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Human Capital, Employment and Bargaining.

It is difficult to characterize the contents of this book succinctly. Although modestly edited, it is essentially a compendium of previously published papers written individually and jointly by Hart and Moutos (with each other and with others). Compiling these papers has more than the usual value, however, especially to American readers, because many of the papers were published in European journals (several in the European Journal of Political Economy) that many Americans do not often read. The views contributed by Hart and Moutos singly, together, and in combination with their other co-authors give the book a diversity of focus that is more common in conference volumes. Perhaps it is best left to the authors to describe the book's contents:

The book has three objectives. First, it seeks to provide an exposition of key labour market issues that stem from standard comparative static human capital theory of the neoclassical firm.... Secondly, it explores the relevance of firm-worker and firm-union bargaining models to the study of human capital investment and employment decisions.... Thirdly, and partly with an eye to reinforcing continuity, it tackles relevant labor market policy topics at several different stages in the text's development. (pp. 1-2)

Although the authors note that the book is "easily accessible to final year undergraduate and postgraduate students" (abstract), I suspect, given the book's subject matter and exposition, that it will appeal to few readers outside its main target audience - academic economists.

Briefly, the topics covered include the tradeoff between hours and employment in traditional models with fixed employment costs; efficient contracting models of union behavior; macroeconomic modeling of turnover costs and specific human capital; the impact of tax structure, especially payroll taxes, on the choice of compensation structure; the impact of unemployment insurance on union bargaining outcomes; the interrelationship between specific human capital and bargaining; and (in a particularly wide-ranging discussion) coalitional versus neoclassical firms.

The book is primarily theoretical. On the important question of union bargaining and training, for example, the authors cite only two empirical studies, each reporting the unsurprising finding that there is a positive correlation between formal training programs and collective bargaining; given the link between formality of all sorts and collective bargaining, this result barely rises to the level of being worth reporting. (To be fair, it is relegated to a footnote or two.) Otherwise the authors rely on the conventional wisdom of the Japanese labor market for substantive examples for their models, which is unfortunate at a time when these culturally based models are being seriously questioned in Japan (prewar labor relationships in Japan look strikingly similar to those in the United States). Readers might have been better served by examples drawn from sources a little closer to the authors' own experience; certainly discussions of the European experience would have been welcome.

The wide range of topics means that no single topic, even the core question of the impact of union bargaining on human capital investment, is analyzed in depth. For example, the analysis of union effects on training, primarily contained in Chapter 6, does not even mention the important theoretical work by Yoram Weiss. ("The Effect of Labor Unions on Investment in Training: A Dynamic Model," Journal of Political Economy, Vol. 93 (Oct. 1985), pp. 994-1007; "The Effect of Labour Unions on Investment in Training: A Dynamic Model," in Asaf Razin and Efraim Sadka, eds., Economic Policy in Theory and Practice [New York: St. Martin's Press, 1987], pp. 435-67.)

Hart and Moutos employ two "bargaining" models in their investigation of the impact of union bargaining on human capital investment: a traditional "sequential" model in which the union sets the compensation level and the firm then chooses the employment level (and here the investment strategy), and a Nash bargaining model in which compensation, employment, and investment are simultaneously determined. The authors focus on a profit sharing model in which there is bargaining over a base wage and a share of profits as well as the level of specific human capital investment and number of employees hired. The union values the representative worker's utility and the number of members employed, while the firm values profits. Specific human capital investments are characterized as monetary expenditures that increase the worker's productivity according to a concave production relationship.

The Nash bargaining outcome, of course, can be derived as the maximum of the geometric mean of the utility increments of the outcome to firm and union, where the weights assigned to each reflect bargaining power. The authors note that the number of employees hired and the specific human capital invested are negatively related in the bargaining solution, presumably because of the concavity of the production function. Of greater interest is the implication that if workers are risk-averse in both wages and profit shares, the equilibrium level of specific human capital per worker will be negatively related to union power. Both the wage rate and the union's profit share increase with union power, although the worker's profit share, which depends on the number of workers employed as well as the union's profit share, is ambiguous.

In the same chapter the authors raise a second issue, posed oddly from an American point of view: "Why would a profit-maximising firm choose voluntarily to seek out and to bargain ex-ante with an established union when there are no economic, social or political pressures so to do?" (p. 9). The brutal history of labor strife in the United States suggests that firms do not typically volunteer to have unions in this circumstance. Fortunately the answer is more interesting than the question. If firms encourage unionization without any of the usual reasons for doing so, one would do well to consider specific human capital motivations. To demonstrate this result, the authors construct a two-period contracting model, with the first period a training period, the second a production period. By assumption, the only way a firm can contract with workers over time, even implicitly, is through unions: the firm has no reputational credibility and workers do not anticipate that they may join a union in the second period, although firms know that workers will find it attractive to do so. In this situation firms may encourage first period unionization.

The authors derive similarly thoughtful models to explore each of the topics enumerated above. This book will be of special value to academic labor economists and contract theorists.

Donald O. Parsons Visiting Professor of Economics Copenhagen Business School
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Author:Parsons, Donald O.
Publication:ILR Review
Article Type:Book Review
Date:Apr 1, 1998
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