Wage employment: fixed rate, subjection, and job insecurity

The standard employment contract has three main features:

1. (i) A fixed rate (whether in money or in indexed contracts, targeted in real terms) per unit of time at a monitored effort supply above a minimum level.

2. (ii) Subjection to the employer's authority in the workplace.

3. (iii) Job insecurity (i.e., exposure to unemployment risk), depending among other things on the enterprise's success or failure.

Alternative employment and payment systems involve modifications of these three features, introducing:

1. (i) Profit-sharing or payments related to other indicators of enterprise performance (e.g., group productivity in physical terms, sales, value added); this includes collective participation in enterprise capital (Employee Stock Ownership Schemes or Trusts, ESOPs and ESOTs). Personal share ownership (PEPs in the UK) and wage-earners' funds at national or regional level (such as the Meidner Plan or its blander implementation in Sweden) do not alter the fixed nature of earnings with respect to the performance of the employee's enterprise.

2. (ii) Workers' participation in enterprise decision-making, which we could call power-sharing (as in the German-style Mitbestimmung).

3. (iii) Job security.

Permutations of the employment contract

There are only eight possible combinations and permutations demonstrating the presence or absence of profit-sharing, power-sharing and job security; all are actually observed or have been proposed, and their main types are illustrated in Table 3.1. Of course each combination contains any number of alternative degrees of intensity of any of the three features actually present.

Introduction

Suppose that there were a determined social consensus in favor of workplace democracy such that conventional employment relationships were ruled out by custom, by constitution, or by law. That is, assume that it has been decided that most enterprises will be so organized that the right to choose their boards of directors, managers, or other decision-making bodies and personnel, or directly to determine major enterprise policies, is assigned to their workers and only to their workers (including managerial personnel), on the basis of one worker, one vote. What problems should be anticipated, and how might these be dealt with by appropriate institutional design or policies? In this chapter, I attempt to apply the results of the theoretical and empirical literatures on worker-managed firms, along with some personal rumination, to the question of the costs and dangers of implementing enterprise democracy in a market economy.

The chapter is organized as follows. Section 2 briefly reconsiders the old question of why capital hires labor, in other words why worker-run firms are not the norm, in market economies. Section 3 is equally brief, giving a preliminary discussion of the question of society-wide institutional change viewed as a change in the regime of rights. The next three sections provide the core discussion of what past studies of self-management imply for the transition to an economy of worker-managed firms. Section 4 deals with issues of employment, membership rights, and product market behavior. Section 5 treats financing of worker-run firms and property rights in capital goods. Section 6 deals with some less standard topics, including decision-making mechanisms, work organization, and job satisfaction.

Introduction

While worker participation in decision-making has been a popular topic in the business press for much of the last decade, substantive participation by workers remains relatively rare in the USA (Levine and Strauss, 1989). Many economists have concluded that the low incidence of participatory arrangements in the USA implies that such arrangements are inefficient – for if participation were a good idea, then the market would favor companies with participation (Alchian and Demsetz, 1972a; Jensen and Meckling, 1979; Williamson, 1980).

The argument that “survival of the fittest” implies efficiency is not correct if there are externalities from work organization – that is, if one company's choice of work organization affects the costs of other firms. Several examples of such externalities are presented in Chapters 1, 11, and 6 in this volume (by Bowles and Gintis, Dow, and Pagano, respectively; see also my survey article with Tyson, 1990).

The current chapter focuses on a single externality of participatory work organizations, a macroeconomic externality that stems from the tendency of participatory workplaces to avoid layoffs when product demand declines. To see the basic argument, consider two fictitious auto plants X and Y. Plant Y has a highly trained work force and a participatory work organization with a no-layoff pledge. Its competitor in the auto industry is plant X, which utilizes a traditional US labor relations system. At both X and Y nominal wages are set once a year. Plant X lays off workers whenever there is a downturn in demand. Plant Y, on the other hand, avoids layoffs during downturns by retraining workers, freezing hire, transferring workers within the firm, and ultimately hoarding excess labor.

Introduction

A growing body of econometric evidence suggests that worker participation in firm decision-making increases productivity (Defourney, Estrin and Jones, 1985a, 1985b; Jones and Svejnar, 1985; Estrin, Jones and Svejnar, 1987). Labor-managed firms (LMFs), however, have only a marginal place in Western market economies. LMFs most commonly engage in professional, craft manufacturing, or service activities where capital requirements are modest. The principal exceptions involve worker takeovers of capitalist firms (KMFs) in financial distress (Ben-Ner, 1988a, 1988b).

At first glance, this situation seems paradoxical: why should the bulk of production activity in market economies be organized in hierarchical capitalist firms, when worker control appears to have a significant positive impact on productivity? Writers who have addressed this question can (at some risk of caricature) be classified as skeptics and proponents. Skeptics draw normative conclusions from evolutionary outcomes: if contemporary economies are dominated by capitalist firms, then such firms must have some efficiency advantage relative to more democratic rivals. Authors who have expressed this view include Nozick (1974, Ch. 8), Jensen and Meckling (1979), and Williamson (1985). Skeptics often grant that the LMF might have merit in the specialized niches where it has already proven viable (Hansmann, 1988, 1990a, 1990b), but doubt that widespread adoption of this organizational form would provide net social benefits.

Proponents of the LMF place less weight on the verdict of the market, although they are encouraged by the recent upsurge in the LMF population relative to capitalist firms (Ben-Ner, 1988a). They also take heart from favorable empirical findings about LMF productivity performance.

Introduction

The possible connection between economic and political systems is one of the great issues of classical political economy. However, the subject is not much discussed by straight economists today, nor does it typically appear in contemporary economics courses.

This is too bad. The topic of “capitalism and democracy” is obviously of enormous general importance in its own right. Furthermore, the possible connections have lately become a more immediately operational issue. Without some sense of the logic behind possible relations between capitalism and democracy it is very difficult to understand many aspects of the economic “reforms” now taking place in formerly orthodox socialist countries. The connection between the economic and political spheres in the area of socialist reforms is usually of overpowering significance, typically overshadowing straight economic aspects of reform even for narrowly posed economic issues.

Advocates of free market economics, like Hayek and Friedman, have long perceived and articulated a link between capitalism and freedom or democracy. Now there is new evidence from the recent experiences of the former USSR, Eastern Europe, China, and other reforming socialist countries, and also from newly industrialized capitalist countries like Korea and Taiwan, hinting that capitalism and freedom or democracy tend to “go together.”

In view of its importance, even for an understanding of straight economic issues, it is somewhat puzzling that mainstream economists have not devoted more professional research to the linkage problem. Perhaps one reason has to do with the technical difficulty of formalizing the ways capitalism and democracy might be connected.

The contributions to this volume encompass a wide range of subjects pertaining to the analysis, understanding and evaluation of economic systems in regard to their structural as well as to their behavioral and evolutionary aspects: capitalism, socialism, institutions, rules, ownership, power, participation, agency, incentives, conflict, cooperation, productivity, and investment behavior. But it seems to me that the underlying common denominator is somehow related to the quest for an economic régime that is able to bring about an acceptable trade-off between efficiency and participation (democracy) in modern society. It may be held that this quest has seemingly been removed from the agenda as a consequence of the decline and fall of socialism in the world. But such a conclusion would certainly be premature, and for several reasons. In the first place, it is debatable whether the socioeconomic system in Eastern Europe had anything more in common with traditional images of socialism than collective ownership of the means of production and planning.

Introduction

Does it matter who owns and directs the means of production? In particular, does the structure of ownership and command influence the choice of production technique in any important way? Given complete and competitive markets, the answer to the latter question is “no,” as illustrated by the first welfare theorem for production economies: existence of Walrasian equilibrium implies that only efficient techniques are adopted, no matter how ownership is divided or who directs production. This is an example of what Bowles and Gintis (1988) have termed the principles of “neutrality of property assignment” and “irrelevance of command.”

These principles may not be supported in the absence of complete and competitive markets. In this chapter, we explore the implications of distributional conflict in labor markets for the choice of production techniques in capitalist firms. Such conflicts stem from possible bilateral monopoly conditions arising from the presence of significant mutual costs of exit from given employment relationships. Potential sources of exit cost in labor markets derive from such problems as search, factor-specificity, asymmetric information, and task idiosyncrasy, which are frequently encountered in such markets.

We study the distribution of production rents in capitalist firms as a bargaining relationship between owners of firms and the labor teams they employ. Following the seminal work of Rubinstein (1982), we model the relationship as a game in extensive form in which bargaining proceeds over real time and is costly to the participants. We relate equilibrium outcomes to the structure of ownership, and suggest that the choice of production technique in capitalist firms may be driven by considerations of bargaining power as well as of efficiency.

Introduction

In the New Institutional economics firm ownership or its governance system is endogenously and efficiently determined by the characteristics of the resources which are used in the organization: namely their degree of specificity and their monitoring requirements. Section 2 of this chapter summarizes the New Institutional view. Section 3 inverts the New Institutional view by arguing that the characteristics of the resources, employed in the firm are, in turn, determined by the nature of its ownership and/or governance system. This view supports some of the claims of the Radical economists who have traditionally argued that the technology and the internal organization of the firm are often not due to the need for increasing efficiency and can be better explained as an outcome of given property relations. The two arguments are integrated by introducing the concept of property rights and technological equilibria and, more generally, the concept of organizational equilibria. In section 4 these equilibrium concepts are developed by means of a simple model. There, we argue that institutionally stable property rights' equilibria need not be efficient. In section 5 we consider Williamson's contracting scheme and suggest two ways in which the scheme can be generalized. Finally, in the concluding section 6 we apply briefly the framework developed in this chapter to two issues. The first concerns the diversity of institutions which characterized the major Western capitalist countries after 1945 in spite of their different efficiency. The second is related to the possible inability of democratic institutions to come about in spite of their greater efficiency.

Introduction

Despite the fact that the phrase “market socialism” has a respectable history, dating back to Lange's (1938) famous contribution in the Austrian debate, there has been little formal economic theorizing on the nature of market socialism. We take market socialism to be a system of economic organization in which (1) the state has the authority to influence the pattern and levels of investment across sectors; (2a) most, if not all, resources are distributed via markets; (2b) citizens, in particular, earn income from labor that is traded on markets; (3a) firms are publicly owned, which means that profits are distributed to members of the population in proportions that are politically determined; and (3b) firms maximize profits. In this chapter, we depart from much contemporary literature (e.g., Miller, 1990 and Estrin and LeGrand, 1989, but not Brus and Laski, 1990), and do not consider the presence of worker-managed firms to be a necessary condition of market socialism.

Given the above characterization of market socialism, two kinds of question naturally arise. The first concerns the consistency of the five characteristics listed above. For example, can one design institutions which will assure that firms maximize profits while at the same time distributing profits diffusely among the population rather than concentrating firm ownership in the hands of stockholders who can trade stock? Is it possible for the government to control the distribution of corporate profits, without interfering with profit-maximization? It is largely these questions that have animated the debate on market socialism in recent years. The second kind of question concerns the flexibility of market socialism.

In their research on comparable worth, Sara Evans and Barbara Nelson find that states which pass such laws typically have public-sector collective bargaining, Democratic control of state politics, and energetic commissions on the status of women. Minnesota had all these as well as a strong progressive tradition; a politically astute branch of the American Federation of State, County, and Municipal Employees (AFSCME); 154 women's organizations; and feminist (not just women's) caucuses in both major parties. Moreover, as important for the passage of comparableworth legislation as any one of these was Minnesota's position as one of the first states to act, so that events transpired at a time when few knew anything about the issue and opposition forces had not mobilized.

In the late 1970s, Minnesota evaluated the state's personnel system. As a part of the evaluation Hay Associates did a study of salary and benefit policies, which included job evaluation point totals for 762 multiincumbent job classes. Under prodding from Nina Rothchild, the executive director of the Commission on the Economic Status of Women, Hay did a brief analysis comparing male-dominated and femaledominated job classes. Hay reported a “slight tendency” to pay maledominated classes at a higher rate than female-dominated classes, but considered the finding of no significance.

Searching for ways to improve the economic status of women, Rothchild and fellow staffer Bonnie Watkins decided to look again at the relationship of points and pay for male- and female-dominated jobs. Watkins says they began pessimistically, expecting the Hay system to have produced a study justifying the status quo favoring male-dominated positions.