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Labor Economics and Industrial Relations: Markets and Institutions.

Labor Economics and Industrial Relations: Markets and Institutions. Clark Kerr and Paul D. Staudohar, eds. Cambridge, MA, Harvard University Press, 1994, 752 pp,, $35. This is not light, weekend reading. It is a meaty, thought-provoking, rewarding collection of 23 essays by top labor relations specialists surveying the development and current state of labor economics and industrial relations theory and practice. If these subjects turn you on, you should buy this book and read it slowly and carefully. What will you find?

Former Secretary of Labor George Shultz tells of persuading President Richard M. Nixon to abstain from intervening in a "national emergency" strike, and uphold free collective bargaining. Shultz, also Secretary of State in the Reagan Administration, extends to international relations his view of collective bargaining as a way to solve problems.

George Hildebrand reviews labor economics from "classical" Adam Smith to Karl Marx, and "neo-classical" Alfred Marshall, A.C. Pigou, and John R. Hicks.

The Wisconsin Institutionalists--John Commons, Selig Perlman, and three generations of economists who followed these scholars--share with their forerunners "the view of the labor problem as a moral question, the research method of `go and see,' and a preference for problem-solving over theory-making." Jack Barbash describes them as "activist advocates and administrators in behalf of their case." Barbash also credits scholars at Johns Hopkins University who "put together a sort of political science of trade unionism in the early years of the twentieth century."

The neoclassical and institutionalist approaches were brought together from the 1930's to the 1960's by "social economics revisionists--Paul Douglas (who later was elected a U.S. senator from Illinois); Sumner Slichter; John Dunlop, Secretary of Labor in the Ford Administration; Albert Rees; and George Shultz--according to Clark Kerr, who sees himself as one of the revisionists. "We saw not equilibrium but disequilibria. We saw not determinate solutions but indeterminate ranges for solutions. We saw not a market for labor but many markets with distinguishing characteristics. We saw collective action as well as atomistic decision-making. We saw systems of beliefs, including justice and benevolence, affecting people as well as self-love."

Human capital theory has enlarged the field of labor economics, according to Jacob Mincer. He explains the contributions of human capital analysis to wage structure and distribution of labor income, labor mobility and its wage and unemployment consequences, and the effects of technological change on. labor markets. He also finds human capital theory a powerful tool in new fields such as the economics of health, education and demography, linking these areas to labor economics.

To what extent are labor markets competitive? Bruce Kaufman finds institutionalists on the negative side and the Chicago school on the positive side. He surveys a range of factors and finds the net impact "uncertain," but becoming more competitive. However, lower pay for women and minority workers and the absence of compensating wage differentials for workplace injuries indicate a need for institutional intervention in labor markets in equal employment, affirmative action, and occupational safety and health legislation. Kaufman deplores "the divorce of theory from reality" under the influence of the Chicago school for which "theory development has become an end in itself."

Richard Lester, who has challenged neoclassical minimum wage-employment theory for 50 years, reports on recent minimum wage studies by David Card, Lawrence Katz, Alan Krueger, and Lawrence Summers. Lester writes that his essay may require many textbooks "to have their treatment of wage differentials and minimum wage effects altered."

Lloyd Reynolds challenges "dualistic models" of third world labor markets. Dual labor market theories do not stand up well in the light "if the evidence," he says, adding that evidence does not exist to support the idea of wage rigidity. "Instead of a single rural and urban wage, the studies reveal a great variety of wage rates for particular kinds of labor. The whole wage structure moves generally upward, as rising productivity is translated into higher incomes." As a result "labor markets in the less developed countries bear a distinct family resemblance to our own."

The so-called "natural rate of unemployment," also known as the nonaccelerating inflation rate of unemployment, is challenged by Robert Solow, a Nobel laureate in economics. Exploring equilibrium in the labor market, he writes that the field "is open to plausible scenarios in which many equilibrium unemployment rates are possible." He adds that the equilibrium rate itself, and therefore eventually the observed amount of unemployment, can be changed by policies affecting the structure and institutions of the labor market."

Richard Freeman examines union/ nonunion wage differentials in the United States and other countries, finding that unions in the United States raise wages by 20 to 25 percent, push up the wages of nonunion workers, but reduce wage dispersion among organized workers. In addition, union workers are less satisfied with their jobs than nonunion workers in similar industries who are paid the same wage. Unions also reduce the number of workers who quit; increase the time a worker spends at a firm; and reduce employer profitability, according to Freeman. Thus, he finds that "the voice component of unionism is more universal and less dependent on the system of labor relations than are monopoly wage effects. From this I conclude that voice factors must be intrinsic in any general theory of trade unionization." Freeman refers to "union voice factor" to describe union effects that produce less wage dispersion, more fringe benefits, fewer quits, longer job tenure, and less job satisfaction--in contrast to union economic effects on wage levels and profits.

Paul Osterman's essay on internal labor markets is itself worth the price of the book. From his own survey of 875 establishments he finds firms that are most likely to have some kind of "high-performance work system" are those "that competed in international markets, that were part of larger organizations, that used high skill technology, that followed a market strategy based on quality and variety rather than price competition, and that espoused values that emphasized employee well-being." This last item shows that "internal firm customs, norms, and politics modify . . . market forces." But Osterman warns that in a firm represented by a union, senior management may find it difficult to accept the degree of cooperation that is typically necessary. In the absence of a union, management is likely to fear that empowering the labor force is the first step toward unionization."

Despite the growth in human resource management among nonunion companies in the 1960's, "even heavily unionized firms eventually jumped on the human resource management bandwagon," writes Sanford Jacoby. Professionalism in this field is difficult to achieve because "today's human resource managers still risk ostracism by their fellow managers if they veer too much toward advocacy of the employees' rights," according to Jacoby.

Dunlop widens his theory of industrial relations systems by identifying eight categories of "structured" internal labor markets: small enterprises (31 million workers), participants in labor pools such as construction workers and banquet waiters (7 million), owner-operators (2 million), civil service (18 million), multitier internal labor markets in many large-scale establishments (15 million), short-tier internal labor markets in retail stores and supermarkets (15 million), clerical-oriented organizations in banking and insurance with a predominance of women workers (12 million), and technical-professional groupings such as high-tech and consulting firms and higher education institutions where employees (10 million) offer their loyalty more to the profession than to the employer. Multitier labor markets get much of the attention from industrial relations specialists, but cover only 1 of 7 workers in the United States, according to Dunlop.

About 25 percent of workers in the United States are covered by explicit individual employment contracts, a larger proportion of the work force than those who are covered by collective bargaining contracts, according to David Lewin. He is uncertain that this practice will expand because employers who seek high commitment from their employees may prefer implicit, rather than explicit, contracts. In contrast, Lewin believes that employers and employees may prefer explicit contracts to gain more certainty about inherently unstable employment conditions when they are jointly involved in contingent, nonpermanent relations, variable pay systems based on output, productivity, or profit-sharing, production or financial information-sharing, employer-sponsored worker training, and worker self-monitoring without supervision. As a result, "it is plausible to expect that explicit contracting will become the now dominant institutional arrangement in U.S. labor markets during the 1990's," Lewin writes.

Contract negotiations that forced concessions from unions in the 1980's marked a structural change in collective bargaining, says Daniel J.B. Mitchell. "Once the initial management probes succeeded, union vulnerability was exposed and the concession movement spread." But he finds two continuing features of union bargaining: long-term contracts and "a relative insensitivity of union wages to short-term business-cycle influences." Mitchell also examines the bargaining process itself. "The union side's behavior can be viewed as the outcome of an internal political process" that reflects the preferences and perceptions of union members.

However, from the management point of view, "information on union vulnerability is something of a public good. A firm obtaining information--through conflict with a union--pays the cost but does not capture most of the benefit." He concludes that macroeconomic determinants of real wage trends, such as productivity growth, trade competition from abroad, and immigration cannot be resisted indefinitely and that collective bargaining needs safety valves such as profitsharing to prevent excessive wage pressures from building, as occurred in the 1970's.

Peter Feuille reviews post-World War II developments in the resolution of disputes between management and workers represented by unions and those who were not represented. "In the unionized private sector, disputes have become much less likely to occur as disruptions to the normal workflow, whether as strikes, slowdowns, lockouts, boycotts, and so on," he writes. But in the unionized public sector since the mid-1960's, "strikes have become more `normal' bargaining events (whether they are legal or illegal) and public employers have realized that the sky does riot fall when such strikes occur."

Disputes in the nonunion sector are becoming much more important, says Feuille. "Whether these claims are based on anti-discrimination or on common law exceptions to the employment-at-will principle, their unifying thread is a quest for fair treatment." Feuille believes that this trend will continue with the growth of implicit and explicit contracts between management and individual workers. As a result, an increasing number of nonunion firms will develop formal grievance procedures, he writes.

Unions must develop new strategies to survive, says Michael Piore. Instead of the alternatives of unions as political institutions as proposed by Arthur M. Ross, or unions as economic institutions, as proposed by Dunlop, Piore calls for a fuzzy "transformative vision" of unions "mediating between the economic and social structures" by pushing simultaneously for political action on social legislation and workplace democracy and for collective bargaining and other economic actions to advance worker's direct economic interests. The Service Employees International Union offers a model for this approach to unionism, says Piore. Ray Marshall, Secretary of Labor in the Carter Administration, calls for restructuring the Nation's learning systems, supporting a high-wage economic development strategy, and more worker participation in company decisions. His essay follows the argument of his 1992 book, Thinking for a Living: Education and the Wealth of Nations, and the 1990 report of the Commission on the Skills of the American Workforce of which Marshall was co-chairman.

In the final essay, Thomas Kochan calls for active government policy to encourage "mutual-gains strategies" to supplement rules governing adversarial labor-management relations. Kochan also calls for labor law reforms to strengthen workers' rights to bargain effectively with "a labor organization that best suits their circumstances." All these essays are more subtle and sophisticated than my remarks and quotations indicate. Jonathan Leonard is particularly effective in his essay about affirmative action. More predictable and less interesting essays are those by Albert Rees about occupational wage differentials; Melvin Reder, who discusses "labor's bargaining disadvantage," and J.K. Galbraith, who writes about countervailing power. This book is a treasure for those whose interest is in labor economics and industrial relations.
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Author:Roberts, Markley
Publication:Monthly Labor Review
Article Type:Book Review
Date:Oct 1, 1995
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