METHODOLOGICAL ISSUES IN CROSS-SECTIONAL AND PANEL ESTIMATES OF THE HUMAN RESOURCE-FIRM PERFORMANCE LINK

Because companies differ in factors such as management ability that ma y lead to both high performance work systems and enhanced firm perform ance, conventional estimates of the effects of human resource (HR) man agement practices on firm performance may be biased upward. Alternativ ely, if HR management practices are measured with error, estimates of their effects on firm performance may be biased downward. We find that although longitudinal estimates that avoid the first source of bias a re substantially smaller than cross-sectional estimates, the former ar e strongly influenced by errors in measuring HR management practices. Based on independent estimates of the measurement error, we calculate a range of estimates that correct for both biases. We estimate that a one standard deviation increase in our measure of high performance wor k systems raises the market value of the corporation by approximately $15,000 per employee.