4.4  Skills and work organisation

Evidence is accumulating that obtaining the full productivity gains from technical change requires changes in workplace organisation. New workplace practices can include flatter management structures, increased employee involvement in decision making, more team work and a greater emphasis on performance-related pay. Piva, Santarelli and Vivarelli (2003) summarise the literature on the effects of reorganisation and technological change on the demand for skilled and unskilled labour, and conclude that reorganisation and technological change are complementary, which favours workers who are both skilled and adaptable. Caroli (2001) also concludes that organisational change contributes to the gains in productivity obtained from the adoption of new technologies. The OECD (OECD 2004) also argues that it is key to making ICT work. A listing of studies of workplace practices on firm performance is given by Arnal et al (2001), while the OECD (OECD 2004) provides a number of case studies of complementary effects.[11]

Bresnahan, Brynjolfsson and Hitt (1999) analyse US data on how the use of computer technologies by 400 large firms in the manufacturing and service sectors has influenced the relative demand for skilled labour. They find that a cluster of complementary changes in information technology (IT) usage, workplace organisation (WO) and the products that firms provide are changing the skill mix that employers require. They argue that skill requirements and IT usage interact in several ways. One is the substitution of IT for less skilled labour in undertaking repetitive tasks. Far more important is the role of high skilled labour in supporting technology adoption and workplace re-organisation. IT usage supports WO, in that it allows job re-design, the re-allocation of tasks, and access to data sets, allowing changes to the firm’s practices and products. They see the increased demand for cognitive skills occurring in three directions: the greater ability to analyse data; greater worker autonomy and responsibility; and the skills for dealing with colleagues, customers and suppliers. Their empirical findings are that changed work practices around measures of IT, human capital (HK) and WO are often highly correlated, and result in higher productivity gains for the firms adopting them. Interestingly, high HK is associated with high productivity, but only in firms that also have high IT and have adopted new WO forms.

Black and Lynch (2000) also explore the effect of changes in workplace practices on plant productivity and wages, using 1994 and 1997 data from a representative sample of US manufacturing establishments. These practices include introducing profit sharing, greater teamwork, and giving employees greater involvement in decision making. They find a positive and significant relationship between the proportion of non-managers using computers and higher productivity. They find less of a relationship between the overall educational level of the plant and labour productivity. In contrast, they find that firms that re-engineer their workplaces to incorporate a number of high performance practices when adopting new technologies have experienced higher productivity, compared to those who retained more traditional workplace practices. They also find that workplace responses are associated with higher wages, although increased usage of profit sharing or stock options results in lower regular pay for technical and clerical/sales workers. Without changes in organisational infrastructure, the effect of technical change appears more limited: workplace practices do appear to matter. However, other results, such as workers in self-managed teams experiencing lower productivity might suggest that other influences are present.

Caroli and Van Reenen (2001) look more explicitly at “skill biased organisational change”, encompassing features such as less hierarchy and more decentralisation, and increased worker autonomy and responsibility. They see the benefits of decentralisation as being reduced cost of communication and monitoring within the hierarchy, more responsiveness to market changes, and the potential for increased job satisfaction. There are also risks involved. In terms of theoretical undergirding, they point to the work of Milgrom and Roberts (1990, 1995) and others who seek to model the ways the internal organisation and practices of firms is structured to capture the complementarities amongst WO, IT and HK. This literature points to the possibility of combinations of WO, IT and HK that involve high and low levels of skills. This can lead to skill levels across the organisation becoming more homogeneous, with discontinuities between combinations that cause re-organisation to be costly.

Caroli and Van Reenen (2001) provide econometric evidence for France and Britain across a broad range of establishments on the effect of the timing of organisational change on increasing the demand for skills, and on how firm productivity is affected by the combination of decentralisation and HK deepening. They report three findings: that establishments that introduce changes in organisation are significantly more likely to reduce their demand for unskilled workers; that organisational change (OC) is negatively associated with rising skill premia, and that the probability of introducing changes in organisation, such as de-layering hierarchies, is depressed by shortages of skilled workers; that OC leads to significantly faster productivity growth in skill intensive firms, than OC in unskilled firms.