On Participation and Productivity
America needs a quick, inexpensive way to increase productivity growth. Sluggish productivity growth is a cause of some of the nation’s most pressing economic problems, including stagnation in real family incomes and the erosion of our competitive lead in world markets.
Since 1973, output per hour of labor has increased an average of just 1% a year. This compares poorly to the 2.7% annual productivity increase we realized during the previous 15 years and to the 2% growth rate we enjoyed during the preceding century. It also compares poorly to the performance of many of our trading partners, especially Japan and West Germany.
In the competitive world economy, what we can afford to pay ourselves depends on our productivity. If we want to make our labor more valuable, we must make ourselves more productive. The question is how.
One obvious way is to increase investment in education and in the creation of new capital. If we invest to address the shocking weaknesses of our educational system, we will produce better trained, more productive workers. And if we invest to give these workers more and better equipment to work with, they will certainly perform better.
But more investment, though necessary, is expensive, and its effects take time. We need to increase worker productivity quickly and cheaply, but can it be done?
Fortunately, yes. There is growing evidence that meaningful employee participation in decision making, accompanied by new forms of employee compensation such as profit sharing, can foster productivity.
Recently, David Levine, an assistant professor in the Business School at UC Berkeley, and I analyzed this evidence in a paper for the Brookings Institution. We drew on the experiences of both American and foreign companies, and we surveyed the findings of a large number of researchers from diverse disciplines. We concluded that employee participation, if done right, can and does increase productivity--but to be successful in raising productivity, employee participation must be substantive.
Recently, many U.S. companies have introduced quality control circles--QCs--to encourage employee suggestions on how to improve performance. Usually, the effects on productivity have been minimal and short-lived.
After a brief honeymoon period, workers have lost interest in participating in QCs. Often their suggestions have gone unheeded. Sometimes they have resulted in job loss. And employees have rarely shared in any increased profit from their suggestions. When employees have pushed for more meaningful participation and a share in the resulting profit, even successful QCs have sometimes been terminated by management.
Employee stock ownership plans--ESOPs--have also proved disappointing unless they are accompanied by substantive participatory arrangements. The evidence suggests that ESOP firms with opportunities for employee participation outperform conventionally owned firms, but ESOP firms without participation do not. And the kind of participation that seems to affect ESOP productivity is not participation by stock voting rights or employee representation on company boards, but participatory arrangements that extend to the shop floor and involve real influence over how work is organized.
One such participatory arrangement is the work team. In contrast with QCs, work teams allow employees both to generate ideas and to act on them. Typically, work teams make their own work assignments and determine their own work routines, subject to overall work-flow requirements. The organization of production into work teams can have substantial, long-term effects on productivity. The most successful team production techniques, however, require other changes, including the development of additional channels for employee participation, such as joint labor-management consultation committees or employee representation on company boards. Institutionalized participation across a broad range of issues leads to higher productivity.
Dramatic Effects
In addition, successful work teams are usually accompanied by alternative pay systems, such as gain sharing or profit sharing, that motivate employees to cooperate as a team and reward them for their enhanced productivity. And work teams are more likely to improve performance in companies that are committed to job security. Without such a commitment, workers are discouraged from making workplace innovations that will improve productivity but threaten their jobs.
With supporting changes in work organization, compensation and employment security, the productivity effects of employee participation can be dramatic. One need only think of the experience of NUMMI, the joint GM-Toyota venture in Fremont, Calif. The old GM plant there was plagued by drug abuse, absenteeism and very poor labor relations. Largely using the same technology and the same workers as in the old plant, and with the same union in place, NUMMI has reduced by 40% the number of labor hours required per car, has zoomed to the top of U.S. auto plants in quality and has the lowest absenteeism rate in the U.S. auto industry. Work teams are an essential feature of NUMMI, as are pay-productivity linkage, a degree of job security unprecedented in the U.S. auto industry and union-management consultation committees at every level.
Successful participation, however, does not require Japanese ownership or management. Several American-owned companies, including Hewlett-Packard and Xerox, have developed channels for employee participation bolstered by employment security and innovative pay arrangements. In most cases, productivity has increased.
Key Role for Employees
If employee participation improves performance, why don’t we see more of it? Simple inertia is one explanation. Managerial resistance is another. By definition, meaningful participation reduces managerial autonomy. Sometimes, certain managerial positions, such as first-line supervisor, are eliminated as workers take over day-to-day management of their jobs. Participation also tends to reduce differences in status--and occasionally even pay--between managers and workers.
Unions, too, often oppose employee participation. Sometimes participatory arrangements are introduced by management to avoid unionization or to get around union contracts. Even when this is not the case, such arrangements threaten traditional union authority on a wide range of issues.
One year ago, the report of the Cuomo Commission on Trade and Competitiveness recommended employee participation as part of a strategy to restore American competitiveness. Mounting evidence demonstrates the wisdom of this recommendation. If American companies are to prosper in the long run, American labor and American management must work together to develop participatory workplaces.
