (Wolf & Zwck, 2002), or may reflect the argument that only consstent bundles of HRM practces are effectve (Arthur, 1994; MacDuffe, 1995; Ichnowsk, Shaw & Prennush, 1997). Many studes have emphaszed the complementarness of varous HRM practces. Mlgrom & Roberts (1995) developed a formal model n whch the varous HRM practces of a frm are seen as symmetrc Edgeworth complements, n the sense that dong more of any one of these practces ncreases the returns of dong addtonal practces. The emergng lterature on Hgh Involvement Management (HIM) or the Hgh Performance Workplace (HPW) focuses partcularly on the nternal ft of the varous HRM practces. A HIM strategy focuses on ncreasng the commtment of the personnel 4

11 to the frm n whch they work. The focus of HPW s broader and hghly related to Total Qualty Management (TQM), whch s based on both the nternal and organzatonal ft of a frm s HRM polces. 5 Arthur (1994) found that steel mlls that use an HRM commtment system have hgher productvty levels than those that do not. Others have found that the HPW has sgnfcant postve effects on frm productvty (Huseld, 1995; Ichnowsk, et al., 1997; Batt, 2002; Wolf & Zwck, 2002). Other studes, however, dd not fnd clear effects of HRM systems or bundles of HRM practces on productvty (e.g. Delaney & Huseld, 1996). 6 Kelley (1996) found that HPW practces do not affect the performance of sngle-plant frms, whereas Batt (2002) found that HIM practces do not pay off n small frms that operate on local markets wth a restrcted scope of ther market. Cappell & Neumark (2001) found no consstent effects of HPW practces on frm performance. Wood (1999) stated that the nconsstent fndngs from the studes on the effects of HRM mght also be due to the fact that t s crucal for the effectveness of HIM that there are no Taylorst jobs that restrct workers autonomy. If workers are merely nvolved n perfectng the desgn of a routnzed job, ths wll not ncrease a frm s performance. In the lterature, only a few studes nvestgate to what extent employees beneft from more advanced HRM systems. Osterman (2000) addressed the queston of whether frms wth a HPW are mutual gan enterprses. However, he dd not fnd any benefts of HPW practces for a frm s core workforce, n terms of a lower layoffs rates and/or hgher average real wage ncrease. He also found that frms wth a HPW have hgher layoff rates of regular employees. Black & Lynch (2000) found that reengneerng a workplace to ncorporate hgh performance practces ncreases workers wages, whereas proft sharng or stock opton plans result n lower regular wages. Bauer & Bender (2001) found that especally the flattenng of the herarchy structure of an establshment and the ntroducton of self-managed teams postvely affect the wages of employees. Meanwhle, Cappell & Neumark (2001) also analyzed the effects of HPW practces on both the sales of the frm and labor costs (cf. Batt, 2001). The latter can, however, not be consdered as benefts of these HPW practces for the workforce, as the analyss of labor costs does not control for the effects of workers characterstcs, such as ther level and feld of educaton and work experence. As we dscussed above, the emprcal lterature on the effects of HRM s qute nconclusve regardng the effects of partcular HRM practces and systems for workers as well as the frms that employ them. Partcularly for the small frms n the servce sector we analyze, t s not clear whether these frms and ther workers wll beneft from a more advanced HRM system. We wll, therefore, test the followng two sets of alternatve hypotheses: 5. However, the HPW s sometmes used as a synonym of HIM and defntons overlap (cf. Lawler, Mohrman & Ledford, 1995). 6. Wood (1999) concludes n hs overvew study that the effects of HRM systems found vary between performance ndcators. 5

12 Hypothess 2a: Human Resource Management practces wll have postve effects on both frm productvty and workers wages. Hypothess 2b: Human Resource Management practces wll have dfferent effects for workers and the frm that employs them. Hypothess 3a: A more advanced Human Resource Management system wll have postve effects on both frm productvty and workers wages. Hypothess 3b: A more advanced Human Resource Management system wll have dfferent effects for workers and the frm that employs them. 2.3 Measures of Productvty In studes of the effects of HRM practces, varous ndcators of a frm s performance have been used: perceptual measures of frms performance (Delany & Huseld, 1996), fnancal measures such as frms profts (e.g. Terpstra & Rozell, 1993) or Tobn s q (e.g. Huseld, 1995) 7, the value added or sales of the frm per employee (Black & Lynch, 2001; Cappell & Neumark 2001), or physcal measures of frms productvty (e.g. Arthur, 1994). A dsadvantage of a perceptual measure s that t can be hghly subjectve both n the judgment of frm performance tself, and n the selecton of a comparator frm one selects to benchmark the performance of one s own frm. Other measures - fnancal measures and value added - are affected by many systematc and ad hoc factors for whch t s very dffcult to control. Moreover, these measures, n practce, are often hghly volatle. Physcal measures of productvty do not have these dsadvantages because they are straghtforward n measurng productvty gven the specfc producton process n a sector of ndustry (cf. Ichnowsk & Shaw, 2003). In ths study we wll therefore use a physcal measure of productvty, followng the research of other studes that focus on a partcular ndustry (Arthur, 1994; MacDuffe, 1995; Ichnowsk, et al., 1997). We measure the productvty of pharmaces by the number of prescrpton lnes delvered to customers. Each prescrpton lne refers to a partcular medcne delvered to a customer. Famly doctors wrte these prescrpton lnes, ths beng the only way n whch regstered medcnes can be obtaned n the Netherlands. The average number of prescrpton lnes per assstant s a good ndcator of the productvty of a pharmacy, snce t determnes the quantty of medcnes delvered to customers: Although some dfferences may exst n the tme t takes to delver dfferent medcnes, no substantal dfferences n the composton of the medcnes delvered by the varous pharmaces exst. 8 Moreover, the pharmaces are pad a fxed amount of money for each prescrpton lne ( 5.08) by the health 7..e. the rato of the market value of a frm to the replacement value of ts assets. 8. It should be noted that n the Netherlands non-regstered medcnes are almost always bought n commercal drugstores and hardly contrbute to the sales of the pharmaces. 6

13 nsurance companes. 9 In ths way our measure of physcal productvty s drectly related to the value added of the frm. 3 Data We conducted an employers survey among pharmaces n the Netherlands n November A wrtten questonnare was maled to 1,319 pharmacsts of whom 549 responded. The response appeared to be unbased wth respect to regon and pharmacy sze. We were able to lnk the survey data wth the avalable admnstratve data on the number of prescrpton lnes worked up n the varous pharmaces and wth admnstratve data on workers wages and other worker characterstcs. 11 The latter data source was used to calculate the assstants average gross wages per month 12, as well as workers average age and tenure for each pharmacy. Table 1 shows the means and standard devatons of the varables n the data set used. The average gross wage per month for assstants workng n a pharmacy s 1,770. On average, an assstant n a pharmacy handles 13,630 prescrpton lnes per year. The table also ncludes some controls for frm and workforce characterstcs we wll use n our analyss: 70 percent of the pharmaces are ndependent frms; the remanng ones are part of a chan. 53 percent of the pharmaces has more than 10 employees. The core workers on whch we focus our analyss (.e. the pharmacst s assstants) represent 80 percent of the total workforce n the pharmaces. The rest of the workforce consst of two other groups of workers: the second pharmacsts 13 and other workers (usually cleanng personnel and admnstratve staff). Technologcal nnovatons, n the form of the ntroducton of a new computer system, took place n 17 percent of all pharmaces. Organzatonal nnovatons are more common. 56 percent of the pharmaces had to deal wth organzatonal changes. In addton, 15 percent ntroduced new products n the shop, and 60 percent mentoned that customer orentaton had ncreased. The HRM practces we nclude n the analyses can be classfed as recrutment practces, human captal or HRD, employablty practces, ncentve pay and benefts offered to the pharmacst s assstants. The recrutment polcy varables show that few assstants have temporary contracts (on average 13 percent n a pharmacy). Although the labor market for 9. Although pharmaces n the Netherlands have to deal wth all knds of government regulatons, they are truly ndependent, for-proft frms. 10. In the tradton of nsder econometrcs, we based ths survey on extensve feldwork to get a detaled understandng of the producton process n the Dutch pharmaces. 11. All pharmacst s assstants are regstered at the penson fund (Pensoenfonds Medewerkers Apotheken). 12. The gross wages per month are based on fulltme jobs (36 hours per week). 13. Second pharmacsts are pharmacsts employed by the managng pharmacst who usually owns the frm. 7

14 pharmacy assstants was tght at the moment of the survey, only 13 percent of the pharmaces offered hgher wages to new assstants n the case of vacances Table 1 Descrpton of the varables* Varable Mean Standard devaton Wages and Productvty Assstants average gross wages per month n euros (x 1,000) Number of prescrpton lnes per assstant per year (x 1,000) Frm characterstcs Type of pharmacy - Independent (yes/no) Chan of less than 5 pharmaces (yes/no) Chan of 5 or more pharmaces (yes/no) More than 10 employees (yes/no) Share of second pharmacsts n total number of employees Share of other employees n total number of employees Workforce characterstcs Assstants average age n years Assstants average job tenure n years Technologcal and organzatonal nnovatons New computer system (yes/no) Organzatonal changes (yes/no) New products (yes/no) Increased customer orentaton (yes/no) Recrutment polcy Assstants wth temporary contracts (%) Offerng hgher wages to new assstants n case of vacances (yes/no) Human captal (HRD) Assstants average score on general sklls hgher than 7.5 (yes/no) Assstants average score on specfc sklls hgher than 7.5 (yes/no) Assstants average score on computer sklls hgher than 7.5 (yes/no) Number of general courses enrolled n per assstant per year Number of specfc courses enrolled n per assstant per year Number of computer courses enrolled n per assstant per year Assstants take courses durng work hours - No courses (yes/no) Few courses (yes/no) Most courses (yes.no) All courses (yes/no) Tranng of employees n case of vacances (yes/no) Worker performance evaluaton ntervew (yes/no) Personal development plan for assstants (yes/no) Employablty Assstants performng tasks of pharmacst (yes/no) Assstants performng tasks of lower-level jobs (yes/no)

15 Table 1 (contnued) Descrpton of the varables* Varable Mean Standard devaton Assstants workng overtme (yes/no) Incentve pay Performance pay (yes/no) Addtonal benefts Addtonal chldcare facltes (yes/no) Flexble workng hours (yes/no) Number of frnge benefts ** - low: 0 to 2 benefts (yes/no) medum: 3 or 4 benefts (yes/no) hgh: 5 or more benefts (yes/no) * n = 549 ** subsdy for commutng expenses, product dscounts, a free bcycle or car, a subsdy for a home computer, a clothng allowance, tax free savngs. For human captal development we nclude varables that measure the competences of the workforce, and the partcpaton n tranng, as well as facltes that may ncrease the qualty of human captal nvestments lke worker performance evaluaton ntervews. Moreover we dstngush between general sklls, sector-specfc sklls and computer sklls. The sklls of assstants can be nterpreted as the assstants stock of human captal. Because all the assstants have attended the same government requred educaton program, ther sklls wll, to a large extent ndcate workers stock of tranng nvestments durng ther workng career (cf. Lynch, 1998). The human captal varables show that assstants have a hgh score on general competences, such as socal sklls, ndependence, and dealng wth responsblty. They score somewhat lower on specfc competences, such as knowledge of medcnes and preparaton of medcnes, and on computer competences. 14 Assstants follow qute a few courses, manly n the pharmaceutcal feld. About half of them followed one or more courses durng work tme n the last twelve months. 10 percent of the pharmaces tran ther employees n response to vacancy problems. 75 percent hold worker performance evaluaton ntervews, but only 7 percent use personal development plans for assstants. The employablty measures ndcate whether pharmacsts consder ther assstants to be flexble n ther tasks and workng hours. 55 percent of the assstants perform tasks of the pharmacst, 34 percent perform tasks of lower-level jobs. 74 percent (occasonally) work overtme. Performance pay s used by 16 percent of the pharmaces. Fnally, Table 1 gves an 14. The competence scores refer to the score scales from 1 to 10 common n Dutch educaton, n whch a score of 6 s a passng grade. A score of 7.5 s n between amply suffcent (7) and good (8). 9

16 overvew of the addtonal benefts pharmaces offer ther personnel. 19 percent of the pharmaces offer addtonal chldcare facltes, whereas 43 percent of pharmaces offer the opton of flexble workng hours to ther assstants. 11 percent of the pharmaces offer more than fve other frnge benefts, such as a subsdy for commutng expenses, subsdzed transportaton n the form of a free bcycle or a car, product dscounts, a clothng allowance, a subsdy for a home computer project, and tax free savngs. 4 Econometrc specfcatons and estmaton results To analyze the effects of the varous HRM practces on workers wages and the productvty of the frm (Hypotheses 1a & 1b and 2a & 2b), we estmate the effects of the varous practces n a wage equaton as well as a producton functon. We estmate these two equatons as a set of seemngly unrelated regresson equatons (Zellner, 1962). By usng EGLS estmators we are able to use the nformaton on the explanatory varables that are only ncluded n the second equaton when estmatng the frst equaton and allow for correlaton between the two error terms: ' ' ' In ( W / L) α 1 + β1h + δ 1OI + γ 1TI + µ 1 X + ε 1 = (1) ' ' ' ' In( P / L) α 2 + β 2H + δ 2OI + γ 2TI + µ 2 X + φ 2In( Z / L) + ε 2 = (2) W = total wages of pharmacst s assstants n frm ; L = number of full-tme assstants n frm ; P = number of prescrpton lnes delvered n frm ; H = use of varous HRM-practces n frm ; OI = organzatonal nnovatons n frm ; TI = technologcal nnovatons n frm ; X = control varables; Z = addtonal staff; α, β, δ, γ, µ, φ = (vectors of) coeffcents; ε 1, ε 2 = error terms. In the frst equaton we analyze the effect of HRM practces on the wage level of the pharmacst s assstants. Although n human captal lterature workers wages are often used to measure ther productvty, we wll use the average wage level of the pharmacst s assstants merely as a measure of the extent to whch they beneft themselves from ther human captal and the varous HRM practces of the frm. The second equaton s a producton functon n whch we estmate the effects of HRM practces on the average productvty of the pharmacst s assstants assumng constant returns to scale (cf. Black & Lynch, 2001). As mentoned above, we measure the productvty of the frm by the average number of prescrpton lnes delvered by pharmacst s assstants to the frm s customers. We do not nclude data on the physcal captal used n the pharmaces n the producton functon. However, as the producton process n the varous pharmaces s rather smlar, the captal stock nvested n the frm wll be strongly related to the sze of the workforce. Moreover, 10

17 n both equatons we nclude varables that take nto account the technologcal (TI) and organzatonal nnovatons (OI) that may have taken place n the pharmacy. Both technologcal and organzatonal nnovatons have been found to contrbute to hgher levels of frm productvty (Bresnahan, Brynjolfsson & Htt, 2002), and may also result n an ncrease n workers wages (Bauer & Bender, 2001). As mentoned, n our analyss we dstngush between several categores of HRM practces: recrutment practces, human captal development, employablty practces, ncentve pay, and benefts. It should be noted, however, that frnge-benefts mght have a postve effect on workers productvty, but at the same tme may result n a negatve effect on wages n so far as there are hedonc or compensatng wages. Fnally, we nclude some control varables related to frm and workforce characterstcs (see table 2). These controls dffer between the two equatons, snce n the producton functon (equaton 2) we have to add addtonal controls for the other categores of workers n the pharmaces (cf. Black & Lynch, 2001),.e. the rato between other staff employed, and pharmacst s assstants. In order to mpose constant returns to scale, we take the log transformaton of the latter term. Table 2 shows the estmaton results of the equatons 1 and 2. Wages are strongly related to the age and job tenure of workers; a result that s usually found when earnngs functons are estmated and, followng Mncer (1962), s usually nterpreted as the productvty effect of general and job or frm-specfc experence or on-the-job tranng. However, our estmaton results show that age and tenure do not have a postve effect on the productvty of the frm. Ths ndcates that the effects of age and experence on earnngs merely reflect nsttutonalzed salary-scale effects 15 rather than real productvty effects. The results show that only some of the varous HRM varables affect the average wage level and/or average productvty. Moreover, there are remarkable dfferences between the determnants of the wage level, and the determnants of productvty. Wth respect to the humancaptal varables, we fnd that assstants wth hgh scores on computer sklls have a hgher productvty, whereas these computer sklls do not affect the wage level. Conversely, hgh scores on sector-specfc sklls have a postve effect on the wage level, whereas these sklls do not have a smlar effect on productvty. Ths probably ndcates that such occupatonal sklls are hghly valued by pharmacsts, snce these sklls are thought to affect the qualty of work, even though ths s not reflected n the productvty of the frm. Moreover, we fnd that partcpaton n addtonal tranng courses does not add anythng to the effects of workers skll levels. Tranng of employees n the case of vacances, however, seems to be an adequate HRM polcy, snce t ncreases the productvty of the pharmacy. 15. These salary scales are defned n the Collecteve Arbedsovereenkomst Apotheken 2001 (Collectve Barganng Agreement Pharmaces 2001). 11

18 Table 2 Results of Zellner s seemngly unrelated regresson analyss Average wage level Prescrpton lnes (ln) (ln) Varable B t-value B t-value Constant.291 *** *** Frm characterstcs Type of pharmacy - Independent (yes/no) Chan of less than 5 pharmaces (yes/no).021 ** Chan of 5 or more pharmaces (ref.) More than 10 employees (yes/no).010 * ** Employment share of second pharmacsts (ln) ** 3.08 Employment share of other employees (ln) ** 2.73 Workforce characterstcs Assstants average age n years.006 *** Assstants average job tenure n years.004 *** Technologcal and organzatonal nnovatons New computer system (yes/no) Organzatonal changes (yes/no).012 ** New products (yes/no) Increased customer orentaton (yes/no) Recrutment practces Assstants wth temporary contracts (%) ** Offerng hgher wages to new assstants n case of vacances (yes/no).019 ** Human captal (HRD) Assstants score on general sklls > 7.5 (yes/no) Assstants score on specfc sklls > 7.5 (yes/no).014 ** Assstants score computer sklls > 7.5 (yes/no) ** 2.21 Number of general courses per assstant per year Number of specfc courses per assstant per year Number of computer courses per assstant per year

19 Table 2 (contnued) Results of Zellner s seemngly unrelated regresson analyss Average wage Prescrpton lnes (ln) level (ln) B t-value B t-value Assstants follow courses n work tme - No courses (ref.) Few courses (yes/no) Most courses (yes.no) All courses (yes/no) Tranng of employees n case of vacances (yes/no) ** 2.03 Worker performance evaluaton ntervew (yes/no).017 ** Personal development plan for assstants (yes/no) Employablty Assstants performng tasks of pharmacst (yes/no) Assstants performng tasks of lower-level jobs (yes/no) Assstants workng overtme (yes/no) Incentves Performance pay (yes/no) * 1.89 Addtonal benefts Addtonal chldcare facltes (yes/no) Flexble workng hours (yes/no) Number of frnge benefts - low (ref.) medum (yes/no) hgh (yes/no) Adjusted R 2 n * p < 0.10 ; ** p < 0.05 ; *** p < 0.01 Another remarkable fndng s that performance evaluaton ntervews have a postve effect on the wage level of assstants, but do not affect productvty. Ths ndcates that these ntervews are more favorable for workers than for the frm. Moreover, we fnd that pharmaces, whch offer a hgher wage to newly, recruted assstants n order to cope wth ther vacancy problems also have a hgher wage level on average. Ths shows that hgher wages for newly recruted assstants also ncrease the wages of the other workers, although ths does not have a postve effect on productvty. Temporary contracts appear to have a negatve effect on productvty, whereas there s no effect on the wage level. The latter could be expected because for workers wth 13

20 temporary contracts, the lmted duraton of ther contract s already a negatve aspect of ther contract. Moreover, we fnd that performance pay has a postve effect on the productvty of the frm, but does not affect the average wage level of the pharmacst s assstants. Other HRM practces nether sgnfcantly affect wages nor productvty. Ths holds for task flexblty, the partcpaton n tranng, chldcare facltes as well as the mscellaneous frnge benefts offered to assstants by frms. The above-mentoned results obvously contradct our hypotheses 1a and 2a and confrm the alternatve hypotheses 1b and 2b,.e.: the wage polces of the frms do not optmally result n the convergence of the nterests of the workforce wth frm nterests. Our estmaton results also show that technologcal developments nether affect wages nor productvty n the pharmaces, whereas organzatonal nnovatons have a weak sgnfcant postve effect on workers wages, although they do not affect the productvty of the frm. Fnally, we fnd some effects of frm sze characterstcs: Apart from the control varables n equaton 2 that take nto account the addtonal workforce n the pharmacy, we fnd that n larger pharmaces (more than 10 employees) assstants are on average sgnfcantly less productve, although these larger pharmaces pay hgher wages. Pharmaces that are part of a small chan of pharmaces also appear to pay hgher wages to ther pharmacy assstants. 4.1 Human Resource Management Systems To analyze the effects of a more advanced HRM system on frm productvty and workers wages (Hypotheses 3a & 3b), we dentfy four HRM systems that map out a herarchy from tradtonal to a HIM system (cf. Ichnowsk et al., 1997). Table 3 descrbes the HRM practces ncluded n the four systems. The frst HRM system s the tradtonal system of personnel management n smaller frms n whch no vsble practces exst that focus on mprovng the performance of the assstants. 26 percent of the pharmaces belong to ths group. The second HRM system refers to a basc system that merely ncorporates the practce of worker performance evaluaton ntervews. 30 percent of the pharmaces belong to ths group. In the ntermedate HRM system (the thrd system) more practces are ncluded. Apart from the performance evaluaton ntervews, assstants n these pharmaces take courses to contnually upgrade ther knowledge and sklls. Moreover, these pharmaces do not employ many assstants wth temporary contracts, thereby ncreasng the commtment of the assstants to the organzaton. 41 percent of the pharmaces belong to ths group. The fourth HRM system can be classfed as a HIM system. Only 3 percent of the pharmaces have such a HIM system. Apart from the HRM practces ncorporated n the thrd HRM system, these pharmaces employ assstants wth a hgh average skll level (.e. an average score of 7.5 or hgher on a 10-pont scale for all 10 sklls dstngushed). In these pharmaces, (some) assstants also perform tasks of the pharmacst. Moreover, the assstants n these pharmaces have a hgher partcpaton n addtonal tranng: on average they take at least one course a year. These pharmaces also 14

21 stmulate tranng partcpaton by allowng assstants to work on ther coursework durng work hours. It should be noted, however, that we dd not nclude varables on the presence of teamwork, job rotaton, and qualty crcles n the survey, snce these HPW practces are not relevant for Dutch pharmaces where all assstants work together n a small team wthout any herarchy apart from the role of the pharmacsts. For ths reason we qualfy the most advanced HRM system n the Dutch pharmaces as a HIM system. Table 3 Descrpton of ndcators ncluded n the four HRM systems dstngushed Indcator % HRM system 1: Tradtonal system 26 No HRM practces that focus on mprovng performance HRM system 2: Basc HRM system 30 Worker performance evaluaton ntervews HRM system 3: Intermedate HRM system 41 Worker performance evaluaton ntervews Assstants follow courses Percentage of assstants wth temporary contracts lower than 20% HRM system 4: Hgh Involvement Management 3 Worker performance evaluaton ntervews Percentage of assstants wth temporary contracts lower than 20% Assstants follow on average 1 course a year Assstants follow courses n work tme Assstants average score on sklls hgher than 7.5 Assstants perform tasks of pharmacst Equaton 3 and 4, that are agan consdered as a set of Zellner s seemngly unrelated regresson equatons, nclude the HRM system appled by the frm nstead of the varous ndvdual HRM practces: ln ( ln ( = α + β + γ + µ + ε (3) ' ' W / L) 3 3HRMS 3TI 3 X 3 = α + β + γ + µ + φ + ε (4) ' ' ' P / L) 4 4HRMS 4TI 4 X 4 ln( Z / L) 4 HRMS = Human Resource Management System n frm 15

22 Table 4 Results of Zellner s seemngly unrelated regresson analyss on the effects of HRM systems Average wage level Recpe lnes (ln) (ln) Varable B t-value B t-value Constant Frm characterstcs Type of pharmacy - Independent (yes/no) - Chan of less than 5 pharmaces (yes/no) - Chan of 5 or more pharmaces (ref.) More than 10 employees (yes/no) Employment share of second pharmacsts (ln) Employment share of other employees (ln) Workforce characterstcs Assstants average age n years Assstants average job tenure n years Technologcal and organzatonal nnovatons New computer system (yes/no) Organzatonal changes (yes/no) HRM system - HRM system 1 Tradtonal system (ref.) - HRM system 2 Basc system - HRM system 3 Intermedate system - HRM system 4 HIM *** * *** *** ** ** *** * ** *** ** Adjusted R 2 n * p < 0.10; ** p < 0.05; *** p < 0.01 Table 4 shows the estmaton results of the equatons 4 and 5. We fnd that assstants beneft from more advanced HRM systems by means of hgher wages. Our estmaton results show there are two sgnfcant thresholds. Worker performance evaluaton ntervews are a frst step, whereas assstants beneft the most from a HIM system. However, the estmaton results show that pharmaces wth a more advanced HRM system do experence hgher productvty. Ths ndcates that a more advanced HRM system has dfferent effects for the assstants, and the pharmacy that employs them (Hypothess 3b). In ths sense, a more advanced HRM system does not stmulate the convergence of the nterests of workers wth frm nterests. Ths ndcates an mportant threshold n the dffuson of more advanced HRM systems among the pharmaces. 16

23 5 Conclusons and dscusson In ths study, we analyzed the effects of HRM polces n Dutch pharmaces. We focused on the queston of whether the effects of HRM practces on workers wages and frm productvty are smlar or dfferent. We found consderable dfferences between the determnants of pharmacst s assstants wages, and the determnants of the productvty of the pharmaces. Wages appeared to be strongly related to job tenure and age; a result that s usually nterpreted as the productvty effect of on-the-job tranng. However, we found that both age and tenure do not have a postve effect on the productvty of the frm. Ths ndcates that the effects of experence and age on earnngs n Dutch pharmaces merely reflect nsttutonalzed salary-scale effects rather than real productvty effects. Smlar to the results of other studes, we found that most specfc HRM practces nether affect workers wages nor the productvty of the frm. However, our estmaton results show nterestng dfferences between the effects of workers performance evaluaton ntervews on the two performance measures, snce these ntervews have a postve effect on workers wages, but do not affect the productvty of the frm. Apparently workers proft more from these ntervews than does the frm tself. For performance pay we fnd the opposte pattern. It has a postve effect on the productvty of the frm, whereas t does not affect the average wage level of the workers. In addton, the sklls of the workers are not rewarded accordng to ther relevance for the productvty of the frm. We found a postve effect of workers computer sklls on the productvty of the frm, whereas ths s not reflected n workers wages. Conversely, hgh scores on sector-specfc sklls have a postve effect on the wage level, whereas these sklls do not affect workers productvty. These results contradct our hypotheses 1a and 2a, and confrm the alternatve hypotheses 1b and 2b. The remarkable dfferences we found between the determnants of the wage level of the assstants, and the determnants of productvty of the frm clearly ndcate that the wage polcy of the pharmaces does not stmulate a convergence of nterests between the frm and ts workforce. To a large extent ths s due to the fact that workers earnngs merely reflect nsttutonalzed salary-scale effects rather than real productvty effects. Ths ndcates that pharmaces could gan from algnng ther wage polces wth a worker s contrbuton to frm performance. Our results on the effects of a more advanced HRM system confrm hypothess 3b. As n some other studes we do not fnd any effect of an advanced HRM system on frm performance. More remarkable, however, s our result that workers beneft more from an advanced HRM system than does the frm tself. The former mght ndcate that more advanced HRM polces ncrease the effects of the nsttutonalzed salary-scales. Ths could be an mportant threshold n the dffuson of a more advanced HRM system. Ths may partcularly hold for smaller frms for whch the salary-scales are determned by collectve barganng at the sector level. 17

24 Our fndng that frm performance does not beneft from a more advanced HRM system mght, however, also be due to tme lags between the mplementaton of a more advanced HRM system, and any subsequent change n frm performance (Huseld & Becker, 1996). Snce some of the pharmaces mght have ntroduced partcular HRM practces more recently our estmaton results mght underestmate the effect on these frms productvty. However, n that case t s stll remarkable that the workers beneft from a more advanced HRM system wthout any delay. Snce the data we used are cross-sectonal, our estmaton results may suffer from a negatve selectvty effect for whch we could not control. As shown by Wolf & Zwck (2002) a negatve selectvty effect may occur because less productve frms have an ncentve to ntroduce a more productve HRM strategy. However, t should be noted that pharmaces are small frms that serve a local market that offers few opportuntes to ncrease ther level of producton by means of a more advanced HRM system (Batt, 2002). Small frms also have no possbltes to proft from delayerng the organzaton, whch s one of the reasons why a HIM/HPW system mght ncrease productvty n large frms. More generally, our fndng that frm performance does not beneft from a more advanced HRM system could be explaned on the grounds that, n small frms, formal HRM polces are less mportant for workers productvty levels than the personal relatons between employer and employees. An alternatve explanaton mght be that t may be very dffcult to create a real HPW n a pharmacy settng. Although the assstants are professonals who usually work n a team, the pharmacst wll not only act as a manager, but also s the domnant professonal. Therefore, although the assstants obvously do not have Taylorst jobs, ther autonomy wll, to some extent, be restrcted by the professonal authorty of the pharmacst, whch may lmt the potental effects of a HIM/HPW system on the performance of the frm. Our estmaton results show that pharmaces could gan from algnng ther wage polces wth workers contrbuton to frm performance. Ths ndcates that employers are not well nformed regardng the mpact of the varous HRD/HRM practces on frm performance. Research n ths feld can therefore be very worthwhle for the employers concerned. Ths probably many holds for small and medum szed frms. Unfortunately, sector studes on the effects of HRM practces cannot be conclusve regardng the extent to whch the results found can be generalzed to other sectors n the economy. Ths rases the need for more emprcal research on the effects of HRM polces n small or medum sze frms. Moreover, as the majorty of the workng populaton n the Western world s employed n these smaller frms, further emprcal research on the effects of HRM practces n these frms may also sgnfcantly contrbute to our understandng of the thresholds n the dffuson of more advanced HRM systems n the varous sectors of the economy. 18

25 References Acemoglu, D. & Pschke, J.-S Why do frms tran? Theory and evdence, Quarterly Journal of Economcs, 113: Acemoglu, D. & Pschke, J.-S Beyond Becker: Tranng n mperfect labour markets. Economc Journal, 109: F112-F142. Appelbaum, E, Berg, P., Baley, T. & Kalleberg, A.L Manufacturng advantage. Why hghperformance systems pay off. Ithaca: ILR Press. Arthur, J.B The lnk between busness strategy and ndustral relatons systems n Amercan steel mlls. Industral and Labor Relatons Revew, 45: Arthur, J.B Effects of human resource systems on manufacturng performance and turnover. Academy of Management Journal, 37: Ballot, G., Fakhfakh, F. & Taymaz, E Frms human captal, R&D and performance: a study on French and Swedsh frms. Labour Economcs, 8: Barrett, A. & O Connell, P Does tranng generally work? The returns to n-company tranng. Industral and Labor Relatons Revew, 54: Bartel, A.P Productvty gans from the mplementaton of employee tranng programs. Industral Relatons, 33: Batt, R Explanng wage nequalty n telecommuncatons servces: Customer segmentaton, human resource practces and unon declne, Industral and Labor Relatons Revew, 54: Batt, R Managng customer servces: Human resource practces, qut rates, and sales growth. Academy of Management Journal, 45: Bauer, T.K. & Bender, S Flexble work systems and the structure of wages: Evdence from matched employer-employee data. Bonn: IZA Dscusson Paper No Black, S.E. & Lynch, L.M What s drvng the new economy: The benefts of workplace nnovaton. Cambrdge, MA: NBER Workng Paper No Black, S.E. & Lynch, L.M How to compete: The mpact of workplace practces and nformaton technology on productvty. The Revew of Economcs and Statstcs, 83: Bresnahan, T.F., Brynjolfsson, E. & Htt, L.M Informaton technology, workplace organzaton and the demand for sklled labor: Frm-level evdence, Quarterly Journal of Economcs, 116, Brown, J.N Why do wages ncrease wth tenure? On-the-job tranng and lfe-cycle wage growth observed wthn frms. Amercan Economc Revew, 79: Cappell, P. & Neumark, D Do hgh-performance work practces mprove establshmentlevel outcomes?. Industral and Labor Relatons Revew, 54:

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