In Discussion Paper No. 1233, John Abowd, Francis Kramarz and Antoine Moreau investigate the link between the quality of a firm's products and the quality of its work-force. Both product quality and worker quality are difficult to measure. The former is related to the purchasers' willingness to pay more for a good; that is, in all other measured dimensions, the same as a less-expensive alternative. The latter is related to the employer's willingness to pay more for a worker who is, according to all measurable characteristics, identical to many other workers.

The authors present a model which suggests that under perfect competition, worker quality and product quality will be positively related but that under imperfect competition, the relation is ambiguous. They equate a product's quality with its market price. In a perfectly competitive product market, product price is monotonically positively related to product quality and worker quality among highly-standardized goods. Hence, within these standardized product categories, relative price variation measures quality differences. In the labour market, the equation of worker quality with price means that measured and unmeasured person characteristics in the wage rate equation capture the heterogeneity in worker quality. Hence, when the authors measure wage rates for the same worker in jobs at a variety of employers, and characteristics of this worker at several points in time, they assert that a worker with a larger person effect (wage rate component that is common to all employers, but not captured by measured characteristics) is a higher-quality worker. They thus use the average person effect within a firm as a measure of unobserved (by the econometrician) worker quality, and the average predicted wage given worker characteristics as a measure of observed worker quality. They then seek to find whether or not these two price-based measures of worker and product quality are positively related. The empirical results uncover a very weak, generally positive, relation between worker quality and product quality using detailed firm-level data from the French Producer Price Index surveys.

Product Quality and Worker Quality
John Abowd, Francis Kramarz and Antoine Moreau

Discussion Paper No. 1233, September 1995 (HR)