Business environments dominated by information flows and autonomous tasks, typical of knowledge-intensive industries, are likely to require enough social capital to be viable and productive. This column uses a new database to investigate the influence of trust, a key element of social capital, on labour productivity in intangible-intensive industries. In such industries, productivity gains from high levels of trust are stronger than elsewhere, while overly strict hiring and firing regulations are more damaging for productivity. In addition, the positive impact of high trust on productivity in intangible-intensive industries is channelled by the ability to benefit from good management, a key element of organisational capital.
Over the past three decades, a fundamental driver of growth in advanced economies has been the accumulation and exchange of knowledge, as embodied in so-called intangible assets (Corrado et al. 2022, 2023). The positive impact of these assets on productivity, both directly as a production input and indirectly through the spillovers they generate on the efficient use of other production factors, has been highlighted by a multitude of economic and business studies (for a survey, see Roth 2022, Takizawa et al. 2020), with many of them focusing on the role played by advanced management practices (Scur et al. 2021), a key element of organisational capital.
A knowledge-rich business environment is likely to require enough social capital to sustain reliable flows of information among economic agents (workers, managers, suppliers, and customers alike) and confidence in their ability to implement tasks in an autonomous way. A key element of social capital – trust – needs to be sufficiently high to ensure that cooperation rather than conflict characterises relationships between agents, especially in large organisations (La Porta et al. 1997). Indeed, trust can foster performance by both increasing commitment and facilitating organisational change, via easier management of collective action (Leana and van Buren 2000, Algan and Cahuc 2013). To our knowledge, research that directly investigates whether the productivity benefits of intangibles are influenced by the level of trust prevalent in society is still lacking.
To fill this gap, in a recent paper (Cette et al. 2024) we look at whether differences in levels of trust across countries can explain differences in the industry-specific productivity benefits of investing in a large set of intangibles. We also explore whether the possible mediating role played by trust is channelled through the better ability to implement productivity-enhancing management practices in a business environment where trust is relatively high, e.g. by lowering the transaction costs associated with delegating responsibility (Bloom and van Reenen 2010, Cette et al. 2020). And throughout the analysis we also account for the potential influence of certain labour market settings on the returns to intangible assets. To this end, we focus on hiring and firing regulations, which are likely to frame the ability to spread out productivity-enhancing management practices especially in intangible-intensive industries (for a survey, see Malherbet et al. 2019, Cette et al. 2018).
Original database
We base our empirical analysis on a sample of 19 countries over the 1995-2018 period for which the new vintage of EUKLEMS-INTANProd data (Bontadini et al. 2023) covers 20 manufacturing and service industries. These data embody a full (and detailed) set of intangibles and ensure consistency between the production and value-added sides. We measure trust by drawing on individual responses to the European Social Survey. Similarly, we use the global management survey by Bloom and van Reenen (2010) to measure the quality of management practices in different countries, which however is only available for a subset of countries in our sample. Finally, we use the OECD indicator of employment protection legislation (OECD 2020) to measure cross-country differences in the stringency of hiring and firing regulations.
Using these data, we estimate a labour productivity model – with productivity levels depending on capital deepening and the share of intangibles in capital – in which we introduce a mediating role for trust and labour market regulations along with other controls. Using a range of measures of intangible intensity, we find that the estimated productivity gains from the use of intangibles are boosted where trust is high. The results are robust to controlling for the mediating role of hiring and firing regulations, which in contrast tend to lower the productivity gains from the use of intangibles in production when they are excessively strict. We also find suggestive evidence that the mediating effects of trust in the relationship between intangibles and productivity are channelled by the ability to reap stronger efficiency gains from implementing good management practices in a high-trust environment than in a low-trust environment. We interpret this as indirect evidence that the way in which trust affects productivity in intangible-intensive industries is through enabling the implementation of better management practices that lead to efficiency-enhancing organisational change. 1 Our results survive various robustness checks.
Potential productivity gains from raising trust or decreasing employment protection legislation
To illustrate the economic relevance of our results, we use the coefficient estimates to compute the productivity gains from the use of intangibles that are missed by the different countries in our dataset compared to Finland (the country with the highest level of trust in our sample) or to the US (the country with the lowest level of employment protection legislation (EPL) in our sample) because of a lower level of trust or a higher level of EPL. In other words, we evaluate the potential productivity gains that would follow from enhancing trust to Finnish levels or from easing labour market regulation to US levels.
Potential productivity gains from raising trust to the Finnish level, which come from better use of intangibles, appear to be particularly sizeable in countries where either intangible intensity is particularly high (France, the UK, the US) or trust is particularly low (Greece) (Figure 1). In contrast, productivity gains are the smallest in Sweden, where the trust level is estimated to be closest to the Finnish level, or in Latvia and Slovakia, where intangible intensity is low. On average over all the countries of our dataset, the potential productivity gains from enhancing trust appear to be around 2.2%.
Potential productivity gains from better use of intangibles due to easing employment protection legislation to the US level appear to be particularly high in France, where EPL is estimated to be the most restrictive among countries in our sample (Figure 2). By contrast, productivity gains are quite small in the UK, where the value of the OECD EPL indicator is the closest to the US, and the smallest again in Latvia and Slovakia because of their low intangible intensity. The average gain of easing EPL across the countries in our dataset (2.6%) is comparable to that of an increase in trust.
Figure 1 Intangible-related gains in labour productivity from raising trust to Finnish levels
Figure 2 Intangible-related gains in labour productivity from switching employment protection legislation to US levels
To conclude
Our findings suggest that to benefit most from the potential productivity gains associated with the increasing importance of intangibles in the economy, public policies should couple reforms that increase social trust, as expressed in the degree of confidence among citizens, with the easing of hiring and firing regulations. Labour market regulations can be changed by legislators but any attempt to reform employment protection may face high social and political opposition, which may also originate from lack of trust in the workplace.
At the same time, the degree of mutual confidence among citizens (including between workers and managers) is influenced by a range of historical, cultural, and institutional factors over which policymakers have only a limited immediate leverage. In the workplace, such confidence is also affected by historical developments in industrial relations. Therefore, any attempt by policymakers to boost social trust involves changes in institutional architectures (e.g. tax and benefit regimes, the composition of public spending, the rule of law, the role of unions, etc.) and their interactions with social relations and values, which are complex and long-term goals. Some hints in this direction are provided by the studies of psychologists and sociologists, who highlight the individual and community drivers of trust, respectively. Also, the negative effects of lack of social trust on the productivity impact of intangible capital might be at least partly compensated by other structural factors such as skill levels or innovation incentives that are more directly influenced by public policies. Our results seem especially relevant as our economies are increasingly characterised by production processes that are knowledge-intensive and where trust is likely to play an important role. Indeed, recent developments in generative AI and its potential economic applications are likely to exacerbate the impact of trust on productivity via knowledge-based assets (see Filippucci et al. 2024).
Source : VOXeu
