DISCUSSION: a New Labour Economics? the Contours of Institutional Labour Economics: Notes Towards a Revived Discipline

Socio-Economic Review (2009) 7, 695–726 doi:10.1093/ser/mwp008 Advance Access publication June 16, 2009 DISCUSSION: A new labour economics? Downloaded from https://academic.oup.com/ser/article/7/4/695/1606158 by guest on 29 September 2021 At the 2008 SASE meeting in San Jose´ , Costa Rica, David Marsden organized a session on the prospects for a renewed institutional labour economics. The debate began with introductory remarks by Paul Osterman, who sketched out an argument that at the time was still in its very early stages. The introduction and the subsequent comments were found by the audience to be highly productive. After the session, the editors of Socio-Economic Review asked the participants to share their views with the readers of the journal. We are grateful to Paul Osterman for taking up the challenge and summarizing the state of his thinking in a brief draft of what has yet to be developed into a formal paper. We also thank the discussants who agreed to write up their comments on the basis of Osterman’s intermediate draft. Keywords: employment, labor economics, labor market institutions, organizations, personnel management JEL classification: J01 labor economics The contours of institutional labour economics: notes towards a revived discipline Paul Osterman Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA, USA Correspondence: [email protected] Labour Economics has increasingly become an extension of standard economic theory. This tendency is exemplified in the so-called New Personnel Economics (NPE), which seeks to explain the personnel practices of firms [their internal labour markets (ILMs)] from an optimization perspective (Lazear and Shaw, 2007). However, while this view has gone largely # The Author 2009. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected] 696 Discussion unchallenged within the profession, there are important reasons to regard it as incomplete in explaining the employment practices of organizations and, in particular, in explaining the current evolution of these practices. An alternative perspective draws from an older tradition of institutional labour economics (ILE) as well as from recent developments in organizational sociology and political science. Downloaded from https://academic.oup.com/ser/article/7/4/695/1606158 by guest on 29 September 2021 The goal of this paper is to sketch the outlines of this alternative view. In the next section, I describe the main features of the debate and, in subsequent sections, I illustrate the argument with evidence regarding the rise of ILMs, the spread of new forms of work organization, efforts by firms to obtain employee commitment, and the growing diversity of employment practices. I then discuss whether the arguments developed here represent merely transitory deviations from standard theory and conclude with some final observations. The debate Mainstream labour economics does study institutions, such as unions or the minimum wage or temporary help firms, but the perspective is to view them as external constraints on a firm which is optimizing a well-defined objective function. In contrast, the goal of this paper is to introduce greater reality into our understanding of how firms make decisions regarding their employment rules. The core argument developed here is that a fruitful approach to an institutional analysis is to focus on the importance of groups inside of organizations, the persistence of conflict of interest among these groups and the role played by power and politics in working through these conflicts. It is this group level process that creates the employment practices that we are seeking to explain. In emphasizing these factors, the argument shifts attention away from the optimizing models that NPE uses to explain employment practices while at the same time acknowledging that the impulses central to the NPE models are one of the multiple factors at play and need to be given weight. One possible critique of NPE might be termed the socio-psychological perspective. The standard model typically sees economic actors as atomistic and selfish utility maximizers whereas social-psychologists emphasize interpersonal comparisons of utility and alternative sources of motivation such as gift exchange. It is easy to show (Pfeffer, 2007; Baron and Kreps, forthcoming) that the behavioural assumptions inherent in NPE models are incomplete and shallow and lead to misunderstandings about how people actually behave at work and about what motivates them. However, as useful as this socio-psychological viewpoint is, it is also important to see that the discussion A new labour economics 697 and examples centre on such individual level behaviours as the role of intrinsic motivation, the importance of reciprocity and gift exchange, status inconsis- tency, the anchoring of expectations and interpersonal comparisons of utility. That is, the entire discussion remains almost entirely at the level of individual actors. The other end of the spectrum from the social-psychological view is the point Downloaded from https://academic.oup.com/ser/article/7/4/695/1606158 by guest on 29 September 2021 that the labour market (and other markets) is embedded in larger cultural, legal and institutional systems. This perspective is exemplified in the substantial political science literature on ‘varieties of capitalism’, which argues that alternative equilibria are possible and that there is no single ‘most efficient’ outcome (Katz and Darbishire, 1999; Hall and Soskice, 2001; Streeck and Yamumara 2001; Thelen, 2004). For example, Japan, Germany and the USA are all successful market systems, but they show considerable variation in how they have responded to economic shocks and the impact technological change has had on the wage distribution. This contrasts not just with standard theory but also to the older institutional view that industrial societies were converging towards a single model (Kerr et al., 1960). One review of the varieties of capitalism literature concludes that the consensus among scholars that there is a persistent diversity across nations in how capitalism is organized is ‘truly striking’ (Thelen, 2004, p. 1). The implication of these national effects is that in order to understand why a given ILM practice is adopted it may be important to pay close attention to the national context. For example, research by Marsden and Belfield (2008) shows that the use of performance pay differs between Britain and France, and the difference can be attributed to the impact of variation in employee protection laws across the two countries. National effects are important because, in addition to having a direct impact upon ILM practices, they also shape the relative power and resources of different groups within firms. Although, in one sense, national effects are a challenge to NPE—because their existence demonstrates that context matters and that ILM practices cannot be explained via timeless and spaceless optimization models— a more sophisticated version of NPE can deal with national effects by simply treating them as an additional constraint on firm decision-making. It is also worth noting that a weakness in the national effects literature is its tendency to view nations as internally homogeneous in their practices while the reality, as I will show below, is that there is substantial diversity within countries in ILM rules. It is this diversity that I seek to better understand. The alternative perspectives NPE scholars identify a personnel practice that is empirically prevalent and develop a model in which the practice in question emerges as the most efficient 698 Discussion solution to the problem posed in the model. Added to this is the standard economics equilibrium assumption that if organizations err and adopt sub- optimal practices they will lose out in the competitive market. The institutional perspective offers a more complex view of organizational decision-making and behaviour. There have, of course, been a number of rela- tively recent important contributions that have sought to elaborate the Downloaded from https://academic.oup.com/ser/article/7/4/695/1606158 by guest on 29 September 2021 meaning of ILE and to create space for this school of thought (Jacoby, 1990; Kaufman, 1994, 2004; Marsden, 1999), and the goal of this paper is to add to this literature. The interpretation of institutional thinking developed here is that within organizations there are competing rationales as well as competing fac- tions with distinct interests. The decisions organizations make about their ILM practices flow from a complex interaction of rationales and interests that includes an important role for factors such as norms and customs, social structure, competing interests, search for legitimization and power. Only by understanding this mixture can we explain why a given practice emerged and took the form it did and, more importantly, how it is likely to evolve and adapt to shifts in the environment. The view of organizations as an arena in which different visions and power configurations are played out has a distinguished provenance in sociology and political science. Nearly a century ago John Commons wrote that ‘ ...economic conflicts are not merely conflicts between individuals ...but are conflicts between classifications or even classes of individuals ...’ (quoted in Parsons, 1963). In his description of a French bureaucratic organization Crozier wrote of ‘opposing forms of rationality’ (p. 298) and went on to observe a ‘complex equilibrium affecting the patterns of action, the power relationships, and the basic personality traits characteristic of the cultural and the institutional systems of a given society’ (p. 294). Gouldner took a similar position in his classic book Patterns of Industrial Bureaucracy (Gouldner, 1954). He examined, via a case study of one firm, the origins and implementation of bureaucratic rules regarding issues such as attendance, safety, bidding for jobs and effort. As a result, the firm’s personnel practices, i.e. ILM, reflected a political and social process that resolved these conflicts.

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