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Effect of Hrm Practices on Productivity

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    The following is the brief summary of the main findings from the Bloom & Van Reeenen’s consideration for impact of HRM on productivity:- Increase productivity from incentives both individual & group bonuses. Increase in productivity because workers are generally attracted to the organizations which offer high incentives. More efficient when introduced with other complementary features within HRM practices such as team work , group bonuses and firm characteristics such as ICT, decentralization etc. Distortions due to perverse incentives. Incentives pay system has stronger effects on more able workers and hence is more likely to be associated with high dispersion of productivity. Also, the effects are stronger then selection effect. Purpose of the article: – The authors try to find a relationship between productivity and HR practices. They also try to examine role of HR management in productivity; how firms sustain with even inferior HR management practices which includes individual and group incentives pay, appraisals, hiring, decentralization etc. ; how this pattern varies across US & European countries.

    Theoretical back ground: – Many studies reveal that there is a positive correlation between productivity with fair HRM the investments in these practices do not overcome the profits. The design approach for HR management assumes all companies always try to improve their HR practices& generalization. However, variations may occur between firms but it doesn’t harm the overall productivity and each firm is still sustaining. It states forcing any firm adopt incentives pay schemes may harm the performance (Lazear, 2000).

    It also includes application econometrics in HR practices. Another response to this question is firms try to maximize profits not productivity. The elimination of piece rates pay system gradually reduced productivity but profits significantly increased due to increase in quality in the dearth of piece rate. And corresponding to factors for e. g. –anincrease capital per hour will increase in output per hour (Freeman and Kleiner, 2005). Another perspective of HRM i. e. technology says the productivity effect of HRM practices depends upon diffusion of technology in to firms.

    Another reason that makes HRM practices worth exploring is if they affect productivity what are the mechanisms involved in it. It ensures heterogeneity in the productivity. Empirical evidence: According to Black & Lynch the various aspects of high performance are not just incentives but quality management, team work, hiring methodologies etc. Bloom & Van Reenen (2007) examined how HRM is highly correlated with labor productivity in 1633 firms of 7countries . A considerable relation is evident when other measures such as performance based promotion, careful hiring/firing processes, etc are used. There is no clear interpretation about individual incentive effect on productivity. Some studies show positive effect on productivity while others show that it affects the behavior of the employee. Freeman and Kleiner (2005) tried eliminate piece rates & replace with flat-hourly rates for US shoe Manufacturer Company. He applied different methodologies in two different plants of the firm. In one plant it was flat hourly rate but no change in management practices while in the other change in rates were coupled with better HR practices.

    It was observed that in the former productivity fell while profits rose by 6% in the later one. Shearer (2004) when applied this to tree planters in some random assignments, found 22% increase in overall productivity. In another survey by Lavy (2009) showed up that increase in performance were due to better management while the estimation for ‘pay for performance’ were not so positive. In “Group incentive pay system” the facts available are weaker then “individual incentive pay system” although mostly all studies show positive effects of this system.

    Boning et al (2010) found 10% increase in productivity when allotted group pay. Lavy(2002) found group incentives to be useful in the performance of teachers of Isreali School. Blasi, Freeman, Mackin& Kruse (2009) found 4. 5% positive effects of Group pay in Meta Study. Group incentives have gained much popularity in the recent years. Given the rider problem for free more performing workers switched on job before poor performers. The theories shows many ways in which incentive pay system cause distortions which led to decrease in productivity.

    The facts suggest that pay schemes often have negative effects when deployed in poor manner while the net effect is generally positive. Asch, Beth (1990), Courty&Marshke (2004)andHeckman(2004)show potential distortions due to incetivaztion in private sector when poorly designed. Oyer (1998) &Larkin (2007) Show that how flawed incentive system reduce overall productivity. Some minute distortions were observed under individual pay system when workers were provided with social welfare schemes. Labour unions can effect productivity only when the union has more has a strong support from the workers.

    DiNardo and Lee(2014) didn’t find any effects of union ,wages and other outcomes on overall productivity. While Methodology: – The methodologies adopted by Bloom & Van Reenen for their survey included collection of data from 732 firms from US, UK, France, and other European countries ,building up questionnaire for management, telephonic interviews with managers, acquire impartialopinions, official approval from PBC, Bundesbank& RBI etc. & getting firms to participate in the interview. Conclusion: – The survey concludes that HRM effects on productivity are generally positive but need better identification & research.

    HRM has dramatically changed in past few years& is now a major field of labor economics. Although there are significant improvements but all surveys & facts lack availability of data, the data on HRM is still weak. Design personnel Economicshave led to some influential data but some firms have slower than others in adopting “technology” perspective which implies poor management. The evidences suggest that poor competition & inheritance being the reason behind why HRM practices differ between different firms and countries.

    Importance of Article:- The economic growth of any firm or an organization depends upon its efficiency and the potential of their human resources. Therefore, effective HRM practice becomes necessary in order to ensure the skills & proper knowledge of the workers. A proper HR management also acts as boosts up the motivation & inspires them to commit themselves to work more for the organization. The said article provides an extensive view on HRM practices and their productivity effect with a better identification.

    Apart from showing a correlation between HRM and productivity function, it also explains on the basis of facts & evidences how management practices how differ in different firms & countries, effect of individual & group pay system in different firms, distortions due to incentive pay system. It also explains how management deals with workers performing poor, appreciating good performers, magnetizing & maintaining human resources. The determinants of decentralization across countries (cultural & legal), various determinants of HRM practices i. e. risk, ownership & regulation practices and trends of HRM & productivity are discussed. They find future prospects of HRM & leaves with the conclusion that better identification is needed for e. g. field experiments & research in this field.


    • Asch, Beth, 1990. „Do Incentives Matter? The Case of Navy Recruiters? , Industrial and Labor Relations Review
    • Bloom, Nicholas, Christos Genakos, RaffaellaSadun, and John Van Reenen. 2009. “Management Practices around the Globe. ” Unpublished paper.
    • Bloom, Nicholas, RaffaellaSadun, and John Van Reenen. 2007. “Americans Do IT Better: American Multinationals and the Productivity Miracle.
    • Freeman, Richard and Morris Kleiner, 2005. „The Last American Shoe Manufacturers: Decreasing Productivity and Increasing Profits in the Shift from Piece Rates to Continuous Flow Production Why do management practices differ across firms and countries, Journal of Economic Perspectives—Volume 24, Number 1—Winter 2010—Pages 203–224
    • Human Resource Management (HRM) and Productivity Nick Bloom, Stanford, NBER & CEP – John Van Reenen, LSE, NBER, CEPR &CEPBerkeley, November 2009 – Centre for Economic Performance
    • Lavy, Victor (2002) “Evaluating the effect of Teachers?
    • Performance Incentives on Pupils” achievement”, Journal of Political Economy,
    • Lavy, Victor (2007) “Using Performance-Based Pay to improve the Quality of Teachers” The Future of Children
    • Oyer, Paul, 1998, „Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality” Quarterly Journal of Economics
    • Shearer, Bruce, 2004. „Piece

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