Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital

Recent research using longitudinal microeconomic databases on businesses and individuals has uncovered tremendous heterogeneity. Across businesses, even within narrowly defined industrial sectors, we observe large differences in the levels and growth rates of inputs, outputs, and productivity. Across workers, even controlling for demographic characteristics, wage and employment outcomes vary a great deal, and there are sizable worker flows across jobs in the economy. These worker flows are closely connected to firm outcomes, reflecting in large part the ongoing shift in resources from less productive to more productive employers. The primary message is that the continual process of matching and sorting as businesses and workers seek their niches is heterogeneous, with experimentation, learning, and selection all playing important roles. Understanding the connection between the matching and sorting of businesses and workers is at the very heart of the overlap between industrial organization and labor economics. However, due to the paucity of data linking businesses and workers at the micro level, we know relatively little about these interactions. Although a large empirical literature suggests that worker outcomes are associated with firm characteristics (notable examples are firm-size wage effects, compensating wage differentials, and interindustry wage differentials), very little is known about the converse-the process by which business outcomes are associated with the characteristics of their employees. There are a number of questions associated with this process. Do employers choose different modes of production resulting in skill segregation, as suggested by the sorting and assignment hypotheses in Michael Kremer (1993) and Michael Sattinger (1993), or do all firms in a given industry select roughly the same workforce composition? How do employers change their workforce composition either to accommodate demand shocks or to experiment with new modes of production? In turn, what is the connection between these different decisions regarding workforce composition and observable business outcomes such as survival, growth, and productivity? In this short paper, our empirical objectives are relatively modest compared to these broad research questions. Our focus is to provide an initial investigation into the connection between a key measure of firm performance, labor productivity, and the composition of the firm's workforce as measured by observable worker characteristics. We exploit longitudinal matched employeremployee micro data developed under a recent pilot project at the U.S. Census Bureau. Our data set contains longitudinal information on key outcomes of the businesses, as well as many of the basic demographic characteristics for the universe of workers at these businesses. Although longitudinal matched employer-employee micro data have been developed in a variety of countries over the last decade or so (see John Abowd and Francis Kramarz, 1999), ours is the first large-scale micro-level data set in the United States that allows the investigation * Haltiwanger: Department of Economics, University of Maryland, College Park, MD 20742, U.S. Bureau of the Census, and NBER; Lane: Department of Economics, American University, Washington, DC 20016, and U.S. Bureau of the Census; Spletzer: Bureau of Labor Statistics, 2 Massachusetts Ave., N.E. , Washington, DC 20212. We thank Adela Luque and Javier Miranda for superb research assistance, and Charles Brown and Marilyn Manser for comments on an earlier draft. This research was conducted at the Center for Economic Studies at the U.S. Bureau of the Census while the second author was an American Statistical Association Census Bureau fellow. The analysis and results are attributable to the authors and do not necessarily reflect concurrence of the institutions they represent.