Workplace Innovation Is Boosting Productivity

Changes in workplace organisation – such as ''re-engineering'', profit sharing and the greater use of computers by non-managerial employees – can have a significant impact on firms'' productivity. According to research by Sandra
and Lisa Lynch, published in the February Economic Journal, organisational innovations like these have played a key role in the surge in US productivity growth since the mid-1990s, often described as the ''new economy''.

The new economy is characterised in part by firms increasing their capital investments, especially in computer hardware and software. But in addition, as Black and Lynch show, more firms have adopted work processes in which an increasing proportion of non-managerial employees are involved in problem-solving and identifying opportunities for innovation and growth.

Increased managerial focus on quality management, continuous innovation, incentive-based compensation and employee involvement programmes has in turn raised the productive capacity of the US economy.

Until recently, there has been limited causal evidence on the role of technology and workplace innovation in generating rising productivity in the United States. This study uses a unique sample of US businesses over the period 1993-6 to examine the impact on productivity of computers and other capital investment, workplace innovation – including teamwork, employee involvement in decision-making and re-engineering activities, and profit sharing – and worker characteristics, such as education, turnover, gender and race.

The study indicates that:
· High performance practices are related to firm productivity. Specifically, there is a positive and significant relationship between the proportion of non-managers using computers and the productivity of establishments. Firms that re-engineer their workplaces to incorporate more high performance practices experience higher productivity.
· Profit sharing is also associated with higher productivity.
· And employee ''voice'' – as measured by the percentage of workers who regularly meet to discuss workplace issues – has a larger positive effect on productivity when it is done in the context of unionised establishments.

These results suggest that changes in workplace organisation may explain a significant portion of trends in US productivity growth that have been attributed to the New Economy.

The researchers use their estimates of the impact of workplace practices on labour productivity to see how much of overall growth in manufacturing the measures of workplace innovation can account for over the period 1993-6. They find that under particular assumptions, workplace practices and reengineering efforts accounted for approximately 30% of output growth in US manufacturing or 89% of ''multifactor productivity''.

This may sound rather high and in fact the number should be treated as an upper bound since some of the workplace practices such as re-engineering reflect both technological as well as organisational changes. Nevertheless, this accounting exercise indicates that understanding workplace innovation can go some way to explaining recent trends in US productivity.

And these trends are continuing. In spite of the US economic slowdown and accounting scandals that have cast suspicion on the actual financial performance of an increasing number of firms, the productivity numbers still suggest that since the second half of the 1990s something new is occurring in the US economy.

From 1960 until the 1973 oil shock, average annual US productivity growth, as measured by output per hour, grew at approximately 3% a year for nonfinancial corporations. This growth rate then declined to around 1.7% per year between 1973 and 1995. But since 1995, average annual labour productivity growth for non-financial corporations has risen back up to around 3%. And US manufacturing productivity grew even faster at almost 4.4% annually during the second half of the 1990s.

One consequence of this turnaround in US productivity is that the convergence towards the US standard observed in manufacturing productivity across industrialised countries between 1960 and 1980 has stopped or even reversed for countries such as Canada, Germany and the UK.

''What's Driving the New Economy?: The Benefits of Workplace Innovation'' by Sandra Black and Lisa Lynch is published in the February 2004 issue of the Economic Journal. Sandra Black is at the University of California, Los Angeles; Lisa Lynch is at Tufts University.