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Managerial practices influence the ability of economies to weather large shocks

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Managerial practices influence the ability of economies to weather large shocks

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Gilbert Cette, Jimmy Lopez, Jacques Mairesse, Giuseppe Nicoletti 02 December 2020

The COVID-19 crisis has highlighted the importance of swift reorganisation of tasks and logistics in cushioning economic shocks. For instance, the ability to rapidly implement teleworking, reorganise supply chains to handle disruptions in deliveries of intermediate goods, and the ability to resort to online services to meet social distancing rules is likely to have played a key role in lessening the depressive effects of lockdowns on OECD economies. Managerial talent plays a key role in enabling and promoting such reorganisation, contributing to the ability of firms to weather the storm during crises by preserving skills, production and market shares. Aggregating up, the average quality of management in a country can therefore potentially contribute to increasing economic resilience to shocks at the sectoral and aggregate levels as well. While it is too early to study the effects of managerial talent on resilience to the COVID-19 crisis, useful insights can be drawn from the experience of the Great Recession.

Several studies have studied the effect that managers can have on firm-level and sectoral productivity outcomes in the medium to long-run (Bloom et al. 2012, 2014, 2016, 2017, Syverson 2011, Giorcelli 2019). Another strand of research has highlighted the role of managers in efficiently allocating tasks in a firm in ways that preserve, develop and use efficiently human capital and workers’ skills, and that maintain workers’ incentives and satisfaction (Bandiera et al. 2007, Burgess et al. 2010; Friebel et al. 2017, Amodio and Martinez-Carrasco 2018). In particular, Adhvaryu et al. (2019) have shown that effective managers can respond to exogenous microeconomic shocks by reallocating workers in order to preserve productivity. On the contrary, there has been relatively little research to date on the effects of managerial practices on macroeconomic outcomes during a crisis. In a recent paper (Cette et al. 2020), we aim to fill this gap by using the Great Recession as an exemplary case study to investigate the way in which managerial quality has shaped the response of OECD economies.

We take a dynamic approach and rely on a country-industry panel covering 18 industries in ten OECD countries over the 2007-2015 period to estimate the extent to which country differences in managerial quality influence the responses of employment and other variables to the intensity of the demand shocks induced by the 2008 Great Recession. Management quality is particularly hard to measure. It requires to define ‘good’ and ‘bad’ practices, and the assessment of the diffusion of these practices across firms. Bloom and Van Reenen (2007) constructed such a measure based on business surveys, which was subsequently updated and extended to other countries by Bloom et al. (2012) and Bloom et al. (2014). As the quality of management practices may be contingent on the firm environment, these surveys focus on some practices that can be deemed ‘good’ or ‘bad’ independent of the environment. Our empirical investigation uses the country median value of firms’ management quality indicators in these papers to measure the country differences in managerial quality. To avoid a potential source of endogeneity, we use only firm data from surveys conducted prior to the crisis.

The average impact of management quality

In Figure 1, we present the average impact of management quality on cumulated growth in employment, value-added and in real wages per worker (i.e. the difference between the current and the 2007 values in logarithm), with corresponding confidence intervals. Management quality has a direct positive impact on employment but a negative impact on real wages. One interpretation of these results is that the impact of management quality is to move the trade-off between employment and the real wage: higher management quality preserves employment by moderating real wage growth during the recession and in the subsequent recovery period. The positive impact on employment is matched by a similar impact on the output level.  We show that productivity remains neutral over the same period, but over time, employment resilience more than offsets wage moderation resulting in an increase of the labour share.

Figure 1 Average impact of management quality on cumulated growth since 2007

a)  Employment (number of workers)

Managerial practices influence the ability of economies  to weather large shocks 2

b) Valued added (constant price)

Managerial practices influence the ability of economies  to weather large shocks 3

c) Real wage per worker

Managerial practices influence the ability of economies  to weather large shocks 4 

Note: For each variable of interest, higher and lower bounds correspond to the estimated value of the coefficient plus and minus two estimated standard errors. 

Management quality attenuated the detrimental impact of the Great Recession 

While the Great Recession has significantly depressed both employment and value added, countries with a higher median management quality have been able to attenuate these negative effects on average, as shown in Figure 1. If good managerial practices allow preserving employment and value added after large shocks, their positive effects on macroeconomic outcomes could also be growing with the size of the shock, reflecting the ability of well-managed organisations to adapt. 

We therefore test whether good managerial practices have a differential impact depending on the industry-specific intensity of the shock. We use the industry production loss between 2007 and 2009 to measure how much the different industries have been affected by the Great Recession. To avoid potential endogeneity bias, we only use the US production loss and exclude this country from the estimation sample. The production loss in the US is a good proxy for the industry-specific production loss suffered in other countries as the industry-level 2007-2009 production losses are strongly correlated across countries. 

Figure 2 shows the year-by-year range of the estimated impact of management by size of the industry-specific shocks. The results confirm that the detrimental medium to long-term impact of the shock depends largely on the quality of management: the higher its quality, the lower the detrimental impact. In all cases, the quality of management has attenuated the detrimental impact of the shock on value-added and employment levels. More generally, the quality of management appears to be able to lessen the negative consequences of a shock on the macroeconomic equilibrium. 

Figure 2 Impact of management quality depending on the size of the industry shock  

a) Cumulative effect on employment (number of workers)

Managerial practices influence the ability of economies  to weather large shocks 5

b) Cumulative effect on valued added (constant price)

Managerial practices influence the ability of economies  to weather large shocks 6

Notes: The box and whiskers plot shows in each year the percent cumulated impact (relative to 2007 levels) of management quality on employment and value added across industries that experienced shocks of different intensity during the Great Recession. 

From our estimated results, the impact of one standard error increase of the management quality on the employment change in 2015 compared to 2007 would be -3.6% in industries where the shock was nil,  +0.1% for the first quartile of the shock intensity,  +8.2% for the median shock intensity,  +14.0% for the third quartile of shock intensity and +22.0% for the highest shock intensity.

This result could have implications that go beyond the Great Recession and inform analysts and policymakers on the likely comparative resilience of OECD economies in the current COVID-19 crisis, as well as the importance of raising the level of managerial abilities in view of possible future shocks. Clearly, the causes, intensity, and features of the Great Recession crisis are not the same as those of the COVID-19 crisis. Moreover, the policies implemented to protect jobs and firms during the height of the COVID-19 shock and later deployed in the context of the recovery plans also differ from those implemented in the aftermath of the Great Recession. For these reasons, the effect of management quality on macroeconomic outcomes could be quantitatively different in the context of the COVID-19 shock and the subsequent recovery. However, we would expect them to be qualitatively similar and act through comparable channels.

References

Adhvaryu, A, N Kala and A Nishadham (2019), “Something in the air: Managing shocks to worker productivity”, VoxEU.org, 29 September.

Amodio, F, and M A Martinez-Carrasco (2018), “Input allocation, workforce management and productivity spillovers: Evidence from personnel data”, The Review of Economic Studies 85(4):1937–1970.

Bandiera, O, I Barankay and I Rasul (2007), “Incentives for managers and inequality among workers: evidence from a firm-level experiment”, The Quarterly Journal of Economics 122(2):729–773.

Bloom, N and J Van Reenen (2007), “Measuring and Explaining Management Practices Across Firms and Countries”, Quarterly Journal of Economics 123(4): 1351-1408.

Bloom, N, C Genakos, R Sadun and J Van Reenen (2012), “Management practices across firms and countries”, Academy of Management Perspectives 26(1): 12-33.

Bloom, N, R Lemos, R Sadun, D Scur and J Van Reenen (2014), “The New Empirical Economics of Management”, NBER Working Paper 20102.

Bloom, N, R Sadun and J Van Reenen (2016), “Management as a Technology?”, NBER Working Paper 22327.

Bloom, N, E Brynjolfsson, L Foster, R Jarmin, M Patnaik, I Saporta Eksten and J Van Reenen (2017), “Adding a piece to the productivity puzzle: Management practices”, VoxEU.org, 17 May.

Burgess, S, C Propper, M Ratto, S v H Kessler Scholder and E Tominey (2010), “Smarter task assignment or greater effort: the impact of incentives on team performance”, The Economic Journal 120(547): 968–989.

Cette, G, J Lopez, J Mairesse and G Nicoletti (2020), “Economic Adjustment during the Great Recession: The Role of Managerial Quality”, NBER Working paper 27954.

Friebel, G, M Heinz, M Kruger and N Zubanov (2017), “Team incentives and performance: Evidence from a retail chain”, American Economic Review 107(8):2168–2203.

Giorcelli, M (2019), “The Long-Term Effects of Management and Technology Transfers,” American Economic Review 109(1):121-152.

Jordà, O (2005), “Estimation and Inference of Impulse Responses by Local Projections”, American Economic Review 95(1): 161-182.

Syverson, C (2011), “What Determines Productivity?”, Journal of Economic Literature 49(2): 326-365.

Teulings, C N and N Zubanov (2014), “Is Economic Recovery a Myth? Robust Estimation of Impulse Responses”, Journal of Applied Econometrics 29(3): 497-514.

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