Modern Management and the Demand for Technical Skill

Transcription

1 Modern Management and the Demand for Technical Skill YONG SUK LEE * Stanford University January 9, 2018 Abstract This paper examines the relationship between modern management practices and the demand for different occupational skills utilizing a unique context in South Korea after the Asian financial crisis. Management practices in South Korea had traditionally emphasized the organizational harmony over individual performance, and firm growth over short-term profits. However, as South Korea opened up to foreign firms after the financial crisis, domestic firms started to adopt western or more modern management practices. Using the industry level variation in management practices generated by the average industry management index of five advanced economies (the US, Britain, France, Germany, and Italy), I find that modern management is positively associated with the demand for technical skill. I also find that performance measured as the return on asset increases with modern management practices, and document the complementarity between modern management practices and technical workers in increasing the return on assets. In short, this paper finds that modern management practices may increase inequality between skilled - in particular, technically skilled - and unskilled workers. Keywords: modern management, management-technology complementarity, skill premium JEL Codes: M54, J31, J24!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! * Lee: Freeman Spogli Institute for International Studies, Stanford University, Encina Hall E309, 616 Serra St, Stanford, CA 94305, USA. Phone: Fax: yongslee@stanford.edu. I thank Shai Bernstein, Nick Bloom, Mitchell Hoffman, Adriana Kugler, Chiaki Moriguchi, Raffaella Sadun, Mu- Jeong Yang, and participants at the Society of Labor Economist Meeting, Empirical Management Conference, Korea-America Economic Associations Workshop, and Stanford Economics Junior Faculty Workshop for comments.! 1!

2 1. Introduction The Asian financial crisis, which had originated in Southeast Asia in 1997, unexpectedly and abruptly spread to South Korea, and by the end of that year a liquidity crisis was looming in the then third largest economy in Asia. The International Monetary Fund (IMF) agreed to provide an emergency loan package conditional on South Korea making progress on various structural reforms surrounding financial openness and corporate governance. The domestic market became more open to foreigners, and many US and European entities, taking advantage of the deflated prices, invested in South Korean firms, equities, and assets (Kim 2006; Choi et al. 2007). Naturally, more foreigners were in managerial positions and western management practices spread to many firms. Management practices in South Korea had traditionally emphasized the organization over the individual worker. Individual salary contracts were rare and bonuses were usually shared among the employees. Family owners had disproportionately large control over shareholders and managers regarding firm operations. Firms tended to focus on growth over short-term profits. However, many of these features changed around this period as more firms adopted western or modern management practices that emphasize individual performance and corporate profits. Utilizing data from this unique period, this paper examines the relationship between modern management practices and the demand for different occupational skills, and in particular technical skill, in the manufacturing sector. The World Management Survey and research by Bloom and Van Reenen (2007) have triggered an expanding volume of research that explores how management practices affect the productivity and performance of firms and organizations. However, there is relatively little research on how modern management practices affect the demand for different occupational skills and, hence, inequality. Modern management practices are a set of generally perceived best practices, such as, whether workers are incentivized and compensated accordingly, whether targets are initially identified and later assessed, and whether procedures to minimize production errors are in place. These practices could differentially affect the demand for occupational skill groups, e.g., managers, technical workers, office workers, production workers, etc., if modern management practices complement or substitute each occupational skill to varying degrees. However, estimating the impact of management practices on the demand for skill is difficult because of endogeneity. Firms decide whether or not to adopt modern management! 2!

3 practices based on the projected benefits and costs of adopting such practices, which are often determined by unobservable firm specific characteristics. Without a randomized control trial or a convincing quasi-experimental design it is difficult to estimate causal effects, and this paper does not aim to estimate such impact. Instead, the goal of this paper is to examine, through multiple correlational analyses, whether there are convincing and consistent evidence that show that modern management practices play a role in increasing the demand for technical skill. I adopt the questions developed by Bloom and Van Reenen (2007) and construct a management index for South Korea using survey data from the early 2000s. In addition to firm level variation, I use the industry level variation in management practices to examine the demand for occupational skills. Management practices could vary across industries because of various reasons, including the difference in technologies, multinational firm activity, labor unionization, etc. As Figure 1 documents, there is substantial variation in management practices across industries within countries. I construct an industry management frontier, i.e., the industry level management practices of five advanced western economies, by averaging the industry level management indexes of the US, Britain, France, Germany, and Italy using the World Management Survey. Firms from this group of 5 (hereafter, G5) countries often invest and operate in other countries. Hence, the industry management frontier is likely to be more correlated with the management practices in countries with large western firm presence, which was increasingly the case for post-financial crisis South Korea. I find that the management index is positively related to the employment of skill - i.e., managers, technical workers, and office workers - relative to the employment of production workers and simple manual laborers. This relationship holds in the OLS regressions as well as in regressions that use the variation coming from the industry management frontier. The positive relation holds for relative wages as well. However, other industry characteristics that affect the demand for occupational skill could be correlated with the industry management frontier. The most obvious candidate is technology. Technological change is considered a leading cause of the recent rise in inequality and employment polarization (Acemoglu and Autor 2011; Autor and Dorn 2013), and researchers have found that technology and aspects of modern management, such as decentralization or incentive-based human resource management, complement each other (Bresnahan, Brynjolfsson and Hitt 2002; Bloom, Sadun and Van Reenen 2012). Globalization, corporate governance, and unionization could also be correlated with management practices and! 3!

4 influence the demand for different types of workers. When I control for technology using the number of computers in the establishment, modern management is associated with the increase in the relative employment and wage of technical workers only. Controlling for exports, corporate governance, and union status, however, have virtually no effect on the estimates once technology is controlled for. The empirical results suggest that modern management is likely an important factor behind the increase in the employment and wages of the high-skilled technical workforce. Finally, I find that modern management is related to better performance measured as the return on assets, and that modern management complements technical workers in increasing the return on assets. This paper is related to the literature that examines how organizational characteristics are related to aspects of inequality. Caroli and Van Reenen (2001) find that delayering and multitasking increases the demand for skill. Bandiera et al. (2007) and Lemieux et al. (2009) find that performance pay increases wage inequality within firms. I believe this is the first paper that examines how overall management practices, rather than a specific aspect of organizational change, affect the demand for skill. The complementarity between modern management practice and technical skill found in this paper is related to studies that show that the productivity gains from technology differ based on the organizational characteristics of the firm. Bloom, Sadun and Van Reenen (2012) find that information technology productivity is higher in firms that implement incentive based human resource management, such as performance based pay and promotion. Bresnahan, Brynjolfsson and Hitt (2002) show that productivity gains from information technology are higher in more decentralized organizations. Also related is the literature that examines labor market polarization by occupational skill, where employment has been increasing in the high-skilled and low-skilled occupation categories but decreasing in the middle-skilled occupation groups (Autor et al. 2003; Autor et al. 2006; Autor and Dorn 2013; Michaels et al. 2014). In particular, Autor and Dorn (2013) show that the reduced costs of routine and codifiable tasks from technological change disproportionately hurt both blue- and white-collar workers in the middle-skill categories, relative to the low-skilled service sector workers and high-skilled managerial, professional, and technical workers. I show that another factor - i.e., management practices - can explain employment polarization where technical workers increase relative to unskilled workers.! 4!

5 Finally, this paper contributes to the expanding economics literature on management. That literature has largely focused on the impact of management practices on the performance of firms and organizations. For example, scholars have examined how management practices affect firms (Bloom and Van Reenen 2011; Bloom et al. 2013), the health sector (McConnell et al. 2013; Bloom, Propper, Seiler, and Van Reenen 2015), schools and universities (McCormack et al. 2014; Bloom, Lemos, Sadun, and Van Reenen 2015), and bureaucracies (Kahn et al. 2016; Rasul and Rogger 2017). In this paper, I show that modern management is not only related to better performance but also greater inequality between the technically skilled and low skilled workers. 2. The Context The Asian Financial Crisis, which started with the sudden drop in the value of the Thai baht in 1997, quickly spread to neighboring Southeast Asian countries, as well as to South Korea. 1 Multiple South Korean banks and corporations that took out short-term loans in foreign currencies were on the verge of going bankrupt and South Korea was unexpectedly in need of cash to provide short-term liquidity into its financial sector. The IMF agreed to provide an emergency loan package of $58.4 billion, but payments were to be made conditional on South Korea making progress on a wide range of structural reforms. South Korea without much alternative agreed to the conditional loans and embarked on a series of radical reforms. South Korea's equity market became more open to foreign investors. Constraints on the purchase of domestic assets by foreigners were relaxed. Corporate boards were instituted to enhance accountability and transparency at banks and large firms. At the same time, US and European firms, taking advantage of the deflated prices, purchased and invested in South Korean firms and assets (Kim 2006; Choi et al. 2007). Naturally, more foreigners were in managerial positions and western management practices quickly spread across the economy. Some indication of this can be seen in how pay practices evolved in South Korea. Most firms in Korea paid their employees based on a set wage table before the crisis. That is, worker pay was primarily determined by the number of years one worked at the firm, along with a few!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 A large literature examines the causes behind the Asian Financial Crisis and why it spread so quickly to many countries, including South Korea, which was geographically detached and generally perceived as a more stronger economy compared to Southeast Asia. Potential causes for the financial crisis include weak corporate governance, moral hazard in the financial sector, speculative attacks on currencies by hedge funds, as well as the grouping of countries under the so called emerging market funds. (Krugman 1999, Faccio et al. 2001).! 5!

6 observable characteristics, such as, education, gender, military experience, etc. The notion that individual pay among workers in the same entering cohort could differ substantially based on performance was alien to many workers and firms at that time. However, with the spread of western management practices, firms started to adopt salary systems where individual pay would be negotiated based on performance. Figure 2 illustrates the year firms first adopted a salary system based on a survey of South Korean establishments. 2 Most establishments started to adopt a salary system soon after the crisis and the number peaks in 2000 during the height of the structural reforms. The delayering of organizations and the introduction of teams are also aspects of organizational change in modern firms (Caroli and Van Reenen 2001). The team structure reduces the hierarchy within organizations and help expedite the decision making process. Moreover, evaluating worker contribution is easier in smaller teams, since performance can more easily be tracked within small groups. Figure 3 presents the year team systems were introduced. It exhibits a similar pattern to Figure 2. The year teams were introduced also peaks at As Figures 2 and 3 illustrate, two features often associated with modern management practices - performance pay and delayering - were widely instituted in Korea soon after the financial crisis. The share of occupation groups in the economy also changed soon after the financial crisis. Figure 4 presents the employment patterns of four occupational skill groups - (a) managers, (b) technical and professional workers, (c) office, service, and sales workers, and (d) production and simple task workers - for all South Korean firms with 5 or more employees. The employment dip in 1998 is the aftermath of the financial crisis, which negatively affected overall employment. The dip is particularly sharp for the production and simple task workers and their employment level does not reach its pre-crisis level until On the other hand, employment of the technical and professional workers jumps after the crisis. The number of managers jumps after the financial crisis as well, which is more clearly illustrated in Figure 6. Figure 5 presents the employment dynamics of each occupation group in terms of its share relative to total employment. The share of production and simple task workers decrease by about 10 percentage points from 50% to 40% after the crisis, reaching a new steady state. The relatively lower skilled white-collar workers, i.e., office workers and service and sales workers,!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2 Figures 3 and 4 are based on the workplace survey used in the empirical analysis of this paper. I provide more details on the survey in the following data section.! 6!

7 also drop to a slightly lower steady state. On the other hand, the share of technical and professional workers jumps to a higher steady state. Manager share also increases after the crisis, which again is better illustrated in Figure 6. Figures 4 through 6 suggest that the demand for managers, technical and professional workers may have increased after the financial crisis. Though these figures are purely descriptive, they do hint that modern management practices may be related to the composition of the occupational skill groups in the economy. 3. Data This paper s empirical analysis uses a nationally representative workplace survey that samples all South Korean establishments with 30 or more employees in 2002 and The survey was conducted by the Korea Labor Institute as a pre-survey to the biannual Workplace Panel Survey that starts in The 2002 and 2003 survey collected data on when firms first adopted certain management practices after the financial crisis. It also provides detailed industry classification, enabling it to be merged with the World Management Survey. These questions were not asked in the main biannual panel survey that started several years later. 3 The survey interviews human resource managers and employee representatives, and asks about management practices, compensation policy, labor relations, and worker benefits. I benchmark the World Management Survey to construct South Korea s management index based on questions that ask about employee evaluation, operations, and human resource management strategies. 4 These questions are listed in Table 1. Evaluation questions ask how important individual performance is in promotion decisions and whether the establishment implements Management by Objective (MBO) practices, where individuals set goals at the beginning of the year and are evaluated based on performance on these goals at the end of the year. Operations related question is whether the firm implements Six Sigma, which is a set of practices that aims for process improvement. 5 Human resource management questions ask about the organization s emphasis on the individual versus the team, performance versus harmony, and how flexible the organization can hire and fire workers. I standardize each response and take the sum to construct a standardized management index.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 More information on the survey and the data can be accessed at the Korea Labor Institute s website 4 The World Management Survey does not yet cover South Korea. 5 One thing to note is that these management concepts were all devised or popularized in the west. MBO was popularized by the management guru Peter Drucker in Six Sigma was introduced by Motorola and Jack Welch used it as a central business strategy of General Electric.! 7!

8 In addition, the survey provides the number of employees by occupational skill groups, i.e., managers, technical workers (R&D personnel and technicians), office workers, sales and service workers, production line workers, and simple manual laborers. The manager category does not include executives, such as the owner, CEO, or top executives. Simple manual laborers are low-skilled non-production line workers, such as cleaning and janitorial personnel. I construct the relative demand of four occupational skill groups, i.e., managers, technical workers, office workers, and service and sales workers, relative to unskilled workers. Unskilled workers are comprised of the production line workers and simple manual laborers. I also construct the relative wages. However, information on wages is more limited in the survey. The survey collects the average wages of all six occupational skill groups, but only for temporary workers in a subsample of the establishments. The survey does collects data on the average wage of managers and all non-managers combined, i.e., the rest of the workers, for each establishment. I use these information to impute the average salary of each occupational group for each establishment. I first calculate the industry level relative wage rates based on the temporary worker wages. I then use the number of employees in each occupational skill group and the average wage of managers and non-managers to impute the average wage of each occupational group for each establishment. 6 Despite the paper s focus on manufacturing establishments, there are establishments with unusually high ratios of skilled to unskilled workers, often due to the very low number of lowskilled workers. For example, quite a few establishments have zero or only one production worker. I drop establishments with zero or one production worker. I also drop establishments if the ratio of any skilled occupation group to unskilled workers is greater than The final sample size is 1,430 establishments and Table 2 presents the descriptive statistics. Establishments on average have 390 employees. Production workers comprise 52% of the employment, followed by office workers at 13%, and simple manual laborers at 12%. Managers comprise 10 % of the employment and technical workers 7%. Service and sales workers!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 6 For example, I impute the average wage of technical workers as below!!"!!!"#"$%&'!!"!!!"#"$%&'!!"#! =!!"#! +!!!!!"#!!!"",!"#$,!"#$,!"#$ where! denotes wage,!!"# the industry average wage from the temporary worker information, and! employment, the subscripts indicate the occupational skill groups. 7 There were 280 establishments with zero production worker, and 10 establishments with exactly one production worker. This process in total drops 308 observations.!!"#!!"#!! 8!

9 comprise the lowest share at 6%. The wage of managers relative to unskilled workers in log differences, i.e., ln(manager wage) ln(unskilled wage), is 0.5. The relative premium is 0.46 for technical workers, 0.01 for office workers, and 0.06 for sales and service workers. In other words, manager pay is over 50% higher than that of unskilled workers and is closely followed by technical workers. The average pay of office workers is very close to that of unskilled workers. 4. The Empirical Framework I consider the following equation to examine the relationship between modern management practices and the demand for different occupational skill groups:!!"# =!!!!" +!!" Π +!!"#. (1)! indexes the occupational skill group,! the establishment, and! the industry.!!"# is establishment i's share of employees in occupation group! relative to the unskilled occupation group.!!" is the set of control variables that include establishment age and log employee size, as well as region dummies, and a year dummy for 2003 (since the survey spans two years). The dummy variables capture unobserved region and time characteristics that affects the demand of each occupational skill group.!!" is the establishment's management index. In addition to examining labor share!!"#, I examine wage share!!"#, i.e., the relative wage of occupational skill group! relative to that of the unskilled occupation group. By examining both relative employment and wage, one can better check whether the responses are driven by the demand for or supply of the different occupational skill groups. If modern management increases the relative demand for a certain occupational skill, then both the relative employment and wage of that occupational skill group would increase. The main challenge in examining the impact of modern management practices on the demand for occupational skill groups is the fact that management practices are endogenous. Firms weigh the benefit against the cost of introducing modern management practices and choose whether or not to adopt new practices. There would be firm specific characteristics that factor into that decision, many of which the econometrician may not be able to control for. In addition to firm level OLS regressions of equation (1), this paper examines the industry level variation in management practices and the demand for occupational skill. Modern management practices would vary across industries due to various reasons that render modern management! 9!

10 practices more beneficial to some industries relative to others. 8 Industries that often use complicated machineries and production processes may reap the benefits of modern management more than others. Industries that use a multitude of intermediate goods sourced from many regions may benefit more from modern management than industries that do not. Multinational firm activity or labor unionization could also generate industry level variation in management practices. As Figure 1 illustrates there indeed is substantial variation in management practices across industries within each of the five advanced economies. I construct the industry management frontier by averaging this group of 5 - the US, Britain, France, Germany, and Italy- countries' industry level management indexes from the World Management Survey. These five economies are generally at the frontier of production technologies and business practices. Modern management practices were widely established among firms in these countries and many multinational firms originate from these advanced economies. Moreover, firms and funds from these western economies invested in South Korea s firms and assets after the financial crisis. Figure 7 presents the correlation between the industry management frontier (the G5 industry management index) and South Korea s management index. The x-axis indicates that there is substantial industry level variation in management practices in the Group of 5 countries. Also, there is a positive correlation between the industry management frontier and South Korea s management index. Table 3 presents the regression results of this relationship. In panel A of column (1), South Korea s management index is regressed on the G5 industry management index and the control variables. Standard errors are clustered at the industry level. A standard deviation increase in the G5 index increases South Korea s management index by about 0.13 standard deviation, and the effect is statistically significant at the 1 percent level. The other panels in column (1) examine the correlation using each country s industry management index. The estimates are similar across all 5 countries. I next split Korea s management index into two components an industry average and the establishment specific residual and examine how each component is related to the foreign management indexes. The foreign industry level management indexes are strongly correlated with South Korea s industry level index but not with the establishment specific residual.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8 The idea of utilizing industry level variation for identification has been used to examine the impacts of financial dependence. Rajan and Zingales (1998) identify the industry s need for external finance to examine the impact of external financing on growth. Manova (2004) examines how financial market imperfections distort trade across industries and countries.! 10

11 Finally, I examine the scatterplots between the employment share of each occupational skill group and the G5 industry management index in Figure 8. The positive relation between the share of technical workers and the G5 index, and the negative relation between the share of production workers and the G5 index particularly stands out. This potentially suggests that modern management practices may be complementary to technical skill while substituting production workers. 5. The Empirical Results 5.1 Modern management and the level of employment and wages by skill groups I first examine how modern management is related to the level of employment and wage of each occupational skill group in Table 4. The base OLS results in Panel A indicate that modern management is positively related to the number of managers, technical workers, and office workers, but negatively related to the number of production workers. On the other hand, modern management is positively and significantly related to the wage of all six occupational skill groups. In Panel B, I separate the management index into two components - the industry average and the establishment specific residual component. In general, employment is more strongly and significantly related to the industry average than the residual component. Establishments in industries with a higher average management index have significantly more managers, technical workers, and office workers, but less production workers. On the other hand, wage tends to be more significantly related to the establishment specific residual. An interesting feature from the wage result is that the coefficient estimates on the establishment specific residual index for all six occupation groups are quite similar, whereas the estimates on the industry average index are substantially more varied. One explanation may be that the establishment specific residual index is closely related to the establishment's total productivity that affects all workers similarly, whereas the industry average index better captures the differential demand for the occupational skill groups. Panel C examines how the industry management frontier, i.e., the G5 industry management index, is related to the level of employment and wages. The industry management frontier is most strongly and positively related to the number of technical workers, as well as managers, but negatively related to the number of production workers. The industry management! 11

12 frontier is also positively and significantly related to the wages of skilled workers, especially, technical workers and office workers. Finally, Panel D presents the regression results that use the variation in South Korea s management index generated by the industry management frontier, i.e., the 2SLS results. As Table 3 illustrated the first stage is strong with an F-statistic of Overall, the 2SLS results are qualitatively similar to the reduced form results of Panel C. Modern management is positively related to the employment and wages of skilled workers, notably, the technical workers, managers, and office workers, but negatively to the employment of production workers. 5.2 Modern management and the relative demand for skill Table 5 examines the relative demand for the different occupational skill groups. The dependent variables in columns (1) through (4) are the natural logarithms of the employment of managers, technical workers, office workers, and sales and service workers relative to the employment of unskilled workers, i.e., production workers and simple manual laborers. Columns (5) to (8) present the relative wage results for the corresponding occupation groups. The OLS results in Panel A indicate that modern management is most strongly associated with the relative demand for technical workers and office workers. For managers the estimate is significant only for relative employment, and for sales and service workers only the relative wage result is significant. As before, I separate out the industry average and establishment specific residual management index in Panel B. Again the industry average, compared to the establishment specific residual, has a substantially larger relation with the relative employment of each skill group, and the estimate on the industry average is largest for the technical workers. The relative wage results are not as strong statistically, except for one estimate on the industry average index for sales and service workers. However, similar to before the magnitude of the estimate for technical workers is larger than that for managers or office workers. There is no establishment specific residual effect on the relative wages of any skill group. Finally, the reduced form results of Panel C and the 2SLS results of Panel D all return positive and significant estimates for the relative employment shares of skilled workers. Similar to previous results, the effect is strongest for the technical workers. Moreover, the positive estimates for both relative employment and relative wage suggest that the effects are driven by! 12

13 modern management s demand for skilled workers, rather than the relative supply of skilled workers. The coefficient estimates for the technical worker group is consistently the largest in Table 5, regardless of whether one examines relative employment or relative wage, or whether one examines the OLS result, reduced form result, or 2SLS result. 5.3 Controlling for technology and other sensitivity analyses There are likely unobserved factors that correlate with the industry level management index and the demand for skill in the Panel D results. Technology adoption varies across industries and influences the demand for skill. Moreover, there is evidence that organizational characteristics, such as delayering and multitasking, are complementary to technology. Table 6 presents the 2SLS results with additional controls for technology as well as other potential channels that could influence the demand for technical skill. In Panel A, I additionally control for the log number of computers at the establishment to proxy for technology usage. The relative employment share results in columns (1) through (4) indeed indicate that technology increases the demand for skill, especially managers and office workers. The coefficient estimates on the management index become smaller in magnitude, but only the estimate for the technical workers remains significant. On the other hand, the relative wage results in columns (5) through (8) indicate that, the number of computers is not significantly related to the relative wage of skill groups, and if any tends to reduce the wage gap. However, the estimates on the management index, as well as their standard errors become larger. Overall, Table 6 Panel A indicates that modern management is positively related to the demand for technical skill even when controlling for a proxy for technology. I further explore how controlling for exports, corporate governance, and labor unions change the Table 5 Panel D results. I include the export share of revenue as an additional control in Panel B. The literature has found exports to be associated with better quality and the demand for skilled workers (Verhoogen 2008). However, the export share variable has no significant relationship with the relative employment or wage share of all occupational skill groups when management is controlled for. Moreover, the coefficient estimates on the management index is very similar in terms of both magnitude and significance to the 2SLS results in Table 5. I next examine whether controlling for an aspect of corporate governance, i.e., whether the firm had a Chief Executive Officer (CEO) independent from the owner, changes the impact! 13

14 of modern management on the demand for skill in Panel C. Many firms in Korea were directly governed by their owners rather than independent CEOs. Holding management practices constant, having a CEO tends to be negatively associated with the relative demand of skill. However, the coefficient estimates on the management index barely changes. Panel D examines whether having a labor union influences the relative demand for skill. I find no impact of union status on relative employment and wages. Again, the coefficient estimates on the management index are virtually unchanged. Finally, I control for all of the above potential channels in Panel E. All coefficient estimates are very similar to that from Panel A. This suggests that technology is the critical factor that needs to be accounted for in the 2SLS regressions that uses the industry management frontier as an instrumental variable. However, once technology is controlled for, other factors identified in the literature are not major concerns, and the 2SLS regression that controls for technology suggests that modern management may increase the demand for skill. While controlling for the number of computers at the establishment, I examine whether modern management s relative demand for technical skill is primarily related to the increase in the demand for technical workers and/or the decrease in the demand for unskilled workers. Table 7 Panels A and B present the results on employment and wages. Modern management is significantly and positively related to the demand for technical workers. However, modern management's employment and wage relationship with unskilled workers are not significant. The evidence indicates that modern management's relative demand for skill is primarily driven by the increased demand for technical workers. If establishments had part-time employees, those numbers were included in the employment numbers. In Table 7 Panels C and D, I separate out the part-time employees from the full-time employees. First of all, column (7) shows no evidence that modern management practices substitute full-time employees for part-time employees. Obviously, these can differ by the institutional context, but at least at the aggregate industry level this seems not to be the case. Columns (1) through (6) indicate that modern management is not significantly related to the demand of part-time employees, and the increased demand for the technical workers is from the full-time employees. 5.4 Modern management and firm performance Modern management's demand for technical workers would imply complementarity! 14

15 between the two. I examine whether the evidence is consistent with such complementarity in terms of firm performance. I first examine the relationship beetween modern management and firm performance measured as the return on assets (ROA). Table 8 columns (1) and (2) present the OLS results where I include the same set of control variables as before. The estimates on modern management are positive but not statistically significant. When I instrument using the industry management frontier in columns (3) and (4), modern management is positively and significantly related to a higher ROA. In column (3), A standard deviation increase in the management index increases the ROA by 0.272, and the impact is statistically significant at the 10% level. Given that the average ROA is about 0.12 with a standard deviation of 0.57, this amounts to about half a standard deviation increase. Once I control for the number of computers in column (4) a standard deviation increase in the management index increases the ROA by 0.59, which is a full standard deviation, and the impact is statistically significant at the 5 percent level. Finally, I examine the complementarity between modern management and technical workers in columns (5) and (6). I run an OLS regression that additionally includes the log number of technical workers, and the management index interacted with the log number of technical workers. The coefficient estimates on the interaction term are positive and statistically significant and are similar regardless of whether I control for log computers in column (6). Overall, Table 8 indicates that modern management and firm performance are positively related and that there is complementarity between modern management and technical workers. 6. Conclusion This paper examined the relationship between modern management practices and the demand for different occupational skills. Focusing on the industry level variation in management practices generated by the industry management frontier, i.e., the average industry management index of 5 advanced economies (the US, Britain, France, Germany, and Italy), I examine how modern management practices relate to the demand for managers, technical workers (R&D workers and technicians), office workers, sales and service workers relative to the unskilled production workers and simple manual laborers. As widely found in the literature, controlling for technology is important for the analysis. I find that modern management is positively associated with the demand for workers with technical skill, but has relatively little relationship with the other occupational skill groups. I also find that performance measured as the return on assets! 15

16 increases with modern management practices, and that modern management practices complement technical workers in increasing the return on assets. A relatively large literature finds that modern management practices increase the efficiency of firms and organization. However, what this paper finds is that such practices may increase inequality between skilled - in particular, technically skilled - and unskilled workers. The complementarity between modern management practices and technical workers suggests why modern management might increase the demand for technical skill - the marginal productivity of technical workers might be higher than that of other occupational skill groups, and modern management practices are better at identifying that. Firms adopt modern management practices to better monitor and track the performance of workers. These firms are making the additional effort to identify the types of workers that generate relatively more value to the firm, and eventually hire and pay more for such workers. If workers with technical skill create more value to the firm, relative to the other occupational skill groups, firms that implement modern management practices would more likely increase the demand for technical workers. It seems that more firms around the world are adopting modern management practices, either because of guidance by foreign investors, multinational firms, management consultancy, MBA education, and even international organizations like the World Bank. Future research that more precisely estimates the causal relationship and the channels by which modern management practices increase the demand for technical skill using more detailed data could help shed light on how labor market inequality and polarization may evolve in the future.! 16

17 References Acemogul, Daron and David Autor Skills, Tasks, and Technologies: Implications for Employment and Earnings. In Handbook of Labor Economics, vol. 4, ed. David Card and Orley Ashenfelter, Amsterdam: Elsevier. Autor, David and David Dorn. (2013). "The Growth of Low-Skill Service Jobs and the Polarization of the U.S. Labor Market," American Economic Review, 103(5): Autor, David, Frank Levy, and Richard Murnane "The Skill Content of Recent Technological Change: An Empirical Exploration." Quarterly Journal of Economics, 118(4): Autor, David H., Lawrence F. Katz and Melissa S. Kearney "The Polarization Of The U.S. Labor Market," American Economic Review 96(2): Bandiera, Oriana, Iwan Barankay, and Imran Rasul Incentives for Managers and Inequality among Workers: Evidence from a Firm-Level Experiment. Quarterly Journal of Economics, 122 (2): Bloom, Nicholas and John Van Reenen (2007). Measuring and Explaining Management Practices Across Firms and Countries. Quarterly Journal of Economics, 122, Bloom, Nicholas and John Van Reenen (2011). Human Resource Management and Productivity. In Handbook of Labor Economics, Vol. 4B, edited by Orley Ashenfelter and David Card. North-Holland, Chapter 19, pp Bloom, N., Sadun, R. and van Reenen, J. (2012). Americans do IT better: US multinationals and the productivity miracle, American Economic Review, 102(1): Bloom, N., Eifert, B., Mahajan, A., Mckenzie, D. and Roberts, J. (2013). Does management matter: evidence from India, Quarterly Journal of Economics, vol. 128(1), pp Bloom, N., Propper, C., Seiler, S. and van Reenen, J. (2015). The impact of competition on management practices in public hospitals, Review of Economic Studies, vol. 82(2), pp Bloom, N., Renata Lemos, Raffaella Sadun and John Van Reenen Does management matter in schools? Economic Journal, 125: Bresnahan, Timothy, Erik Brynjolfsson, and Lorin Hitt (2002). Information Technology, Workplace Organization and the Demand for Skilled Labor: Firm-Level Evidence. Quarterly Journal of Economics, 117(1): Caroli, Eve, and John Van Reenen Skill-Biased Organizational Change? Evidence from a Panel of British and French Establishments. Quarterly Journal of Economics, 116(4): ! 17

18 Choi, Jongmoo Jay, Sae Woon Park, and Sean Sehyun Yoo "The value of outside directors: Evidence from corporate governance reform in Korea." Journal of Financial and Quantitative Analysis 42(4): Faccio, Mara, Larry H.P. Lang, and Leslie Young Dividends and Expropriation. American Economic Review 91(1): Khan, Adnan, Asim Khwaja, and Ben Olken Making Moves Matter: Experimental Evidence on Incentivizing Bureaucrats through Performance-Based Postings. Unpublished. Kim, Kihwan "The Korean financial crisis: Causes, policy response, and lessons." In IMF Seminar on Crisis Prevention in Emerging Markets. Krugman, Paul The Return of Depression Economics. New York: W. W. Norton & Company. Lazear, Edward (2000). Performance Pay and Productivity. American Economic Review, 90, Lemieux, Thomas, W. Bentley MacLeod, Daniel Parent Performance Pay and Wage Inequality. Quarterly Journal of Economics, 124(1): Manova, Kalina Credit Constraints, Heterogeneous Firms, and International Trade. Review of Economic Studies 80: McConnell, John, Rich Lindrooth, Doug Wholey, Tom Maddox, and Nicholas Bloom Management practices and the quality of care in Cardiac units. Journal of the American Medical Association: Internal Medicine, 173(8): McCormack, John, Carol Popper and Sarah Smith Herding Cats? Management and University Performance. Economic Journal, 124: Michaels, Guy, Ashwini Natraj, and John Van Reenen Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years. Review of Economics and Statistics 96(1): Rajan, Raghuram G. and Luigi Zingales Financial Dependence and Growth. American Economic Review, 88(3): Rasul, Imran and Daniel Rogger Management of Bureaucrats and Public Service Delivery: Evidence from the Nigerian Civil Service. Economic Journal, doi: /ecoj Verhoogen, Eric "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector." Quarterly Journal of Economics 123(2): ! 18

19 Figure 1. The distribution of industry level management practices across countries Density US Density Britain Density France Density Germany Density Italy Source: World Management Survey.! 19

20 Figure 2. Introduction of performance pay 250! 200! 150! 100! 50! 0! 1977! 1979! 1982! 1983! 1986! 1987! 1988! 1989! 1990! 1991! 1992! 1993! 1994! 1995! 1996! 1997! 1998! 1999! 2000! 2001! 2002! 2003! salary!system!start!year! Figure 3. Introduction of team systems 250! 200! 150! 100! 50! 0! 1977!1982! 1986! 1988!1990! 1992! 1994! 1996! 1998!2000! 2002! team!system!start!year!! 20

21 Figure 4. Employment by skill groups ! ! ! Managers! ! Technical!and!professional!workers! Office,!service,!and!sales!workers! ProducGon!and!simple!task!workers! ! ! 0! 1994! 1995! 1996! 1997! 1998! 1999! 2000! 2001! 2002! 2003! Figure 5. Employment share by skill groups 0.5! 0.4! 0.3! %!Manager! %!Technical!and!professional! %!Office,!service,!and!sales! 0.2! %!ProducGon!and!simple!task! 0.1! 0! 1994! 1995! 1996! 1997! 1998! 1999! 2000! 2001! 2002! 2003!! 21

22 Figure 6. Employment and employment share of the managers 0.066! 0.061! 0.056! 0.051! 0.046! 0.041! 0.036! 1994! 1995! 1996! 1997! 1998! 1999! 2000! 2001! 2002! 2003! % Manager Managers ! ! ! ! ! ! Figure 7. Korea management index and the Group of 5 countries industry management index Korea management index Group of 5 industry management index! 22

23 Figure 8. Employment share by skill group and the G5 industry management index! 23

24 Table 1. Questions used in constructing the management index for Korea Category Evaluation Survey question How important are individual performance evaluation scores in promotion decisions? (0 to 100 scale) Do you implement Management by Objectives (MBO)? (Yes/No) MBO is a practice where individuals set goals at the beginning of the year and are evaluated based on performance on these goals at the end of the year. Operations Human resource management Do you implement Sigma 6 practices? (Yes/No) HRM s main objective is to reduce labor costs, as opposed to promoting loyalty to the firm (1 to 7 scale) Hire and fire qualified personnel based on firm needs, as opposed to develop personnel by hiring new recruits and maintaining long-term employment. (1 to 7 scale) Utilize temporary workers as much as possible, as opposed to use permanent workers as much as possible. (1 to 7 scale) HRM is based on individual performance, as opposed to teamwork. (1 to 7 scale) HRM focuses on maximizing employee s short-term performance, as opposed to longterm development and nurturing of employees Notes: Management by Objectives (MBO) is a practice where employees set goals at the beginning of the year and are evaluated based on performance towards the set goals at the end of the year.! 24

25 Table 2. Descriptive statistics Variable Mean Std. Dev. Min Max Obs Mangement index G5 industry management index Total employment Manager share Technical (R&D and tech) worker share Office worker share Service and sales worker share Production worker share Simple task worker share Log(manager wage relative to unskilled wage) Log(technical worker wage relative to unskilled wage) Log(office worker wage relative to unskilled wage) Log(service and sales worker wage relative to unskilled wage) Manager salary (1,000 KRW) R&D and technical worker salary (1,000 KRW) Office worker salary (1,000 KRW) Service and sales worker salary (1,000 KRW) Return on capital Log(revenue) Number of computers Use team system Use salary system Hired consultants Has a CEO separate from the owner Notes: Salary and revenue numbers are adjusted to 2002 values. Primary source of data is the 2002 and 2003 establishment level pilot survey for the Korea Workplace Panel. The G5 industry management index is constructed based on the US, Britain, France, Germany, and Italy data in the World Management Surveys.! 25