Cornell Unversty ILR School DgtalCommons@ILR Workng apers ILR Collecton June 2007 The Effect of Self-Managed and Closely-Managed Teams on Labor roductvty and roduct Qualty: An Emprcal Analyss of a Cross Secton of Establshments Jed DeVaro Cornell Unversty, jed.devaro@csueastbay.edu Follow ths and addtonal works at: http://dgtalcommons.lr.cornell.edu/workngpapers Thank you for downloadng an artcle from DgtalCommons@ILR. Support ths valuable resource today! Ths Artcle s brought to you for free and open access by the ILR Collecton at DgtalCommons@ILR. It has been accepted for ncluson n Workng apers by an authorzed admnstrator of DgtalCommons@ILR. For more nformaton, please contact hlmdgtal@cornell.edu.
The Effect of Self-Managed and Closely-Managed Teams on Labor roductvty and roduct Qualty: An Emprcal Analyss of a Cross Secton of Establshments Abstract [Excerpt] I estmate the effect of team producton on labor productvty and product qualty usng a cross secton of Brtsh establshments, fndng that the typcal establshment enjoys statstcally sgnfcant ncreases n labor productvty (but not product qualty) from usng teams, though there s no statstcally sgnfcant dfference between the predcted gans from autonomous versus non-autonomous teams. I show that standard methodologcal approaches that treat teams and autonomy as exogenous nduce bases of two forms: 1) the benefts from teams are nflated, 2) the benefts of autonomous teams relatve to those of non-autonomous teams are nflated. Keywords team, producton, labor, productvty, Brtsh, autonomous Comments DeVaro, J. (2007) The effect of self-managed and closely-managed teams on labor productvty and product qualty: An emprcal analyss of a cross secton of establshments. Retreved [nsert date], from Cornell Unversty, ILR School ste: http://dgtalcommons.lr.cornell.edu/workngpapers/7 Ths artcle s avalable at DgtalCommons@ILR: http://dgtalcommons.lr.cornell.edu/workngpapers/7
The Effects of Self-Managed and Closely-Managed Teams on Labor roductvty and roduct Qualty: An Emprcal Analyss of a Cross Secton of Establshments Jed DeVaro * Department of Labor Economcs 357 Ives Hall East Cornell Unversty Ithaca, NY 14853, U.S.A. Emal: devaro@cornell.edu hone: (607) 255-8407 FAX: (607) 255-4496 June 21, 2007 * The author acknowledges the Department of Trade and Industry, the Economc and Socal Research Councl, the Advsory, Conclaton and Arbtraton Servce and the olcy Studes Insttute as the orgnators of the 1998 Workplace Employee Relatons Survey data, and the Data Archve at the Unversty of Essex as the dstrbutor of the data. None of these organzatons bears any responsblty for the author s analyss and nterpretatons of the data. I also thank numerous colleagues for helpful comments, and Dana Brookshre, Henr Frasse, Fdan Ana Kurtulus, Robert L, and Davd Rosenblum for research assstance. I am partcularly ndebted to three anonymous referees for unusually detaled and nsghtful feedback.
The Effects of Self-Managed and Closely-Managed Teams on Labor roductvty and roduct Qualty: An Emprcal Analyss of a Cross Secton of Establshments Abstract I estmate the effect of team producton on labor productvty and product qualty usng a cross secton of Brtsh establshments, fndng that the typcal establshment enjoys statstcally sgnfcant ncreases n labor productvty (but not product qualty) from usng teams, though there s no statstcally sgnfcant dfference between the predcted gans from autonomous versus non-autonomous teams. I show that standard methodologcal approaches that treat teams and autonomy as exogenous nduce bases of two forms: 1) the benefts from teams are nflated, 2) the benefts of autonomous teams relatve to those of non-autonomous teams are nflated. 1
I. INTRODUCTION Ths paper contrbutes to a vast and growng lterature concernng the effects of team producton on organzatonal performance. Usng the 1998 Workplace Employee Relatons Survey (WERS), a large and natonally-representatve cross secton of Brtsh establshments, I estmate the effects of team producton on labor productvty and product qualty and ask whether and how these effects dffer when teams are granted autonomy. Table 1 summarzes the prevous lterature on the effects of team producton on workplace outcomes. Some studes are sngle-frm cases that explot temporal varaton n human resource practces (such as a swtch from ndvdual producton to team producton). Others are cross sectonal, explotng varaton n the use and nature of teams across ndvdual frms or producton unts. Others use panel data spannng many organzatons to explot both types of varaton, though there tends to be less varaton temporally than across producton unts. Studes also dffer wdely n ther choce of dependent varable (e.g. labor productvty, product qualty, fnancal performance, turnover, wages, absenteesm, nnovaton and R&D, worker well-beng and satsfacton, layoff rates) and n whether the focus s on team producton alone or on an entre system of human resources practces of whch team producton s one component. Frequently these studes concern selfmanaged teams n whch team members enjoy sgnfcant autonomy concernng how the work s executed, n contrast to closely-managed teams n whch supervsors exercse consderable control over tasks. The emphass on self-managed teams arses from theoretcal consderatons suggestng that the benefts of team producton to organzatonal performance are contngent on teams beng conferred wth suffcent autonomy over ther work. Whle the studes n Table 1 dffer n analyss samples, dependent varables, types of teams analyzed, and whether teams are analyzed alone or as part of a broader system, they are unted by ther common methodologcal approach of treatng both team producton and the degree of autonomy granted to team members as exogenous n models of organzatonal performance. 1 In contrast, the dstngushng feature of the present study s that I treat both of these varables as endogenous. The reason s that the exstence of team producton and the degree to whch teams are conferred wth authorty over the executon of tasks are not exogenously assgned to frms n a random fashon. Rather, they are the result of employer decsons that are presumably made n an effort to mprove organzatonal performance. Ths s mportant, because unmeasured determnants of an employer s choces of teams and autonomy 2
(such as, for example, manageral personalty and tastes, and the socal atmosphere of the workplace) are lkely correlated wth unmeasured determnants of organzatonal performance. It mght also be that good workers go to work n more productve establshments and that establshments wth good workers choose team producton. Correlatons n the unobserved determnants of manageral choces and organzatonal performance result n based estmates of the effects of nterest f the endogenety of teams and autonomy s gnored. An advantage of the WERS s that t has varaton not only n whether or not team producton s used but n the type of team producton used, n partcular whether or not team members are granted autonomy. It also ncludes nformaton on labor productvty and product qualty. Whle panel data would be preferable to cross sectonal data for the purpose of measurng the effects of teams on organzatonal outcomes, I do not know of any natonallyrepresentatve panel datasets that are approprate and large enough for ths analyss. My research strategy s therefore to explot the unque and extensve nformaton contaned n the avalable cross sectonal data, whle smultaneously addressng the concerns arsng from correlatons n unobserved determnants of employer choces and organzatonal outcomes. The focus on labor productvty and product qualty n ths paper s consstent wth the man emphass of the economcs lterature on the productvty effects of teams. Labor productvty s the most commonly-studed outcome measure n such studes (e.g. Hamlton, Nckerson, and Owan 2003, Erksson 2003, Kato and Morshma 2002, Black and Lynch 2001, Ichnowsk, Shaw, and rennush 1997, Banker, Feld, Schroeder, and Snha 1996, Ichnowsk 1990). Often the studes n ths lterature consder product qualty as a second outcome varable of nterest (e.g. Ichnowsk and Shaw 1999, Ichnowsk, Shaw, and rennush 1997, Banker, Feld, Schroeder, and Snha 1996). The focus on labor productvty and product qualty s drven by clear theoretcal channels of nfluence predctng effects of teams on these outcomes, as dscussed n the next secton. The new contrbuton of the present study s to nvestgate the mplcatons of endogenety of teams and autonomy n the labor productvty (and to a lesser extent product qualty) models that have been the central focus of economc studes of team producton. 2 The prevous study that s nearest to the present analyss s DeVaro (2006), whch consdered fnancal performance as an outcome varable. That study also allowed for the endogenety of teams and autonomy, fndng a postve effect of teams for the typcal workplace 3
and no statstcally sgnfcant dfference between autonomous and non-autonomous teams n terms of ther predcted benefts to fnancal performance. However, bases from gnorng the endogenety of teams and autonomy were found to be relatvely modest. In the present paper I apply the structural model that was developed n DeVaro (2006) to the study of labor productvty and product qualty. II. THEORETICAL BACKGROUND All relevant aspects of the qualty of a product or servce would, n prncple, be subsumed n a comprehensve defnton of labor productvty. That s, the labor productvty measures would be fully qualty adjusted. If labor productvty measures are comprehensve, then an mprovement n product qualty that enhances the value (and thus prce) of a product or servce should also contrbute to hgher productvty. It then follows that an emprcal result that teams mprove productvty but not qualty would shed lght on the mechansm by whch productvty enhancements are secured. Throughout the paper, however, I avod drawng such nferences from comparsons between labor productvty results and qualty results. Whle the two concepts are conceptually related, t s unclear whether the respondents report answers to the labor productvty queston that fully account for qualty, and ths assumpton s crucal to nterpretatons of the type just descrbed. 3 Some of the man benefts of team producton accrue through productve nformaton sharng among workers, when potental team members have knowledge that s non-duplcatve and also relevant to the producton process (Lazear 1995, 1998). These synerges n nformaton can gve rse to new deas about process mprovement that lead to hgher product qualty. 4 The potental for such productve synerges should theoretcally ncrease wth the sze of the group and the assocated pool of deas, though some costs also ncrease wth group sze ncludng the greater lkelhood of free rdng. 5 Kandel and Lazear (1992) argue that teams allevate costly montorng of workers n the presence of asymmetrc nformaton by relyng on montorng of workers through peer pressure. Mohrman and Novell (1985) dscuss two ways n whch teams produce benefts to labor productvty and product qualty. The frst s that teams lead to dea generaton and mplementaton, whch n turn leads to mproved productvty and qualty. The second s that teams lead to mproved job satsfacton, motvaton, and task performance, whch ultmately translates nto ncreased productvty. A varety of costs are also assocated wth team 4
producton. These nclude regular team meetngs and tranng, and shrkng and free-rdng among team members (Alchan and Demsetz 1972, Holmstrom 1982, Rasmusen 1987, Itoh 1991, 1992, McAfee and McMllan 1991, Legros and Matthews 1993). It s frequently argued that teams confer the greatest benefts when they are granted autonomy, and ndeed autonomous or self-managng teams have been the focus of much of the emprcal teams lterature. The dstngushng feature of self-managed or autonomous teams s that team members are gven the lattude to jontly decde how ther work s to be done. The alternatve to an autonomous team s a non-autonomous or closely-managed team, n whch team members have lttle dscreton over tasks and are told not only what to do but how to do t. When the teams under study are autonomous or self-managng, a postve effect on frm performance s typcally found n the lterature. For example, Hamlton, Nckerson, and Owan (2003) found a fourteen percent ncrease n labor productvty after the ntroducton of selfmanaged teams n a garment manufacturng plant, and Erksson (2003) found a postve effect of self-managed teams on labor productvty n a cross secton of establshments. Theoretcal ratonales for grantng teams autonomy can be found both n economcs and n organzatonal behavor. In economcs the relevant lterature concerns the delegaton of authorty wthn organzatons, and the nsghts from ths lterature are relevant n the team context even though the theores are frequently framed n language pertanng to ndvdual workers. 6 Grossman and Hart (1986), Hart and Moore (1990), and Hart (1995) suggested that authorty may be conferred by the ownershp of an asset, whch gves the owner the rght to make decsons concernng the use of ths asset. More generally, authorty may result from an explct or mplct contract allocatng decson rghts to a team or to an ndvdual worker n the organzaton. An dea that emerges from ths lterature s that the agent s ncentves are weaker when he does not have control over asset-allocaton decsons. In the team context, ths suggests a beneft from grantng autonomy. An mportant contrbuton to ths ncentves-based lterature s Aghon and Trole (1997), whch develops a theory of the allocaton of formal authorty (the formal rght to decde) and real authorty (the effectve or de facto control over actual decson makng) wthn organzatons. Asymmetrc nformaton s key to the Aghon and Trole model. A prncpal who has formal authorty over a decson or actvty can always reverse the subordnate s decson but wll refran from dong so f the subordnate s much better nformed and f ther objectves are 5
reasonably congruent. In the Aghon and Trole model, there are two man benefts assocated wth delegatng formal authorty to the agent (or team n the present context). Frst, t credbly ncreases the agent s ntatve or ncentve to acqure nformaton, snce the grantng of authorty prevents the prncpal from over-rulng the agent n those stuatons n whch both partes have acqured the nformaton. Second, grantng authorty over decsons that matter relatvely more to the agent than to the prncpal (an example would be performng the job standng up versus sttng down) and for whch the prncpal s overrulng mght hurt the agent wll make the agent more lkely to partcpate n the contractual relatonshp. The man cost of delegatng authorty s the prncpal s loss of control over the choce of tasks or projects and how they are executed. An ncrease n an agent s real authorty promotes ntatve but results n a loss of control for the prncpal. Ths basc tradeoff between loss of control and ntatve s a central dea, and n the team context t mples that grantng teams more autonomy s not necessarly better. In organzatonal behavor, the ratonale for grantng autonomy evolved from work on motvatonal job desgn for ndvdual workers (Hackman and Oldham 1976, 1980; Turner and Lawrence 1965). 7 Accordng to the theory, the degree of autonomy a worker s granted affects three crtcal psychologcal states (experenced meanngfulness, experenced responsblty, and knowledge of results), whch n turn nduces a number of outcomes of nterest both to workers and frms, such as hgh nternal work motvaton, hgh qualty work performance, hgh satsfacton wth work, and low absenteesm and turnover. Hackman (1987) appled these deas to teams, syntheszng an extensve lterature on group research to propose varables that are key to group job desgn. Hackman dentfed a number of task condtons that would produce hgh task motvaton, and among these was autonomy. That s, the tasks assgned to the group should provde group members wth substantal autonomy for decdng how best to accomplsh them. To the extent that workers experence autonomy n a team producton context, Hackman (1987) argues that they experence greater motvaton, whch should translate nto hgher labor productvty. There s also evdence that n some producton contexts montorng by peers n self-managed teams s better than supervsory montorng, encouragng team members to meet self-mposed group norms (Barker 1993). As mentoned earler, Kandel and Lazear (1992) argue that teams allevate costly montorng of workers n the presence of asymmetrc nformaton by relyng on montorng of workers through peer pressure. A theoretcal counterargument s the agency perspectve (Alchan and Demsetz 1972, Holmstrom 1982) that predcts shrkng and 6
free-rdng problems to ncrease n a team context when workers are no longer closely montored by supervsors. 8 Self-managed teams change the organzatonal structure of frms, from herarchcal to horzontal, as team members assume some of the dscreton that would otherwse be held by management. Ths s another means by whch team producton can mpact labor productvty. See Batt (2001) for further dscusson. III. DATA AND MEASURES The data are from the management questonnare n the 1998 Workplace Employee Relatons Survey (WERS), jontly sponsored by the Department of Trade and Industry, ACAS, the Economc and Socal Research Councl, and the olcy Studes Insttute. 9 Dstrbuted va the UK Data Archve, the WERS data are a natonally representatve stratfed random sample coverng Brtsh workplaces wth at least ten employees except for those n the followng 1992 Standard Industral Classfcaton dvsons: agrculture, huntng, and forestry; fshng; mnng and quarryng; prvate households wth employed persons; and extra-terrtoral organzatons. Some of the 3192 workplaces targeted were found to be out of scope, and the fnal sample sze of 2191 mples a net response rate of 80.4% (Cully et al., 1999) after excludng the out-of-scope cases. Data were collected between October 1997 and June 1998 va face-to-face ntervews, and the respondent manager was usually the most senor manager at the workplace wth responsblty for employment relatons. Labor roductvty and roduct Qualty Each respondent manager n the WERS s asked how the current labor productvty of the workplace compares wth that of other establshments n the same ndustry. The analogous queston s then asked for the establshment s current qualty of product or servce compared wth that of other establshments n the ndustry. Responses to both questons are: A lot better than average, Better than average, About average for ndustry, Below average, A lot below average, and No comparson possble. Snce the survey s anonymous, there are no ncentves for respondents to purposefully msrepresent ther answers to ether queston. Nonetheless, snce the measures are subjectve responses they are potentally affected by reportng errors. 10 Unsystematc reportng errors add nose to the observed measures, basng the treatment effects of nterest towards zero. Such 7
errors mght result from mperfect nformaton on the part of respondents, though t s hoped that the most senor manager at the establshment would usually be knowledgeable about the ndustry and have a good sense of how the establshment s productvty and product qualty stand relatve to that of the competton. Systematc reportng errors mght arse from the Lake Wobegon effect whereby most respondents clam to have above-average performance. 11 Even f all respondents overstate productvty, ths need not amount to anythng more than a relabelng of the dscrete categores descrbng productvty, wth no mplcatons for the treatment effects of nterest as long as the systematc reportng error s uncorrelated wth the treatment. Furthermore, the mere observaton of a heavy concentraton of responses on the hgh end of the scale s not necessarly evdence of reportng errors of the Lake Wobegon type but could nstead be the result of length-based samplng. The survey condtons on establshments beng operatonal when sampled; the more successful establshments experence longer duratons of operaton and are therefore more lkely than unsuccessful establshments to be sampled at a pont n tme. 12 Systematc reportng errors could potentally be correlated wth teams and autonomy. Ths could arse f an omtted varable, such as manageral optmsm, determnes both the outcome measure (labor productvty or product qualty) and the decson to engage n teams. It mght be that the more optmstc managers have a roser vew of the establshment s performance relatve to the ndustry average and that such managers are more lkely to organze producton n teams. Such reportng errors would bas estmates of the teams treatment n a regresson of organzatonal performance on the use of teams. But my estmaton approach explctly accounts for correlatons n the unobserved determnants of teams, autonomy, and organzatonal performance, so that these correlatons are not confounded wth the treatment effects of nterest. It s precsely concerns such as these (namely omtted unobserved varables that mght nfluence not only the employer s response to questons about organzatonal performance but also the ssues of whether teams are chosen and granted autonomy) that motvate the structural approach taken n ths paper. 13 Teams and Autonomy Respondent managers are asked to report the proporton of employees n the largest occupatonal group at the workplace that works n formally desgnated teams: All 100%, Almost all 80-99%, Most 60-79%, Around half 40-59%, Some 20-39%, Just a few 1-8
19%, or None 0%. An advantage of ths queston s that t specfcally refers to formally desgnated teams, drectng the respondent s attenton to stuatons of true jont producton and reducng the respondent s lkelhood of reportng the use of teams smply on the bass of a cooperatve atmosphere of team sprt at the workplace. The restrcton to the establshment s largest occupatonal group s one lmtaton of the data. The sample may contan establshments n whch team producton s heavly used n occupatonal groups other than the largest, yet the response to ths queston mght be None 0%. The survey also contans a measure of team autonomy that closely corresponds to the noton of autonomy dscussed n the economcs lterature on organzatons and n the lterature on organzatonal behavor (Aghon and Trole 1997, Hackman 1987). Hackman (1987) wrtes that team members are motvated when the task provdes group members wth substantal autonomy for decdng about how they do the work [emphass added] n effect, the group owns the task and s responsble for the work outcomes. For establshments that report the use of formally desgnated teams n the largest occupatonal group, the respondent s asked to respond Yes or No to the followng statement: Team members jontly decde how the work s to be done. The dstngushng feature of an autonomous or self-managng team s that team members are granted dscreton over how ther work s to be done. 14 In contrast, closelymanaged or non-autonomous teams are gven a task and told not only what to do but how to do t. There are 2182 non-mssng observatons for teams, 1774 for labor productvty, 1972 for product qualty, 1769 for labor productvty and teams smultaneously, and 1966 for product qualty and teams smultaneously. The tendency to use teams s smlar whether or not labor productvty (product qualty) s observed; the fracton usng teams n the largest occupatonal group s 0.876 (0.871) when productvty (product qualty) s non-mssng and 0.843 (0.856) when t s mssng. Appendx A presents descrptve nformaton on the uncondtonal assocatons between teams and organzatonal performance. IV. METHODOLOGY Snce the models estmated here have the same structure as the model for fnancal performance proposed and estmated n DeVaro (2006), the descrpton here s bref (see Appendx B for techncal detals). The endogenous varables are defned as follows: 9
LABROD = 1 f labor productvty s About average for ndustry or below = 2 f labor productvty s Better than average = 3 f labor productvty s A lot better than average QUALITY = 1 f qualty of product or servce s About average for ndustry or below = 2 f qualty of product or servce s Better than average = 3 f qualty of product or servce s A lot better than average TEAMS = 1 f postve fracton of workers n the largest occupatonal group s n teams = 0 otherwse AUTO = 1 f team members are allowed to jontly decde how the work s to be done = 0 otherwse The labor productvty and product qualty measures aggregate 5 dscrete categores to 3, and the teams measure aggregates 7 dscrete categores to 2, to facltate estmaton of the structural models by reducng the number of dscrete states. The structural model for labor productvty (product qualty) smultaneously estmates four equatons: one for labor productvty (product qualty) gven that teams are used n the largest occupatonal group, a second for labor productvty (product qualty) gven that teams are not used n the largest occupatonal group, a thrd for teams, and a fourth for autonomy. I assume the four dsturbance terms n each model follow the multvarate normal dstrbuton, estmatng the models by maxmum lkelhood. The exogenous varables ncluded n each equaton are defned n Table 2. An ndcator varable for just-n-tme producton appears n the teams equaton but not the equatons for labor productvty and product qualty. Just-n-tme s frequently cted as an mportant determnant of the decson to use team producton. As argued by Berg et al. (1996) n the context of the apparel ndustry, the demands of just-n-tme producton requre flexble organzatonal structures such as teams. 15 More recently, Hamlton, Nckerson, and Owan (2003) cte the demand by retalers for just-n-tme producton as a major reason for the ntroducton of teams durng 1995-1997 n the garment manufacturng establshment they study. The assumpton that just-n-tme has no drect effect on ether (wthn-ndustry) labor productvty or product qualty s rather strong, though t should be noted that whether or not a producton process s characterzed by just-n-tme s more central to dscussons of teams n the lterature than t s to dscussons of labor productvty and product qualty. Emprcal studes of labor productvty or product qualty rarely nclude just-n-tme producton as a determnant of labor productvty or product qualty, nor do they dscuss the mplcatons of omttng t. Fnally, my work wth these data confrms that there s no noteworthy statstcal relatonshp between 10
just-n-tme and ether labor productvty or product qualty, ether uncondtonally or n the presence of controls. 16 Four varables that proxy for the organzatonal and nformatonal structure of the establshment, the algnment of ncentves between workers and owners, and the mportance to the establshment of montorng nputs appear only n the autonomy equaton. The frst three of these are qualtatve measures of manageral opnon. The manager s asked to respond Strongly agree (1), Agree (2), Nether agree nor dsagree (3), Dsagree (4), or Strongly dsagree (5) to each of the followng statements: Informaton: Those at the top are best placed to make decsons about ths workplace. Incentve Algnment: Employees here are fully commtted to the values of ths organzaton. Decsons: Most decsons at ths workplace are made wthout consultng employees. The fourth, pertanng to the mportance to the organzaton of closely montorng labor nputs, s the proporton of workers at the establshment that ever work from home durng normal workng hours. 17 Responses nclude: Half or more 50% (1), A quarter up to a half 25-49% (2), Up to a quarter 10-24% (3), A small proporton 5-9% (4), Hardly any (less than 5%) (5), or None 0% (6). In establshments where top managers have better nformaton for makng decsons than workers on the lne, autonomy s less lkely to be granted to teams. Therefore, Informaton and Decsons should both have postve effects, meanng that employers who dsagree wth those statements are more lkely to grant autonomy. In establshments where the nterests and goals of workers are algned wth those of the frm, autonomy s more lkely to be granted to teams. 18 Therefore Incentve Algnment should have a negatve sgn, snce agreement wth the statement s assocated wth more autonomy (Aghon and Trole 1997). The fracton of employees who work at home mght be thought of as a proxy for the mportance the employer places on montorng workers through drect supervson, as opposed to relyng on the socal norms and peer pressure that arse n a team context, as dscussed n Kandel and Lazear (1992). Therefore, the expected sgn on ths varable s negatve, meanng that workplaces that are more permssve of workng from home are more lkely to grant team autonomy. 19 11
V. RESULTS Tables 3 and 4 dsplay the parameter estmates. 20,21 The followng functons of these parameters gve the effect of team producton overall (whether autonomous or non-autonomous) on labor productvty and product qualty for establshment : (Effect A1) = rob(labrod = 1 TEAMS = 1) rob(labrod = 1 TEAMS = 0) (Effect A2) = rob(labrod = 2 TEAMS = 1) rob(labrod = 2 TEAMS = 0) (Effect A3) = rob(labrod = 3 TEAMS = 1) rob(labrod = 3 TEAMS = 0) (Effect A1Q) = rob(quality = 1 TEAMS = 1) rob(quality = 1 TEAMS = 0) (Effect A2Q) = rob(quality = 2 TEAMS = 1) rob(quality = 2 TEAMS = 0) (Effect A3Q) = rob(quality = 3 TEAMS = 1) rob(quality = 3 TEAMS = 0) anels 1 and 2 of Fgure 1 convey ths nformaton graphcally. Establshments predcted to beneft the most from team producton are those farthest from the orgn n the second quadrant, and those predcted to be hurt the most are those farthest from the orgn n the fourth quadrant. In both the labor productvty and product qualty plots, the predcted effect of team producton s postve for many establshments and negatve for many others, though the postve effects appear to domnate. For the labor productvty model, I rank the establshments n order by ther values of (Effect A3 Effect A1), whch s a measure of the predcted effect of teams on productvty. I then select three establshments of nterest (the medan establshment, the establshment at the 25 th percentle, and the establshment at the 75 th percentle), determnng whether ther respectve values of Effects A1, A2, and A3 are statstcally sgnfcantly dfferent from zero. I follow the analogous approach for the product qualty model, rankng frms by ther values of (Effect A3Q Effect A1Q) and selectng three new establshments of nterest. For these sx establshments, I also compute: 1) the effect of autonomous teams on labor productvty (or product qualty), 2) the effect of non-autonomous teams on labor productvty (or product qualty), 3) the ncremental effect of autonomy on labor productvty (or product qualty) gven that teams are used. 22 Tables 5 and 6 dsplay the man results. 23 The frst man result s that the medan workplace benefts consderably from team producton n terms of labor productvty but not n terms of product qualty. The effect of team producton s an 11.0 percentage pont decrease n the probablty that labor productvty s at or below the ndustry average. The pont estmates suggest that of these 11.0 percentage ponts, 8.0 are accounted for by an ncrease n the probablty that labor productvty s better than the ndustry average and the remanng 3.0 are 12
accounted for by an ncrease n the probablty that labor productvty s a lot above average for the ndustry. Although the pont estmates reveal a postve effect of team producton on product qualty for the medan workplace, ths result s statstcally nsgnfcant. The second man result s that there s no mportant dfference between the effects of autonomous teams and those of non-autonomous teams. As was the case for team producton n general, for both autonomous and non-autonomous team producton the medan workplace benefts consderably n terms of labor productvty. Whle the pont estmates suggest slghtly hgher benefts from autonomous teams than from non-autonomous teams, the dfference between the two types of teams s statstcally nsgnfcant. For product qualty, the only effect that acheves sgnfcance at the ten percent level s the effect of autonomous teams on the probablty that product qualty s a lot above the ndustry average. As wth labor productvty, the pont estmates are slghtly more favorable to autonomous than to non-autonomous teams, but agan the dfference between the two types of teams s statstcally nsgnfcant. The fndng of no sgnfcant dfference between autonomous and non-autonomous teams holds for the workplaces at the 0.25 and 0.75 quantles as well as at the medan. At least n terms of statstcal sgnfcance, the data therefore do not support the noton that self-managed or non-autonomous teams are superor to closely-managed or non-autonomous teams. The thrd man fndng s that, whle the workplaces at the 0.75 quantle experence predcted benefts to both labor productvty and product qualty that far exceed those at the medan, there s no evdence that the workplaces at the 0.25 quantle suffer n ether dmenson from usng teams. For the workplace at the 0.75 quantle n the labor productvty model, usng teams s assocated wth a decrease of 21.0 percentage ponts n the predcted probablty that labor productvty s at or below the ndustry average and an 8.7 percentage pont ncrease n the probablty that productvty s a lot above the ndustry average, and these magntudes are sgnfcantly hgher than those for the medan workplace. For the workplace at the 0.75 quantle n the product qualty model, usng teams s assocated wth a decrease of 13.2 percentage ponts n the predcted probablty that qualty s at or below the ndustry average and an ncrease of 11.4 percentage ponts n the probablty that qualty s a lot above the ndustry average. The correspondng numbers for the medan workplace were only 3.7 and 6.0 percentage ponts, respectvely, and nether were statstcally nsgnfcant. Turnng to the workplaces at lower quantles of the predcted benefts from usng teams, for labor productvty none of the effects are 13
statstcally sgnfcant for the workplace at the 0.25 quantle and even the pont estmates do not suggest a detrment to usng teams. For product qualty, whle the pont estmates for the workplace at the 0.25 quantle suggest a negatve effect from usng teams, the magntudes are small and all effects are statstcally nsgnfcant. The fourth set of fndngs concerns the correlatons among the unobserved determnants of the endogenous varables. Note that σ 13, or cov(ε 1, ε 3 ), s the correlaton between the unobserved determnants of autonomy (gven that teams are used) and labor productvty (product qualty) gve that teams are used. 24 It s negatve and statstcally sgnfcant n both models, mplyng that unobserved factors that make an establshment more lkely to grant autonomy to teams also tend to depress labor productvty and product qualty. An example of such a factor mght be fun, lkable, and lad back managers at the workplace. Such managers mght be popular among workers, and more lkely to grant consderable dscreton to team members, but lax n enforcng hgh standards for labor productvty and product qualty. Further note that σ 23, or cov(ε 2, ε 3 ), s the correlaton of the unobserved determnants of teams and autonomy (gven that teams are used). It s negatve and statstcally sgnfcant n both models, suggestng some unobserved characterstc of the producton process (or of managers) that makes closely-managed teams attractve. Fnally, note that σ 02, or cov(ε 0, ε 2 ), s the correlaton of the unobserved determnants of teams and labor productvty (product qualty) gven teams are not used. It s negatve and statstcally sgnfcant n the product qualty model, suggestng that factors that make an establshment more lkely to use teams are also lkely to make that establshment have lower product qualty n the absence of teams. One example of such a factor would be the degree to whch product or servce qualty ncreases from the complementartes arsng from nformaton sharng among coworkers. When such benefts from nformaton sharng are large, teams are more lkely to be used, and product or servce qualty s more lkely to suffer f teams are not used. A frequent approach n management research s to treat the choce varables of the organzaton (such as team producton and autonomy n ths study) as exogenous on the rghthand sde of regressons of organzatonal outcomes. 25 Ignorng the endogenety of teams and autonomy means assumng that the dsturbances are uncorrelated across equatons. The last four rows of Tables 3 and 4 suggest that the data are ncompatble wth such restrctons for both labor productvty and product qualty. 26 If the restrctons are mposed anyway, a vsual 14
summary of how the results change can be seen by comparng anels 1 and 2 of Fgure 1 to anels 3 and 4. In anels 3 and 4 the predcted effects are more heavly concentrated n the second quadrant (where the predcted benefts from teams are the hghest) and less concentrated n the fourth quadrant (where the predcted benefts are the lowest) than n the correspondng structural scatter plots n anels 1 and 2. Ths shft n the scatter s clearly more pronounced for product qualty than for labor productvty. To reveal the magntudes of these dstortons, Tables 7 and 8 dsplay the key effects of nterest based on the constraned models. These tables are analogous to Tables 5 and 6, respectvely, that were based on the structural models. For labor productvty, as seen by comparng Tables 5 and 7, the Effects A1, A2, and A3 that were found to be (-0.110, 0.080, 0.030) for the medan establshment usng the structural model would be (-0.125, 0.086, 0.039) f the endogenety of teams and autonomy were gnored. In ths case the magntude of the dstorton s relatvely modest. The magntude of the bas s much larger n the case of product qualty and gves rse to a qualtatvely dfferent concluson. As was seen n Table 6, Effects A1Q, A2Q, and A3Q were (-0.037, -0.023, 0.060) for the medan establshment usng the structural product qualty model, and each of these estmates were statstcally nsgnfcant. In contrast, as revealed n Table 8, when endogenety s gnored the correspondng numbers are (-0.068, -0.014, 0.082) and are statstcally sgnfcant. In summary, by treatng teams and autonomy as exogenous n the 1998 WERS, we would ncorrectly nfer an economcally and statstcally sgnfcant postve effect of teams on product qualty for the medan workplace, whereas accountng for the endogenety we would nfer no statstcally sgnfcant effect. Ignorng the endogenety of teams and autonomy n the 1998 WERS would also lead to mstaken nferences regardng the dfference between autonomous and non-autonomous teams. As revealed n the fourth columns of Tables 5 and 6, the structural model mples that there are no statstcally sgnfcant dfferences between autonomous and non-autonomous teams n ther effects on ether labor productvty or product qualty. In contrast, f the endogenety of teams and autonomy s gnored, the fourth column of Table 8 would lead us to the erroneous concluson that autonomous teams yeld statstcally sgnfcantly larger benefts to product qualty than do non-autonomous teams, at each of the three quantles of nterest. For labor productvty, both the structural and non-structural models yeld roughly the same qualtatve conclusons regardng the dfference between autonomous and non-autonomous teams. 15
The fndng that the endogenety bas tends to nflate the relatve benefts of autonomous teams as opposed to non-autonomous teams, at least n ths data set wth these measures of organzatonal performance, s nterestng n lght of the common vew that autonomous teams tend to be superor to non-autonomous teams n terms of ther benefts to organzatonal performance. For example, one of the leadng texts n strategc human resource management argues that Closely managed teams mss many of the advantages that nternally autonomous teams can have, whle possessng a number of the dsadvantages. Except where concerns for nternal equty are paramount, allowng teams the freedom to nternally manage themselves seems to us the better strategy. (Baron and Kreps 1999). The results here suggest that neglectng the endogenety of teams and autonomy mght contrbute to an overly sangune vew of the merts of autonomous teams relatve to non-autonomous teams. Whle my best estmates suggest no dfferences between the two types of teams for any of the three measures of organzatonal performance, neglectng the endogenety n the WERS data would lead one to the erroneous concluson that the typcal establshment benefts more (n terms of product qualty) from autonomous than from non-autonomous teams. Another pont that emerges regardng the relatve advantages of autonomous and nonautonomous teams s that whether autonomous teams are preferable to non-autonomous teams for the typcal workplace depends on the measure of organzatonal performance consdered. In the present study of labor productvty and product qualty, the pont estmates favored autonomous teams. In an earler analyss of fnancal performance n DeVaro (2006), the reverse was true. In the emprcal teams lterature, the most commonly used measures of performance are labor productvty and product qualty, whereas broader measures of organzatonal performance such as proft are much rarer. The results of ths study suggest that a second possble reason (apart from the endogenety ssue) for the relatvely favorable vew of autonomous teams s the heavy focus n the lterature on outcome measures such as labor productvty. If the focus of future work shfts more n the drecton of broader measures of organzatonal performance, then the results from the WERS suggest that the evdence n favor of non-autonomous or closelymanaged teams may mprove. Increased attenton to broader outcome measures such as fnancal performance would be desrable n any case. Such measures are more nclusve of the full spectrum of benefts and costs resultng from teams than are ntermedate outcomes such as labor productvty. Most frms wll ultmately care the most about what effect a gven human resource 16
practce has on proft, regardless of how varous ntermedates such as labor productvty and product qualty may be affected. In summary, the work here suggests that greater attenton both to endogenety and to broader measures of organzatonal performance n future research s lkely to yeld results that are more favorable to non-autonomous teams than have been found n prevous work. 17
AENDIX A Table A1 dsplays the dstrbuton of labor productvty categores by the percentage of workers n teams. A ch-square test of ndependence has a p-value of 0.005, provdng strong evdence aganst the null that the team producton and labor productvty classfcatons are ndependent of each other. Restrctng our attenton to those establshments that use teams and that grant teams autonomy by allowng team members to jontly decde how the work s to be done, column percentages are gven n Table A2. The ch-square test of ndependence has a p- value of 0.271, so the null that the autonomous teams and labor productvty classfcatons are ndependent cannot be rejected at conventonal sgnfcance levels. Tables A3 and A4 dsplay the results for product qualty, and the p-values from ch-square tests of ndependence are 0.820 and 0.880, respectvely. In summary, the descrptve evdence suggests that team producton s emprcally related to labor productvty but that, gven that teams are used, self-managed or autonomous team producton s not. In contrast, nether team producton n general nor autonomous team producton s emprcally related to product qualty. However, these tabulatons are uncondtonal. TABLE A1: Labor roductvty by % of Largest Occupatonal Group n Teams 0% 1-19% 20-39% 40-59% 60-79% 80-99% 100% Dstrbuton of Labor roductvty (unweghted) A lot below average 0.9 1.1 1.4 2.3 1.0 0.0 0.2 Below average 3.7 3.2 7.8 6.7 6.1 5.6 3.6 About average for ndustry 50.9 48.9 35.5 51.7 43.2 43.9 40.0 Better than average 34.3 36.2 46.8 32.6 42.1 40.0 40.9 A lot better than average 10.2 10.6 8.5 6.7 7.6 10.8 15.4 Column sum 100 100 100 100 100 100 100 Dstrbuton of Labor roductvty (weghted) A lot below average 0.4 0.6 2.8 0.9 1.6 0.0 0.0 Below average 1.0 2.4 8.5 3.5 9.4 2.5 3.8 About average for ndustry 51.2 64.8 26.8 61.6 36.8 45.9 37.2 Better than average 38.0 26.3 39.0 29.0 44.1 40.1 43.2 A lot better than average 9.5 5.9 23.0 5.0 8.1 11.5 15.7 Column sum 100 100 100 100 100 100 100 Note: Column categores represent the fracton of the largest occupatonal group that s engaged n team producton. Row categores represent the labor productvty of the establshment relatve to the ndustry average, as reported by the respondent manager. Sample sze s 1727. 18
TABLE A2: Labor roductvty by % of Largest Occupatonal Group n Autonomous Teams 1-19% 20-39% 40-59% 60-79% 80-99% 100% Dstrbuton of Labor roductvty, Gven Autonomous Teams (unweghted) A lot below average 2.2 1.6 2.3 1.9 0.0 0.0 Below average 4.4 6.3 4.7 6.5 4.7 3.8 About average for ndustry 47.8 35.9 46.5 43.0 39.8 38.8 Better than average 34.8 50.0 37.2 39.3 44.5 42.6 A lot better than average 10.9 6.3 9.3 9.4 11.0 14.8 Column sum 100 100 100 100 100 100 Dstrbuton of Labor roductvty, Gven Autonomous Teams (weghted) A lot below average 1.1 6.6 0.1 2.5 0.0 0.0 Below average 1.5 4.8 3.0 12.2 1.4 4.7 About average for ndustry 65.2 19.3 53.8 34.3 38.1 34.0 Better than average 26.2 50.0 35.7 40.7 51.5 44.8 A lot better than average 5.9 19.3 7.3 10.2 9.0 16.4 Column sum 100 100 100 100 100 100 Note: Column categores represent the fracton of the largest occupatonal group that s engaged n team producton, gven that teams are used and granted autonomy. Row categores represent the labor productvty of the establshment relatve to the ndustry average, as reported by the respondent manager. Sample sze s 843. TABLE A3: roduct Qualty by % of Largest Occupatonal Group n Teams 0% 1-19% 20-39% 40-59% 60-79% 80-99% 100% Dstrbuton of roduct Qualty (unweghted) A lot below average 0.0 0.0 0.0 1.1 0.0 0.0 0.3 Below average 3.2 2.0 2.7 1.1 2.3 2.3 2.3 About average for ndustry 26.5 24.2 29.5 24.7 25.2 25.6 23.7 Better than average 51.8 54.6 46.6 51.7 51.9 52.6 48.9 A lot better than average 18.5 19.2 21.2 21.4 20.6 19.5 24.8 Column sum 100 100 100 100 100 100 100 Dstrbuton of roduct Qualty (weghted) A lot below average 0.0 0.0 0.0 0.8 0.0 0.0 0.0 Below average 0.9 1.4 1.7 1.5 5.6 0.9 2.7 About average for ndustry 21.0 12.0 35.1 21.0 23.7 25.8 18.8 Better than average 52.7 66.4 44.5 50.8 50.5 53.2 49.2 A lot better than average 25.3 20.2 18.7 26.0 20.1 20.1 29.3 Column sum 100 100 100 100 100 100 100 Note: Column categores represent the fracton of the largest occupatonal group that s engaged n team producton. Row categores represent the product qualty of the establshment relatve to the ndustry average, as reported by the respondent manager. Sample sze s 1917. 19
TABLE A4: roduct Qualty by % of Largest Occupatonal Group n Autonomous Teams 1-19% 20-39% 40-59% 60-79% 80-99% 100% Dstrbuton of roduct Qualty, Gven Autonomous Teams (unweghted) A lot below average 0.0 0.0 0.0 0.0 0.0 0.2 Below average 2.0 3.0 2.4 1.7 1.8 1.8 About average for ndustry 24.0 31.8 16.7 28.6 26.1 22.3 Better than average 60.0 45.5 59.5 50.4 50.0 50.0 A lot better than average 14.0 19.7 21.4 19.3 22.1 25.7 Column sum 100 100 100 100 100 100 Dstrbuton of roduct Qualty, Gven Autonomous Teams (weghted) A lot below average 0.0 0.0 0.0 0.0 0.0 0.0 Below average 1.1 3.3 2.3 7.8 0.7 1.6 About average for ndustry 8.7 41.7 16.5 31.7 27.6 16.2 Better than average 73.3 38.2 60.2 43.2 50.4 48.5 A lot better than average 16.9 16.8 21.1 17.3 21.4 33.7 Column sum 100 100 100 100 100 100 Note: Column categores represent the fracton of the largest occupatonal group that s engaged n team producton, gven that teams are used and granted autonomy. Row categores represent the product qualty of the establshment relatve to the ndustry average, as reported by the respondent manager. Sample sze s 942. In addton to establshment characterstcs, the exogenous varables n the teams and autonomy equatons of the structural models nclude ndustry controls snce the establshment s choces of teams and autonomy are also lkely to vary by ndustry. I exclude these ndustry controls from the labor productvty and product qualty equatons snce the survey asks the employer to rate the establshment s current labor productvty and product qualty compared wth other establshments n the same ndustry, so ndustry dfferences are n effect already controlled by the nature of the queston. 27 The 12 ndustry controls are dummy varables ndcatng the 1992 SIC code that most closely corresponds to the man actvty of the establshment. The upper panel of Table A5 dsplays the dstrbuton of the sample by ndustry. Snce both the teams and autonomy varables measure organzatonal choces n the largest occupatonal group, I also nclude as exogenous varables n these equatons a set of occupatonal dummy varables ndcatng the establshment s largest occupatonal group. All survey responses correspond to SOC codes, some at the 1-dgt level and others at the 2-dgt level. I aggregated all observatons to the 1-dgt level, and sample frequences for the resultng 9 occupatonal groups are dsplayed n the lower panel of Table A5. Table A6 dsplays means and standard devatons for all varables n the structural models except for the occupaton and ndustry varables that were summarzed n Table A5. 20
TABLE A5: Dstrbuton of Establshments by Industry and Largest Occupatonal Group Number ercent Number ercent Dstrbuton by Industry Manufacturng 253 14.7 276 14.4 Electrcty, Gas, and Water 68 3.9 69 3.6 Constructon 95 5.5 102 5.3 Wholesale and Retal 267 15.5 292 15.2 Hotels and Restaurants 114 6.6 122 6.4 Transport and Communcaton 113 6.5 122 6.4 Fnancal Servces 86 5.0 95 5.0 Other Busness Servces 178 10.3 197 10.3 ublc Admnstraton 108 6.3 120 6.3 Educaton 178 10.3 215 11.2 Health 178 10.3 210 11.0 Other Communty Servces 89 5.2 97 5.1 Total 1727 100 1917 100 Dstrbuton by Largest Occupatonal Group Managers & Admnstrators 10 0.6 13 0.7 rofessonal Occupatons 210 12.2 258 13.5 Assocate rofessonal & Techncal Occupatons 140 8.1 151 7.9 Clercal & Secretaral Occupatons 295 17.1 321 16.7 Craft & Related Occupatons 203 11.8 212 11.1 ersonal & rotectve Servce Occupatons 231 13.4 272 14.2 Sales Occupatons 202 11.7 225 11.7 lant & Machne Operatves 235 13.6 252 13.2 Other Occupatons 201 11.6 213 11.1 Total 1727 100 1917 100 Note: Columns 1 and 2 use the subsample on whch the labor productvty model s estmated, and columns 3 and 4 use the subsample on whch the product qualty model s estmated. 21