Human resource management and organisational productivity : A systems approach based empirical analysis

Purpose – The purpose of this paper is to present robust evidence about the effects of human resource management (HRM) systems on organizational productivity, by mixing both distal objective and proximal subjective measures, and by proposing an estimation method that employs hard HRM data. Design/methodology/approach – The purpose of the study is achieved via a simultaneous equations system that has been estimated and simulated, based on an augmented Cobb-Douglas production function, which innovatively has been transformed from static to dynamic, using both economics-based literature and literature from the HRM discipline. Findings – The study supports the view that HRM has a positive impact on productivity, through employee skills, attitudes, and behaviour. Additionally, the study finds that a 10 per cent increase in the extent of the systematic use of HR practices will lead to a 3.27 per cent increase in the total production, and that employee compensation and incentives play the most important role in improving production efficiency. Further, the study finds that for each additional year of systematic use of HR practices, total production will be increasing by 0.07 per cent per annum. Practical implications – The findings of the study suggest practitioners that competitiveness (expressed by increased productivity) will be increased not by reducing costs, as a result of dismissing employees or decreasing wages, but instead by improving productivity as a result of increased compensation and incentives, and improved training and development. Originality/value – The key output of the paper is the development of a sophisticated model that links an HRM system to a production system, through intermediate HRM outcomes, and the extension of the “generalised method of moments” as a systems estimation method that should be used for curing possible misspecification and common method bias problems in the HRM discipline.