Productivity and Organization in Portuguese Firms

April 6, 2016

Firms are extremely heterogeneous in their ability to transform a combination of inputs, like capital and labor, into the goods they decide to produce. One can point to many potential sources of heterogeneity and changes in productivity. Some of these sources are exogenous to a firm’s actions and can be most simply modeled as idiosyncratic (like random innovations or production disruptions). Some others are the organizational responses to changes in demand and consumer tastes, factor prices, and other changes in the economic environment, like trade liberalizations and tax reforms.

We use a detailed employer-employee matched Portuguese dataset to measure the effect of a firm reorganization on firm productivity.  We show that firms that reorganize change their labor force in ways that allow them to economize on the human capital they employ. Firms that expand and reorganize add management layers with well-trained experts, which allow them to routinize lower-level jobs for which they now hire less skilled and experienced employees. We then measure the response of quantity and revenue-based productivity to a change in the number of layers of management of firms. We are careful to include a battery of firm and layer-level fixed effects. The results are quite stark. A reorganization that increases by one the number of layers of management increases a firm’s hours of work by 25%, value added by slightly more than 3%, and increases quantity-based productivity by about 4%. Firms that add a layer are about 4% more productive in transforming inputs into units of output. In contrast, firms that reorganize and add a layer decrease revenue-based productivity by about 4%. Namely, as a result of the reorganization, firm prices fall enough to convert the positive quantity-based productivity increase into a 4% decline.

Click here to go to the paper by Caliendo, Mion, Opromolla, and Rossi-Hansberg