Using a German employer-employee matched panel data set this paper examines the effects
of High Performance Workplace Systems (HPWSs) on labor productivity (defined as sales
per worker) and labor efficiency (defined as the inverse of unit labor costs). The estimation
results indicate that simple cross-sectional estimates of the effects of implementing HPWSs
on labor productivity are biased downward due to unobserved time-invariant establishment
effects and the endogeneity of the used measure for innovative workplace practices. The
latter bias appears to be quantitatively more important. Results from estimating a correlated
random coefficient model further suggest that a potential bias in the 2SLS-estimates due to
self-selection seems to be negligible. The estimated effects of HPWSs on labor productivity
are economically important and rising over time. However, corresponding positive effects of
HPWSs on labor efficiency occur only in the long run. Finally, due to rising wages associated
with the adoption of HPWSs, the effects of these systems on labor efficiency are smaller than
the corresponding effects on labor productivity.
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