Research shows that the management practices in a workplace explain a great deal when it comes to the differences in productivity between companies and regions. The education level of the management and labour mobility are also relevant.
The differences in productivity between companies and countries are a central question in economics. Simply put, productivity means how many goods or services can be produced with a certain amount of work and other production factors. Increasing productivity drives economic growth and makes it possible to increase the standard of living and fund public services.
When the world changes quickly, the importance of research data is highlighted. Great changes such as the green transition are also reflected in the structures and boundaries of the economy. That is why it is important to understand developments in productivity and the underlying mechanisms. Traditionally, the differences in productivity between companies and states have been explained by things like R&D activities, ICT and the skill of the employees.
In recent years, economists have paid more attention to the impact that the management practices of companies have on driving productivity. Management practices refer to the ways in which companies e.g. organise their practical work, set targets, monitor performance and reward their employees.
Empirical research has shown that management practices explain the differences in productivity between countries as well as companies and company branches. According to some research, the management practices even have the same explanatory power as RD&I activities, human capital and ICT. Management practices also have a wider impact and do not just affect productivity, but also things like wellbeing at work. Good management practices are also linked to smaller than average wage differentials and less variation in working hours between employees.
Based on the research into management practices in industry, Finnish companies are particularly good at monitoring their production and activities. Some improvements could, however, be made in the use of incentives and goal setting. In regional comparisons, the management practices are of a fairly even quality throughout Finland. When we want to compare regions and countries, we must also take into account employee distribution to different companies and company branches.
When it comes to productivity, it is vital to know to what degree employees work at the most productive companies with the best management. Labour force distribution is also a key factor in terms of regional competitiveness.
In Finland, a slight but statistically significant regional variation has been discovered in how the labour force is distributed to branches with different management practices. In some regions, a larger share of the workforce works at the workplaces with higher quality management practices, which also explains some of the regional differences is productivity. Education has a key role in this: the education level of the management has been found to change the relationship between management practices and productivity.
The higher the education level of the management, the more a company benefits from good management practices. This kind of correlation is not found for the education level of the other employees.
Management practices and productivity go hand in hand, but their relationship also depends on other factors. A key one is the managers’ human capital, which seems to strengthen this link. Finnish management practices are already of a high quality to begin with, so only focusing on improving them is unlikely to achieve a significant increase in productivity. Instead, more attention should be paid to things like the education level of Finns and the factors that reduce labour mobility and the competition between companies.
Hiring new employees from more productive companies is linked to an increase in productivity at the hiring company. Employees who change jobs spread information gained through RD&I activities from one company to another, for instance.
It is particularly interesting that this link also seems to remain when the differences in characteristics between the hired employees are taken into account. In other words, a link has been found between employee mobility and productivity even in a hypothetical situation where the structure, skill and knowledge of the workforce at the hiring companies remain unchanged. This means that the link between employee mobility and productivity is not only due to the fact that the hired employees bring new technical knowledge or are more educated or skilled than average. Other potential channels of influence are things like an increase in the employee’s productivity as a result of changing jobs or roles, the transfer of good approaches and practices, and the increased diversity that new employees bring.
Research data supports the view that a more flexible labour market can increase productivity.
At the same time, we need to ensure that the level of social security is sufficient: even though high employee mobility can impact productivity in ways that support economic growth, it also has negative impacts on an individual level, such as periods of involuntary unemployment.
Society must ensure that the labour market is not made more flexible at the expense of people’s wellbeing. A sufficient social security also supports the acceptability of the flexible job market, staff turnover and creative destruction which is necessary for economic regeneration.
Roope Ohlsbom, D.Sc. (Econ.), economist at Suomen Yrittäjät
The sources the author used for this article include Bloom et al (2019), American Economic Review; Ohlsbom (2023), JYU Dissertations; Maliranta, Mohnen and Rouvinen (2009), Industrial and Corporate Change.
