Employee Trust and Workplace Performance

1 DISCUSSION PAPER SERIESF orschungsinstitut zur Zukunft der ArbeitInstitute for the Study of Labor Employee Trust and Workplace PerformanceIZA DP No. 8284 June 2014 Sarah BrownDaniel GrayJolian McHardyKarl Taylor Employee Trust and Workplace Performance Sarah Brown university of Sheffield and IZA Daniel Gray university of Sheffield Jolian McHardy university of Sheffield Karl Taylor university of Sheffield and IZA Discussion Paper No. 82 84 June 2014 IZA Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: Any opinions expressed here are those of the author(s) and not those of IZA.

2 Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the university of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program.

3 IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 8284 June 2014 ABSTRACT Employee Trust and Workplace Performance * We explore the relationship between Employee Trust of managers and Workplace Performance .

4 We present a theoretical framework which serves to establish a link between Employee Trust and firm Performance as well as to identify possible mechanisms through which the relationship may operate. We then analyse matched Workplace and Employee data in order to ascertain whether the average level of Employee Trust within the Workplace influences Workplace Performance . We exploit the 2004 and 2011 Work Place and Employee Relations Surveys (WERS) to analyse the role of Employee Trust in influencing Workplace Performance in both pre and post recessionary periods.

5 Our empirical findings support a positive relationship between three measures of Workplace Performance (financial Performance , labour productivity and product or service quality) and Employee Trust at both points in time. We then exploit Employee level data from the WERS to ascertain the determinants of Employee Trust as well as how Trust is influenced by measures taken by employers to deal with the recent recession. Our findings suggest that restricting paid overtime and access to training potentially erode Employee Trust .

6 In addition, we find that job or work reorganisation experienced at either the Employee or organisation level are associated with lower Employee Trust . JEL Classification: J20, J50 Keywords: Employee Trust , financial Performance , labour productivity, product quality Corresponding author: Sarah Brown Economics Department university of Sheffield 9 Mappin Street Sheffield S1 4DT United Kingdom E-mail: * We are grateful to the Data Archive at the university of Essex for supplying data from the 2004 and 2011 Workplace and Employee Relations Surveys.

7 We are also grateful to Anita Ratcliffe, Jennifer Roberts and participants at the Work and Pensions Economics Group Annual Conference, university of Sheffield, July, 2013 and the RES Annual Conference, Manchester, April, 2014, for excellent comments. The normal disclaimer applies. 2 1. Introduction and Background Given the importance of identifying determinants of firm Performance for understanding both economic growth and productivity at an aggregate level, it is not surprising that a vast literature exists exploring this issue focusing on a range of measures of firm Performance such as financial Performance (see, for example, Machin and Stewart, 1990, McNabb and Whitfield, 1998, and Munday et al.)

8 , 2003) and labour productivity (see, for example, Griliches and Regev, 1995, Oulton, 1998, and Griffiths and Simpson, 2004). Many of the studies in this area focus on the role of firm level characteristics such as capital and labour inputs in determining firm Performance . It is apparent that Employee behaviour may influence firm level Performance given that many employees have some degree of discretion with respect to how hard they work (see, for example, Brown et al., 2011, who explore the relationship between worker commitment and Workplace Performance ).

9 In this paper, we focus on Employee Trust , specifically Employee Trust in management, which has attracted limited interest in the economics literature. Trust can be defined as firm belief in the reliability, truth, or ability of someone or something (Oxford English Dictionary, 2013). It may be the case that Employee Trust in the Workplace influences the behaviour of employees, which in turn affects firm Performance . In particular, the extent to which employees Trust that their managers will treat them honestly and fairly may influence the extent to which employees engage in opportunistic behaviour or Thus, the degree of Trust that employees have in their managers may impact upon firm Performance .

10 The role of Trust in the economy is being increasingly recognised in the economics literature at both the macroeconomic level, where there has been debate, for example, on the relationship between Trust and economic growth (see, for example, Knack and Keefer, 1996, 1 For instance, Kurtulus et al. (2011), using data from the NBER Shared Capitalism Survey, find that Employee Trust in management is associated with employees wanting a part of their pay to be related to company Performance .)