The Effects of Employee Involvement on Firm Performance: Evidence from an Econometric Case Study*

We provide some of the most reliable evidence to date on the direct impact of employee involvement through participatory arrangements such as teams on business performance. The data we use are extraordinary --daily data for rejection, production and downtime rates for all operators in a single plant during a 35 month period, more than 77,000 observations. Our key findings are that: (i) membership in offline teams initially enhances individual productivity by about 3% and rejection rates by about 27%; (ii) these improvements are dissipated, typically at a rate of 10 to 16% per 100 days in team; (iii) the introduction of teams is initially accompanied by increased rates of downtime and these costs diminish over time. In addition: (iv) the performance-enhancing effects of team membership are generally greater and more long-lasting for team members who are solicited by management to join teams whereas the cost of team membership (increased downtime) is smaller and diminishes more rapidly as team members engage in learning by doing for such solicited members; similar relationships exist for more educated team members. These findings are consistent with the diverse hypotheses including propositions that: (i) employee involvement will produce improved enterprise performance through diverse channels including enhanced discretionary effort by employees; (ii) the introduction of high performance workplace practices are best viewed as investments, though there are significant learning effects; (iii) differences in performance for team members solicited by mangers compared to those who volunteer are consistent with various hypotheses including management signaling and opportunistic behavior by employees, but inconsistent with hypotheses based on Hawthorne effects; and (iv) various kinds of complementarities accompany many changes in organizational design (such as between teams and formal education).