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SKILLS PAY: THE CONTRIBUTION OF

SKILLS TO BUSINESS SUCCESS
RESEARCH REPORT 5
SEPTEMBER 2004

To obtain copies of this document, contact

Sector Skills Development Agency
Callflex Business Park
Golden Smithies Lane
Wath-upon-Dearne
South Yorkshire
S63 7ER

Tel 01709 765 444

Email: [email protected]
Web: www.skillsforbusiness.org.uk

ISBN: 0-9545358-7-1
Skills Pay: The contribution
of skills to business success

Penny Tamkin
Lesley Giles
Mike Campbell
Jim Hillage

September 2004
Prepared for SSDA by:

INSTITUTE FOR EMPLOYMENT STUDIES

Mantell Building
Falmer
Brighton BN1 9RF
UK

Tel. + 44 (0) 1273 686751

Fax + 44 (0) 1273 690430

http://www.employment-studies.co.uk

Copyright © 2004 Institute for Employment Studies

No part of this publication may be reproduced or used in any form by any means—graphic,
electronic or mechanical including photocopying, recording, taping or information storage or
retrieval systems—without prior permission in writing from the Institute for Employment
Studies.
Sector Skills Development Agency: Research Series

Foreword

In October 2002 the Department for Education and Skills formally

launched Skills for Business, a new UK-wide network of
employer-led Sector Skills Councils (SSCs), supported and
directed by the Sector Skills Development Agency (SSDA). The
purpose of SfB is to bring employers more centre stage in
articulating their skill needs and delivering skills-based
productivity improvements that can enhance UK competitiveness
and the effectiveness of public services. The remit of the SSDA
includes establishing and progressing the network of SSCs,
supporting the SSCs in the development of their own capacity and
providing a range of core services. Additionally the SSDA has
responsibility for representing sectors not covered by an SSC and
co-ordinating action on cross cutting and generic skills issues.

Research, and developing a sound evidence base, are central to

the SSDA and to Skills for Business as a whole. It is crucial in:
analysing productivity and skill needs; identifying priorities for
action; and improving the evolving policy and skills agenda. It is
vital that the SSDA research team works closely with partners
already involved in skills and related research to generally drive
up the quality of sectoral labour market analysis in the UK and to
develop a more shared understanding of UK-wide sector
priorities.

The SSDA is undertaking a variety of activities to develop the

analytical capacity of the Network and enhance its evidence base.
This involves: developing a substantial programme of new
research and evaluation, including international research;
synthesizing existing research; developing a common skills and
labour market intelligence framework; taking part in partnership
research projects across the UK; and setting up an expert panel
drawing on the knowledge of leading academics, consultants and
researchers in the field of labour market studies. Members of this
panel will feed into specific research projects and peer review the
outputs; be invited to participate in seminars and consultation
events on specific research and policy issues; and will be asked to
contribute to an annual research conference.

The SSDA takes the dissemination of research findings seriously.

As such it has developed this dedicated research series to publish
all research sponsored by the SSDA and results are being made
available in both hard copy and electronically on the SSDA
website.

Lesley Giles

Head of Research at the SSDA

iii
The Institute for Employment Studies
The Institute for Employment Studies is an independent,
apolitical, international centre of research and consultancy in
human resource issues. It works closely with employers in the
manufacturing, service and public sectors, government
departments, agencies, and professional and employee bodies. For
over 30 years the Institute has been a focus of knowledge and
practical experience in employment and training policy, the
operation of labour markets and human resource planning and
development. IES is a not-for-profit organisation which has over
60 multidisciplinary staff and international associates. IES
expertise is available to all organisations through research,
consultancy, publications and the Internet.

IES aims to help bring about sustainable improvements in

employment policy and human resource management. IES
achieves this by increasing the understanding and improving the
practice of key decision makers in policy bodies and employing
organisations.

iv
Contents

Executive Summary vii

Skills Pay: The contribution of skills to business success 1

Introduction 1
The productivity challenge 3
A national issue 3
A regional issue 5
A sectoral issue 6
A firm issue 7
The skills and workforce development challenge 8
Comparative skills profiles 8
Skill deficits 13
Training and development 14
Linking training and skills to performance 17
Benefits to and through the individual 18
Benefits to the firm 21
Embedding skills within the wider context of HR practice 29
High performance work systems 30
Other intervening factors 38
Low skill equilibrium 38
Critical role of managers in organisational
performance 39
Conclusion and implications for action 42
Inputs to and deployments of capability 43
The individual/organisational partnership 43
A model of business performance 44
Implications for research and policy 45

Bibliography 49

v
vi
Executive Summary

UK productivity has shown a relative decline since the late

nineteenth century and as a consequence the UK has moved from
being one of the most productive industrialised countries in the
World to occupying only a middle-ranking position with regard
to its OECD neighbours. This has caused policy makers to seek
underlying causes and one of the most durable concerns has
focused on skill levels in the UK. The most straightforward
comparisons of qualification levels in the workforce for different
countries demonstrate that the UK has lower skill levels than our
competitor nations. This may therefore be a contributor to the
productivity gap. More complex research has implicated skills
much more convincingly. The NIESR group of matched plant
studies (begun in the mid 1980s) compared various UK industries
with their competitors and sought to understand different
approaches to production and the contributing factors including
skills, investment in capital equipment and maintenance practices.
Across a wide range of studies, UK producers tended to produce
lower quality goods and be less productive. The studies strongly
implicated skills gaps as contributing to these differences in
productivity performance. NIESR have calculated that skill gaps
contribute as much as a fifth of the productivity gap between the
UK and Germany. Other research has confirmed this relationship
and that better educated workforces are associated with higher
productivity and other organisational outcomes.

Research has also lent support to the impact of training on

productivity. For instance, work by IFS has suggested that an
increase of five percentage points in the proportion of workers
trained raises value added per worker by four per cent. As might
be expected, better performing firms also tend to have better
qualified and better trained employees.

The research which has focused primarily on skills is

complemented by a body of literature which has explored skills in
the context of wider people management policies. This
burgeoning body of research shows strong associations between
what have been termed ‘high performance working practices’ and
firm performance. Amongst the high performing practices
frequently included are those to do with the development and
training of staff but the exact practices studied and the way they
are measured might vary.

vii
There is still healthy debate on just which practices are most
strongly associated and the degree to which practices need to be
aligned internally to create cohesive bundles of practice or
externally to align with the organisational strategy. However, the
research does present a persuasive argument for good people
management. Yet despite the evidence of beneficial effects the
uptake of such practices in the UK has been relatively low.

The literature is also helpful in cautioning against too simplistic an

interpretation of the contribution of skills to performance. Skills
and training are nested within a wider system where
organisations use skills differently. Some compete on a quality
basis and therefore call on a higher skilled workforce, others
compete on cost and therefore produce goods to a lower
specification with a lower demand for skills. We have also seen
that skills are only one aspect of performance. Increasingly the
literature reflects the role of good management and the motivation
and morale of individuals.

We propose a model of human capability within organisations

reflecting both the development and deployment of capability
from both an individual and organisational perspective. Skills are
one key element of this mix but need to be seen in context.

Parts of this model have been much better explored and

researched than others. Any attempt to develop policy in raising
skill levels and productivity needs to consider the impact of the
wider aspects of the model and the implications of these gaps.

viii
Skills Pay: The contribution of skills to business
success

Introduction
The UK’s economic performance, in particular the competitiveness
of UK-based industry relative to other countries, has been the
subject of a long running public policy debate in recent decades.
As international economic pressures have intensified, there has
been growing concern within government about the persistence of
a productivity gap between the UK and international competitors.

Recent policy developments1 have been predicated on the basis

that improvements in national economic performance and
competitiveness, ie at a macro level, largely depend on changes at
a micro, firm level. This is not solely about increasing skill levels
and supplying ever higher skills in the labour market but
achieving the right skills that meet employers’ needs. Essentially
this means ensuring businesses have the skills needed to innovate,
respond to changing market pressures, enhance their productivity
and profitability and retain their competitive advantage in the
market. It is also increasingly about encouraging the on-going
modernisation of UK businesses2, improving their efficiency and
effectiveness in the way employees are utilised in the workplace
and improving the quality and relevance of workforce
development to meet changing skill needs in different sectors and
to sustain on-going business development and growth. This is not
just the responsibility of employers. When public agencies
intervene, perhaps due to market failures, public skills policy and
provision must also fully meet employers’ needs.

Delivering this agenda are a large number of policy players

involved in UK Vocational Education and Training — DWP, DTI,
DfES, the LSC, the RDAs, all taking slightly different perspectives
and with different but overlapping stakeholders. In April 2002,
the government set up the Skills for Business Network, created to
work with and for employers in key sectors of the UK economy in
the drive for better productivity and effectiveness. The Network
consists of a number of new employer-led Sector Skills Councils

1 DfES (2003), 21st century skills: realising our potential, skills white paper
2 Taylor R (2003), Skills and Innovation in Modern Workplaces, ESRC
Future of Work Programme seminar series

Skills Pay: the contribution of skills to business success 1

 (SSCs) supported and directed by the Sector Skills Development
Agency (SSDA). It provides a basis for employers from specific
sectors to work together and with other partners on skills issues of
common interest, and to co-ordinate action around workforce
development and employment practice. The aim is to more
effectively meet changing sector skills and business needs and, by
so doing, to increase business competitiveness, productivity and
performance above current levels.

In many ways, government and its agencies act in the belief that
skills make a difference. But how strong is the evidence that
workforce development and raising skills in the economy bring
real benefits to business and efficiency? The search for ‘proof’ that
skills make a difference might be seen as merely stating the
obvious. It is intuitively convincing that a more highly skilled
workforce should be beneficial to organisations and the human
capital approach reflects the view that the market value of the
firm increasingly depends on intangible rather than tangible
resources. The three main components of human capital are
described as (Blundell et al. 19991):

z early ability
z qualifications and knowledge acquired through education and
z skills competencies and expertise through on and off the job
training.

This would suggest that individual capability is enhanced by

greater qualifications and higher skill levels. If this can be accessed
and used to good effect in the firm then better human capital
should, ceteris paribus, enhance organisational performance. Better
organisational performance should, in turn, translate into better
national performance.

This paper, undertaken on behalf of the Skills for Business

Network, reviews the latest research evidence and explores how
skills embed within a broader model of workforce capability to
impact on business performance. We start by considering why
skills have been such an enduring element of concern for policy
makers and then move on to explore the evidence for the role
skills may play in raising performance levels of individuals, firms,
sectors and ultimately the whole economy. The paper concludes
by considering the implications for policy and outlining further
research questions that will strengthen the evidence and our
understanding in this policy area. The paper presents a model that
will help policy makers to capture what we already know and
provide a framework to explore what we still don’t know.

1 Blundell R, Dearden L, Meghir C, Sianesi B (1999), ‘Human Capital

Investment: the Returns from Education and Training to the
Individual, the Firm and the Economy’, Fiscal Studies Vol. 20, No. 1

2 Institute for Employment Studies

The productivity challenge
A national issue

There has been considerable discussion since the 1970s about the
poor performance of the UK economy relative to other countries,1
much of which has centred around the contribution that UK-based
industries have been making to this overall performance and what
action can be taken to improve the position.

There are a variety of measures used to assess economic

performance and these assessments have taken place at a number
of levels, including the individual employee and/or firm, sectors,
regions or for the whole national economy. Examples of
performance measures in the literature have included a mixture of
financial and operational measures including profits, turnover
and sales, share price dividend, value added per employee, new
products as a percentage of product range, quality standards
(and/or defects), scrap rates, machine breakdowns and downtime,
absenteeism, employee satisfaction, employment growth, output
and labour productivity. They have also included employer and
employee perceptions of performance. The most commonly and
widely used measure to assess economic performance, and the
efficiency with which different sectors, firms and/or the economy
produce goods and services, is productivity.

Productivity measures how well an economy uses the resources

available by relating inputs to outputs. There are essentially two
measures which take into account the contribution of labour: GDP
per worker (the productivity of each person in active
employment) or GDP per hour worked (also takes account of part
time work and time spent not working). GDP per hour worked is
seen as a better comparative measure because it does not suffer
from differences in the way labour is used (it does not, for
example, vary simply due to differences in the length of the
working week, holiday entitlement etc.). Another measure of
productivity is Total Factor Productivity (TFP) which also takes
into account capital and therefore requires accurate measures of
capital stock which are not often available.2

With productivity as the key measure, the evidence for the UK

makes depressing reading. Despite being the fourth largest
economy in the world, the UK historically has had a poor national
productivity record, measured by GDP per head, compared to its
international competitors. The size of the gap depends on how
labour productivity is measured. Productivity levels in Europe

1 DfES (2003), 21st Century Skills: Realising our Potential, skills white paper
2 HM Treasury (2000), Productivity in the UK: the Evidence and the
Government’s Approach

Skills Pay: the contribution of skills to business success 3

 overtook those in the UK during the 1970s but a gap between the
UK and the US had existed with the US since the early 1900s.

Despite the fact that GDP per head for the economy has increased
five fold since 18701 and has grown faster in the UK during the
1990s than other G7 countries (especially within the service
sector), internationally the UK still only has a middle ranking
position. The reality is that productivity in the UK has grown
more slowly relative to a number of other countries and therefore
the British experience has been of relative economic decline. In
relation to the 15 EU countries, the UK ranks 12th and recent
figures from the Office for Economic Co-operation and
Development (OECD) put it at fifteenth place out of 30 countries.2.
Craft (2002) concludes that the relative decline in the UK has
resulted from poor productivity performance rather than simply
low investment. A relatively low capacity for innovation and for
making effective use of technological change is at the heart of this
decline. Craft places the blame at the door of weak competition
and managerial failure in firms.

Recent measures of labour productivity show that gradual progress

on productivity may be paying off. This improvement is most
visible using GDP per worker. Since 1990, UK productivity has
grown faster that its main competitors and as a result, UK workers
on average produce more than those in Japan, as much as those in
Germany. The gap between France and the UK has narrowed by 17
percentage points. However, US workers are still just under 30 per
cent more productive than UK workers. On GDP per hours worked
the UK remains behind all our major competitors (Figure 1).

Interestingly, the productivity gap with the US diminishes using

GDP per hour worked, as a consequence of a longer working
week, the extent of workers undertaking more than one job and
fewer holidays in the US. Figure 2 shows where UK productivity
per hour worked comes in relation to the OECD countries and
overall hours worked (ie labour utilisation). It would appear that
our European neighbours work smarter while the US works
smarter and harder.

A regional issue

In addition to international differences, there is also variation

within the UK in terms of productivity. In particular there are
significant and persistent variations in GDP per capita amongst
the UK regions (see Figure 3).3 For example, GDP per capita in the

1 Crafts N (2002), Britain’s Relative Economic Performance 1870-1999,

Institute of Economic Affairs Research Monograph No. 55, IEA London
2 DTI (2003), Prosperity for all, DTI Strategy Analysis
3 HM Treasury (2001), Productivity in the UK: Progress Towards a
Productive Economy

4 Institute for Employment Studies

 North East was more than 40 per cent below that of London in
1999 and these differences in regional GDP have been persistent
over the last 30 years. The main source of these regional variations
differences in unemployment rates, participation rates and
working-age population share affecting productivity to a lesser
extent.

Figure 1: International comparisons of labour productivity (GDP per hour worked, UK = 100)

160

140

120
UK
100

80

60

40

20

0
Japan Germany USA France
1990 2002

Source: ONS, 2004

Figure 2: Labour force utilisation and productivity

Note: Labour Force Utilisation measured as hours worked per working age population; Labour Productivity measured
as output per hour worked
Source: OECD (2001), IMF (2003)

Skills Pay: the contribution of skills to business success 5

Figure 3: Regional differences in economic performance
GDP per head,
1999
UK average
£18,000

£17,000 London

£16,000
East
£15,000 South East

£14,000

£13,000 East Midlands

Scotland UK average
£12,000
North West West Midlands

£11,000
North East Wales
£10,000 Yorkshire Northern Ireland
South West
£9,000

£8,000
4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00%

Annual GDP per head Growth Rate, 1989-1999

Source: Campbell and Giles, 2003

A sectoral issue

A sectoral analysis of labour productivity shows that the existence

of the gap is common across all parts of the UK economy and
affects most sectors, therefore any improvements must be
economy wide.1 A recent report by the Advanced Institute of
Management (AIM)2 suggests that more than half the gap in
productivity between the UK and US can be attributed to three
sectors: ‘wholesale and retail’, ‘financial intermediation’ and
‘machinery and equipment’. Their analysis of changes in the gap
since 1990 suggest that, although the size has not changed
particularly, the sectoral composition giving rise to the gap has
shifted considerably. The gap has narrowed in the service
industries such as gas and water, in manufacturing (with the
exception of machinery and equipment) and in business services.
The share of the gap accounted for by manufacturing (excluding
machinery and equipment) declined more than any other sector
over the decade. The gap has risen over the decade in ‘wholesale
and retail’, financial intermediation, hotels and restaurants and
machinery and equipment. In many sectors, the UK’s relatively
poor performance can be attributed to a greater acceleration in
productivity growth in the US rather than low growth in the UK.
Both countries are increasing productivity but the US is doing so
faster.

1 O’Mahoney M, De Boer (2002), Britain’s Relative Productivity

Performance, Updates to 1999, NIESR Final Report to DTI; Campbell
M, Giles L (2003), The Skills and Productivity Challenge: A Summary of
the Evidence Base for the SSDA Strategic Plan 2003-2006
2 Griffith R, Harrison R, Haskel J, Sako M (2003), The UK Productivity
Gap and the Importance of the Service Sectors, summary report of the
AIM Management Research Forum

6 Institute for Employment Studies

 Other analyses by sector support this overall picture.1
Productivity has been rising across the UK economy but much
faster in manufacturing than in services. Manufacturing output
grew by over five per cent in the 12 months to December 2000, the
strongest performance since 1994. Output per worker in
manufacturing has been growing strongly since 1999.

A firm issue

A firm level analysis helps to reveal what is contributing to the

sectoral and national picture. It seems that the spread in
productivity levels between individual firms is important. Recent
analysis of variations in firm level productivity in the UK, shows
that the worst performers have productivity levels significantly
lower than their international competitors2 and there is a much
bigger spread across UK firms. Whereas the best UK performers
had productivity levels equivalent to the best international
competitors, there is a large tail of low performers. This suggests
that a significant wholesale increase in performance is required to
close the gap. The best performing firms in the manufacturing
sector were around five times more productive than the worst.
However, there is also a significant positive relationship between
productivity and market share ie the biggest producers tend to be
the most productive.

Thus despite the numbers, the lowest performing organisations

are not holding down national productivity as they amount to a
relatively small proportion of national output. Raising the
performance of these poorer performers to the median
productivity level in the industry would still be insufficient to
close the overall international productivity gap (raising the lowest
performing firms to the median would raise performance by eight
to ten percentage points). In fact, given the gaps in productivity
noted above, the UK would have to raise average productivity to
the current eightieth percentile to close the gap.

To summarise:

z There is a productivity gap between the UK and our main

competitor nations.
z The gap has been closing since the late 1990s but mostly as a
result of workers in the UK working longer hours.
z There are marked and persistent regional variations in
productivity with a North/South divide.

1 HM Treasury (2001), Productivity in the UK: Progress Towards a

Productive Economy
2 Haskell J, Martin R (2002), The UK manufacturing productivity spread,
CeRIBA Discussion Paper

Skills Pay: the contribution of skills to business success 7

 z The productivity gap is echoed in most sectors but there is a
shifting picture on sectoral contribution to the gap with
evidence that in manufacturing, productivity is rising faster
than in other sectors.
z Most firms are under-performing —the best may be ‘top class’
but we have too many organisations not up to scratch.

The skills and workforce development challenge

As we have seen there is persuasive evidence of a significant
productivity problem in the UK. The key questions are what gives
rise to this economic position in the UK relative to other countries,
and what gives rise to the variation in sectoral and firm level
labour productivity? There has been a strongly held belief at
policy level for more than two decades that skills are an important
contributing element to the productivity gap. Commentary on UK
competitiveness1 has highlighted the importance of skills in
modern economies, which increasingly demand a highly trained
labour force.2 The DTI has also stressed that large parts of the UK
economy are now dependent on the management and processing
of knowledge and information. Service industries have already
been transformed by new technology and the demand for ICT
skills has increased. In addition, several commentators have
pointed to the growing importance of communication and inter-
personal skills with the expansion of service work. So although
there is a commonly held belief that skills are an important part of
the equation, we now explore the evidence that might lend weight
(or otherwise) to this belief.

Comparative skills profiles

At the simplest level of analysis, there have been numerous direct

comparisons between the UK skill profile and that of other nations
who are more productive than ourselves. It is noted in the DTI
reviews that although the UK performs reasonably well against
our European competitors in terms of higher level skills, at
intermediate level skills the UK performs considerably below
France and Germany (see Figure 4). Whilst a recent update to this
work suggests some improvement in the UK, (particularly
amongst the 19 to 21 year olds), a significant gap still exists,
especially concerning the up take of vocational qualifications.3

1 DTI (2001), UK Competitiveness Indicators second edition, and DTI (2003)

UK Productivity and Competitiveness Indicators 2003, DTI Economics
Paper No 6
2 DfEE (1988), The Learning Age and Renaissance for New Britain, White
Paper; DTI (1998), Our Competitive Future: Building the Knowledge
Driven Economy
3 Steedman H (forthcoming) Updating of the Skills Audit 2004, DfES

8 Institute for Employment Studies

Figure 4: Qualification levels at NVQ 2 and 3: UK, France and Germany
Germany*
workforce
25-28 year olds

19-21 year olds

Level 2+ Level 3+

France
workforce
25-28 year olds

19-21 year olds

UK
workforce
25-28 year olds

19-21 year olds

100 80 60 40 20 0 0 20 40 60 80 100

General Vocational

Note * Germany data are 1997

Source: DTI from Steedman

There is a long tail of adults with no or low skills; just over one-
third of the working age population in the UK either have no
qualifications or are qualified below level 2. Poor literacy and
numeracy skills are also much more prevalent in the UK than
nearly all other countries (see Figure 5).1

Figure 5: Adults with literacy and numeracy skills at the lowest level

50%

45%

40%
% of adult population

35%

30%

25%

20%

15%

10%

5%

0%
lia
s

nd

ic
da

nd
y

d
en

UK
US
nd

an

an

bl
iu

tr a

na
ed

la

la
pu
la

rm

lg

al
er

Po
Ca
Sw

s
er

Be

Ze

Re
Au

itz
Ge
th

Sw

ish
Ne

Ne

Ir

Percentage of adults with literacy skills at the lowest level

Percentage of adults with numeracy skills at the lowest level

Source: Literacy Skills for the Knowledge Society, OECD, 1997

1 OECD (1997), Literacy Skills for the Knowledge Society: Further Results
from the International Adult Literacy Survey

Skills Pay: the contribution of skills to business success 9

 This basic skill deficit may remain of concern in the UK for some
time:

z The labour market is set to expand more slowly over the next
20 years compared to the previous 20 and the average age is
increasing. This means that there will be proportionally more
older workers who tend to be less well qualified than younger
workers.
z High drop-out rates at 16 contribute to the problem. The UK
has one of the lowest participation rates in education at 17 of
the OECD.
z Over one-third of British minority ethnic economically active
adults hold qualifications below level 2 and yet minority
ethnic groups are expected to account for more than 50 per
cent of growth in the working population over the next ten
years.1
z The UK labour market is tight with a high employment rate (at
around 75 per cent) and low unemployment. Many areas of
the UK are already experiencing full employment yet a further
1.3 million new jobs are forecast over the next ten years. Also,
13.5 million jobs will need to be filled as people leave the
labour market because of retirement and so on.

Regional skills

There are substantial skills differences between UK regions (see

Figure 6). In England, the proportion of those of working age
qualified to level 3 is just 36 per cent in the North East but is 46
per cent in the South East. Indeed the proportion varies
considerably across LSC area from 32 per cent in the Black
Country and 36 per cent in South Yorkshire to 49 per cent in
Hertfordshire and 53 per cent in Surrey.2 HM Treasury suggests3
that the difference in the skill composition of the workforce in UK
regions is the main underlying factor associated with regional
productivity differentials.

1 Campbell M, Giles L (2003), The Skills and Productivity Challenge: a

Summary of the Evidence Base for the SSDA Strategic Plan 2003-2006,
SSDA
2 Campbell and Giles op.cit.
3 HM Treasury (2001), Productivity in the UK: Progress Towards a
Productive Economy

10 Institute for Employment Studies

Figure 6: Regional variations in percentage of workforce with no qualifications

Source: Campbell et al. 20011

Sectoral skills

The national picture does not apply equally at sectoral level.

While all sectors undoubtedly need to take action to ensure they
have the right balance of skills, some sectors are clearly operating
from a lower skill position than others and arguably therefore
have a greater challenge to raise skill levels and tackle deficiencies
(see Table 1 modified from skills white paper). Table 1 highlights
those sectors with the most poorly qualified workforces at levels 3
and above: textile and clothing manufacture; food and drink,
agriculture, hotels and catering and retailing. Indeed, around two-
thirds of the employees in these sectors respectively have
qualifications at or below level 2. This compares to around a
quarter in parts of the public sector such as education.

The implications of these differences are, however, not clear as

there are considerable differences in skill needs across sectors. The
important dimension is the degree to which current skills meet
sectoral needs and how skill levels in these sectors compare
internationally.

Surprisingly, the link between skills and productivity at the

sectoral level has been little studied. However, a parallel SSDA
funded project undertaken by IES (‘Innovation Indicators’) aims to
address this issue using international comparisons.

1 Campbell M, Chapman R, Hutchinson J (2001), Spatial Skill Variations:

their Extent and Implications Skills Task Force, Research Paper 14

Skills Pay: the contribution of skills to business success 11

Table 1: Level of qualification by detailed (27) sector

S/NVQ S/NVQ S/NVQ S/NVQ S/NVQ Weighted

5 4 3 2 1 None base
Sector (%) (%) (%) (%) (%) (%) (=100%)

Textiles & clothing manufacture * 9 15 29 12 34 244,960

Food, drink & tobacco * 10 19 33 16 18 465,210

manufacture

Agriculture * 13 17 31 11 25 381,452

Hotels & catering 1 10 24 36 13 16 1,260,570

Retailing 1 11 22 37 11 17 2,973,697

Other manufacturing and * 12 20 34 12 19 245,288

recycling

Transport & storage 2 12 22 35 17 12 1,362,963

Wood & paper manufacture * 9 26 35 13 15 199,276

Wholesale distribution 2 14 20 36 13 14 764,909

Sale and maintenance of motor * 7 34 34 10 14 562,052

vehicles

Communications 3 17 22 34 10 13 640,312

Construction 1 12 34 31 9 13 2,088,263

Metals and metal goods * 15 29 29 11 13 536,583

manufacture

Chemicals and non metallic 5 22 20 28 11 13 769,321

minerals manufacture

Whole economy 5 23 22 29 9 11 28,422,836

Miscellaneous services 5 22 24 28 9 11 1,529,839

Engineering manufacture 4 23 26 27 9 11 1,041,604

Transport equipment 4 21 29 26 9 11 558,073

manufacture

Printing and publishing 5 23 26 28 7 10 412,704

Health and social work 6 37 14 25 9 9 3,131,282

Professional services 8 28 22 28 7 7 617,220

Financial services 5 27 27 32 6 3 1,279,194

Public administration and 6 28 24 29 6 6 1,907,543

defence

Other business services 8 33 18 24 8 9 2,116,999

Utilities * 26 31 27 7 5 217,385

Mining & quarrying * 29 21 22 * 11 112,785

Education 22 38 11 17 6 6 2,315,669

Computing services 11 43 21 18 4 * 524,019

Source: SSDA skills matrix/LFS, 2001/02 (average: 2001q4 - 2002q3)

12 Institute for Employment Studies

 Three critical roles have emerged for skills at the sector level:

z Skilled workers are important for R&D, and the development

of innovative products and services.1
z Organisations also benefit from skilled workers through
spillover and through new methods and products from other
sectors.2
z Finally, skilled production workers are more important in
high-technology sectors than in low-technology sectors.3

Skill deficits

Most of the research mentioned compares qualification levels.

However, there is a problem with comparisons between
qualification levels in the UK with elsewhere and the assumption
that they reflect skill levels. Strong evidence of qualification
deficits may not equate to a skills problem but may reflect
different qualification systems rather than a less skilled workforce.
An alternative indicator might be the degree to which organisations
report skill deficiencies –- can they find the workforce they are
looking for?

Evidence from UK employer skills surveys4 gives us an indication

of the level and nature of current skill deficiencies in the labour
market by measuring external skills shortages and internal skills
gaps. This evidence shows that a fairly small proportion of
employers experience skills shortage vacancies ie they have
vacancies that are hard to fill because of a shortage of suitably
skilled applicants. In England for example this equates to only
four per cent of employers and around 135,000 vacancies. These
tend to be concentrated in small (but not the very small) firms and
those in certain sectors: construction, transport and communication,
parts of manufacturing and health and social care. By occupation,

1 Adams J D (1999), ‘The Structure of Firm R&D, the Factor Intensity of

Production and Skill Bias’, The Review of Economics and Statistics, Vol.
81, No. 3, pp. 499-510
2 Engelbrecht H J (2002), ‘Human capital and International Knowledge
Spillovers in TFP Growth of a Sample of Developing Countries: an
Exploration of Alternative Approaches’, Applied Economics, Vol. 34,
pp. 831-841
3 Anderson M A, Robertson R, Smith S L S (2001), Measuring Skill
Intensity: Production Worker vs. Education Data in the NAFTA Countries,
US International Trade Commission, Office of Economics Working
Paper, No. 2001-07-B
4 Hogarth, et al. (2004), National Employers Skill Survey 2003: Key
Findings; Future Skills Wales (2004), Wales Generic Skills Survey 2003;
Future Skills Scotland (2003), Skills in Scotland; Department for
Employment and Learning in Northern Ireland (2004), Skills
Monitoring Survey 2002

Skills Pay: the contribution of skills to business success 13

 skilled manual trades and associate professionals are most affected,
perhaps lending some support to the view that intermediate skills
are a key issue. This is not exclusively the case and in Northern
Ireland and Scotland skills shortages occur in other occupations
too, namely plant and machine operatives in the former and
personal services, sales and elementary jobs in the latter. The latest
data from these surveys indicate that the level of external
recruitment problems is both stable and persistent. These skill
shortages also still tend to be most acute in sectors requiring
technical skills such as construction and manufacturing.

On the other hand skills gaps are much more prevalent than skills
shortages across the UK. For example in England just under a
quarter of employers (accounting for around 2.5 million employees)
report skills gaps, which outnumber shortages by nearly 20.
Across the UK regions, skill gaps are most apparent within
England accounting for 11 percent of all employees. This compares
to three per cent in Northern Ireland, nine per cent in Scotland
and five per cent in Wales. Skill gaps seem to affect the larger
employers and the very small disproportionately and are a more
universal problem with less extreme variation between sectors.
However industries where there are slightly greater numbers of
staff with gaps include retail, business services, and hotels and
catering. By occupation, sales, customer service and elementary
jobs are the most affected and generic skills such as
communication and customer handling are the skills most lacking.

The fact that organisations experience skill deficiencies may not

present a strong enough case for a UK skills deficit. But when this
is considered alongside the UK skills profile (outlined earlier) and
the fact that these deficiencies have persisted for some time, the
case perhaps does become more compelling. Furthermore there is
evidence1 that the degree of skills problems may be greater than
the level recorded in official surveys. Organisations do not always
report skills problems because they have learnt to make do with
what they have; that is they have latent skills gaps.

Training and development

Education and qualifications may be one element of human

capital but training and development is another and we turn now
to look at the data on levels of training and development in the
UK. Whilst the proportion of the UK workforce participating in
training is high compared to other OECD countries, the duration
of training is low and access is uneven (see Figure 7); the lower
skilled and qualified are less likely to receive training. There is
thus a tendency to reinforce existing inequalities in skill
attainment. Some commentators have also questioned whether
training is of an adequate quality to meet skill needs and

1 Hogarth T, Wilson R (2001), Employer Skills Survey Synthesis Report,

DfES

14 Institute for Employment Studies

 overcome any skill deficiencies. Most training periods are short (ie
half of training lasts for less than six months and two fifths for less
than one week). Much is driven by statutory requirements such as
health and safety (eg in England 69 per cent of training is for this
need) rather than business needs. A lot of training activity is not
driven by a formalised training or business plan and therefore can
be reactive and dominated by short term needs rather than
supporting business development and growth (ie a third of
employers have no plan and two fifths of employers do not
undertake performance reviews to assess their employees skill
needs). Only half of training leads to a formal qualification, raising
questions about completeness and coverage of sufficient
underpinning knowledge.1 Furthermore there are significant
sectoral variations in the level and nature of training activity
which may only serve to exacerbate problems in some sectors. For
instance, public sector organisations and those in energy and
utilities and finance provide more training than those in textiles,
parts of manufacturing and retail.

Attempts to increase workforce development in the labour market

are likely to be affected by the composition of the organisation. It
has been consistently shown that smaller establishments have less
well-qualified staff and are less likely to provide formal off the job
training than larger ones.2 This pattern has persisted over time
and been reported in various training surveys.3

Whilst some of these small businesses do develop people

informally, through experiential learning and in ways that are not
always picked up by official training surveys, there are still
questions about the scale and adequacy of these approaches.

Although most of the gaps in skill levels compared to other

countries are attributed to historic failures of the education
system, the lack of participation in high quality and relevant job-
related education and training is believed to be a further
contributory factor to this national and sectoral skills shortfall,
especially in keeping pace with the continual structural changes in
the labour market. The manufacturing and primary industries
have been in decline for decades, taking with them traditional
full-time, manual work and are being replaced by jobs which
challenge conventional modes of working. The increasing demand
in the service sector for higher skilled professional and technical
jobs is set to continue. With these changes comes greater
employment flexibility, more job moves in a typical career and
diminishing notions of ‘a job for life’. Indeed, the median length of
service for men has fallen by a fifth since 1975. This places a

1 Hogarth et al (2004), op.cit.

2 eg Small Firms Enterprise Development Initiative (2002), Small Firms
Skills Assessment, SFEDI
3 Spilsbury D (2003) Learning and Training at Work, DfES

Skills Pay: the contribution of skills to business success 15

Figure 7: Average hours of continuing education and training

140

120

100

80

60

40

20

0
k

lia
da

ic

m
nd
d

UK
d

nd
ay

*
nd
ar

an

an

US
bl

iu
ra
rw

na

la

la
nm

pu
la

lg
nl

al

st

er

Po
No

Ca

er
Ze

Be
Fi

Re
Au

itz
De

th

Sw
w

ish
Ne
Ne

Ir
All continuing education and training Job-related education and training

* US = 1999
Average hours of continuing education and training, by type of training. Selected OECD country comparison, 1994-
1998. Mean number of hours, adult population, aged 25-64
Source: International Adult Literacy Survey, and national surveys

growing emphasis on continual re-training and upskilling amongst

firms to maintain their competitive advantage.

To summarise:

z The review of the UK’s productivity gap demonstrates that the

UK does face significant problems compared to its main
competitors.
z There is evidence that productivity gaps are accompanied by
gaps (proxied by qualifications) at intermediate and basic skill
levels in comparison with France and Germany and at high
skill levels in comparision with the US.
z There are considerable regional variations in skill/ qualification
level broadly in line with differences in productivity.
z Reports of skill shortages are at a generally low level but there
is some concern that employers may be ‘making do’ with sub-
optimal levels of skill without recognising that they do so.
z The proportion of the workforce participating in training is
good compared with competitors but the actual duration of
training is low and access is uneven.
z The evidence we have reviewed here focuses on whether there
is a UK skills (qualifications and training) gap which echoes
the productivity gap, this does not however necessarily mean
that the relationship is causal ie that it is the absence of skills
that results in the productivity gap.

16 Institute for Employment Studies

Linking training and skills to performance
We now turn to research that has attempted to relate skills more
directly to performance at individual, organisational or national
levels. It is important to point out that most research evidence of
the link tends to demonstrate an association between skills and
measures of individual benefit or organisational performance,
rather than proving a link by monitoring relationships or impact
over time. The latter is methodologically more difficult and
therefore more scarce but more compelling.
The research has to deal with a number of difficulties inherent in
the measurement:

z Not all investments in education are considered equal in the

labour market eg there are very different rates of return from
arts and science degrees.
z Educational attainment may be an indicator of ability rather
than skill.
z Education is only part of the input to skill, ongoing learning is
much harder to codify.
z Not everyone fully utilises the skills they have or applies them
to their current job.
z The traditional unit of skills measurement is some indicator of
educational attainment but education, qualifications and
training are all proxies for skills.
z As has been noted elsewhere,1 much of the discussion on skills
assumes that training and skills are synonymous and it needs
to be remembered that training is only one route to skill
acquisition.

Others have highlighted the difficulties in defining skills and the

multiple functions of training apart from skill enhancement.2

The relevant research has tended to fall into three broad camps, all
throwing light on the issues of skills and performance from
slightly different research perspectives:

1. The first block is the most traditional. It seeks to address the

relationship between skills and performance head on,
deliberately looking for evidence of a direct link between
performance and either qualifications and knowledge

1 Bloom N, Conway N, Mole K, Moslein K, Neely A, Frost C (2004),

Solving the Skills Gap, Summary Report from a CIHE/AIM
Management Research Forum
2 Keep E, Mayhew K, Corney M (2002), Review on the Evidence of the
Rate of Return to Employers of Investment in Training and Employer
Training Measures, SKOPE Research Paper No. 34

Skills Pay: the contribution of skills to business success 17

 acquired through education, or skills, competencies and
expertise through on or off-the-job training.
2. The second block is more tangential and throws light on skills
while focusing on HR practices. HR practices, including those
designed to improve the skills and capability of the workforce,
have been linked to organisational performance.
3. The third block is slightly different in that it does not aim to
identify positive relationships but seeks to enhance the
understanding of why skills are not enough and what other
factors might crucially affect any relationship between skills
and business performance.

If higher skills do enhance performance we might expect certain

hypotheses to be upheld by the evidence. Returning to our
measures of human capital as early ability, qualifications and
knowledge acquired through education and skills, competencies
and expertise through on and off the job training, we might
reasonably expect that:

a) If better skilled people enhance organisational performance,

organisations will recognise the greater value of skilled
people, and be willing to pay more.
b) If training raises skill levels, those receiving training should be
valued more.

We might also expect better performing firms to be those which

have recognised the importance of skill and therefore:

c) Better performing firms should have more skilled workforces.

d) Higher levels of training should be associated with better firm
performance.

More compellingly:

e) Investment in training and development should improve

organisational performance.
f) Recruiting more qualified and better educated staff should
improve performance.

We turn now to the literature to see what support it gives for these
hypotheses.

Benefits to and through the individual

As we have suggested, evidence of individual gains to education,

qualifications, skills or training support the argument that they
enhance individual capability and the individual’s value to the
firm. A number of studies have looked at the benefits to the
individual of attaining higher skills (eg higher wages). This
relationship has primarily been assessed by looking at the effect of

18 Institute for Employment Studies

Table 2: Wage premia from obtaining qualifications (percentage)

Qualification Men Women Qualification Men Women

CSE/lower GCSEs 9 5 Level 1-2 NVQs Nil Nil
O level/higher GCSEs 21 19 BTEC First Nil Nil
A level 17 19 Level 3-5 NVQs 6 5
First degree 28 25 RSA Higher 4 12
Higher degree 8 18 C&G Craft 7 Nil
C&G Advanced 7 Nil
Professional qualifications 35 41 ONC/BTEC National 10 8
Nursing 13 21 HND/HNC 15 9
Teaching Nil 27

Notes:
1. The wage premiums are additive. For example, a man with ‘O’ levels/higher GCSEs and ‘A’ levels and a first
degree will earn 66% more than a man with no qualifications.
2. Results control for age, ethnicity, region, firm, size, public/private sector.

Source: Campbell, 2002 using data from Dearden et al, 20013

varying years of education or of having attained different levels of

qualifications, and to a more limited extent, of having undertaken
varying amounts of training. There is now considerable UK
evidence of an association between the amount of education, level
of qualifications and individual benefits, eg salary level or
likelihood of being unemployed.1 A notable exception to this
evidence is the lack of individual return on the acquisition of
vocational qualifications in marked contrast to the benefits
accruing to academic qualifications (see Table 2).2

There have however, been criticisms of the fundamental

assumption behind such calculations which is that the increase in
earnings can be attributable to the added benefit of the study
undertaken.

Others have argued that the education may not in fact be adding
value but instead may signal to employers the higher capability

1 eg Greenhalgh C, Stewart M (1987), ‘The Effects and Determinants of

Training’, Oxford Bulletin of Economics and Statistics, 49; Booth (1991),
‘Job Related Formal Training, Who Receives it and What is it Worth’,
Oxford Bulletin of Economics and Statistics, 53; Wilson R, Hogarth T
(2003) Skills in England 2002, LSC, Coventry
2 eg Sianesi B (2003), Returns to Education, CEE mimeo; McIntosh S
(2003), What Difference Does it Make? Vocational Education for Low-
Achieving School-Leavers, CEE mimeo
3 Campbell M (2002), Learn to Succeed: The Case for a Skills Revolution,
Policy Press, Bristol; Dearden L, Macintosh S, Myck M, Vignoles A
(2001), The Returns to Academic, Vocational and Basic Skills in Britain,
DfEE Research Report 192, DfEE

Skills Pay: the contribution of skills to business success 19

 and potential of the individual — what is termed the ‘screening’
hypothesis.1

Importantly to help counter this perspective, there is evidence that

acquisition of skills during a working lifetime can have benefits to
the individual. Improving basic skills can improve UK labour
market outcomes.2 There is therefore evidence in support of
higher skills conferring labour market advantage on individuals.

There is also evidence that training received from a current or

previous employer brings wage benefits, improved promotability,
and reduced likelihood of redundancy for the individual.3

As summarised by Campbell (2000):4

‘For those not in employment, skill acquisition can reduce labour

market exclusion and unemployment by increasing employability and
improving access to evolving job opportunities. For those already in
work: acquiring skills can improve people’s future job prospects and
their earnings potential in the future.’

Some studies have sought to explore the impact of different kinds

of training. It has generally been found that off the job training has
a greater wage effect than on the job.5

There is considerable evidence that the higher trained and

qualified are also more likely to receive further training
investment such that differences in earnings are amplified rather
than compensated:

‘The current accumulated stock of human capital provides both strong

incentives and more opportunities for future investment.’ (Blundell et
al. 19996)

1 Keep E, Mayhew K, Corney M (2002), op.cit.

2 eg Machin S, McIntosh L S, Vignoles A, Vitanen T (2001), Basic Skills,
Soft Skills and Labour Market Outcomes: Secondary Analysis of the
National Child Development Study, DfES 250 and Bynner J, McIntosh S,
Vignoles A, Dearden L, Reed H, Van-Reenan J (2001), Improving Adult
Basic Skills Benefits to the Individual and to Society, DfEE Research
Report, RR251, HMSO
3 Blundell R, Dearden L, Meghir C, Sianesi B (1999), ‘Human Capital
Investment: the Returns from Education and Training to the
Individual, the Firm and the Economy’, Fiscal Studies, Vol. 20, No. 1
4 Campbell M (2000), Learning Pays and Learning Works, NACETT,
Sheffield, p. 2
5 Blundell, Dearden and Meghir (1996),The Determinants and Effects of
Work-Related Training in Britain, 1996, Institute for Fiscal Studies,
London
6 Griffith et al. (2003) op.cit.

20 Institute for Employment Studies

 AIM1 report a study by Jenkins et al. (2003) which uses panel data
to explore lifelong learning on individual economic outcomes.
They confirm that lifelong learning is more likely amongst those
with some qualifications and found that one episode of lifelong
learning increased the probability of undertaking more. However,
there was little evidence of wage effects. One exception was for
men who left school with only low level qualifications who then
go on to study for a degree later in life, for whom there are
significant earnings effects. Lifelong learning was associated with
reduced probability of being unemployed.

Amongst this literature there are a few UK studies that have

sought to contrast the benefits to the individual with those to the
organisation. These have tended to show that benefits to the
individual are associated with additional advantages for the firm,
that tend to off-set any increases in labour costs associated with
training and rewarding a more highly skilled workforce. The
consensus is that the gains for the organisation exceed the greater
wage costs.2

So far so good. There is nothing in the literature on individual

benefits of education, qualifications, skills or training which
would contradict our hypotheses. We turn now to evidence of
benefits to the firm.

Benefits to the firm

The impact of education

Various econometric studies have sought to understand the ways

in which education impacts on national productivity. Early
studies have tended to support a view that considerable
proportions of differences in productivity are accounted for by
differences in education.3 Work by Sianesi and Van Reenan4 have
estimated that in the US, investments in human and physical
capital account for 83 per cent of the productivity growth between
1948 and 1986. Growth in labour input is estimated at 61 per cent
of productivity growth, of which under half –- 42 per cent — was
due to changes in labour quality.5 Criticism of this body of
research has noted that these studies rely on ‘levels estimation’
across countries, relating levels of education with levels of

1 Bloom et al. (2003) op.cit.

2 eg Dearden et al. ( 2000), op.cit., Blundell et al. (1999) op.cit.
3 HM Treasury (2000), op.cit.
4 Sianesi B, Van Reenan J (2002), The Returns to Education: a Review of the
Empirical Macroeconomic Literature, IFS, WP02/05
5 Bloom N, Conway N, Mole K, Moslein K, Neely A, Frost C (2004),
Solving the Skills Gap, summary report from a CIHE/AIM
Management Research Forum

Skills Pay: the contribution of skills to business success 21

 productivity. The removal of idiosyncratic country level fixed
effects (eg work ethic, language, climate), weakens the correlation
significantly and it may be that some other factor is driving the
relationship such as culture.

The impact of skills

If human capital is associated with better performance, then we

would expect there to be evidence of a strong association between
performance and skills. Studies have sought to isolate whether
high skills are a contributory factor behind successful and higher
performing firms. Altogether, these studies have identified a
significant association between a highly skilled workforce and
organisational performance, most commonly measured by the
level of labour productivity. For instance Haskel1 has shown that
the top performers in UK manufacturing hired workers with, on
average, an extra qualification level compared to the lower
performers. Haskel also found that higher skill levels support
innovation and more sophisticated production processes and were
associated with the production of higher quality products.

Using matched establishment and workforce data Haskel,

Hawkes and Pereira (2003)2 showed that more productive UK
firms hired more skilled workers (the establishments in the top
decile had workers with an average of two years extra schooling
compared to those in the bottom decile). Both hard and soft skills
were positively related to TFP and the skill gap between the top
and bottom performing firms explained some eight per cent of the
productivity gap. In addition, Lynch and Black (1995)3 found in
the US, that an extra year of education raised productivity by
between 4.9 and 8.5 per cent in the manufacturing sector and
between 5.9 and 12.7 per cent in services.

These results have been supported by Mason et al. in 2003 for the
UK.4 Green et al. (2003)5 has also found a strong relationship
between different levels of UK workforce skills and the
sophistication of products. Other research has suggested that a
more highly skilled workforce can bring other benefits such as

1 Haskel J, Hawkes D (2003), How Much of the Productivity Spread is

Explained by Skills? UK evidence using matched establishment/
workforce survey data, CeRIBA discussion paper
2 Haskel J, Hawkes D, Pereira S (2003), Skills and Productivity in the UK
using Matched Establishment, Worker and Workforce Data, CeRIBA
3 Lynch L, Black S (1995), Beyond the Incidence of Training, Evidence
from a National Employers Survey, NBER working paper 5231
4 Mason and Wilson (2003), Employer Skill Survey, New Analysis and
Lessons Learned, DfES Research Report, NALL1
5 Green F, Mayhew K, Molloy E (2003), Employer Perspectives Survey

22 Institute for Employment Studies

 enhancing company survival. For instance Reid1 suggested that a
more skilled UK workforce was related to a greater commercial
orientation and strategic awareness and propensity to innovate to
retain competitive advantage. In the US, Bates (1990)2 found that
higher qualification levels were related to improved access to
finance and increasing probability of business survival. Bosworth
(2004) has cautioned against too simple an interpretation of
survival studies as they do not account for the different life cycle
stage at which any firm will be.

An OECD study looked at innovation in UK SMEs and found that

higher qualification levels of both managers and staff boosted
innovation.3 Higher training expenditure per employee was also
associated with higher technological complexity and originality.

Perhaps some of the most influential work in this area has focused
on the investment in skills and training and the association
between skills and productivity. This relationship was at the heart
of a number of well known studies by the National Institute for
Economic and Social Research (NIESR). Through a series of
‘matched plant’ studies4 the impact of workforce skills and
development on productivity was considered alongside a range of
other factors such as investment in capital equipment and
maintenance practices. The studies have compared UK businesses
with similar firms in competitor countries within a variety of
sectors including engineering, food, clothing, chemical and
furniture manufacture and the hotel sector. A clear connection
between higher skills and higher productivity has been identified
particularly at the intermediate skills level. All the studies found
that the higher average levels of labour productivity in firms in
continental Europe were closely related to the greater skills and
knowledge of their workforces, especially intermediate skills.
Within manufacturing, lower skills levels in the UK were found to
have a negative effect directly on labour productivity and on the
types of machinery chosen, the ways in which machinery was
modified in line with particular needs, the smoothness of
machinery running and the introduction of new technology. The
proportion of employees holding a relevant vocational
qualification at the intermediate level in these establishments in
the UK was well below that in Europe. A study of the hotels sector
suggested similar lower skills and productivity in services.

1 Reid G C (2000), The Development and Survival of New Small Businesses.

Centre for Research into Industry, Enterprise, Finance and the Firm,
St Andrews University
2 In Bosworth forthcoming op.cit.
3 Albaladejo M, Romijn H (2001), Determinants of Innovation Capability
in Small UK Firms, ECIS working paper No. 00.13
4 See, for example, Keep E, Mayhew K, Corney M (2002), op.cit.

Skills Pay: the contribution of skills to business success 23

 A more recent study returned to the automotive sector to discover
whether the findings from the original NIESR studies had moved
on.1 They found that the UK had made gains in reducing
inventory and reject rates but value added per employee was still
15 to 25 per cent higher in Germany. The study concluded that
investment in capital equipment, human capital and R&D spend
remained higher in Germany and there were still significant
differences in qualification levels.

The NIESR reviews also noted that there are specific skills gaps
compared to nation competitors. Britain produced only a quarter
as many skilled craft employees as France and Germany
(Steedman, Mason and Wagner, 1991),2 and although Britain did
somewhat better at higher levels, it had no national equivalent to
the German ‘Meister’ qualifications for first line supervisors with
resultant impact on capability. These problems of education were
seen to be aggravated by similar gaps in training, with relatively
few British firms having a feasible strategy to upgrade foreman
capability.

NIESR3 have been able to break down the productivity gap into
component parts to establish how much of an influence these
factors have on productivity differences between the UK and its
competitors. They suggest that most of the productivity gap
between UK and Europe is accounted for by differences in the
amount of investment in physical capital and skills. Indeed,
NIESR estimate that as much as one-fifth of the productivity gap
between the UK and Germany is a result of the UK’s relatively
poorly skilled workforce, which was highlighted earlier.

There is evidence that skill levels are associated with innovation

performance. Using US data, Hall4 argues that R&D spend is
associated with higher market valuation. Others have focused on
the relationship between the skills of the workforce and the ability
to absorb and benefit from new technologies.5

Altogether, the evidence supports our hypothesis that high skills

are related to high performance and low skills to low performance.

1 Mason G, Wagner K (2002), Skills, Performance and New Technologies in

the British and German Automotive Components Industries, DfES
2 Steedman H, Mason G, Wagner K (1991), Intermediate Skills in
Workplace; Deployment, Standards and Supply in Britain, France and
Germany, National Institute Economic Research No. 136
3 O’Mahoney M, De Boer (2002), Britain’s Relative Productivity
Performance, updates to 1999, NIESR, Final report to the DTI
4 Hall B H (1995), ‘The Stock Market Valuation of RD Investment
during the 1990s’, American Economic Review, Papers and Proceedings,
Vol. 83, No. 2
5 Eg Solo (1966), Amsden (1989), from Bosworth (forthcoming) op.cit.

24 Institute for Employment Studies

Figure 8: Labour productivity and training in British industries
log(Value Added per head)

4
Labour Productivity

1
0 .1 .2 .3 .4
proportion training last 4 wks

Source: Dearden, Reed and Van Reenan

The impact of training

If skills are a positive influence, then it might also be expected that

skill development ie ongoing investment in training, should also
be associated with performance outcomes. This is unlikely to be a
simple relationship as training is a complex intervention of
variable duration, complexity and quality. However, if training is
a good thing we might expect relationships between the quantity
and quality of training and performance. Several studies at the
level of the firm have highlighted the performance benefits
associated with increasing training activity, the type of training
provided and the depth. For instance:

Increasing activity

Several earlier US studies1 compared training investment to

subjective measures of productivity. Although they have tended
to find positive associations there are clearly methodological
weaknesses in these analyses. Dearden, Reed and Van Reenen2
analysed the impact of training on performance for a variety of

1 Bartel A P (1995), ‘Training, Wage Growth and Job Performance:

Evidence from a Company Database’, Journal of Labor Economics, 13, 3;
Barron J M, Black D A, Loewenstein M A (1989), ‘Job Matching and
on the Job Training’, Journal of Labor Economics, 7. 1
2 Dearden et al. (2000), Who Gains When Workers Train? IFS

Skills Pay: the contribution of skills to business success 25

 measures including value-added output, profits and wages for a
group of British industries between 1983 and 1996. They found
connections between higher training and higher labour product-
ivity across a number of sectors. In essence, manufacturing firms
undertaking training were found to be more productive, to have
higher capital intensity, to conduct more research and develop-
ment and have a more highly qualified workforce (see Figure 8).
They concluded that the effects of training on wages are only
about half the size of the effects on industrial productivity and
that it is misleading to ignore the pay-off firms take in higher
profits from training. For instance, raising the proportion of
workers trained in an industry by five percentage points (say,
from the average of ten per cent to 15 per cent) was associated
with a four per cent increase in value added per worker and a 1.6
per cent increase in wages. They note that this level of increase has
also been found by other researchers eg Blundell et al. (1996)1 and
Booth (1991).2

In a broad review of the literature, Keep et al. 20023 report a UK

study of management training (Amos et al., 1997) which explored
the relationship between investment in education, training and
development and various business outcomes. A relationship was
found between overall investment and a range of outcome
indicators but not for a number of specific training and
development measures individually. A possible explanation for
the relatively weak association was the absence of a strategic
association between training and development policy and business
strategy which others have found to be important.4

The research has been criticised by some eg Keep, Mayhew and

Corney, 2002 for only covering manufacturing, looking at gains to
sectors rather than individual firms and focusing on training
quantity rather than quality.

Type of training

Lynch and Black (1995)5 in the US, examined the impact of

training in terms of the number of workers being trained, the type
of training and how it was delivered (eg off the job and/or out of
office hours) on company productivity. They found that in

1 op.cit.
2 Booth A (1991), ‘Job Related Training; Who Receives it and What is it
Worth?’, Oxford Bulletin of Economics and Statistics, 53, 3
3 op.cit.
4 Thomson A, Storey J, Mabey C, Gray C, Farmer E, Thomson R (1997),
A Portrait of Management Development, OU business school; Mabey C,
Thomson A (2001), The Learning Manager: A Survey of Management
Attitudes to Training and Development, London: Institute of Management
5 Lynch L, Black S (1995), op.cit.

26 Institute for Employment Studies

 manufacturing, greater productivity improvements were achieved
when more training was undertaken off the job. In contrast,
specific types of training were more important in the service
sector; in particular training in IT and computing skills was
associated with higher productivity gains. Bishop (1994)1 noted
that in the US on-the-job training from a previous employer raises
productivity by 9.5 per cent but had no lasting effect whereas off
the job training raised productivity by 16 per cent and was longer
lasting. Other studies suggested that generic training was likely to
produce greater returns than firm-specific training (eg Black and
Lynch, 1996).2 The premia to computing training was also
confirmed by Green (1999).3

Barrett and O’Connell in 19984 and in 20015 used a firm level

dataset to explore the link between general and specific training
and then went on to review a number of studies examining the
business benefits of continuing vocational training and organisa-
tional performance. They, like Lynch and Black (above) also
highlight the importance of the type of training. They report that
in many studies continuing vocational training is found to have a
positive influence on productivity and wages. Furthermore, it
seems that this type of training has the greatest impact when it is
specific to the firm providing it. General training, which may
provide transferable skills and/or knowledge relevant to many
firms, tends to have less impact on firm performance. This is
interesting in comparison to the Lynch and Black study which
found off-the-job training, which might be assumed to be less firm
specific than on-the-job, to have greater impact on productivity. It
may be that off-the-job training tends to also be more
comprehensive and thorough.

Depth and consistency of training

Cosh, Duncan and Hughes (1998)6 used a panel data set of 1,600
UK firms tracked between 1987 and 1995. They concluded that
training makes little difference to business survival in addition to
existing profit, level of maturity and past innovation. There was a

1 Bishop J (1994), The Incidence of and Pay-off to Employer Training: A

Review of the Literature with Recommendations for Policy, Cornell
2 Black S, Lynch L (1996), ‘Human Capital Investments and
Productivity’, American Economic Review, Vol. 86, No. 2
3 Green F (1999), The Market Value of Generic Skills, Paper 12, NSTF
4 Barrett A, O’Connell P J (1998), Does Training Generally Work; the
Returns to In-Company Training, Centre for Economic Policy Research
(CEPR) Paper No 1879, London
5 op.cit.
6 Cosh A, Duncan J, Hughes A (1998), Investment in Training and Small
Firm Growth and Survival; an Empirical Analysis for the UK 1987-1996,
DfEE Research Brief No. 36

Skills Pay: the contribution of skills to business success 27

 relationship between business growth and training between 1987
and 1990 but not in the later period. Similarly, larger firms
showed a link between training and profitability in the earlier
period but not later.

In a follow up study in 2000, Cosh, Hughes and Weeks1 explored

the impact of increasing investment in skills and training on
business success in terms of employment growth, assuming that
successful establishments were those most likely to be expanding.
They found a strong significant effect of training on employment
growth for small firms which were persistent trainers but not for
those who were ad hoc trainers. They also established a positive
relationship between sales growth and training but not at such
significant levels. In a more recent study in 2003, examining the
impact of training on business performance, and extending their
earlier work, Cosh et al.2 found that training was viewed
positively by business, especially larger firms. Indeed, half the
businesses studied felt that the training they had provided had
increased their turnover and profit margin. Three quarters
thought that it had improved their labour productivity.
Furthermore, the research found a significant link between the
intensity of training and performance: training spend per firm was
significantly related to changes in profit margins (but training
spend per employee was much less so). There was no relationship
between productivity growth and training intensity.

Kitching and Blackburn (2002)3 found that higher intensities of

training were associated with employment growth and sales
growth in UK SMEs, however they did not find a relationship
with profit.

Green (1997)4 in a review of the literature urges caution on

interpretation of the results:

z Although many studies find positive effects on productivity,

they do not assess the costs of training and therefore cannot
comment on the rate of return.
z Problems arise because training is an endogenous variable ie
whether or not a firm trains its employees is likely to depend
on certain other characteristics of the company which may
themselves be related to productivity.

1 Cosh, Hughes and Weeks (2000), The Relationship between Training and
Employment in SMEs, DfEE Research Report RR245
2 Cosh A, Hughes A, Bullock A, Potton M (2003), The Relationship
between Training and Business Performance, RR 454 DfES
3 Kitching J, Blackburn R (2002), The Nature of Training and Motivation to
Train in Small Businesses, DfES
4 Green F (1997), Review of Information on Benefits of Training for
Employers, DfEE Research Report No. 7

28 Institute for Employment Studies

 z Causality is frequently not proven and may be reversed ie
more profitable firms train more.
z Companies do not just undertake a training initiative. A
number of other internal and external changes will be taking
place simultaneously with the training.
z There is differing understanding as to what constitutes training.
z The measures used tend to be crude and may only pick up
incidence rather than amount of time spent.

To summarise:

z For most forms of qualification, individuals benefit in earnings

and other employment outcomes.
z The evidence is that the benefits to the firm exceed the wage
costs paid back to the individual.
z High performing firms employ better educated people than
low performers.
z Better educated workforces are associated with higher
productivity and other organisational outcomes.
z Matched plant research has suggested skills are an important
component of the skills gap with competitor nations.
z Higher levels of training are associated with positive business
benefits in several studies but not all.
z There is mixed evidence regarding the kinds of training and
their link to business outcomes.
z Evidence suggests consistent trainers achieve greater returns.

Embedding skills within the wider context of HR practice

We now turn to studies which have taken a rather different
perspective. There is a body of literature which, although not
focusing on skills per se, is of relevance to our skills and training
debate because it highlights a range of factors which appear to
influence outcomes. The literature begins to paint a picture of
skills as part of a wider approach to human capital and its
contribution to organisations; it shows that the effects of skills or
training are not always realised in isolation.

There has always been some literature that has explored the
impact of skills or training within a broader context such as
training and development strategy. Amongst these have been
various studies that evaluated the impact of the Investors in
People Initiative. One such study was conducted by the
Hambledon Group in 2000.1 This found a better performance

1 Hambledon Group (2000), Corporate Financial Performance Observed

Before and After Investors in People Recognition, DfEE, 222

Skills Pay: the contribution of skills to business success 29

 amongst those employers with IiP than without it, in a four year
period, on a range of measures, including return on sales, growth
in net worth, return on capital, return on assets, salary levels,
growth in export performance. Although the research cannot
prove that the achievement of IiP has caused the improved
performance, it nevertheless is an interesting association. A
number of other evaluations of IiP have also found a positive
relationship between having IiP and a range of business benefits
reported by employers, including improved service quality,
increased turnover, and higher profitability.1 Whilst there can be
problems of subjectivity and possible personal bias with studies
reliant on self reporting of performance, a number of studies have
reported similar findings.

More recent work on management development has also

highlighted the importance of context. In one study of European
firms, organisational performance correlated significantly with the
degree to which line managers believed management development
demonstrated attributes of best practice (Mabey and Gooderhan,
20032).

The NIESR studies already mentioned have also played a key role
in highlighting the complexity of achieving higher performance
due to the interplay of factors and the importance of achieving the
right compliment of different business practices. It is not a simple
case of selective policy borrowing and/or implementing a single
high skills strategy. Indeed, they have shown that for substantial
improvements in productivity to occur, investment in skills is not
sufficient in itself but needs to be contextualised into the business.
For instance, new investments in skills and training need to be
complemented by effective management practices alongside a
clear market strategy and higher levels of investment in new
capital equipment and product and service innovation. It is
important within this context to understand how skill needs are
derived and how they are set within a broader business strategy.
They will be both determined, and refined, by the nature of the
product and/or service market strategy, organisation of work and
the production and delivery process. The importance of this is
examined further in the next section.

High performance work systems

Increasingly there has been a move away from straightforward

assessments of skill or training and business performance and

1 Hillage J, Moralee J (1996), The Return on Investors, IES report 314,

Tamkin P, Hillage J, Cummings J, Bates P, Barber L, Tackey N, (2000),
Doing Business Better: the Long Term Impact of Investors in People,
FOCUS central London
2 Mabey C, Gooderhan P N, (2003), The Impact of Management
Development on the Organisational Performance of European Firms,
seventh conference on HRM

30 Institute for Employment Studies

 towards an exploration of much more complex relationships
where, attention to skills is seen as one element of a strategic
approach towards managing people. (Indeed several earlier
studies investigating skills have noted a relationship between
levels of training and other HR practices1.) Such studies have
suggested that the full benefits of workforce development and
raising skill levels are only realised when bundled together within
a wider array or package of workplace changes, re-organisation
and human resources practices. It is the bundling of a critical mass
of measures and the implementation of these measures in
conjunction with one another that increases the magnitude of the
effect.2 This body of literature can be seen to have developed in
parallel with the literature on skills, frequently focusing on HR
systems in general rather than skills or training in particular. It
has thus examined the role of skills investment as part of a wider
system of management practices and sought to draw out how
these practices critically link with, and ultimately impact on,
performance. These systems have been given varying terms,
ranging from good people management systems, through high
performance working and high involvement management to
strategic HRM. For simplicity we refer to them as HPWP (high
performance working practices). Much of the earlier work has
taken place in the US and has focused on the identification of HR
practices that might contribute to strategic advantage eg Pfeffer,
1994; Huselid, 1995; Huselid and Becker, 1996.3

Whilst there may be disagreement about what combination of

practices constitutes a ‘perfect system’ and how this should be
defined, there is a shared understanding about the general effects.
Indeed, this evidence commonly highlights positive improvements
to organisational performance. For instance, Wood, de Menezes
and Lasaosa4 using the UK WERS (Workplace Employee Relations
Survey) data, found that the implementation of high involvement

1 eg Lynch L M, Black S E (1995), Beyond the Incidence of Training:

Evidence from a National Employers Survey, NBER Working Paper
W5231 and Kitching and Blackburn op.cit.
2 Becker B E, Huselid M A (1998), ‘High Performance Work Systems and
Performance: a Synthesis of Research and Managerial Implications
Research’ Personnel and Human Resources Journal, 16, (1), pp.53-101
3 Pfeffer J (1994), Competitive Advantage through People, Harvard
University Press; Huselid M A (1995), ‘The Impact of Human
Resource Management Practices on Turnover, Productivity and
Corporate Financial Performance’ Academy of Management Journal
44:1; Huselid M A, and Becker B E (1996), ‘Methodological Issues in
Cross-sectional and Panel Estimates of the Human Resource-Firm
Performance Link’. Industrial Relations, 35
4 Wood S, de Menezes L, Lasaosa A (2001), ‘Quality Time’, Centrepiece,
Spring

Skills Pay: the contribution of skills to business success 31

 management raised the rate of productivity growth. Patterson et al.1
(1998) found that nearly a fifth of variations in productivity and
profitability were associated with differences in HR practices.
Guest2 also identified a link between high commitment practices
and financial performance although a later study using WERS data,
(Guest, Michie, Conway and Sheehan, 20033) failed to find a link
with profitability once the previous year’s profit was controlled for.
However, the consensus from these studies was that high
performance HR systems had economic benefits for firms’ financial
performance.

High Performance Working can be considered as an emerging

organisational model4 and there is still a lively debate in the
literature between competing perspectives of how it operates in
practice. One of these is the differences between a contingent or
universalist model of HRM (see Guest et al. 20045). A universalist
perspective argues that there are a number of HR practices which
if adopted will always result in superior performance, whatever
the context (ie some have concluded that it is the intensity with
which HR practices are adopted that has greater effect on
performance than organisational fit — Huselid and Becker 19976),
whereas the contingency model argues that a distinct combination
will work only under specified conditions or with specific groups
of staff. Complementing the contingency view are other concepts
such as the resource based view of the firm (Barney 19917), which
argues that resources internal to the organisation are a source of
competitive advantage to the extent that they are rare, inimitable
and difficult to substitute. HPWP have two attributes associated
with inimitability –- path dependency (developed over time rather
than acquired off the shelf) and causal ambiguity (easily
understood in concept but requiring subtle and numerous
interrelationships which are less easy to see in practice — Collins

1 Patterson M, West M A, Lawthom R & Nickell S (1998), Impact of

People Management Practices on Business Performance, London: IPD
2 Guest D (2000) The Future of Work, CIPD
3 Guest D, Michie J, Conway N and Sheehan M, (2003) ‘Human
Resource Management and Corporate Performance in the UK’, British
Journal of Industrial Relations, Vol. 41, June
4 Strategy Unit (2001), In Demand: Adult Skills in the 21st Century — Part
1, Cabinet Office, November
5 Guest D, Conway N, Dewe P (2004), ‘Using Sequential Tree Analysis
to Search for ‘Bundles’ of HR Practices’, Human Resources Management
Journal, 14:1
6 Becker B E, Huselid M A, Pickus P S, and Spratt M, ‘HR as a Source of
Shareholder Value: Research and Recommendations’, Human Resource
Management Journal, 31 (1), Spring
7 Barney J (1991), ‘Firm Resources and Sustained Competitive
Advantage’, Journal of Management, Vol. 17

32 Institute for Employment Studies

 and Montgomery, 19951). This perspective can be seen to be
compatible with the concept of core competence (Hamal and
Prahaled, 19942) ie what are the unique abilities that differentiate
an organisation from its competitors.

There is some evidence in support of the contingency views ie that

it is not practices per se that make the difference but the degree to
which they align with each other to create meaningful ‘bundles’ of
practice (eg Huselid, Jackson and Schuler, 19973). A recent study of
HPWP in the Netherlands (Den Hartog and Verburg, 20044) found
a bundle of practices labelled ‘employee skill and direction’, were
positively related to perceptions of employees’ willingness to go
beyond contract, negatively to employee absence, and positively
to the perceived economic performance of the firm.

Reviews of such ‘bundles’ of practices have sought to find which

practices are most often included. It has been argued5 that practices
relating to employee development and training; participation and
empowerment; information sharing; and compensation systems,
are most often combined. An evolving understanding of high
performance work systems suggests that they generally focus on
high skill requirements, discretion at work, team working and
incentives enhancing organisational commitment (Batt, 2002;
Delaney and Huselid, 19966) Bosworth (forthcoming7) refers to a
meta analysis by King (1995) which considered the impact of three
specific working practices: training, compensation linked to
worker or firm performance, and employee involvement in

1 Huselid M A, Becker B E (1997), The Impact of High Performance Work

Systems, Implementation Effectiveness and Alignment with Strategy on
Shareholder Wealth, Academy of Management Meetings HR Division
2 Hamal G, Prahaled C (1994), Competing for the Future, Harvard
Business School Press
3 Huselid M A, Jackson S E and Schuler R S (1997), ‘Technical
and Strategic Human Resource Management Effectiveness as
Determinants of Firm Performance’, Academy of Management
Journal, 40:1
4 Den Hartog D N, Verburg RM (2004), ‘High Performance Work
Systems, Organisational Culture and Firm Effectiveness’, Human
Resources Management Journal, Vol. 14, No. 1
5 Bosalie and Dietz (2003), ‘Commonalties and Contradictions in
Research on Human Resource Management and Performance’, the
Academy of Management conference, Seattle, August
6 Batt R (2002), ‘Managing Customer Services: Human Resource
Practices, Quit Rates and Sales Growth’ Academy of Management
Journal 45: 3; Delaney J T, Huselid M A (1996), The impact of Human
Resource Management Practices on Perceptions of Organisational
Performance, Academy of Management Journal 39:4
7 Bosworth D (forthcoming), The Determinants of Enterprise Performance,
Manchester University Press

Skills Pay: the contribution of skills to business success 33

 decision making, across a number of predominately US studies.
King concluded that all three practices seemed to improve labour
productivity and were complementary in their effects — systems
of interrelated practices had greater impact than the sum of
practices adopted independently. Table 3 is reproduced from
Bosworth (forthcoming). Training is sometimes not included in
the practices measured and, where it is, it is often bundled with
other HR practices in searching for effects and therefore it is
difficult to separate out contribution.

Huselid1 maintains a very comprehensive list of recent studies

linking HRM systems with firm performance, and the table is
reproduced at the end of this paper.

A recent study published by the CIPD2 examines the ways in

which HR practices may impact on performance. The authors seek
to move the debate on, from whether HR practices do have an
impact, to understanding how they do so. The researchers assert
that for people to perform above minimal requirements they must:

z have the ability, ie the requisite knowledge and skills

z be motivated to work well
z be given the opportunity to deploy their skills and contribute.

HR practices act to turn these three elements into action with

managers having a key role in implementing policy and practice.
The importance of employee attitude to business performance is
another layer of complexity in seeking to understand the skills-
performance link. The body of research on engagement has shown
that employee motivation is a key intervening variable in
producing higher performance.3

Whereas some have sought to align practices into internally

coherent bundles, others have looked to external alignment with
business strategy. Various studies have failed to find support for
the external fit argument (Huselid, 1995; Huselid and Becker 1995,
1996)4 whilst MacDuffie (1995)1 found some evidence of positive

1 Huselid M, internet page http://www.rci.rutgers.edu/~huselid

2 Purcell J, Kinnie N, Hutchinson S, Rayton B, Swart J (2003), Under–
standing the People and Performance Link: Unlocking the Black Box CIPD
3 Barber L, Hayday S, Bevan S (1999), From People to Profits, IES Report
355, Institute for Employment Studies; Rucci A J, Kirm S P, Quinn R T
(1998), ‘The Employee-Customer-Profit Chain at Sears’, Harvard
Business Review, January-February
4 Huselid M A, Becker B E (1996), ‘Methodological Issues in Cross-
Sectional and Panel Estimates of the Human Resource-Firm
Performance Link’, Industrial Relations, 35; Huselid M A (1995), ‘The
Impact of Human Resource Management Practices on Turnover,
Productivity and Corporate Financial Performance’, Academy of
Management Journal, 38

34 Institute for Employment Studies

 results related to fit with business strategy. In a review of British
aerospace companies Thompson (2000)2 found that it was both the
number of HR practices adopted and the percentage of the
workforce covered, that was a differentiating factor in terms of
performance. He also found that establishments with high skill
densities use HPWP more widely which may be evidence of ‘fit’.
Those firms which were following a high skill, high HPWP route
also spent a high percentage of their non-management training
budget on behavioural skills training. There is evidence that high
skill strategies are particularly important at times of change and
risk3 and that they are associated with a higher qualified
management team.

The research on high performance work practices and systems is

not without problems of interpretation. One of the difficulties
with the body of research is that there has been relatively little
consistency with regard to the practices measured, and therefore
some confusion over what HR practices are the important ones in
raising performance. There has also been debate on how practices
should be combined4 with suggestions that practices might be
additive (combinations may produce additional and non
overlapping benefits), or substitutable (ie either on or off the job
training will do and there may be no additional benefits in both),
synergistic (more than the sum of the parts) or negatively
synergistic (where certain combinations may be worse than no
practice at all). It has been suggested that the positive results
associated with much of the research on individual HR practices
may be due to the underlying HR systems.5

Even where the focus was on more systematic elements of HR eg

employee involvement, the exclusion of other elements affecting
performance such as training, appraisal or compensation may lead
to rather narrow conclusions. It is also not always clear when an
HR policy or practice becomes a system or a bundle (eg Bosalie
and Dietz, 20036). For example, training and development might

1 MacDuffie J P (1995), ‘Human Resource Bundles and Manufacturing

Performance: organisational logic and flexible production systems in
the world auto industry’, Industrial and labor relations review 48:2
2 Thompson M (2000), The Competitiveness Challenge: The Bottom Line
Benefits of Strategic Human Resources, DTI
3 Bosworth (2004), op.cit., Bosworth D L (2001) Goals, Strategies and
Targets: Empirical Evidence from the Employer’s Skill Survey. Report to
the Council for Excellence in Management and Leadership, UMIST
4 Delery J E (1998), ‘Issues of Fit in Strategic Human Resource
Management: Implications for Research’, Human Resource Management
Review 8:3
5 Becker B E, Huselid M A (1998), op.cit.
6 op.cit.

Skills Pay: the contribution of skills to business success 35

Table 3: Summary of HPWP Literature

Type/ Performance
Author (date) coverage Work practice measure Results
Bartel (1994) All industries Training Net sale per Productivity increased by 19% over
employee 3 years in the firms with training
Holzer, et al. Michigan Training Scrap rate A doubling of training resulted in a
(1993) manufacturing 7% decrease in the scrap rate
Bishop (1994) Literature Training Wage Wages of trainees rose between 0
review and 12%
Kruse (1993) Profit sharing Various Resulted in 3-5% increase in
productivity
Kaufman (1992) Manufacturing Gain sharing Relative labour 15% increase in productivity over 3
productivity years
Cooke (1994) Michigan Profit/gain sharing Value added per 5-25% increase in VA in
manufacturing teams employee establishments with incentive pay
Levine and Literature Participation in Various Majority of studies showed that
Tyson (1990) review decision making participation was positively
correlated with productivity
Macy and Izumi Meta-analysis Various: job design, Various Changes in work practices were
(1993) team work, associated with productivity
training, improvements of up to 40%
communication,etc.
Kelly and Emison Metalworking Decentralised Machining time per Production time decreased with
(1995) and machinery responsibility, unit of output worker participation
problem-solving
teams
Ichniowski, et al. Steel Team incentives, Up-time, prime Changes in work practices
(1994) training, yield associated with productivity gains of
communication, up to 40%
etc.
Arthur (1994) Steel Employee Labour hours per Lines with most progressive
involvement, team ton practices had 7% higher up-time
working, others
MacDuffie Automobiles System: teams, Standardised “Commitment” system had 12%
(1995) training, rotation, production time per higher productivity
others vehicle
Cutcher- Components System: problem Labour hours per Non-traditional work groups had
Gershenfeld manufacturing solving, worker standardised task 17% higher productivity
(1991) autonomy, others
Huselid (1995) All industries System: skills Sales per worker System associated with 16% higher
motivation, others productivity
Ichniowski Manufacturing System: job design, Sales per worker System associated with higher
(1990) training, others productivity
Hendricks and All industries Quality award Daily stock price Quality award announcement
Singhai (1994) recipient coincided with 0.6% jump in share
price
Easton and All industries System: training, Share price, Firms implementing the system had
Jarrell (1994) team work, accounting profit 20% higher share price after 6 years
organisational
structure, others

Source: Kling (1995); from Bosworth (forthcoming)

36 Institute for Employment Studies

 be considered a single practice but may be expressed through
management development, internal labour markets, succession
planning processes, or training. These kinds of practices have also
appeared as a development bundle. Some researchers have
focused on related concepts such as a high involvement system
Lawler et al., 19951) or a high commitment system (Wood and
Albanese, 19952).

There is also an absence of consensus over which aspects of firm

performance it is that work practices are proposed to affect3 with
measures ranging from financial performance, productivity,
employee commitment, absenteeism and customer satisfaction.
Some studies have looked at hard data, others have focused on
managerial perceptions of performance.

In the UK, studies using the WERS dataset have arrived at

different conclusions regarding the penetration of the high
performance model, ranging from two per cent to 26 per cent of
companies (see Keep et al. 20024). Other datasets have suggested
lower results; Guest et al. 2000 found only one per cent of
companies in the Future of Work survey use three quarters of 18
progressive practices. Thompson (2000) found generally higher
results for aerospace with some 20 per cent of UK aerospace
establishments using high performance HR practices to a
significant degree. This would indicate that despite strong
evidence of positive effects, employers are either not necessarily
convinced that adoption of such processes will work for them or
find the process of doing so too difficult. It is also likely that there
are sectoral variations in uptake.

Despite these methodological questions and concerns, the weight

of evidence and the consistency of the general direction of results
— even if not the finer detail — presents a strong and persuasive
case that skills embedded within other HR practices do make a
difference to business performance. The critical value of the
research in high performance work systems is in highlighting the
importance of considering investment in skills and workforce
development in the context of the broader company structure,
practices and company strategy. It is important to see skills as one
input, which in combination with a number of other inputs, can
make a positive contribution to organisational performance.

1 Lawler F N, Mohrman S, Ledford G (1995), Creating High Performance

Organisations: Practices and Results of Employee Involvement and Total
Quality Management in the Fortune 1,000 Companies, San Franciso,
Jossey Bass
2 Wood S, Albanesse M T (1995), ‘Can We Speak of Human Resource
Management on the Shop Floor?’ Journal of Management Studies, 32:2
3 Den Hartog D N, Verburg R M (2004), op.cit.
4 Keep E, Mayhew K, Corney M (2002), op.cit.

Skills Pay: the contribution of skills to business success 37

 To summarise:

z Several studies have linked IiP accreditation to improved

business performance.
z The HPWP literature generally finds a positive association
between HR practices and firm performance.
z The impact of training and development within measures of
HR practices is not always clear.
z There are ongoing debates regarding the importance of the
intensity of HR practice adoption and the need to align
practices with the organisations business or product strategy.
z HR practices would appear to affect staff motivation as well as
skill levels.
z Despite the evidence of beneficial effects, the uptake of such
practices in the UK has been relatively low.

Other intervening factors

Our final block of literature is included because it has taken issue
with the skills-performance link. This literature, on examining
other factors which may affect the skills-performance link, has
been highly influential in putting skills into context and
questioning the orthodoxy that says increasing skills will improve
business performance. The research finds common ground with
some of the literature on HPWP (that has focused on the
importance of contingency and places skills very much within the
context of the business strategy of the organisation).

Low skill equilibrium

The phrase ‘low skill equilibrium’ was first coined by Finegold

and Soskice (1988).1 They argued that Britain was trapped in a low
skill equilibrium ‘in which the majority of enterprises staffed by poorly
trained managers and workers produce low quality goods and services’.
Finegold and Soskice used the term to capture the concept of a
self-reinforcing system which acts to stifle the demand for
improvements in skill levels. Others have developed the concept
(eg Keep and Mayhew 19992) to argue that it is a major inhibitor of
UK productivity and needs to be considered in any discussion of
the UK and skills. This might explain why so few organisations
adopt HPWP and why demand for skills is low in the UK. It has
been suggested that the concept of an equilibrium might be better

1 Finegold D, Soskice D (1988), ‘The Failure of British Training; Analysis

and Prescription’, Oxford Review of Economic Policy, Vol. 4, No. 3
2 Keep E, Mayhew K (1999), ‘The Assessment: Knowledge, Skills and
Competitiveness’, Oxford Review of Economic Policy, Vol. 15, No. 1

38 Institute for Employment Studies

 rephrased as a trajectory1 to better capture the dynamic nature of
the relationship. The essence of a low or high skills trajectory is
that the goals and product market strategy of the company,
product quality, HRM systems, work organisation, work design,
management skills and skill demands are intimately bound
together and interrelated. As the work of Finegold and Soskice in
1988 has shown, and more recently Kitching and Blackburn in
2002,2 the demand for different skills and the drivers behind new
training needs are closely related to business strategy. Any
attempts to upskill and move an organisation up-market will
depend on firm modernisation, innovation and new technologies
and products, organisational change and the re-organisation of
work. This line of thinking might be seen to have its antecedents
in much earlier UK work eg Green et al.3 who have also found
evidence that increases in skill requirements were more likely to
be associated with technological change and the NIESR case
studies with their recognition of the role of contextual factors. This
evidence thus encourages a broader thinking about the route to
achieving higher skills and how this approach might sit within,
and be complemented by, the wider production and people
management process.

Critical role of managers in organisational

performance

Managers are a critically important group of staff when it comes

to looking at the link between skills and performance and there is
evidence that they are both part of the problem and part of the
solution. One of the reasons highlighted for the performance
shortfall with the UK is believed to be a function of a skills deficit
amongst UK managers. Porter and Ketels (2003)4 question that the
quality of UK management is the most important determinant of
economic performance but also goes on to note that UK firms are
often slow to adopt modern management practices such as Total
Quality Management, and even once they are implemented, they
then achieve lower returns than other countries. Such a situation
may be explained by a skill deficiency and by the inadequacy of
management training. More detailed evidence from other studies
reinforces the view that there may be qualitative shortfalls in
management skills, for example some recent surveys on
perceptions of management quality have found high levels of

1 Wilson R, Hogarth T (2003), Tackling the Low Skills Equilibrium: A

Review of Issues and some New Evidence, November, DTI Skills Research
Programme
2 Kitching and Blackburn (2002), op.cit.
3 Green F, Machin S, Wilkinson D (1996), An Analysis of Workplace
Training and Skill Shortages, DfEE, Research Studies RS7
4 Porter M E, Ketels C H M (2003), UK Competitiveness: Moving to the
Next Stage, DTI economics paper No. 3

Skills Pay: the contribution of skills to business success 39

 dissatisfaction with the quality of leadership within organisations
as judged by other managers.1

Keep and Westwood (2003)2 use wider business arguments, for

example the low business gains from business process re-
engineering programmes and mergers, to argue that there is a lack
of managerial skill. They also point out these failures are by no
means unique to the UK.

Other studies have critically emphasised the important role

played by managers in achieving productivity and performance
improvements within high performance work systems. The
decisions and actions managers take are undoubtedly vital to the
nature of working practices in place, the organisational structure
and strategies, the degree of innovation and R&D, the
organisation and management of the workforce and the mix of
skills demanded, and hence the overall success of the business.
Studies have shown that firms with a more qualified management
workforce and a dedicated programme of management
development, pursue more sophisticated and higher quality
market strategies and achieve greater profits. For example
Bosworth, 1996 found a positive relationship between the
employment of professional scientists and engineers, within the
company and at board level, and business performance. Other
studies have also found a link between the skill levels of senior
managers and business performance. Those employing senior
managers with degree level qualifications outperformed those
who did not, (with greatest benefits where the manager possessed
an accountancy qualification).

‘The performance gap between the unqualified and qualified is so stark

that this factor alone may go a long way to explain the poor
performance of British industry when compared with American,
French or German industry. The more so when we recall that until 50
years ago few British TEs (Top Executive) had academic qualifications
of any kind, whereas French and German TEs have been outstandingly
well qualified certainly since the 19th Century.’ (Barry, quoted in
Bosworth, 1999)

This finding is also supported by Woods (1992)3 who suggested

that organisations managed by Chief Executives with a degree
outperform those without, regardless of the degree discipline.

1 Horne M, Stedman Jones D (2001), Leadership the Challenge for All? The
Institute of Management and Charlesworth K, Cook P, Crozier G
(2003), Leading Changing in the Public Sector: Making the Difference,
Chartered Management Institute
2 Keep E, Westwood A (2003), Can the UK Learn to Manage? The Work
Foundation.
3 Woods W J (1992), ‘Who is Running British Manufacturing?’
Industrial Management and Data Systems, Vol. 92

40 Institute for Employment Studies

 Cockerill (1993)1 tried to link management capability with
organisational performance using a framework of seven
competencies and found that six of the selected competencies
were positively related to measures of organisation performance.
Overall, the competence of a manager explained about 15 per cent
of unit performance in dynamic, but not stable, environments. A
growing area of interest is the crucial role of the manager in
motivating staff. Rucci et al. (1998)2 analysed of data from 800
stores in the Sears retail group in the US. The data covered
business information, customer and employee attitudes. Causal
pathway modelling was used to unpick the cause and effect
relationships linking employee attitudes, customer attitudes and
business results. Employee attitudes towards the job and attitudes
towards the employer both emerged as key factors associated with
customer attitudes and in turn with business results. The line
manager emerged as a key link in this chain through a critical item
‘how does the way you are treated by those who supervise you influence
your overall attitude about your job?’.

Barber et al. (1999)3 conducted a similar study with nearly 100

stores of a major UK retailer. The data collected spanned 65,000
employees and 25,000 customers. Employee satisfaction and
employee commitment were related to sales increases. There were
also more indirect links to sales through improved staff
attendance and increased customer loyalty (linked with customer
service). The quality of line management as perceived by staff
emerged as an important link in this value chain via its impact on
employee commitment. Most recently, Purcell et al. (2003)4 have
used an in-depth case study approach to try and shed light on the
HRM-performance link in the UK. The case studies in a retail
organisation show strong association between employee attitudes,
employee views on the quality of HR management applied to
them, and store performance. The study also showed that the
number and extent of HR practices was less important than the
effectiveness of their implementation. These studies tend to
support the view of managers as motivators of staff who in turn
produce better business results.

In a cross national study of European managers, relationships

were found between management development activity and
perceived organisational performance. In particular the study
emphasised the importance of strategic fit (the degree to which a
strategic stance is taken by HR), organisational fit (the extent to
which the organisation takes responsibility, sets criteria and takes
a long term view) and perceived congruence (the fit between what

1 Cockerill A P (1993), Validation Study into the High Performance

Managerial Competencies, London Business School
2 Rucci A J, Kirm S P, Quinn R T (1998), op.cit.
3 Barber L, Hayday S, Bevan S (1999), op.cit.
4 op.cit.

Skills Pay: the contribution of skills to business success 41

 organisations promise in terms of management development and
managers’ first hand experience of such policies and activities).
These relationships were much greater than the links between
amount of development, the diversity of development practices
and performance.

To summarise:

z Some have argued that the UK’s poor performance on

productivity may be linked to the adoption of low skill and
low added-value business strategies, any attempts to upskill
must be in the context of appropriate changes in product/
market strategy.
z There is evidence that managers play a key role in
performance with their own skill levels influencing business
strategy and business performance.

Conclusion and implications for action

There is considerable evidence of the value of skills to individuals
and to organisations. This evidence is not perfect and most studies
have been criticised in some way or another: for the sample being
too narrow either sectorally or hierarchically; using perceptions
rather than hard outcome measures; adopting too narrow a set of
outcome measures; failing to collect data on other possible
outcomes; for variability in research design and underlying
philosophy, or perhaps most importantly, for failure to resolve the
thorny question of causality.1 But despite these concerns the
evidence is striking in its weight and consistency and increasing
methodological sophistication. From different theoretical perspec-
tives, using widely different methodologies, and research in
organisational and national contexts, there is a weight of evidence
that acquiring skills makes positive differences to people, to
organisations and to regions and countries. So overall there is a
positive picture, albeit one with many questions unanswered and
uncertainties remaining.

What we also see emerging is a deeper understanding of the ways

in which skills impact, which has shifted from an initial and
straightforward belief that skills improve performance on to an
exploration of a more complex dynamic where skills sit alongside
and are linked to other HR practices, then on to believing skills to
be contextually embedded, and finally to an understanding that
culture and support may attenuate or exaggerate the action of
skills at work. This can be seen to be a journey from relative
simplicity to a growing acknowledgement of the range of other
variables that influence the picture. What is beginning to emerge
is an understanding that skills and their development (through

1 eg Green F (1997), op.cit. and Keep E, Mayhew K, Corney M (2003)

op.cit.

42 Institute for Employment Studies

 education and training) affect performance but so does the way
people are managed and the opportunities organisations provide
to use higher levels of skills. Underlying this complexity we think
there are two key dimensions:

1. the inputs to and deployments of individual capability

2. the partnership between the individual and the firm.

Inputs to and deployments of capability

Training and skills focus respectively on the growth and stock of

human capital but workforce capability also depends on the
degree to which this stock is deployed. The motivation and
engagement of employees, their attitudes to their organisation,
their manager, their colleagues, customers and their job will all
affect their performance. The outcome is what Purcell et al. (2004)
has called discretionary effort. Skills alone are not enough and
neither is enthusiasm, put them both together and you have the
potential for extraordinary performance.

The individual/organisational partnership

The organisation is a partner in the processes by which individual

capital is both developed and deployed. On the development side,
organisations provide the policies and processes by which people
can access the organisation and the different roles within it and
thus apply their skills. Organisations only allow some people to
join them and their resourcing strategy and recruitment processes
act to keep many out. Access encompasses processes which allow
people to participate in the first place and those which determine
contribution over time. Organisational access does not just apply
at recruitment but also to promotion and the opportunity to
contribute at a different level.

Organisations do not only provide access, they also play a critical

role in providing the context within which skills and enthusiasm
are applied: how work is organised, the strategy of the
organisation, the organisational structure, the utilisation of capital
— in short the opportunity for skills and enthusiasm to make a
difference. Skills and enthusiasm are attributes of the individual,
but they can only make a difference when the organisation
provides access to roles and an appropriate context within which
they can be applied.

Putting these two dimensions (figure 9) together we can begin to

understand better how skills fit into a broader concept of
organisational capability and performance. Training and skills are
the growth and stock of individual capability, their deployment is
through engagement and motivation. But individuals acting alone
will not create business success. The organisation also creates the
environment within which individuals act and develop capability,

Skills Pay: the contribution of skills to business success 43

Figure 9: A model of capability
Individual capability

Ability Motivation
eg: skills, training, eg: engagement,
education involvement

Development Deployment

Access Application
eg: resourcing, eg: structure,
recruitment strategy

Organisational action

Source: IES, 2004

by providing access (resourcing appropriately skilled people in

the first place), and in allowing them to continue to develop and
contribute (through internal job markets and ongoing
development). Organisations are also major players in the
deployment of capability through providing the context for
application. No matter how skilled or enthusiastic a workforce, if
they are boxed into repetitive and constrained roles, or if the
organisation is following a misguided business strategy, they will
not be able to display the kind of performance that can really
make a difference. Organisations therefore also provide the
opportunity for skilled and enthusiastic people to apply
themselves, through the jobs they design, the infrastructure they
invest in and the strategies they pursue. The result is a holistic
model of individual and organisational capability.

A model of business performance

High performance working practices can be seen to act on all

areas of the model. HR practices create resourcing policy and
practice, employee development systems and culture, engagement
and reward strategies and job structures etc. (see Figure 10).
Managers and leaders similarly are critical to success because they
are the decision makers at all stages. They resource, develop and
motivate people, design organisations and dictate investment and
strategic direction (see Figure 11).

44 Institute for Employment Studies

Figure 10: The role of HR
Individual capability

Ability Motivation

Performance
management
T&D Pay strategy
Policy and strategy Communication and
Competencies involvement
Development Deployment
Resourcing OD
Workforce planning Diversity
Equal opportunities Mergers and acquisitions
Business and product
market strategy

Access Application

Organisational action

Figure 11: The role of managers

Individual capability

Performance
management
Coaching Appraisal
Mentoring Reward
Staff development Communication support
Development Deployment
Recruitment Job design
Succession planning Managing mergers and
acquisitions
Investment decisions
Business and product/
market strategy

Organisational action

Source: IES, 2004

Skills Pay: the contribution of skills to business success 45

 Implications for research and policy

The model provides a unique attempt to make sense of what we

know already and provides a framework to explore what we don’t
know. There is considerable information about the contribution of
skills and the development of people. We know too that HR
practices appear to make a difference. There are also hints that
motivation is a critical variable and that managers play a key part
in bringing to live HR practices in order to have a positive impact
on employees. Some research has suggested that context is
important - some organisations do not encourage performance,
don’t provide jobs of sufficient size and don’t pursue product
market strategies that emphasise skills. The focus to date has been
on the upper left portion of our capability cake, we know we do
less well than we would like and we know skills are lower than
our competitors — but what of the other portions and how do
they relate together: How does the UK compare to our
competitors across the various elements of the model? Are our
people as enthused as those in other countries? What kind of jobs
do we allow people to do? What strategies do we pursue? How
are the various components of high performance working
practices distributed across the model? What is the contribution of
the various ‘bundles’ of practices to overall impact?

We really do not know enough about these areas and how they
contribute to performance or how they might compare between
the UK and elsewhere, or between organisations or sectors
pursuing high value added strategies and those pursuing low cost
strategies. The initial need is to discover more through both
structured reviews of existing research and some further test and
development of other aspects of the model.

This model also provides a coherent framework for organisations

to understand the place of training and skills in business
performance and the ways in which organisations support their
development and deployment. It can be used to explore the
human capital debate and provide a vehicle for organisations to
think about how they get the most out of their employees and
how managers, leaders and HR can help.

It strikes us that the most dynamic interplay within the model is

the diagonal between application (ie business strategy) and ability
(ie the skills and capability of the workforce). This is the dynamic
which has plagued policy makers in their attempts to improve UK
economic success. Is this best done by increasing the supply of
skills so that organisations find themselves awash with human
capital and raise their game to utilise it better, or should we rely
on measures to lift business and product market strategies,
increasing and encouraging competition and knowledge exchange
to increase the demand for skills? In reality, most organisations
find themselves locked more or less into an equilibrium, which is
resistant to movement and where all the various parts of the

46 Institute for Employment Studies

 model are in harmony. Their focus of activity is, albeit implicitly,
in balancing the circle, ensuring that each aspect of the growth
and utilisation of human capital meets their needs. The
overwhelming challenge is how we move to a position where
demand for skills is raised and organisations seek to increase the
skills and motivation of their workforces and to utilise them more
demandingly. This is a shift from equilibrium to a dynamic state.
It is our contention that this requires concerted action in each
quadrant of the model to create a positive circular flow of activity.
The static circle then has the potential of becoming a dynamic
helix; a spiral of success.

Skills Pay: the contribution of skills to business success 47

48 Institute for Employment Studies
Appendix A: Research Linking HRM Systems with
Firm Performance

Skills Pay: the contribution of skills to business success 49

50
Research Linking HRM Systems with Firm Performance
No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
1 Ahmad & Schroeder 2003 Manufacturing plants 107 HRM Practices operational performance Weak NA NA
2 Allen, Shore & Griffeth 2003 Employee (sales and 215 sales; Perceived voluntary turnover Yes Yes
insurance agents) organisational support
197 insurance
(HR practices)
agents
3 Applebaum, Bailey, 2000 Plant and individual; 45-3622 HRM Systems Quality, productivity labour Yes NA NA
Berg & Kalleberg 40 plants; 4374 costs; ee outcomes
workers
4 Appleyard & Brown 2001 Semiconductor firms 23 fabs Employment System Productivity; defects Mixed NA NA
5 Agarwala 2003 Firm (Indian) 7 HR Practices Org commitment Yes Partial NA
6 Bacon & Blyton 2001 Employees (Mfg firms) 401 Teaming Attitude to change; job No NA NA
satisfaction
7 Bae & Lawler 2000 Firm (Korean) 138 HRM Strategy Perceived performance Yes NA NA
8 Ballou, Godwin & 2001 Firm (100 best to work 110 Quality of work life Stock price Yes NA NA
Shortridge for)
9 Banker, Field, 1996 Establishment 328 periods Team program Quality; productivity labour Yes Yes NA
Schroeder & Sinha costs; ee outcomes
10 Banker, Lee, Potter & 1996 Firm (one retailer) 2618 store Incentive pay Sales, profitability, customer Yes Weak NA
Srinivasan months satisfaction support
11 Barnard & Rodgers 2000 Firm (Singapore) 105 Internally orientated Successful implementation of Mixed NA NA
HR practises HPWS
12 Barrette & Ouellette 2000
13 Bartel 2000 Bank branches 3 branches HR practices; ee Sales growth Yes NA 16-26% increase
attitudes deposits & loans
(63-150 ee’s)
14 Bartel, Freeman, Find Find this Find this Find this Find this Find this Find this Find this
Ichniowski & Kleiner this
15 Batt 1999 1 Firm 202 TQM; self managed Sales Mixed Weak 9.3% sales/ee
(customer service teams
reps)
16 Batt 2002 Service and sales 270 HR practices Sales growth; turnover Yes Partial 46% lower turnover;
establishment 16.3% sales growth
17 Batt, Colvin & Keefe 2002 Telecommunications 302 HR practices (emp Quit rate Yes NA NA
firms voice)
18 Bayo-Moriones & 2002 Manufacturing plants 719 HR practices Incentives Yes NA NA
Huerta-Arribas

50 Institute for Employment Studies

 No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
19 Becker & Huselid 1996 Firm Check HRM systems Profitability; stock value Yes Check Find out
20 Becker & Huselid 1998 Firm 548-699 HRM systems Profitability; stock value Yes Yes $63k mkt value; $4752
GRATE
21 Becker & Huselid 1999 Find this Find this Find this Find this Find this Find this Find this
22 Berg, Applebaum & 1996 Firm (apparel) 117-131 ee’s (2 HR Policies Work team quality Yes NA NA
Bailey firms)
23 Berman, Wicks, Kotha 1999 Fortune 100 firms 81 Stakeholder relations ROA Mixed Yes NA
& Jones
24 Bjorkman & Xiucheng 2002 Firm (manufacturing) 62 HRM systems Subjective assessment foreign Yes NA NA
Chinese/Western joint parent’s satisfaction
ventures & subsidiaries w/performance
25 Black & Lynch 1997 Establishment 1621 Find this Productivity Yes Mixed If all HPWS, +20%
productivity
26 Black & Lynch 2000 Private establishments 1621 HPWS Productivity Yes Yes NA
27 Black & Lynch 2001 Private establishments 1621 HR practices Productivity (Cobb-Douglas Yes NA NA
production function)
28 Boslie, Paauwe & 2001 Review
Jansen
29 Boxall & Steenveld 1999 Professional service 6 HR strategy; HRM Industry leadership NA NA NA
firms practices
30 Brynjolfsson & Hitt 1998 Firm 380 Org design Information technology Yes Yes NA
31 Brynjolfsson, Hitt & Find Firm 1031 Computer capital; work Stock price Yes Mixed +$1 installed computer
Yang practices capital->$5 mkt value
32 Brynjolfsson, Hitt, 2002 Firm (large) 1216 Computer investment; Market/book Yes NA +$1 computer
Yang, Bailey & Hall work practices investment=>$10 mv
33 Burton & O’Reilly 2000 High technology 101 HR practices; IPO Yes Yes NA
startups leadership values
34 Cabera & Cabera 2000 Banks 4 HR practices HR strategy NA NA NA
35 Caligiuri & Stroh 1995 Multinational firms 46 HR practices Strategy Mixed NA NA
36 Cappelli & Neumark 1999 Establishment 433; 201; 660 Work practices Efficiency (labour costs & Weak Yes NA
productivity)
37 Collins, Smith & 2001 High technology firms 78 HR practices; Sales growth Mixed Mixed NA
Stevens knowledge creation
38 Colvin, Batt & Katz 2001 Establishment 242 HR Practices Manager pay Yes NA NA
(telecom)
39 Conyon & Read 1998 Firm 139 HRM Practices Productivity Yes NA NA

51
Skills Pay: the contribution of skills to business success 51
52
No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
40 Cormier, Magnan & St- 2001 Bank SBU’s 95-1148 Profit sharing plans ROA Yes Yes NA
Onge
41 Coyle-Shapiro, Morrow, 2002 Employee 141 Perception of profit Org commitment; trust in Yes NA NA
Richardson & Dunn (engineering) sharing management
42 D’Arcimoles 1997 Firms 61 HR policies Firm performance Mixed NA NA
43 Das, Handfield, 2000 Manufacturing firms 290 Quality management ROA, sales growth Yes Mixed NA
Calantone & Shosh
44 Deery & Iverson 1999 Bank branches 460 banks; 1145 IR climate Productivity Yes Yes NA
ee’s
45 Delaney 1997 Find this Find this Find this Find this Find this Find this Find this
46 Delaney & Huselid 1996 Firm (34 industries) 590 HR practices Perceived performance Yes Weak NA
support
47 Delery & Doty 1996 Firm (banks) 101 HR practices Profitability Yes Weak NA
support
48 Delery, Gupta, Shaw, 2000 Trucking cos 379 HR practices Quit rate Mixed NA NA
Jenkins & Ganster
49 Dunlop & Weil 1996 Business units 42 Modular production Lead time, profitability Weak support NA
50 Eriksson 2001 Firm (Denmark) 1605 Work practices (TQM Productivity Yes Mixed NA
teams)
51 Fernie & Metcalf 1995 Find this Find this Find this Find this Find this Find this Find this
52 Fey & Bjorkman 2000 Subsidiaries (in Russia) 101 HRM practices Performance Weak support NA NA
53 Fey, Bjorkman & 2000 Firms (Russia) 101 HRM practices Performance (subjective) Yes NA NA
Pavlovskaya
54 Freeman, Kleiner & 1997 Firm 260 Employee involvement Productivity Weak support NA NA
Ostroff
55 Fynes & Voss 2001 Manufacturing plants 200 Quality practices Quality Yes NA NA
(Ireland)
56 Gant, Ichniowski & Find Find this Find this Find this Find this Find this Find this Find this
Shaw this
57 Gardner, Moynihan & 2002 Business unit 40 (one firm) HR practices; org Quality; profitability Yes NA 17% incr profitability
Wright citizenship
58 Gerhart & Milkovich 1990 BU’s and firms 219 orgs; 70,684 Human capital Org performance Yes NA NA
observations
59 Gould-Williams 2003
60 Guest, Milchie, 2001 Firm (mfg & service) 237 HR practices; Firm perf; productivity; quality Yes NA NA
Conway, Trenberth & effectiveness
McDonald

52 Institute for Employment Studies

 No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
61 Guest & Pecci 1997 Partnership 54 Partnership practices Subjective org perf. Mixed NA NA
organisations
62 Guest & Pecci 2001 Members of IPS 54 Partnership practices Productivity, employee Yes NA NA
attitudes
63 Guthrie 2001 Firms 164 HR practices Productivity; ee retention Yes Yes High HIWP= +$184k
productivity
Low HIWP= -$89k
64 Guthrie 1999 Firms (New Zealand) 164 HIWP Retention; productivity Yes Yes High HIWP= +$184k
productivity
Low HIWP= -$89k
65 Guthrie, Spell & 2002 Firms (New Zealand) 137-165 HIWP Performance Yes Yes NA
Nyamori
66 Harel & Tzafrir 1999 Firm (Israel) 76 Indiv. HR practices Org perf. Perception; market Weak Tmg NA NA
performance only
67 Harel, Tzafir & Baruch 2003 Firm (Israel) 102 HR practices and Org effectiveness Partial Yes NA
fairness in promotion
68 Harris & Ogbonna 2001 Firms (UK) 342 SHRM (mkt orientation Subjective performance (sales, Yes NA NA
as mediator) growth, market share)
69 Hitt, Bierman, Shimizu 2001 Law firms 93 (252 Human capital Firm performance Mixed Weak NA
& Kochhar observations)
70 Hoque 1999 Hotels 209 High commitment Commitment; job satisfaction; Yes NA NA
practice productivity; quality; perf
71 Huang 2000 Firms (Taiwan) 315 HRM practices Subjective firm performance Yes Mixed NA
72 Huang 2001 Firms (Taiwan) 315 HRM practices Subjective firm performance Yes Mixed NA
73 Hunter & Hitt Unpu Retail banks and 35 branches (101 Flexibility, commitment Productivity; sales Yes Yes ********
b branches banks)
74 Hunter & Lafkas 2003 Bank branches 303 Work practices Wages Yes Weak NA
75 Huselid 1995 Firm 816 HRM systems Turnover, stock value, Yes Weak 7% TO;$27k sales;
profitability support $19k mv; $4k profits
76 Huselid & Becker 1995 Firm 628 HRM systems Market value Yes NA $38k - $73k market
value
77 Huselid & Becker 1996 Firm 218 HRM strategy Profitability, stock value Yes NA +1sd HPWS=+q14% &
GRATE + 13-28%
78 Huselid & Becker 1997 Firm 548 HRM systems Profitability, stock value Yes NA +1sd HPWS=$41000
79 Huselid, Jackson & 1997 Firms 293 HRM effectiveness Firm performance, productivity Mixed NA Sales $44k; MV: $9k;
Schuler cash flow $9673

53
Skills Pay: the contribution of skills to business success 53
54
No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
80 Ichniowski 1990 Business unit 176 HRM systems Productivity, firm value Yes NA NA
81 Ichniowski & Shaw 1999 41 steel productions 2594 monthly HRM systems Quality, productivity Yes NA NA
periods
82 Ichniowski, Shaw & 1997 36 steel production 2190 line periods HRM systems Quality, productivity Yes Yes NA
Prennushi lines
83 Ittner & Larcher 1999 Individual (customers 2491 Customer satisfaction Financial performance Mixed NA NA
of telecommunications
co)
84 Jayaram, Droge & 1999 First tier suppliers 57 HRM practices Subjective mfg. Performance Yes NA NA
Vickery
85 Katz, Kochan & 1983 Automotive plants 18 (176 IR systems Quality & efficiency Mixed NA NA
Gobeille observations)
86 Kelly 1996 Establishment (mfg 301-1301 Group participation Hours per unit of output Yes NA NA
plants)
87 Khatri 1999
88 Khatri 2000 Firm (Singapore) 194 HR practices Performance Modest Yes NA
89 Koch & McGrath 1996 Business unit 318-319 HRM sophistication Productivity Yes Yes NA
90 Konrad & Mangel 2000 Firm 658 (195 public) Work life programs Productivity Weak Weak NA
91 Koys 2001 Restaurant chain 28 EE attitudes & Profitability No NA NA
behaviours
92 Lahteenmaki, Storey & 1998 Firm (Finland) 428 HR policies; HR Subjective performance Weak Weak NA
Vanhala bundles
93 Lam & White 1998
94 Laursen 2001 Firm (Danish) 726 HRM practices Innovation Yes NA NA
95 Laursen & Foss 2003 Firm (Danish) 1884 HRM practices Innovation performance Yes NA NA
96 Lee & Chess 1996 Mfg firms (Korean) 48 High involvement mgt Firm performance No No NA
97 Lee & Miller 1999 Firm (Korean 138 Org commitment Financial performance Yes Yes NA
manufacturing)
98 Lepak & Snell 2002 Firm 148 Employment modes HR configurations Yes NA NA
99 Lepak, Takeouchi & In Firm 148 Employment Firm performance Yes NA NA
Snell press modes/flexibility
100 Lewin 2002 Firm; BU; plant; field 249-457 HIWP Performance Mixed NA NA
office
101 Li 2003 MNEs (China) 296 Higher pay, long term Turnover, productivity, Mixed
employment policy profitability (ROA, sales/ee)

54 Institute for Employment Studies

 No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
102 Lieberman, Lau & 1990 Motor vehicle 6 Labour utilisation Productivity Yes NA NA
Williams manufacturers
103 Liouville & Bayad 1998 Find this Find this Find this Find this Find this Find this Find this
104 Lowe, Delbridge & 1997 Plant 71 HR practices Productivity Mixed NA NA
Oliver
105 MacDuffie 1995 Establishment (auto 57 HRM policies Production Yes Yes
assembly)
106 Martell & Carroll 1995 Business units 115 Executive HRM Performance Mixed NA NA
practices
107 Martell,, K., Gupta, A. 1996
& Carroll
108 McNabb & Whiffield 1997 Establishment 587 Flexibility, teamwork Financial performance Yes Mixed NA
109 McNabb & Whiffield 2001 Establishment 688-703 HR practices Subjective financial Yes Yes NA
performance
110 Mendelson 2000 ROVA 63 Organisational IQ ROS, ROVA, Growth Yes NA NA
111 Meyer & Smith 2000 Individual 281 HRM practices Employee commitment Mixed NA NA
112 Michie & Sheehan 1998 Firm 487 HRM practices Innovative activities: R&D, Yes NA NA
new technology
113 Michie & Sheehan- 2001
Quinn
114 Michie & Sheehan 2003 Manufacturing and 361 HRM practices, flexible Innovation activities Yes NA NA
service sector firms working practices
(UK)
115 Miller & Lee 2001 Firm (Korean) 129 Org commitment Firm performance Weak Yes NA
116 Montemayor 1996 Find this Find this Find this Find this Find this Find this Find this
117 Moriones & deCerio Unpu Factory (Spanish) 965 HRM practices Efficiency, quality, time Mixed NA NA
b
118 Morishima 1998 Firm (Japanese) 1054 HRM practices Performance Yes NA NA
119 Patterson, Wall & West Find Firm (manufacturing) 80 Integrated Productivity, performance Yes NA NA
this manufacturing
120 Patterson & West Find Firm (manufacturing) 42 firms (3977 Employee attitudes Productivity, performance Yes Yes NA
this ee’s) (job sat; org commit;
mental health)
121 Patterson, West, 1997 Firm (manufacturing) 67 HR practices Productivity, performance Yes Yes NA
Lawthorne & Nickell
122 Richard & Johnson 2001 Banks 73 SHRM effectiveness Productivity, turnover Mixed Mixed NA

55
Skills Pay: the contribution of skills to business success 55
56
No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
123 Rogg, et al 2001 Small business firms 351 HR practices Customer satisfaction Yes Yes NA
124 Schuster Find Canadian & Chinese 2 (pilot studies) Employee centred mgt Operating income Yes NA NA
this firm (HR index)
125 Schuster, Dunning, 1997 Firm 1 Employee centred mgt Operating income Yes NA NA
Morden, Hagan, Baker (HR index)
126 Sesil 1999 Mfg establishments 118 ee involvement ROS, ROA Yes NA NA
(UK)
127 Shaw, Delery, Jenkins, 1998 Firm (trucking) 141-148 HRM practices Turnover Yes Yes NA
Jr. & Gupta
128 Shaw, Gupa & Delery 2002 Plant; firm (trucking) 141; 379 Voluntary turnover; Productivity; financial perf Yes Yes NA
HRM investment
129 Sheppeck 1998 Firm 106 HRM practices; mgt Org effectiveness Yes Mixed NA
support for HRM
130 Sheppeck & Militello 2000 Theory piece
131 Snell & Youndt 1995 Firm 102 HRM control systems ROA, sales growth Yes Mixed NA
132 Spell, C.S. 2001 Employees 139 HRM strategies Developmental activities Limited NA NA
133 Storey 2002 Middle sized 314 Education, trng, dev 4 economic performances Weak NA NA
companies
134 Takeuchi 2002 Employees 269 Commitment- Org climate; OCB Mixed Yes NA
orientated HR
philosophy
135 Teo & Waters 2002 White collar employees 109 HR practices Stress Yes NA NA
136 Tier Find Review NA NA NA NA NA NA
this
137 Tregaskis 1997 Firm 531 French; 879 HR practices; HRM Employee development Yes Yes NA
UK strategy
138 Vandenberg, 1999 Firm 49 (3579 ee’s) HR practices Org effectiveness Yes NA NA
Richardson & Eastman
139 Varma, Beatty, 1999 Firm 39 Culture, HR practices Fin & operational perf Yes NA NA
Schneier & Ulrich
140 Voos 1987 Bargaining units 343 Profit sharing plans Quality; productivity; labour Yes NA NA
costs
141 Way 2002 Firm (small business) 446 HR practices Turnover; productivity Mixed NA NA
142 Welbourne & Andrews 1996 IPO firms 82 HR “values” Profitability, IPO price Weak support NA NA
143 Welbourne & Ctr 1999 IPO firms 360 Senior HRM executives Stock price growth No Mixed NA

56 Institute for Employment Studies

 No. Study Year Level of Analysis Sample HPWS Indicator Performance Measure Main Effect? Interaction Effect Size
144 West, Borrill, Dawson, 2002
Scully, Cater, Anelay
145 West & Patterson 1999 Firm >100 HRM practices Productivity, performance Yes NA NA
146 West, Patterson & Find Top management 42 Team processes Productivity, performance Yes NA NA
Dawson this teams
147 West, Pattersonn, 1999 Firm (manufacturing) 81 Training Innovation, firm performance Yes NA NA
Pillinger & Nickell
148 Whiffield & Poole 1997 Review NA NA NA NA NA NA
149 Whitener 2001 Credit unions 180 (1689 ee’s) HR practices Org commitment Yes Yes NA
150 Wilkinson, Godfrey & 1997 Establishment 9 HR practices TQM Non- empirical Find this Find this
Marchington
151 Wilmalasiri 1995 1 publishing co 151 employees HRM practices Work performance Yes NA NA
152 Wood 1999 Review NA NA NA NA NA NA
153 Wright, McMahan, 1998 Petrochemical factories 86 HR effectiveness Perceived HR effectiveness; Mixed No NA
McCormick & Sherman financial performance
154 Wright. McMahan, 1999 Petrochemical factories 38 HR practices Financial performance Mixed Yes NA
Snell & Gerhart
155 Yang 1998 Firms 105 HR practices Sales / employee Mixed Yes NA
156 Youndt & Snell 1999 Find this Find this Find this Find this Find this Find this Find this
157 Youndt, Snell, Dean & 1996 Establishment (mfg 97 HR practices Perceived performance Mixed Weak Find this
Lepak plants) support
158 Zheng 2001 Firm (medium & small) 74 (Chinese) HRM practices Firm performance Mixed Yes NA
Source: Huselid M, internet site, http://www.rci.rutgers.edu/~huselid/

57
Skills Pay: the contribution of skills to business success 57
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