Essays on Employer-Employee Relationships and Firm Performance

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Recently, the heterogeneity of workers has been documented and emphasized as a very important feature of labor in various economics fields. Labor is one of the key inputs in the production process, and it is quite different from other inputs in that no single worker can be treated the same as any other worker given their unique characteristics. Research on business performance has only recently begun to pay attention to worker heterogeneity. The most important reason for this is a lack of data that incorporate both business level information about production processes, and rich information about the individuals that work in each business. Many studies of productivity have treated all workers as homogeneous and use the total number of workers (or hours worked) as a single variable representing labor input. Studies using micro level databases could only differentiate labor input into production workers and non-production workers or skilled labor and unskilled labor. This dissertation exploits the heterogeneity of labor and variation in human resource management systems, and tries to understand their impact on firm performance and various outcomes.

I use a newly developed employer-employee matched database to examine the impacts of human resource practices on firm outcomes. First, I show that firms with lower rates of worker turnover have higher productivity and learn'' faster than those with higher worker turnover. Moreover, I develop new instruments to show that learning by doing and turnover have causal effects on productivity. Second, I show that firm performance is tightly linked with workforce quality and worker turnover. Strikingly, workforce quality and worker turnover independently contribute to firm survival even after taking productivity into account. Lastly, I assess the fit between firm-level internal labor markets and firm diversification in the U.S. financial services sector. Drawing on the resource-based view'' of firm strategy, I hypothesize that firms with stronger ILMs are more likely to diversify. I find that firms with lower churn, lower wage dispersion, and greater opportunities for workers inside the firm tend to be those that diversify more subsequently.