Estimating a translog profit function for Vietnamese apparel factories, we jointly test for managerial quality heterogeneity and whether higher quality managers choose more humane working conditions and earn higher profits. Working conditions are measured from the perspective of workers, based on a survey of working conditions, the perspective of management, based on a survey of HR managers, and compliance assessments of Better Work Vietnam.
Given the limited number of observations of factory level financial data, factor analysis is used to reduce the number of working conditions variables to three factors. Working conditions measured from the perspective of workers is positively correlated with the ratio of revenue to total cost. The elasticity of the price-cost margin with respect to each of the three working conditions factors is positive and statistically significant. When working conditions are measured from the perspective of compliance assessments, two of the three factors positively predict the profit margin.
However, when conditions are measured from the perspective of the HR manager, only one of the factors positively predicts firm profits. The findings are consistent with the hypothesis that attempted improvements in working conditions increase the profit margin only to the extent that those improvements are perceived by employees of the firm.
We then turn to understand the determinants of the positive relationship between profits and compliance. Compliance predicts higher work effort as measured by time to production target. Compliant firms also pay higher wages. However, the relationship between compliance and supply chain position is undetermined. Some working conditions predict higher supply chain position while others predict lower supply chain position.