Does workforce affect technical efficiency? A Stochastic Frontier Approach across industries

Abstract

Sustainability has become the new normal for value creation in the long haul, and is on the top of every board’s agenda. We assess the relationship between the workforce and a firm’s output gap justified by systematic inefficiency. To do so we apply a stochastic frontier model to a large sample of U.S. listed firms, across industries, spanning 2005 to 2019, focusing on measures of companies’ management commitment and effectiveness in addressing their workforce job conditions and well-being. Our results reveal an economically sizable and statistically significant positive association between technical efficiency and workforce-wellbeing. Firm inefficiency is explained by firm specific factors and is a decreasing (increasing) function of size and external monitoring (leverage, blockholdings and foreign sales). It is mitigated by employee-oriented practices and external governance mechanisms, as well as market surveillance. The association between workforce and technical efficiency is non-linear and varies across industry sectors. Our results have policy implications and should interest managers and stakeholders in general. JEL Classification: C73; G14, G23, G34