Management Under Differing Labour Market and Employment Systems [Reprint 2019 ed.] 9783110859379, 9783110109474

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Management Under Differing Labour Market and Employment Systems

Management Under Differing Labour Market and Employment Systems Editors Günter Dlugos, Wolfgang Dorow, Klaus Weiermair in collaboration with Frank C. Danesy

w DE

G Walter de Gruyter • Berlin • New York 1988

Editors Prof. Dr. Günter Dlugos Faculty of Economics and Administrative Studies Department of Business Policy and Business Politics Freie Universität Berlin, Berlin Dr. Wolfgang Dorow European School of Management (E.A.P.) Paris, Oxford, Berlin, Madrid Prof. Dr. Klaus Weiermair Faculty of Economics and Administrative Studies Department of Economics York University, Toronto Frank C. Danesy, M.S.B.A. Faculty of Economics and Administrative Studies Department of Business Policy and Business Politics Freie Universität Berlin, Berlin

CIP-Titelaufnahme

der Deutschen

Bibliothek

Management under differing labour market and employment systems / ed. Günter Dlugos . . . - Berlin ; New York : de Gruyter, 1988 ISBN 3-11-010947-6 NE: Dlugos, Günter [Hrsg.]

Library of Congress Cataloging in Publication Data Management under differing labour market and employment systems / editors, Günter Dlugos, Wolfgang Dorow, Klaus Weiermair in collaboration with Frank C. Danesy. Includes bibliographies and index. ISBN 0-89925-185-4 1. Management—Employee participation. 2. Personnel management. 3. Industrial relations. 4. Labor supply. I. Dlugos, Günter. II. Dorow, Wolfgang. III. Weiermair, Klaus. 1939-. HD5650.M347 1988 658.3'15—dc 19 88-6966 CIP © Copyright 1988 by Walter de Gruyter & Co., Berlin 30. All rights reserved, including those of translation into foreign languages. No part this book may reproduced in any form - by photoprint, microfilm or any other means nor transmitted nor translated into a machine language without written permission from the publisher. - Typesetting and printing: Wagner GmbH, Nordlingen. - Binding: Dieter Mikolai, Berlin. - Cover design: Lothar Hildebrand, Berlin. Printed in Germany.

Preface

The processes of technological change, increasing competition in traditional markets, and the strategies which are necessary to develop new markets force enterprises towards greater flexibility. Since it is management's responsibility to give the impulses for adequate measures, the realm of management discretion is gaining central importance with respect to the maintenance and development of the enterprise. The factors which constrain managerial discretion are manifold. On the one hand, they result from the supply, demand, and capital markets, and environmental protection laws. On the other hand, the constraints stem from labour law, property rights, economic order, and corporate legal structure, and also from the educational system, and societal values. The constraints of the latter group determine the management employee relationship on two distinguishable levels: the labour market system (external labour market) and the employment system (internal labour market). The analysis of the management employee relationship and the constraints on managerial discretion resulting from the labour market and employment systems were the subject of the "2nd Berlin-Toronto Conference on Comparative Management". The conference was conducted in Berlin by the Department fo Business Policy and Business Politics at the Free University of Berlin and the Faculty of Administrative Studies at York University in Toronto in 1986. The theme of this conference was related to the symposium, "Management under Differing Value Systems" which took place in Toronto in 1980. The complex topic of management employee relations was partitioned into five general areas. The objectives of Parts A and B were to analyse the socio-political background of the conference theme and to discuss competitive theories on the management employee relationship. This provided the framework for the analysis of the constraints on management discretion in relation to the labour market (Part C) and the employment system (Part D). The final discussion (Part E) concentrated on future developments of labour relations. The international orientation of the conference provided the opportunity to discuss the effects of different industrial relations systems on management discretion, thus revealing the limitations and opportunities for changing management's discretion. Those countries which represent the most important types of industrial relations (i.e. cooperation, confrontation, syndicalistic, central planning) were selected for analysis at the conference. As organizers of the conference and editors of the present book, we would like to thank all participants for accepting our invitation to Berlin and for adding to the success of the symposium. Our thanks are also directed toward the speakers for their informative contributions and their willingness to incorporate the most important discussion results

VI

Preface

in their papers while conducting their final reviews. We also received valuable suggestions through discussions with the participating business practitioners. In addition, the realisation of the symposium was significantly facilitated through the hospitable reception on the premises of the European School of Management (E.A.P.), whose directors and employees we would also like to thank. The funds which enabled us to finance a considerable portion of the travel and accommodation expenses were made available by the Stiftung Volkswagenwerk and the Canadian Social Science Research Council. Because the symposium would not have been possible without their contribution, we owe these institutions our particular gratitude. We would also like to note the benevolent support which we received from the following companies: Bayerische Motorenwerke AG, Brauerei Beck & Co., Boehringer Mannheim GmbH, Kraftwerk Union AG, Reemtsma Cigarettenfabriken GmbH, Schering AG, Siemens AG, Société Alsacienne d'Aluminium S.A., Volkswagenwerk AG. For their assistance while preparing and conducting the symposium and while preparing the present publication, we would like to thank the co-workers of the Department of Business Policy and Business Politics: Hilde Karge, Claudia Krüger, Dipl.-Kfm. Anke Ôlscher and Jens van Gogswaardt. Finally, we wish to express our thanks to the Walter de Gruyter Verlag for its generosity in publishing the proceedings of the symposium. The editors

Contents Contributors Introduction

XIX XXI

A. The Future of the Working Society The Future of the Working Society Friedrich Fürstenberg Abstract 1. The Image of a "Working Society" 2. Indicators of Structural Change 3. Alternative Interpretation Patterns 4. Perspectives for Management References Labour as Factor of Production or Yardstick for Distribution Reinhard Blum Abstract Introduction 1. Production and Distribution in Traditional Economic Theory 1.1 Mercantilism, Labourism, and Capitalism 1.2 Socialism, Social Liberalism, and Democracy 1.3 From Microeconomics to Macroeconomic Revolution 2. New Theoretical Foundations for an Old Paradigm 2.1 New Capitalism by Counter-Revolution 2.2 In Search of Microfoundations of Macroeconomics 2.3 From Political Economy to Economic Theory of Policy 3. New Theories for Man Instead of a New Man for Theories 3.1 Bad Fruits of Traditional Economic Thinking 3.2 Arrogance of Knowledge by "Strange Slopes" of Logic 4. Liberalism or Economic Liberalism as Ruling Paradigm 4.1 "Ultimate Economic Truths" or Arrogance of Knowledge 4.2 Social Costs of Man 4.3 Right Ways as "Third Ways" and Right Decisions on the Way 4.4 Public Wealth Through Markets and Democracy References

3 3 3 4 6 8 10 11 11 11 12 12 13 14 15 15 15 16 17 17 19 21 21 21 22 23 24

B. Theoretical Approaches to the Analysis of Management Employee Relations The E m p l o y m e n t Relation from the Transaction Cost Perspective Arnold Picot and Ekkehard Wenger Abstract 1. The Transactions Cost Perspective as a Ramification of Neoclassical Economics

29 29 29

VIII

Contents 2. The Employment Relation in Free Labor Markets 3. The Employment Relation under Modern Labor Law Appendix: Discussion Notes References

31 35 38 40 42

A s s e t Specificity, G o v e r n a n c e , and the E m p l o y m e n t Relation Louis Putterman Abstract Introduction 1. Theories of the Firm and the Employment Relationship 2. Williamson on Asset Specificity and the 'Hold-up' Problem 3. A Comparison of Williamson's and Knight's Theories 4. Asymmetry of Risk or of Ability to Bear It? 5. Teams, Quasi-Rents, Profit-Sharing, and Control Notes References

45

A n Evolutionary V i e w o n Changes in E m p l o y m e n t Relationships: The Evolution of Organizational Control in the U n i t e d States Udo Staber and Howard Aldrich Abstract 1. Introduction 2. The Concept of Organizational Form 2.1 Labor Process 2.2 Labor Markets 3. An Evolutionary Framework 3.1 Four Basic Processes 3.2 Environmental Characteristics 4. The Evolution of Labor Control Structures 4.1 Handicraft to Factory Production 4.2 The Rise of Large Firms 4.3 The Rise of Managed Labor Markets 4.4 A Decade of Change: After the "Oil Shock" 5. Conclusion References X-Efficiency, Managerial Discretion, and the Nature of E m p l o y m e n t - R e l a t i o n s : A Game-Theoretical A p p r o a c h Harvey Leibenstein and Klaus Weiermair Abstract 1. Introduction 2. Comparative Management Systems: A Game and Convention Theoretical Analysis . . . 3. Comparative Employment Relations and Management Systems: An Organisation Theory Perspective 4. Norms, Conventions, and Motivational Consequences

45 45 46 48 52 54 56 59 61

63 63 63 64 64 65 66 66 67 68 69 70 71 73 75 76

79 79 79 80 84 88

Contents

IX

5. Summary and Conclusions Notes References

90 91 92

M a n a g e m e n t from an Institutional/Biological Perspective Hoyt N. Wheeler 1. Introduction 2. What Is "Management"? 3. "Human Nature" and Management 3.1 Does Human Nature Exist? 3.2 Relevance of Human Nature 4. Management Response to Varying Conditions and Constraints 5. Conclusions References

95

The Analysis of the E m p l o y e r E m p l o y e e Relationship from the Perspective of the Business Politics A p p r o a c h Giinter Dlugos, Wolfgang Dorow, and Frank C. Danesy Abstract 1. The Enterprise and its Members 2. Employers and Employees as Opponents in Individual and Collective Exchange Relationships 3. Non-Conflictive and Conflictive Interaction 4. The T\vo Causes of Conflict-Emergence 5. The Revision of Primary Goals vs. the Handling of Conflict 6. The T\vo Basic Methods of Conflict Handling 7. The Determinants of Employer Discretion Notes References "

95 95 97 98 100 102 104 105

107 107 107 108 110 110 112 113 115 116 117

C. Management and Labour Market Systems Work Ethics in Transition Burkhard Striimpel Abstract Introduction 1. Hypotheses 2. Findings 3. Interpretation 4. Consequences References T h e Inflexibility of Labour Market R e l a t e d Institutions S o m e Observations for G e r m a n y Norbert Walter Abstract

121 121 121 122 123 127 129 132

133 133

X

Contents 1. Introductory Remarks 2. Causes of Unemployment 3. The Trends in the German Labour Market 4. Excessively High Wage Costs - At the Root of the Employment Problem 5. Cartelized Labour Market References

133 134 135 136 137 142

Social Boundaries of Labor Markets Giinter Endruweit Abstract 1. Markets and Labor Markets 2. The Stuttgart Labor Market as an Example 3. Inadequacies of the Traditional Labor Market Concept 4. A Social Science Concept of Labor Market 4.1 Local Labor Markets 4.2 Interlocal Labor Markets 4.2.1 Labor Markets with Migration Mobility 4.2.2 Labor Markets with Commutation Mobility 5. Management's Chances in the Definition of Labor Markets Notes References

143

Labour Market Rigidities: E c o n o m i c Analysis of Alternative Work Schedules Including O v e r t i m e Restrictions Morley Gunderson and Klaus Weiermair Abstract 1. Introduction 2. Economic Determinats of Hours of Work Schedules 3. Non Wage Quasi-Fixed Labour Costs 4. Fixed Time and Money Costs for Workers 5. Voluntary Overtime 6. Restrictions on Overtime to Create Employment 7. Efficiency Rationale for Some Labour Market Rigidities References T h e Impact of Environmental Trends o n the Legitimacy of Trade U n i o n s in Canada Daniel Ondrack Abstract Introduction 1. Legislative Trends 2. Sophistication of Personnel Management 3. Quality of Work Life 4. Substitution of Technology for Labour 5. International Competition 6. The Outlook for Union Legitimacy References

143 143 144 144 145 146 146 146 147 148 150 151

153 153 153 154 156 158 158 159 162 163

165 165 165 167 169 171 172 173 174 175

XI

Contents

The Role of Management in a Political Conception of Industrial Relations at the Level of the Enterprise Roy J. Adams

177

Abstract 1. Introduction 2. The Enterprise as Polity 2.1 Autocracy 2.2 Constitutionalism 2.3 Democracy 3. Why the Discontinuity? 4. Conclusion Notes References

177 177 178 178 180 182 186 187 188 189

Management Between "Old" and "New" Production Concepts and Its Dependence on Factors in the System of Vocational Training and Employment . Margit Osterloh

193

Abstract 1. Introduction 2. Technological and Market-Related Prerequisites for New Production Concepts 3. Qualification-Related Prerequisites for the Introduction of New Production Concepts . . 4. Factors in the Vocational Training System and Employment System Which Influence Decisions in Favor of Old or New Production Concepts Notes References

193 193 194 196 198 202 204

The Changing Nature of Industrial Relations in the UK and its Impact on Management Behaviour Mick Marchington

207

Abstract 1. Introduction 2. The National Context 3. Macho Management 4. The Corporate Context 5. Variations in Management Style 6. Conclusions References

207 207 208 210 212 214 218 219

'

Trends in the Development of Industrial Democracy in Greece and Their Impact on Management Discretion Andreas Nikolopoulos

221

Abstract 1. Introduction 2. Typical Features 3. Relations in the Field of Companies 3.1 Legal Settlements 3.2 Factors Which Determine Bargaining Behaviour

221 221 221 223 223 224

Contents

XII 3.3 Criticism 4. Limitations in the Management's Bargaining Ability 5. Politics for the Settlement of Conflicts Notes References

225 225 228 229 230

Future Trends in the G r e e k Labour Market Athanasios N. Stathopoulos Abstract 1. Introduction 2. The Greek Labour Market as a Demographic Problem Before and After World War I I . . 2.1 Historical Evolution of the Greek Labour Force Profile 2.2 Main Factors Contributing to the Changes in the Labour Force Profile 2.2.1 Industrialization of Greece 2.2.2 Tourist Development 2.2.3 Development of Merchant Marine 2.2.4 Emigration and Repatriation 2.2.5 Evolution of Education 3. The Present Situation in the Labour Market 3.1 Problematic Redistribution of Income to the Labour Force 3.2 The General Change of the Climate in the Private Sector 3.3 The Increase of the Production Cost and Increase of Unemployment 3.4 The Promotion of Small Industry 3.5 The Continuous Pressures Exercised by the Labour Force 4. The Perspective in the Labour Market 4.1 First Alternative 4.2 Second Alternative 5. Conclusions References

233

E m p l o y m e n t Policy in the U S S R - Limitations on Enterprises' Personnel and Wage Policies Hans-Erich Gramatzki Abstract 1. Introductory Remarks 2. Central Planning and Enterprise Powers 3. Central Planning and Regulation of Labor and Wages 4. The Soviet Labor Market 5. Enterprise Labor and Wage Policy 6. Reforms and Experiments 7. Concluding Remarks References The D e v e l o p m e n t of the Labour Market in Poland - Restrictions for Management Jerzy Kortan Abstract References

233 233 234 234 236 236 236 237 237 238 238 238 241 242 242 242 243 243 244 245 245

247 247 247 249 250 252 254 255 258 258

261 261 271

Contents The Changing Industrial Relations S c e n e in Japan and its Impact o n Managerial Behavior Robert M. Marsh and Hiroshi Mannari Abstract 1. The Japanese Economy in the 1970s and Early 1980s 2. Managerial Response 3. Data and Methods 4. Management Discretion Concerning the Size of the Work Force 5. Causes of Changes in Factory Size Between 1976 and 1983 6. Managerial Decisions Concerning Technology and Size 7. Does Unionization Constrain Managerial Decisions Concerning Technology and Size? 8. Conclusion Notes References

XIII

273

.

The Flexibility of Labor Market in Japan Minoru Murata Abstract Notes References

273 273 274 275 276 278 282 284 285 286 286 289 289 296 297

D. Management and Employment Systems E m p l o y e e Participation by Codetermination, Labor Law, and Collective Bargaining Hans G. Nutzinger Abstract 1. Introduction 2. Limitations of Managerial Discretion by Means of Employee Participation in the Federal Republic? 3. Some Basic Theoretical Problems 4. Attempts at Empirical Evaluations of Employee Participation in West Germany 5. Participation and Managerial Discretion in the Federal Republic of Germany 6. Concluding Remarks Notes References Predicting Austrian L e a d e r B e h a v i o r from a Measure of Behavioral Intent: A Cross-Cultural Replication Wolf Bôhnisch, James W. Ragan, Gerhard Reber, and Arthur G. Jago Abstract 1. Introduction 2. Method 3. Results 4. Discussion References

301 301 301 302 303 305 307 310 311 311

313 313 313 315 316 318 321

XIV

Contents The Changing Face of Personnel Management Wolfgang H. Staehle Abstract 1. Leadership in the 1990s - Leadership in a Post-Materialistic Society? 2. Is Personnel Management a Skill that Can Be Taught and Learned? 3. Why Should Personnel Management Take Account of a Change in Values? 4. Recent Trends in Management Research and Practice 5. Conclusion References

323 323 323 326 327 329 333 333

Part-Time Labor: Causes and Consequences for Managerial Discretion . . . . Klaus Weiermair Abstract 1. Introduction 2. Development and Prevalence of Part-Time Employment 3. The Evolution of Part-Time Employment as a Labor Supply Phenomenon 4. Output Changes and the Derived Demand for Part-Time Labor 5. Part-Time Labor in Production and Work Organization: Employer Perspectives 6. Part-Time Labor, Employment System, and Managerial Discretion Notes References

335

The Adjustment of Workers and Hours to Changes in Product D e m a n d . . . . Kornelius Kraft Abstract 1. Introduction 2. Explanations of Adjustment Costs 3. Empirical Investigation 3.1 The Partial Adjustment Approach 3.2 Data, Specification, and Estimation 3.3 Results 4. Conclusions Notes References

351

Educational Expansion, Change in Organizational Structures, and Managerial Discretion Wolfgang Rippe Abstract 1. Definition of the Problem 2. Notes on the Explanation of the Term "Managerial Discretion" and on Its Aspects . . . . 3. Change in Managerial Discretion by Way of Education Induced Change in Organizational Structures? 3.1 Existing Hypotheses 3.2 Educational Expansion and Change in the Configuration of Organizations 3.3 Educational Expansion and Centralization of Organizational Structures

335 335 336 339 341 342 344 348 348

351 351 352 355 355 356 360 360 361 361

363 363 363 364 365 365 366 370

Contents 3.4 Educational Expansion, Formalization, and Standardization of Organizational Structures 3.5 Interim Balance 4. Change in Managerial Discretion Without Education Induced Change in Organizational Structures? 5. Conclusion, Limitations, and Outlook Notes References

XV

371 372 373 377 379 379

Anti-Discrimination Legislation and Its Impact on the Employment Relationship: The Case of Affirmative Action and Equal Pay H. T. Wilson

383

Abstract . I. Discretion and the Manager's Non-Economic Functions 2. Differential Gendering in the Workplace: The Impact of Affirmative Action Legislation 3. Differential Gendering in the Workplace: The Impact of Equal Pay Legislation 4. Conclusion References

383 383 387 390 394 394

Employee Severance - Regulations and Procedures Walter A. Oechsler

397

Abstract 1. Employee Separation Procedures 1.1 Ordinary Dismissal (§ 622 BGB) 1.2 Extraordinary Dismissal (§ 626 BGB) 1.3 Limited Contracts (§ 620 BGB) and Resignations (§ 305 BGB) 2. Regulations for the Protection of Employees in the Dismissal Process 2.1 General Protection Principles for Employees 2.1.1 Ordinary Dismissals (§ 1 KSchG) 2.1.2 Mass Dismissals (§ 17 KSchG) and Takeovers (§ 613a BGB) 2.2 Special Protection Regulations for Certain Groups of Employees 2.2.1 Workers' Representatives (§ 15 KSchG) 2.2.2 Other Groups 2.3 Participation of Workers' Representatives in the Dismissal Process 2.3.1 Participation in the Process of Ordinary and Extraordinary Dismissals (§§ 102,103 BetrVG) 2.3.2 Participation in the Process of Mass Dismissal (§§ 111, 112,112a BetrVG) . . 2.4 Claims for Further Employment 2.4.1 Companies with Workers' Representatives (§ 102 BetrVG) 2.4.2 Companies without Workers'Representatives 3. Empirical Findings 3.1 Frequency of Dismissals 3.2 Reaction of the Worker's Representatives 3.3 Further Employment after Dismissals 3.4 Compensation Payments 4. Theoretical Assumptions References

397 397 398 398 398 399 399 399 401 401 401 401 401 401 403 403 403 403 403 403 407 407 408 409 409

XVI

Contents Measures for the Activation of E m p l o y e e s in Poland and the Limitations of These Measures Leslaw Marfan Abstract 1. The Labour Market in the Eighties 2. Central Interference in Labour and Wage Processes 3. Final Remarks References Regulations Forms of E m p l o y m e n t and Payment U n d e r Conditions of M a n p o w e r Shortage in Poland Ber Haus Abstract 1. The Labour Market and Employment Situation in Industrial Enterprises 2. Forms of Employment in State-Owned Industry 3. Payment Methods in Manufacturing Industry The Impact of Increased Utilisation of Microelectronics o n E m p l o y m e n t , Production Process, and Job Organisation - The Japanese Viewpoint Yoshiaki Takahashi Abstract 1. The Fundamental Characteristics of Microelectronic Technology 2. The Impact of Increased Utilisation of Microelectronics in Enterprises 3. The Measures Taken for Spared Workers 4. The Impact of the Utilisation of Microelectronics on Job Structure 5. Microelectronisation and the Labour Union References

411 411 411 413 416 417 418

419 419 419 421 423

427 427 427 429 431 434 436 438

E. Comparisons and Possibilities in the Development of Labour Market and Employment Systems A Comparative Analysis of Worker Participation in the U n i t e d States and Europe Bikki Jaggi Abstract Introduction 1. Historical Perspective of Worker Participation in US Industries 2. Worker Participation in US Industries Through Collective Bargaining 3. Emergence of Participative Management 3.1 Nature of Participative Management 3.2 Critical Evaluation of Participative Management 4. Comparison of US Participative System With Plant-Level Worker Participation in Europe 4.1 Worker Participation through Works Councils in Europe

443 443 443 444 445 446 446 446 447 447

Contents 4.2 Divergence in US and European Approaches to Worker Participation 4.2.1 Divergence in the Nature of Worker Participation 4.2.2 Divergence in the Goals of Worker Participation 4.2.3 Divergence in the Scope of Worker Participation 5. US Experience With Worker Participation at the Board-Level 5.1 Board-Level Worker Participation in Europe 5.2 Relevance of European Type Board-Level Participation to US Industries 6. Environments and Worker Participation 6.1 Impact of US Environment on Worker Participation Approach 6.2 Impact of European Environments on Worker Participation 7. Conclusion References Potential Constraints U p o n M a n a g e m e n t A c t i o n as a Function of National Work Meanings and Patterns - Germany, Japan, and the U S A George W. England Abstract 1. Introduction 2. The Meaning of Working Study 2.1 Samples 2.2 Work Centrality 2.3 Societal Norms About Working 2.4 Work Goals 2.5 Work Meaning Patterns 3. Summary Notes References Chances for Flexibility in Cooperation B e t w e e n C o m p a n y M a n a g e m e n t and Works Councils Ernst Zander Abstract References

XVII 448 448 449 450 450 450 451 452 452 452 453 454

455 455 455 456 456 457 461 463 464 467 467 468

469 469 475

Reconciling Efficiency and Equity in the E m p l o y m e n t Relationship John Crispo Abstract 1. The Competitive Challenge 2. The Employment Relationship 3. Employer Responses to These Developments 4. Lessons to Be Learned 5. Conclusion

477 477 477 478 480 481 483

Index

485

Contributors

Adams, R. J., McMaster University, Hamilton Aldrich, H., University of North Carolina, Chapel Hill Blum, R., Universität Augsburg, Augsburg Böhnisch, W., Universität Linz, Linz Crispo, J., University of Toronto, Toronto Danesy, F. C., Freie Universität Berlin, Berlin Dlugos, G., Freie Universität Berlin, Berlin Dorow, W., Europäische Wirtschaftshochschule (E. A. P.), Berlin Endruweit, G., Universität Stuttgart, Stuttgart England, G. W., University of Oklahoma, Norman Fürstenberg, F., Rheinische Friedrich-Wilhelm-Universität, Bonn Gramatzki, H.-E., Freie Universität Berlin, Berlin Gunderson, M., University of Toronto, Toronto Haus, B., Politechniki Wroclawskiej, Wroclaw Jaggi, B., The State University of New Jersey - Rutgers, New Brunswick Jago, A. G., University of Houston, Houston Kortan, J., Uniwersytetu Lodzkiego, Lodz Kraft, K., Gesamthochschule Kassel, Kassel Leibenstein, H., Harvard University, Cambridge Mannari, H., Kwansei Gakui University, Nishinomiya Marchington, M., The University of Manchester, Manchester Marsh, R.M., Brown University, Providence Martan, L., Politechniki Wroclawskiej, Wroclaw Murata, M., Chuo University, Tokio Nikolopoulos, A., Hochschule für Wirtschafts- und Handelswissenschaften zu Athen, Athen Nutzinger, H. G., Gesamthochschule Kassel, Kassel Oechsler, W. A., Universität Bamberg, Bamberg Ondrack, D., University of Toronto, Toronto Osterloh, M., Universität Erlangen-Nürnberg, Nürnberg Picot, A., Ludwig-Maximilians-Universität München, München Putterman, L., Brown University, Providence Ragan, J. W., University of Houston, Houston Reber, G., Universität Linz, Linz Rippe, W., Universität Bamberg, Bamberg Staber, U., University of New Brunswick, Frederictown Staehle, W , Freie Universität Berlin, Berlin Stathopoulos, A . N . , Hochschule für Wirtschafts- und Handelswissenschaften zu Athen, Athen

XX Strümpel, B., Freie Universität Berlin, Berlin Takahashi, Y., Chuo University, Tokio Walter, N., Universität Kiel, Kiel Weiermair, K., York University, Downsview Wenger, E., Universität Würzburg, Würzburg Wheeler, H . N . , University of South Carolina, Columbia Wilson, H. T., York University, Downsview Zander, E., Freie Universität Berlin, Berlin

Contributors

Introduction

A.The Future of the Working Society In part A both Fiirstenberg and Blum analyse some of the recent dramatic changes in the nature of the employment relationship and what these changes may eventually hold for the future. At stake are particular aspects such as intensity of work, work ethics, and the distribution of work and earnings. Fiirstenberg approaches the subject of future working relations and the working society from an industrial sociological perspective, focusing on changing social relations at the work place. Blum evaluates prospects of work in the future from a critical perspective. He argues that societal changes from classical "labourism" to neoclassical capitalism entail the shifting of values from liberalism to those of economic liberalism which are ruled by economic values and economic rationality. Blum's analysis unravels the paradox and irreversability of technological change, division of labour and ensuing technological unemployment.

B.Theoretical Approaches to the Analysis of the ManagementEmployee Relationship Part B deals with key theoretical concepts and recent theoretical developments as they apply to the nature of management employee relations in the context of management discretion. This section begins with a transaction cost theoretical treatise of employment relations by Picot/Wenger. This paper follows it's historic predecessors (Coase 1952, Williamson 1975,1980) in postulating that at the core of observable differences in the organization of work and employment relations lie contractual and monitoring problems. This view is challenged by Putterman, who interprets the hiring of labour through either labour or capital and views evolving forms of work organization and employment relations as a phenomenon of risk asymmetry, following earlier classics (Knight 1933). The unbalanced bearing of risk and associated sharing of profits are shown to be key determinants in the structuring and behavior of the employment relationship. The third paper by Staber/Aldrich takes an evolutionary perspective. It focuses on the impact of variations in the distribution and availability of resources in the environment. Consequently this leads to alternate forms and control types of organizations. In many aspects this approach complements the transaction cost perspective in lending "historicity" to otherwise purely economic interpretations. The fourth paper by Leibenstein/Weiermair strays from the classical assumptions of perfect profit maximization and economic rationality and instead includes arguments based on the YerkesDodson Law in psychology. This law describes relationships between stress and per-

XXII

Introduction

formance and reveals a need for tolerance regarding discretionary behavior, motivation, and effort deviation, within an otherwise solely economic framework of analysis. Wheeler's institutional/biological perspective provides an interesting account of the relevance and predisposition of the human species towards "social dominance", which subsequently is shown to affect and condition managerial behavior and employment relations. Finally, the Dlugos/Dorow/Danesy paper analyses those factors which may determine managerial discretion within an employment realtionship from the perspective of the business politics approach. This approach may be regarded as being interdisciplinary in that it contains elements of both political and business administrative science within the context of the business enterprise. It demonstrates means by which management discretion and the employment relationship can be analysed on the basis of the conflicts of interest which may arise between the parties of an employment relationship and the measures they may take to secure their interests. Although the assembly of theoretical papers dealing with the nature and changing character of the employment relationship could be described as exhaustive, it is probably fair to note the absence of a converging view. The various approaches and concepts presented in Part B, nevertheless, should be considered as useful guidelines with which the reader may want to evaluate specific practical questions associated with variable systems of labour market and employment as detailed in Parts C and D.

C.Management and Labour Market Systems Part C focuses on the impact which labour market systems may have on the enlargement or constraint of management discretion with respect to the organization of work and allocation of human resources. Some papers deal with global changes in industrial relations and labour market behavior in various selected countries including West Germany, the U.K., Japan, the U.S.S.R., Poland, and Greece. The paper by Striimpel highlights the importance of changing work values, illustrates the controversial and ill understood nature of their determinants, and points out possible adjustment strategies among West German firms. In a related paper, Walter explores reasons for West Germany's increasing inflexibility of labour market institutions. He emphasizes aspects such as excessive wage demands by unions, a narrowing of negotiating discretion in labour disputes, and associated effects of wage drift. In addition, he notes the extensive government programs, which support declining sectors and industries. Endruweit in turn attempts to describe the labour market in a functional way. He assumes that local and interlocal labour markets can be distinguished by their degree of required mobility and that there are means by which management may discover a company's correlation to the individual labour markets. The next paper by Gundersonl Weiermair sets out to demonstrate that when faced with institutional and/or legal constraints, "apparent" labour market rigidness may often represent economically efficient response patterns by market participants. This is particularly evident with respect to varying work-time arrangements.

Introduction

XXIII

The next two papers by Ondrack and Adams deal with social and political aspects of labour market's behavior, particularly addressing the role, the impact and the changing legitimacy of labour unions vis-a-vis the discretion and power of management. Although their examples and descriptions are based largely on North American observations, similar phenomena of diminishing power and legitimacy of unions have been noted in Europe and thus the account of their analysis is further applicable. Osterloh's inquiry into organizational and managerial consequences stemming from both production technologies, associated skill requirements, and altered supplies of vocational training, provide a typical West German perspective. In large measure this is due to the unique West German system of vocational training which prevails throughout most industrial sectors. The contribution, nevertheless, shows the integration and dependence between training and the labour market system and as a result is able to circumscribe systematic managerial consequences stemming from varying systems and forms of training. The following two papers make a direct reference to intertemporal changes in the level of discretion and power held by the partners in the employment exchange within the industrial relations context of the United Kingdom and Greece respectively. However, while the Marchington paper stresses underlying relationships between managerial discretion and varying competition in product markets, Nikolopoulos describes emerging Greek schemes of worker participation and industrial democracy. Again using the Greek labour market as a point of reference, Stathopoulos points out that during the 80's Greece has experienced disproportionate increases in labour costs and unemployment. While the continued implementation of the economic policies of the past may be regarded as one alternative, the author argues that these attempts have been ineffective in providing a revitalisation of the private sector or creating a climate of confidence for entrepreneurial activity. Thus, he cites a second alternative which could also have implications for management discretion. The following two contributions deal with human resource management issues in the context of labour markets in planned economies. They yield interesting insights regarding the scope and more exactly the limitations of manpower management in Poland and the U.S.S.R. The first of the two papers presented by Gramatzki, show the development of human resource strategies among state enterprises aimed at moderating inefficiency effects associated with the centralized allocation of resources. Kortan's paper similarly descirbes varying degrees of labour hoarding among Polish enterprises in the face of economic reforms, changing demographics, and industrial restructuring. The final two contributions in Part C deal with manpower adjustment policies of Japanese firms following the changes in the structure and conduct of national and international markets. The paper by Marsh/Mannari describes the typical modernization related adjustments in the form of computerization and the associated increase in part-time and contractual labour. Both measures are viewed as trends reflecting altered market demand profiles and technological change. The authors conclude that the Japanese "life time" employment system has hardly been a constraint in management's

XXIV

Introduction

attempt to restructure the work force. The same conclusion is reached in the Murata paper, which, however, attributes a fair amount of the Japanese firms' adjustment capabilities to flexibilities inherent in Japanese labour markets.

D. Management and Employment Systems The central theme in part D ist directed toward the effects which various facets of the employment relationship may have on management discretion. The following papers include analyses of the possible impact of employment related situations; for example: participation and co-determination, workers' interests in work and leisure activities, technological and natural environments, anti-discrimination and severance regulations, as well as qualitative and quantitative considerations regarding manpower. Nutzinger observes that while the various forms of employee participation are often viewed as constraints to managerial discretion, instances can be cited in which participation may in fact lead to increased managerial discretion. It may be assumend that management's willingness to apply a participative leadership style varies between cultures. Based on a study by Jago/Vroom (1978), Bôhnisch/Ragan/Reber/Jago outline the means by which these culturally varying inclinations can be empirically defined and predictions can be made. In his paper Staehle reflects the extent to which changes in societal values regarding work, leisure, technology, and the natural environment have taken place, and how these respective changes affect personnel attitudes and behavior, and perhaps necessitate managerial reactions. Management discretion has also been influenced by increases in part-time labour. Various industrial nations have experienced this discretionary change. Upon investigating both supply and demand related causes of this development, Weiermair presents some of the implications which this development may have regarding management discretion in given employment systems. Management discretion is also viewed in the context of management's ability to respond to changes in product demand by adjusting the size of it's work force and man hours given a certain work force. In a theoretical and empirical account, Kraft investigates the adjustment patterns and argues that there is usually a cost related lag between the time that changes in demand occur and the time when the adjustments are made. Rippe reflects the extent to which the continually growing influx of university graduates in West Germany's industry affect organizational structures and management discretion. On the basis of empirical findings, he argues that in spite of the increasing number of academic managers, management discretion will, by and large, remain unchanged in the future. The employment relationship and management discretion may, however, be effected by anti-discrimination legislation as well as legislation regulating employee severance. Building a case for affirmative action and equal pay in the context of anti-discrimination law, Wilson argues that management may be forced to adapt it's values and practices in view of the continuous and long-term obligations which managers and their organizations have. Oechsler, in turn, reports on the regulations pertaining to employee sever-

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anee in Germany and contends that while the closely knit system of laws and court decisions does not appear to deter managers from executing planned dismissals, workers' representations in companies do. Reflecting the manpower shortage in Poland, both Martan and Haus review the means by which production-related constraints may be overcome. Although the formation of company economic groups and the institutionalization of part-time employment are viewed as possible solutions, they are also subject to controversy. Takahashi discusses the impact of increased utilization of microelectronics on employment, the production process, and job organization in Japan.

E.Comparisons and Possibilities in the Development of Labour Market and Employment Systems Part E of the present publication emphasizes cross-cultural comparisons, outlooks with regard to the development of labour market, and employment systems. These are viewed in the context of the current or future effects which they may have on management discretion. In his paper, Jaggi presents a comparative analysis of worker participation in the United States and Europe. He suggests that despite the various differences between U.S. and European participation approaches, they are also complementary and should be synthesized in order to develop a general harmonization in the framework of international management practices. Based on the results of working data from national labour forces in Japan, Germany, and the U.S.A., England examines potential constraints upon management discretion as a function of work meaning variables and patterns. He argues that while the discretion of Japanese managers is constrained more by expressive than by economic issues, the contrary holds true in Germany. The situation in the U.S.A. lies between that of Japan and Germany, but is more akin to that of Japan. As noted above, management discretion can be effected by the acts of participation in the way of co-determination. From a practitioner's viewpoint, Zander reflects some of the possibilities which management may have in expanding it's discretion through cooperation with the works council within the limiting framework of co-determination. As a summary of the present publication, Crispo argues that free societies are finding it increasingly difficult to reconcile competing claims to efficiency and equity in the employment relationship. Upon discussing various contractual, judicial, and legal constraints and their effects, Crispo suggests means by which the employment relationship could be regulated with greater flexibility in today's dynamic economic environment.

A. The Future of the Working Society

The Future of the Working Society Friedrich

Fiirstenberg

Abstract Any future-oriented analysis should start by defining the object under change. Accordingly, characteristic features of "working society" shall be mapped out, employing a structural approach which considers both situational and motivational factors. Thus, "working society" is conceived as a complex action context, comprising technological production requirements, economical exchange and decision processes, goal- and interest-bound organization structures, socio-cultural orientations and personal needs, interests, and actions. Consequently, there is a wide range of possible indicators for structural change. They shall be analyzed in relation to the volume and content of work, its organization, and its personal and social meaning. The view shall be maintained that work as a central value in life, closely connected with the shaping of modern industrial society, is dissolving as a consequence of a growing differentiation of social life. The emerging perspectives for managerial strategies and employment systems shall be dealt with separately.

1. The Image of a "Working Society" The constitution of work as a central value in life is connected with the binding conviction that all capable members of a society have to work, ought to work, and ultimately also should like to work. The urge to work results from the necessity to provide the means for living. The obligation to work is based upon values and norms putting work at the basis of a meaningful life. The willingness to work results not only from this setting but also from the expectation that primary goals of personal life can be achieved through individual effort. Within the European cultural context two lines of development are characteristic: the institutionalization of work as a central concern of life within a general ideal framework conceiving work as "profession", and the gradually growing tendency to diminish the constraints of work in favour of its potential for self-realization. Already within preindustrial status society, long-term qualified gainful employment even for manual workers was marked by professionalization, shaping the main circumstances of social life. Occupational work as a service owed to God was even connected with religious beliefs. After the secularization of such convictions the meaning of work still remained fundamental to the perception of man's role in society. Wilhelm Meister in the novel by Goethe finds self-fulfillment in professional work. Contrasting to this idealistic orientaManagement under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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tion, the reality of work changed in the course of industrialization. Increasing division of labour and market influences upon employment chances led to the integration of work into functional contexts of rational utilization. The more work became rationalized, the more working man became aware of his economic interests. The dynamics of work and its impact upon modern society, however, still are influenced by the contradiction between the "professional" ideal of work - the ideal of self-realization through work - and the reality of work as a context of utilization processes determined by technological and economical constraints. Without exaggeration it may be stated that basic structures of modern European society owe their existence to the efforts to overcome this contradiction, e.g. systems of social security, industrial relations, and the humanization of work. Thus far, working society has proved to be more than the mere product of economic needs. It was shaped as the counterimage to a society based upon privilege and autocratic representation by a leisure class. The present discussion of structural changes in working society has to be seen against this background. Unmistakably, however, work-related structures in modern society have lost in relative importance due to increasing social differentiation of the spheres of life. Increases in productivity have elevated the standard of life and, at the same time, reduced working hours. Individualized, leisure-oriented life-styles became possible for major social groups. In relation to the 19th century, it makes sense to identify differentiated "occupational cultures", e.g. of "workers", "farmers", or "government officials". In the 20th century such typification has lost grounds considerably. The pluralistic mass culture of a maturing industrial civilization has provided additional means for social differentiation and self-identification beyond the world of work. But only recently, the primacy of work and "professional" orientation has become open to question at a large scale in the public discussion. Therefore, in order to clarify the issue, we should investigate the indicators of such a change and the evaluation criteria employed.

2. Indicators of Structural Change Using the slogan "working society is lacking work", the lack of full employment is widely considered an indicator for structural change. However, the possibility can not be excluded, that middle-term adjustments in employment systems and demographic trends may stabilize a high employment level, perhaps at the price of rationing individual employment within the total career context. Changes in qualitative employment structures do not show definite trends, neither in the direction of dequalification nor of requalification at a large scale. Nevertheless, there is considerable restructuring, especially in areas affected by new technologies and increased rationalization. Qualification changes, however, are not entirely predeter-

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mined by technological innovation. They rather result from managerial decisions for or against models of qualification distribution, considered functional within the organization context. Qualification demanded at a given workplace thus results from work design according to a preconceived model. Basically, a shift from physical to psychical work load, combined with certain work ethics, suggests rather a more intensified utilization of qualification potentials. In addition to that, quick structural change releases pressures for increased learning, which again suggests no lasting reduction of qualification standards. There are some definite trends in the division of labour. The application of new technologies shifts the frontiers between man and machine operations. Related to this, but additionally induced by market developments, service functions increase, while production functions diminish. Concentration and integration processes at an international scale result in new economic structures. As a new factor the horizontal division between dominant centres and dependent peripheries of economic activity gains in importance, also its impact upon allocation and evaluation of work. As a result of the increased division of labour, work organizations have become more complex. They are largely shaped by technical and economic requirements, though considerably modified by social standards and demands. The criteria of efficiency and profitability are augmented by the criterion of acceptability. This process is institutionally fostered by structures of consultation and co-determination, sanctioned partly by law, partly by collective agreements, which led to a considerable reshaping of workrelated decision-making. This does not imply a decrease in the importance of work. On the contrary, person-oriented and social considerations gain in relative weight against merely economic and technical reasoning. When considering changes in criteria, methods, and results in work evaluation, we notice a growing problem-awareness. Performance of work can no longer be measured in terms of a certain amount and quality of work, ascribed to individuals and authoritatively fixed and standardized. Relevant norms are increasingly social contracts. Changes in work-related motivation partly result from socialization influences within families, schools, and universities. There are indicators for a change towards so-called "post-materialistic" sets of values and corresponding individualized work attitudes, aiming at optimal self-presentation towards others and self-realization in terms of a personal life-style. But work motivation is also conditioned by actual work situations. Bureaucratized and rationalized work structures, considerably changing according to external pressures, do not provide stable life-time jobs, where skill is an individual property. The changing world of work calls for more rational and functional attitudes and a high degree of flexibility and even mobility. Work experience can not provide a universal meaning to life. A total identification with work roles leads to the reduced personality of a "workaholic" and to psychical deprivation. As a consequence, the motivation to work is increasingly perceived in its relative importance for the total life situation of individuals.

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In summing up, we may state the traditional notions of a working society have become obsolete due to new patterns of economic growth, the instability and constant restructuring of work situations, and changes in value orientations related to work. However, the future of working society is not only a consequence of some objective trends but also a product of strategies applied in problem-solving processes. Therefore, it is important to analyze the perception and relative evaluation of the trends described thus far. Especially from a managerial point of view it matters how changes in working society are perceived and which consequences are drawn for managerial action.

3. Alternative Interpretation Patterns The differential evaluation of social change related to work is shown in three different models of orientation towards the future. Especially in the mass media a view is advocated announcing the end of "working society". It is based upon apparent limits to economic growth, the existence of long-term unemployment, and changing value orientations towards effort and work. As a consequence, the world of work is supposed to lose in relative importance in favour of alternative ways of life. This conclusion, however, contrasts with the observation that levels of aspiration related to work rather show a rising tendency and that especially women are demanding more chances for full participation in the world of work. Besides, even under the pressure for eventually rationing employment chances, there are ample obligations to work in order to fulfill private duties. Self-service and do-it-yourself-actions do already occupy a substantial part of so-called leisure time. The image of a population mainly consisting of pensioners in view of an immensely increased capital stock is certainly Utopian. Another model less openly professed but nevertheless conceivable, assumes the gradual regression of work-related social structures. A major reason for such a development could be seen in the insufficient or even lacking adaptation to change and the inability to cope with internal conflicts. Indeed, there are threats to the functioning of modern working society, e.g. sudden cuts in ressources, environmental disruption, strikes of long duration, and structural economic disequilibrium. There are also notions of a fateful lagging behind of the European or Atlantic nations in comparison with the Eastern Asian or Pacific nations. Sometimes such a line of thought is based upon a pessimistic view of the future propensity to invest in highly developed countries. Thus far, however, a fundamental weakening of modern working societies can not be observed. On the contrary, differential accumulation of wealth and command over ressources clearly show their increasing advantages in comparison with developing countries. As a third model the view remains that the present type of working society is gradually moving towards another type with apartly different structure. This may be illustrated by the following trends: 1. Growing capital utilization provides every worker with a highly productive technological potential. This implies a qualification for high-level performance. Manual

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skill increasingly is replaced by technological know-how of the interrelationship of components within socio-technical systems. Special skill is needed to recognize operating troubles early. 2. Increasing differentiation of markets and accordingly of demand in connection with ongoing innovation, leads to a greater mobility and flexibility of work structures. Change of workplace and occupation have become normal events, as well as the flexible combination of two or even more jobs. 3. Due to productivity increases only a minority of the labour force will find employment chances in the primary and secondary sectors of the economy. Within the tertiary sector continuous rationalization is limiting labour demand as well. But there is an expansion of an already informally existing "quarternary" sector which might become fully institutionalized in the not too distant future. This sector is marked by individual and co-operative economic activities with restricted marketability. They usually imply individual contributions to the improvement of the quality of life for small groups. A typical example is taking care of children, handicapped, and elderly people. 4. Contrasting to earlier experience, however, the shifting of the labour force between sectors of the economy more and more results in dualistic work commitments: within highly rationalized work organizations only part of the individual work capacity is utilized under the condition of shortening work hours and flexible working time. The rest goes into the quarternary sector and is compensated partly by remuneration in kind, e.g. the right to receive care in case of need, partly by transfer of money according to new distributive formulas, e.g. tax reductions. Generally, there will be more "work combinations" of market-oriented and subsistence-oriented performance. 5. The combination of different jobs and of jobs with other work activities will increasingly vary according to age. Thus, new career patterns may develop, adjusting working conditions to individual changes in capability. 6. Such a flexibilization of occupational life will be necessary to overcome frictions deriving from the aging process of the population and the increasing internationalization of labour markets, e.g. in the EEC countries. 7. Increasing rationalization of work organizations, also required in order to utilize ecological ressources more considerately, is not easily matched with growing individualization of interests and basic socio-emotional needs. Besides, a wide range of conflicts might arise as a consequence of differential perception and distribution of risks. Therefore, conflict management by socio-technical experts will be needed in addition to the management of economic and technical processes. 8. In order to obtain partial release from rationalization pressures during work, alternative ways of life for limited periods will become increasingly acceptable, e.g. by further developing the concept of a leave of absence for eductational purposes, offering new personal, social, and cultural experience, which in turn might enrich working life. 9. There will be growing differentiation and segmentation of work situations, also concerning their sequence during working life. Therefore, an individualized career planning becomes possible and necessary. Such a development might help to reduce

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tensions between different spheres of life with conflicting role expectations, e.g. between work organization and the family, between public duties and private demands. Such a scenario still offers ample space for the further existence of basic traits of the present working society, at the same pointing to its potential for meeting both objective requirements and subjective needs.

4. Perspectives for Management Assuming that "working society" is characterized by a sequence of different phases, corresponding features of employment and management systems may be described. Within a first expansive phase basic traits of "working society" are formed and, starting from some key areas, are spreading over the total society. This process is marked by symptoms of social crisis. The emerging employment system is based upon labour markets which, due to extensive labour supply, are often in a state of disequilibrium, resulting in relative deprivation of workers. Management strategies still are restricted to controlling the relationship between wage and effort. However, the first attempts are made towards establishing systems of fringe benefits. Within the second intensive phase a stabilization of "working society" gradually takes place by giving social relations a new quality and order. Like in other areas, the institutionalization of new employment systems proceeds by establishing relatively efficient organizations representing workers' and employers' interests within a legal framework provided by the government. Systems of social security provide the fundament for gradual development towards a welfare state. Management strategies are focussing upon more rational and intensive utilization of manpower by "scientific management". Industrial relations are augmented by human relations. The third integrative phase of "working society" is marked by advanced rationalization of work organizations, also increasingly within the service sector. There is a growing interdependence between economy and society, as shown e.g. by political influences upon economic processes and the influx of managerial considerations into government. The world of work becomes part of a pluralistically structured society, increasingly enabling the individual to match private with work-related and public interests. The employment system becomes more flexible, partly by greater differentiation of employment conditions, labour markets, and the regulative framework. Managerial strategies are increasingly based upon matching technical and economic requirements with individual and group interests. The hazards of mechanization and automation are made more acceptable by offering greater chances for employee participation. Structural change in working society is a great challenge to management and to its basic objectives: maintaining sufficient autonomy of action and situational control, promoting high and continuing motivation to work and adjusting both qualification and competence of personnel, including the managerial staff.

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The chances for management to act efficiently and goal-oriented under conditions of change and uncertainly largely depends upon the successful search for alternatives. Therefore, providing margins for planned action becomes a main strategy, also in employment relations. The relevant trend towards flexibilization and differentiation of employment systems corresponds with similar trends in technology. An important field for testing such intentions are regulations of working time. Any attempt to improve the motivation to work has to consider the fact that obstacles have not only to be overcome by considering work structures but also by reflecting the tensions between the world of work and the total life situation. As there are little chances for management to positively change a general societal "value climate", improvements in the social organization of the firm are the adequate starting point. "Humanization" of work situations, individual career planning, and better communication are examples for strategies to improve motivation. As motivational structures become more heterogeneous, a graded approach appears to be feasible, giving chances for partial identification with work also to those whose main life interests lie outside the work sphere. Qualification as a means of achieve competence in handling problem situations has become a major objective of management. The faculty to communicate, to train, and to organize in a socially acceptable way has become indispensable for managers. Of course, this has to be combined with functional competence concerning the work flow and its supervision. But the shaping of social interactions, the ability to communicate with persons, become increasingly important. Profound doubts may be expressed whether managerial efficiency in an age of information technology can be mainly achieved by just promoting the ability to formalize and to handle abstract, "ideal" systems. Such a necessarily incomplete survey of trends in working society ultimately calls for clarifying the basic convictions underlying such an attempt. They may be summarized as follows: work as goal-oriented activity to provide the means for life is a basic phenomenon of human existence. As such it influences all spheres of life, being at the same time a part of social life itself. Therefore, it is not possible to stabilize society only by reforming work, or, on the contrary, to deny work as a fundament of social relations. Work is integrated in exchange processes by far transcending the well-known patterns of production and consumption or work and leisure. Everyone trying to influence this context - like managers in their practice - should be aware of the fact that he is not only discharging action but also counteraction. This implies the chance as well as the limits of work-related planning. Thus, a promising strategy could be the matching of extremes. From this point of view, the decreasing willingness to overidentify with work and the increasing desire to lead a more balanced personal life might well be stabilizing factors in the future development of working society.

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References Altvater, E., Baethge, M. et al. (1985): Arbeit 2000. Über die Zukunft der Arbeitsgesellschaft, Hamburg: VSA-Verlag. Benseier, F., Heinze, R. G. and Klönne, A. (eds.) (1982) -.Zukunft der Arbeit, Hamburg: VSA-Verlag. Brandt, G. (1980): Die Zukunft der Arbeit in der "nachindustriellen" Gesellschaft, Frankfurt. Gershuny, J. J. (1981): Die Ökonomie der nachindustriellen Gesellschaft. Produktion und Verbrauch von Dienstleistungen, 2. Aufl., Frankfurt: Campus. Offe, C. (1984): Arbeitsgesellschaft. Strukturprobleme und Zukunftsperspektiven, Frankfurt: Campus. Opaschowski, H.W. (1983): Arbeit. Freizeit. Lebenssinn? Orientierungen für eine Zukunft, die längst begonnen hat. Opladen: Leske und Büdlich. Stooss, F. (1985): Verliert der "Beruf' seine Leitfunktion für die Integration der Jugend in die Gesellschaft? Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, 2: 198-208. Strümpel, B. (1985): Arbeitsmotivation im sozialen Wandel. Die Betriebswirtschaft, 45,1: 42-50.

Labour as Factor of Production or Yardstick for Distribution Reinhard Blum

Abstract Along A. Smith's famous beginning of his "Wealth of Nations" "The annual labour of every nation is the f u n d . . . " it will be argued that changing this classical "labourism" into neoclassical capitalism, with production and distribution according to a production function, means changing the values of liberalism into those of economic liberalism ruled by economic values and economic rationality. Theorizing, expanding from partial analysis of single markets to total analysis of the market economy and even the market society, creates pure theory. When applied to real-world policies, theory changes into ideology. Therefore, if the economic subsystem creates "social problems", it is not the affected people, receiving support from social policy measures, who are the free-riders of a society operating along traditional economic theorizing, but the economic system itself. It is here, where class struggle between labour and capital originates, a source not properly recognized by reasoning that follows free market and free trade strategies. Strategies along "third ways", like the social market economy of the FRG, are regarded only second-best solutions by traditional economic theory. The logical and theoretical errors behind this point of view shall be revealed in order to take into consideration social harmony in the development of the future work society.

Introduction Asking a man not trained in traditional economic theorizing who is producing our wealth, no doubt, he will answer that men are áoing the job. But in economic theory, men and their work are only one factor of production. This factor tends to be displaced by capital and capital-embodied technical progress, thus bringing class struggle between labour and capital into existence. The social market economy in the FRG as a "third way between capitalism and socialism" aimed at offering a special labour market and employment system, avoiding the class struggle of the past, but using the dynamics of markets. This strategy of economic policy created both the German "Wirtschaftswunder" (economic miracle) after the Second World War and the welfare state. Economic theorizing tends to count the former as a success of the market economy and the latter as a factor creating at most only second-best results. This suggestion is very important for the future of the work society. The same economic theorizing predicts that the work society is running out of work. This paper tries to Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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demonstrate where economic theory fails, by discussing (1) production and distribution in the framework of traditional economic theory, (2) new theoretical foundations of an old paradigm, (3) new theories for man instead of a new man for theories, (4) liberalism or economic liberalism as ruling paradigm.

1. Production and Distribution in Traditional Economic Theory Economic theorizing in the course of the history of economic thought starts as political economy replacing "practical theology" during the Middle Ages. So-called traditional economic theory begins with Adam Smith's "Wealth of Nations", setting up an economic strategy of modern-times liberalism against the political economy of mercantilism.

1.1 Mercantilism, Labourism, and Capitalism Mercantilism thought of wealth as arising from trade with foreigners and from measures and privileges by the sovereign. Therefore, it was revolutionary when A. Smith demonstrated that the wealth of the state originates in the wealth of the single man who is most motivated to pursue his own happiness and property through individual freedom in his economic activities. The invisible hand of competition in markets then forces private economic endeavours of individuals to converge to a common good. Thus, our basic economic philosophy stems from Adam Smith's "Wealth of Nation". It begins with the famous statement: "The annual work of every nation is the fund which originally supplies it with all the necessaries and conveniencies of l i f e . . . " . It appears quite paradoxical that what is later labelled capitalism starts out with such an emphatic confession to labour as the fund of wealth. "Labourism" would seem to be the more suitable term. Indeed, classical economic theory begins as "labour theory". It is labour incorporated in the production of goods that determines value. But thinking along this argument today indicates socialist ideology going back to Karl Marx. The old labour value theory kept together labour as the main factor of production and as additional yardstick for the distribution of wealth, following "naturally" "the different ranks and conditions of men in the society" as A. Smith had suggested. These "labour costs" corresponding to the ranking in society then determine the value of production, including capital goods which are kind of "stored labour". Labour and capital together are responsible for the product, the ranking of man in society is responsible for the distribution. But it cannot be separated from the fact that the annual work of a nation is the fund of its wealth. Compared with the feudal rights of the sovereign and the privileges he granted to his subjects, stressing annual work as the origin of wealth, is revolutionary and justifies the label "labourism". The picture changes when factor markets are introduced. Then it happens that labour loses its pivotal position in production and distribution, and capital takes its place

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instead. It is offered by capitalists, if profits are expected to be sufficiently high. If they increase the stock of capital, supply will increase, too. But labour is treated the opposite way: it is demanded more, if its price (wage) is low. Prices too high compared to those of capital will lead to substitution of labour by capital. "Labourism" of A. Smith changes into capitalism, value theory into price theory and capital theory. Markets as an old "social invention" of mankind, coming into existence as an institution introduced by the state, are on their way to get rid of the state. This is the important threshold from partial analysis of single markets to a market economy as an ideal for the whole economy and the society (market society). Now, distribution does not follow the "natural path" along ranks and conditions of men in society, but distribution is the result of the "economic path" of market forces pushed forward by the profitability of capital. The economic laws of production become the laws of distribution (Ricardo). The labour market is a market derived from conditions on the capital market and regulated by the wage, as Malthus demonstrated in his "population law". So, in an ideal economic world - a social system closed by pure economic rationality - full employment of labour is given. But this happens under such social conditions for man that slaves in the feudal system may have apeared to be better off, for their owner had to care for the whole man, at least in so far as to preserve the health and strength being the basis for their performance. Pure capitalism leaves man inside and outside the employed labour force as a social problem for society, pauperizing the labour force - as experience from the industrial revolution demonstrates because capital promoted by technical progress increasingly displaces labour. This "market deficiency" was creating reactions in the political sphere of society and also in economic science.

1.2 Socialism, Social Liberalism, and Democracy Pauperization of a considerable part of the population during the industrial revolution could not be overlooked. Class struggle between labour and capital came into existence. But different authors arrived at different conclusions. Karl Marx followed the path of classical economic theory as value theory on the basis of labour units incorporated in products including capital goods. But the value of labour is not determined by markets and private property, but - following the origin of economic science as political economy during mercantilism - by political decision of the state, replacing coordination through market prices and profits from private property. In the view of our topic it is not important who is right - there has been discussion until today (Nell 1981); it is important that socialism changes the national distribution of A. Smith among the different ranks and conditions of man in society into a political distribution by the socialist state and its ranking of socialist man in a socialist society. These "socialist laws of distribution" also represent the "laws of socialist production", determining the path of future economic development by political decision on what part of production shall be devoted to consumption and what to capital goods.

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The socialist view on labour and capital ideologically encouraged trade unions and labour parties to put forward arguments in favour of more social justice for labour by breaking up social structures benefiting capital - the haves - in production and distribution. This challenge received a response in economic liberalism and economic theory. J. St. Mill, challenged like Karl Marx by the social problems of industrial revolution, set up the position that the laws of production can not be the laws of distribution, too, as Ricardo had suggested. Distribution is locked into a social structure of the past and its (feudal) privileges. Policy measures taken by the state are necessary to compensate for this inequality. Along that line of thinking economists, especially in Germany, at the end of the 19th century developed a "social liberalism" as an alternative to "economic liberalism" and its "free market economy". They put forward the argument for a special social policy and new social institutions. It is here where the roots for the social market economy in the FRG after World War II can be found. Another root originates from the consequences for economic thinking that arose from the experience of the world-wide economic crisis during the 1930s and its harmful results for the work society. The state returned to the economic world, not only for reasons of social security and social justice towards labour, but also for the sake of political stability of the economic and social system.

1.3 From Microeconomics to Macroeconomic Revolution In search of the origins of the Great Depression two arguments promoted a new political economy: market processes and competition as invisible hand are not perfect by their own natures. The firm had developed into big business and its cartels restricted competition. This had altered the legal and economic structure of society to an "economic state" - an idea which was renewed by J. K. Galbraith more than 30 years later when he discovered the "military-economic complex". A special policy by the state towards a better functioning of competition through new legal and economic structures and for taking into account the values of social justice and national interest was recommended by German economists during the 1930s, well-known as "Freiburg School" or "ordo-liberalists". They form another root of the social market economy in the FRG (Blum 1969 and 1980). This view received important support by the "Keynesian revolution" in economic theory. It changed the traditional microeconomic paradigm of general equilibrium in markets towards state responsibility for economic stability. Social transfer expenditures of the state became "built-in stabilizers". Economic policy following that line is sometimes labelled as neomercantilism (Blum 1982). J. K. Galbraith characterized this economic policy as kind of a "social security for capital". The new paradigm of instability of markets was a challenge to traditional economic theory.

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2. New Theoretical Foundations for an Old Paradigm The idea of labour and capital as factors of production and yardsticks for distribution has not turned out to be a "natural law", but a decription of economic processes coordinated by markets, especially by factor markets. But there is some interrelation between the needs of economic policy and ecnomic theory (Blum 1970).

2.1 New Capitalism by Counter-Re volution Based on macroeconomic theory, it was mainly modern growth theory (against the old microeconomic version of A. Smith, renewed by J. Schumpeter 1912 in his theory of economic development) who restricted the "Keynesian revolution" to a kind of "neocapitalism", putting forward classical economic theory as a theory of capital and inventing the macroeconomic production function. It tries to explain (better: to describe) production by a production function with land, labour, and capital as inputs (production factors). With the rise of capitalism, land has been more and more neglected as a production factor. Instead, technical progress is called the "third production factor". Capital-embodied technical progress transforms the production function into a function in labour and capital. The simplest version reduces input to capital, assuming labour to be abundant. Long-term dynamic equilibrium is then demonstrated to depend upon permanent capital investment.

2.2 In Search of Microfoundations of Macroeconomics The deep theoretical break between micro- and macroeconomics challenged traditional theory. There were two ways to deal with that challenge (Bell 1981): (1) bringing macroeconomics back to microeconomic theory by demonstrating that it fits into general equilibrium theory; or (2) fighting against the unconventional wisdom by counterrevolution on a neoclassical basis, mainly known as the monetarist counter-revolution. Textbooks on distribution theory dealing also with macroeconomics are written under titles like "The Neoclassical Theory of Production and Distribution" (Ferguson 1969). The effects of unionization on distribution are derived in a general equilibrium framework (Johnson/Mieszkowski 1970). An empirical description by a New Zealand economist, A. W. Phillips, of the relationship between the increase of nominal wages and the rate of unemployment in GB became a milestone on the way to microfoundations of macroeconomics (Bell 1981: 55). Two of the most renowned economic theorists, P. A. Samuelson and R. M. Solow, took the opportunity to create the "Phillipscurve" or the "Phillips-theorem". Supposing a fixed relationship between nominal wages and price level in the economy, unemployment appears to depend on the rate of inflation and the rate of growth of nominal wages, therefore connecting microeconomic prices and wages with macroeconomic

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unemployment and demonstrating that labour unions may arrive at higher nominal wages. Such higher nominal wages, however, lead only to higher inflation and higher unemployment. Discussion is still going on regarding the "natural law" behind the Phillips-curve. But there are some doubts about explaining unemployment as a microeconomic problem (Hall 1983). From the perspective of this paper the question arises, if there is in a market economy with state interference a tendency to compensate policies towards greater social justice by raising prices, and therefore to decrease again income for labour in real terms. Inflation then becomes the result of the class struggle between labour and capital, originating in the economic power of capital to raise prices, of labour to raise wages, and of the state to stabilize the economic process by income policy or some other policy measure. Economic theory as capital and distribution theory then participates in the distribution struggle between labour and capital mainly on the capital side (microeconomics) or for reasons of stability on alternating sides (macroeconomics). Those are the frontiers where supply-side and demand-side economics have been fighting their battles recently. In the FRG the new class struggle took place in a new institution, the "concerted action". It was established 1967 by the "Law to Promote the Stability and the Growth of the Economy" and ceased to exist ten years later during a new quarrel between labour and capital about worker co-determination in firms. It is obvious that an institution based on the idea of countervailing power between labour and capital is bound to fail, for class struggle among these groups cannot be reconciled by an institution aiming only at income policies for short-run economic equilibrium. Moreover, a coalition between labour and capital does not guarantee the common good or public wealth (Blum 1986). This is particularly true, if policy in general is guided - as it is again these days - by slogans of old class struggle like "freedom or socialism" vs. "freedom through socialism", or "more market, less state" vs. "more state, less market". Economists, especially as politicians or managers, very often forget the social market economy and refer to the free market economy in order to praise the efficiency of markets and the inefficiency of the state. This is supported by a "new political economy" as "economic theory of policy".

2.3 From Political Economy to Economic Theory of Policy Economic theorizing, bottom-up from the microeconomics of single markets to a total analysis of the market economy and market society, is considered the highlight of modern economic theory, named modern or new political economy (McKenzie/Tullock 1978). Using the tools of classical microeconomics, it analyzes policy, democracy, property rights, all kinds of human behaviour, and social justice and arrives at the conclusion that "state deficiency" or "democracy deficiency" is hurting the welfare maximum more than the accused "market deficiencies". From that point of view, which has been recognized as "economic imperialism" (Boulding) or "elephantiasis", "hybris or superbia" of "rationalist-Utopian", "Platonic

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economics" (Kristol 1981: 203, 215), welfare states like the social market economy in the FRG are seen to depart from economic rationality and to turn into "rent-seeking societies" (Buchanan et al. 1980). Economists ask whether expanding the welfare state, democracy, and a free market economy (not a social market economy) are mutually compatible (Bernholz 1982), or whether this leads to "creeping socialism" (Weede 1984), and they draw conclusions on the rise and fall of nations (Olson 1982) and the creation of labour unemployment. It is necessary to cast some light on these predictions for the future of work societies in modern industrialized countries. A potential guide might be the hypothesis that welfare states are bound to be inferior because they are not following the path to a welfare maximum postulated by economic theory. This raises the question, (1) whether judgements of that kind are in accordance with real man and society,® whether they are logically valid at all.

3. New Theories for Man Instead of a New Man for Theories It is worthwile remembering an old wisdom from the bible in order to deal with theories and their relevance for man: "Wherefore by their fruits shall ye know them" (Matth. 7/ 20). Let us then collect some "fruits" of traditional economic theorizing in theory and practice. This may lead to new approaches towards theories for man and his society instead of pure economic man and his (economic) society.

3.1 Bad Fruits of Traditional Economic Thinking There are again rumours in the economic literature that economic theory has arrived at a serious crisis (Bell/Kristol 1981, Kuttner 1984, Leijonhufvud 1973). But similar to the reaction to the Keynesian revolution, economic theorists respond by standing together and by raising the old flag. But the more they move from partial analysis to total analysis of the market economy and market society, the more theory becomes pure theory, and that means ideology, if it is applied to policy for more public wealth. Despite the warning against total analysis expressed already at the end of the 19th century by A. Marshall, economic progress is seen in economic theory in terms of models of the total economy and total society, with the result already suggested that society is reduced to economic society and man to economic man. As for our topic, theory implies (Krelle 1979: 94): "This is the real situation: political disagreement within the society induces a group behavior which is inconsistent with full employment. But all this is perfectly understandable by the ordinary economic theory. There is no 'crisis of economics' but there is a 'crisis of community spirit'. Adam Smith's statement that the pursuit of selfinterest yields optimal results for the society as a whole is not generally true, unfortunately".

To pursue their happiness - as is implied by the quotation - man has human being or factor of production has to behave according to "ordinary economic theory". Thus,

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man arrives in that economic world at best to be "human capital". Unemployment of labour looks like an ordinary abundance of goods. The best remedy is to lower the price. Some fruits of this thinking from German political reality shall be presented here: Right economic thinking seems to be represented best by recommending lower and more flexible wages and more modest expectations towards social security and social justice. Higher wages and "social costs" force firms to introduce more and more technical progress, substituting labour as factor of production by capital which is promoted by capital-embodied technical progress. Plants without human beings are predicted as a threat to the work society, with robots making no claims for higher wages, more leisure, and more social security. So economic theorizing arrives at the opposite end, compared with A. Smith's original starting point: Capital is the fund of wealth. Plants without humans mean, - taking the argument to its logic limit - humans without income, and an income distribution not taking into account that labour is recognized to be the fund of national wealth. So technical progress as a "job-killer" threatens man instead of creating hope for more leisure for activities outside the economic sphere, where "moral sentiments" can rule. Those were the subject of a book by A. Smith, preceding his Wealth of Nations, but not equally well-known within the economic profession. What looks like ethical, moral, social, and political seems to be irrational, emotional, and disturbing the rational path to a welfare maximum. From a macroeconomic point of view, however, this looks disturbing: robots face the serious disadvantage that they do not consume the mass production they create. Capital is by economic definition not consumption, but requires profits aiming at new capital formation. Even more seriously hurting for man as a human being and the social end of economic means in the conventional economic wisdom that asks always for the "price" of social security, social justice, social peace, full employment of labour, better environment, and less working time. Robots seem to be too expensive to stop them working during weekends - an argument made by the head of the Federal Ministry for Labour and Social Affairs in the FRG. But what about the "costs" of a working society without social peace, good environment, full employment, and without weekends for family life and leisure? To conventional wisdom, unoccupied capital looks like a waste of resources, unoccupied labour, however, looks more like a "social problem". The same logic applied to international economic and social relations looks as follows :(1) our former head of the Federal Ministry for Agriculture under a social-liberal government before 1982 stated: There is sufficient economic performance to feed the growing population on earth - only purchasing power is lacking to those starving people. (2) His fellow party member, the head of the Ministry for Economic Affairs within the conservative-liberal coalition after 1982, summarized his experiences during a trip to the Far East, answering questions from journalists while he was still abroad: Wages are too high even in developing countries, as huge unemployment in those countries indicates. Back home he immediately got an answer from the head of the labour group within the christian-democratic party: Something must be wrong with an

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economic thinking that declares starvation wages in developing countries to be still too high. These arguments also cast some light upon the issue of "international competitiveness" through low wage costs, stressed by traditional economic theory and its extension into international economics as international free trade. This reveals hidden mercantilism of former times, making free trade an issue of ideology for the haves and the strongest in international economic affairs (Blum 1970 and 1983a). Strangely enough, German economists and politicans, after having experienced the "Wirtschaftswunder" based on the social market economy, argue in terms of a free market economy and free trade especially in development policy - and deny the need for a new economic order or at least for "social free trade". Doing the best for developing countries, economists of industrialized countries offer no second-best solutions, one could argue. These quotations and reflections nurture once more the suspicion that economic theory is presuming an "arrogance of knowledge" which increases with moving from partial analysis of markets to total analysis of the market economy and its market society, covering the whole world with its free trade philosophy. This mental arrogance also creates those much deplored problems of acceptance of technical progress in the political sphere of society which lead to "political barriers to investment". Our reflections cast some light upon the origins in economic theory as price and capital theory, demeaning man to a factor of production and technical progress to a jobkiller. To solve this paradox of economic thinking in an affluent society in the view of our topic means, to remember the starting point of economic science along market coordination offered by A. Smith: labouralism instead of capitalism, political economy instead of economic theory of policy. Therefore, bringing economic theory back again to political economy aiming at economic means to social ends (Heilbroner 1969, Lowe 1965), especially social justice for labour in distribution according to our issue at hand, requires a more fundamental analysis of the main errors and dead ends of traditional economic thinking. Fortunately, conclusions labelled "theorem" or "paradox" indicate the weak spots. Switching from liberal values to those of economic liberalism creates conflicts between individual freedom and economic rationality and its "utopia".

3.2 Arrogance of Knowledge by "Strange Slopes" of Logic i Economic theorists - and not only theorists in this branch of science - are or have to be convinced that there are laws and principles which determine their subject of research. This is good workmanship in a scientific profession. But pure theories indicate that they are (according to a German saying) sawing the brances of the tree of science people are sitting on. Praising theory for being perfectly in accordance with real problems then means praising the workmanship of sawing, but not of keeping the people who are sitting on the tree wealthy. This happens - according to our metaphor - because traditional scientific thinking along principles and laws starts out with collecting facts by finding single branches or deriving or postulating new branches through prediction

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from the "correlations" within a branch already found or known. This is the kind of double accounting business men customarily use to check the performance of their business. Thus, the whole tree becomes an "ideal tree", according to the principles and laws of one branch, therefore named pure theory. But reality works the other way round: the branches have to be determined in accordance with the whole tree. Physicists explain the whole world with facts from a horizon restricted in time and space, starting at or ending with a big bang. Biologists, on the other hand, know that there is permanently death of old and rebirth of new life. No scientist of a special branch should pretend to know the whole tree, its beginning, or its end. But economists pretend to be able to extend their partial analysis of single economic problems in microeconomics to an analysis of the welfare maximum of the whole society. But along the way one of the announced theorems appears. Accordingly, a welfare maximum is derived from a social welfare function which can be maximized. But in the assumed free society no such function can exist. If it did exist, it would give reason to argue that dictatorship is the best way to that maximum. So economic theorizing arrives at the conclusion of the "impossibility theorem" in our textbooks: only a market economy is the right way to a welfare maximum in a free society. This is a curious logical bridge from pure theory to reality. Common sense teaches - perhaps only if it lacks training in pure theory - that there is no sense in trying to predict a welfare maximum in a free society. This is the error that creates the paradox and forbids the "logical conclusion" of the impossibility theorem. The paradox of individual freedom and a welfare maximum is at least mentioned in the own branch of theorizing (Buchanan 1975). But the seriousness of the consequences for the ideal world and its relevance in economic policy towards the market economy or towards socialism tend to be overlooked (Blum 1983b):(1) it is impossible to argue along the alternatives market economy vs. planned economy. For "under ideal conditions" the welfare maximum is the same (Schneider 1973: 110). Like double accounting in business administration, economic rationality arrives at the same result starting bottom-up or top-down. (2) What are known in textbooks as "theory of the second best" and Arrow's voting paradox in a democracy, originate from the same incompatibility of ideal world and reality. There is no logical bridge to recommend best solutions or second-best approaches to a welfare maximum by referring to results of the ideal world. Help from outside is needed, that means help from policy, democracy, and their solutions for better public wealth. Otherwise there is the same illusion Baron Münchhausen had in a German children's story: this clever man tried to get out of the bog by pulling his own hair. Meanwhile, an exciting bestseller (Hofstadter 1979) is explicit on the "strange slopes" in logical thinking of man along different "trees and branches of culture and science". Demand calling for the right supply is created. This is the economic explanation of a bestseller, but the colleagues of an author will have some doubts, whether he is a true scientist of the qualification required by the special branch of science in its ruling paradigms.

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4. Liberalism or Economic Liberalism as Ruling Paradigm To overcome the recogized crisis of economic theory, authors tell us to go back again to A. Smith (Kristol 1981: 217). But the trouble is that the same happens to the Wealth of Nations that happens to any other "holy book". There are many interpretations of the "right truth". That brings us to yet another "strange slope" in economic theorizing. According to the abovementioned "Münchhausen paradox", theorists always tend to find their own hair promising enough to help them out of the crisis.

4.1 "Ultimate Economic Truths" or Arrogance of Knowledge What are extracted from A. Smith as ultimate values, "bedrock truths of economics" which secure the survival of the theory (Kristol 1981: 217, 218), are only the "economic values" of the Wealth of Nations. The also mentioned "theory of moral sentiments" remains outside the "bedrock truths". If there, by any chance, appeared a "not quite economic man", then, as we have learnt (section 3.1), it would be "unfortunate". Fortunately, it is already apparent from what has been developed in the preceding sections that pretending a kind of "ultimate economic truth" in a free, and not only economic, society may arrive at the same criticized "arrogance of knowledge" we found in theorizing along the idea of economic liberalism. That man is also an economic man does not justify to go on with economic theorizing to the concepts of market economy and market society. That would mean taking one branch for the whole tree, to use the metaphor from above. This is true indeed, when economic rationality and its technical progress have created an "affluent society" and a welfare state as its counterpart. Therefore, it is liberalism who distributes wealth according to the annual labour of man producing the wealth. But it is economic liberalism who defines "useful work" in society according to profitability of private firms and private capital, with labour and capital being the factors of production and the yardsticks for distribution, jointly coordinated by markets, especially factor markets.

4.2 Social Costs of Man The worst fruit of this kind of (pure) economic thinking in reality (not purely economic) are people displaced as a consequence of economic profitability of capital, left to the charity of the haves or as "social problems" to the responsibility of society, and labelled "social costs" or "free-riders". The reality of human society runs the other way round: an economic system, which ought to stand for the concept of economic means for social ends for man and his society, becomes a free-rider of this society, if "social problems" arise or people who are not sufficiently profitable are left to "social Darwinism" following the "population law" of Malthus.

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It is a "strange slope" of traditional economic theorizing to derive through the laws of logic that these "social costs" - the "fixed costs of modern free and affluent society" are "labour costs" which are to be "financed" by the employed labour force taking account the "effort principle". Thus, with increasing standards of living, labour becomes more and more costly and helps to eccelerate its own displacement by capital. Technical progress threatens man as a "jobkiller" instead of creating prospects for better economic means to better social ends. Included in traditional theorizing, there is an ideal which can again create harmony between labour and capital and peace instead of the class struggle. This ideal is the shareholder society, "people's capitalism" (the counterpart to "people's democracy" in the socialist world). There are some suggestions in economic theorizing (Weitzman 1985) pointing in this direction, and there are also some discussions in the FRG. But what is lacking is practical and theoretical evidence that the shareholder society can geht on the way by simple market forces. To arrive at capital formation of the labour force, it would be necessary to raise wages in order to compensate for displaced labour. Conventional wisdom proposes just the opposite to generate more employment. In reality, this pure economic theory is the origin of class struggle, instead of being the needed political economy towards social harmony and political stability by renewing the yardsticks for distribution at a time when we face the new industrial revolution and its robots. The posted "effort principle" tends to prefer that part of work in society which follows profitability of markets and declares everything else to be inefficient (public work) or to be "social cost".

4.3 Right Ways as "Third Ways" and Right Decisions on the Way The concept of economic means to social ends requires to decide first on the right way towards public wealth by policy decisions of a democratic society and leaves it to economic rationality of markets and experts to move along this way. This is also accepted philosophy in modern business administration, where strategic planning and organizational development are ruling. "Political management" (see Dlugos, Dorow, and Fürstenberg), analogous to political economy, replaces the former ideal of profit maximization. In just the same way economics has to replace the traditional ideal of welfare maximization. Therefore, modern organization theory can often provide a better theoretical basis for the social market economy of the FRG than economic theory and its second-best suggestion (Blum, 1983 b). Nothing has turned out to be more "costly" on the way to faster technical progress and economic growth than social problems and their traditional solution through class struggle between labour and capital. Starting under conditions of inequality, markets, especially factor markets, do not lead to more equality, as traditional economic theory suggests, but to more unequal distribution of wealth, as experience with free markets and free trade on the national and the international level demonstrates. Recent examples are the developing countries which can be considered the social problem of the

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world economic system. They are (ideologically) forced to look at socialism because traditional economic theorizing following a free market and free trade philosophy with their preference for first-best solutions leaves only - by laws of logic - the socialist alternative. "Third ways" seem to be "roads to serfdom" (F. v. Hayek). But reality demonstrates that there are many "third ways" (like the social market economy in the FRG) between capitalism and socialism, East and West, USA and USSR, even if they are not producing "economic miracles" at every place and every time. It is worthwile in regard of this Second Berlin-Toronto Symposion on management under different labour market and employment systems to look at Canada's "third way" between its own national interest and that of the dominant neighbour USA. The suggestion has been made that in order to defend its independence against the powerful USA and its "free enterprise culture" (which exists in theory, for practice, however, see Kuttner 1986), Canada responded following a path towards a "public enterprise country" (Hardin 1974). This policy is similiar to that which the social-democratic party in the FRG would recommend (Schultze 1985). Thus, the real social problem can be said to be only one of a free-rider position of an economic system following consequently the way to further economic growth on the existing path of technical progress. Environmental problems are the most modern "fruit", making no difference between capitalist and socialist countries. Competition between those groups of countries for the best economic order (capitalism or socialism) enforces economic rationality to produce more and more economic growth in order to prove superior performance of the system. The East/Westconflict in part continues the class struggle on a World-wide level. Traditional thinking in science as a whole, following laws of logic and evolution, offers two ways for mankind not to survive: the big bang which physicists tell us to be the origin of the world, and the more and more serious "struggle for survival" of a mankind which is dealing with its "biological revolution" by population explosion in the same way the industrial revolution had been dealt with: all technical progress is used to generate growth, but little is done for ecological harmony between man and his natural and human environment.

4.4 Public Wealth Through Markets and Democracy Fortunately, there is hope for an escape from this mechanistic and biological forecast for the future of the work society on earth, if people and their societies trust the capability that arises from their freedom to take action towards shaping their individual wealths as well as the public wealth through collective action following democratic rules, markets, and social values of mankind. But it is already "old progressive thinking" to argue that not everything we can do by using technical progress is necessarily worth to be done. More urgent: our scientific research and our decisions in the reality of political and social life have to look at making possible what has to be done for the survival of mankind.

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Policy and political e c o n o m y then means, both o n a national and international scale, not trying to replace politics by logic and rationality of science, not only trying to m a k e what is possible, but also to realize what is necessary. This elucidates the difference b e t w e e n a (populist) politician and a forward-looking statesman. A s for our topic, he is challenged to o v e r c o m e traditional class struggle b e t w e e n labour and capital o n the national and the international level in order to preserve the future of the work society which is threatened by fast growth of labour supply due to the population explosion. A s for this point, traditional values have to be changed within family and society.

References Bell, D. (1981): Models and Reality in Economic Discourse, The Crisis of Economic Theory, Bell, D./ Kristol, I. (Eds.), New York: Basic Books, 46-80. Bell, D. and Kristol, I. (Eds.) (1981): The Crisis of Economic Theory, New York: Basic Books. Bernholz, P. (1982): Expanding Welfare State, Democracy and Free Market Economy: Are They Compatible? Zeitschrift für die gesamte Staatswissenschaft, 138: 583-598. Blum, R. (1969): Soziale Marktwirtschaft. Wirtschaftspolitik zwischen Ordoliberalismus und Neoliberalismus, Tübingen: J. C. B. Mohr (Paul Siebeck). Blum, R. (1970): The Interrelationsships between Economic Policy and Economic Theory, The German Economic Review 8: 11-31. Blum, R. (1980): Artikel "Marktwirtschaft, Soziale". Handwörterbuch der Wirtschaftwissenschaften Vol. XV V. Albers, W. et al. (Eds.), Stuttgart - New York: Fischer; Tübingen: J. C. B. Mohr (Paul Siebeck); Göttingen - Zürich: Vandenhoeck and Ruprecht, pp. 153-166. Blum, R. (1982): Neoklassische und neomerkantilistische Perspektiven in der modernen Wirtschaftspolitik, Studien zur Entwicklung der ökonomischen Theorie II, (Schriften des Vereins für Socialpolitik Vol. 115/11), Neumark, F. (Ed.), Berlin - München: Duncker and Humblot, 63-91. Blum, R. (1983 a): Soziale Marktwirtschaft als weltwirtschaftliche Strategie, Ordnungspolitische Fragen zum Nord-Süd-Konflikt, (Schriften des Vereins für Sozialpolitik Vol.129), Simonis, U . E . (Ed.), Berlin - München: Duncker and Humblot, 123-151. Blum, R. (1983b): Organisationsprinzipien der Volkswirtschaft. Neue mikroökonomische Grundlagen für die Marktwirtschaft, Frankfurt/M. - New York: Campus. Blum, R. (1986): Wirtschaftliche und gesellschaftliche Stabilität durch konzertierte Aktionen, Die Zukunft der Globalsteuerung, Körner, H./Uhlig, Ch. (Eds.), Bern - Stuttgart: Haupt. Brandis, R. (1985): Distribution Theory: Scientific Analysis or Moral Philosophy? Journal of Economic Issues, XIX: 867-878. Buchanan, J. M. (1975): The Limits of Liberty: Between Anarchy and Leviathan, Chicago - London: University of Chicago Press. Buchanan, J. M., Tollison, R. D., and Tullock, G. (Eds.) (1980): Toward a Theory of the Rent-Seeking Society, College Station: Texas A & M University Press. Ferguson, C. E. (1969): The Neoclassical Theory of Production and Distribution, New York: Texas A & M University Press. Hall, R. E. (1983): Is Unemployment a Macroeconomic Problem? American Economic Review, Papers and Proceedings, 73: 219-222. Hardin, H. (1974): A Nation Unaware: The Canadian Economic Culture, Vancouver: J.J.Douglas. Hofstadter, D. R. (1985): Gödel, Escher, Bach: An Eternal Golden Braid, New York: Basic Books.

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Heilbroner, R. L. (Ed.) (1969): Economic Means and Social Ends, Englewood Cliffs, N. J.: PrenticeHall. Johnson, H. G. and Mieszkowski, P. (1970): The Effects of Unionization on the Distribution of Income: A General Equilibrium Approach, The Quarterly Journal of Economics, LXXXIV: 24-38. Krelle, W. (1979): The Way out of Unemployment: Change of Group Behaviour, Kyklos, 32: 92-128. Kristol, I. (1981): Rationalism in Economics, The Crisis of Economic Theory, Bell, D./Kristol, I. (Eds.), New York: Basic Books, 201-218. Kuttner, R. (1984): The Economic Illusion: False Choices Between Prosperity and Social Justice, Boston: Houghton Mifflin. Kuttner, R. (1986): A Great American Tradition: Government Opening Opportunity, Challenge, 28: 18-25. Leijonhufvud, A. (1973): Life Among the Ekon, Western Economic Journal, LXXIII: 327-337. Lowe, A. (1965): On Economic Knowledge, New York: Harper & Row. McKenzie, R.B. and Tullock, G. (1978): Modern Political Economy, Tokyo: McGraw-Hill. Nell, E . J . (1981): Value and Capital in Marxian Economics, The Crisis of Economic Theory, Bell, D./ Kristol, I. (Eds.), New York: Basic Books, 174-200. Olson, M. (1982): The Rise and Decline of Nations. Economic Growth, Stagflation, and Social Rigidities, New Haven, Conn.: Yale University Press. Schneider, H. (1973): MikroÖkonomie: Eine Einführung in die Preis-, Produktions- und Wohlfahrtstheorie, München: Vahlen. Schultze, R.-O. (1985): Das Politische System Kanadas im Strukturvergleich: Studien zu politischer Repräsentation, Föderalismus und Gewerkschaftsbewegung, Bochum: Studienverlag Brockmeyer. Weede, E. (1984): Democracy, Creeping Socialism, and Ideological Socialism in Rent-Seeking Societies, Public Choice, 44: 349-366. Weitzman, M. L. (1985): Profit Sharing as Macroeconomic Policy, The American Economic Review, Papers and Proceedings, 75: 41-45.

B. Theoretical Approaches to the Analysis of Management Employee Relations

The Employment Relation from the Transactions Cost Perspective Arnold. Picot and Ekkehard Wenger

Abstract The transactions cost perspective rests on the assumption that utility-maximizing individuals seek for efficient solutions of organizational problems by contractual exchange of property rights. Unlike models of perfect markets it takes account of the fact that the operation of a pricing system is not without cost. Consequently, spot market coordination may be inefficient, because its transactions costs exceed those of other modes of contracting. This is especially true for specialized labor inputs, which for various reasons cannot be contracted in infinitesimal quantities on sequential spot markets. Hence, an employment relation emerges, which economizes on transactions costs by mutual agreement on a range of decisions submitted to the employer's authority. In the absence of legal restraints, employment contracts are usually characterized by the reciprocal right of short-term cancellation, even though in the normal course of events sunk costs incurred during the initial contract period would make it detrimental to both parties to discontinue employment. Common belief that employees are "exploited" under unrestricted freedom of contract resulted in the adoption of various statutory measures, such as legally imposed protection against unfair dismissal, union privileges, or mandatory codetermination. The resulting alternative contract structures are compared with the traditional labor contract in terms of transactions costs.

1. The Transactions Cost Perspective as a Ramification of Neoclassical Economics The transactions cost perspective rests on the assumption that utility-maximizing individuals seek for efficient solutions of organizational problems by contractual exchange of property rights. Under certain assumptions it can be shown that perfect and complete markets provide an efficient solution to such problems. This is the basic proposition of neoclassical economic theory which is usually referring to an analytical framework expounded by K. J. Arrow (1964) and G. Debreu (1959). Within an ArrowDebreu-world, trade of contingent claims completely specified for every state of nature will lead to a Pareto-efficient allocation of resources, including an optimal distribution of risk. Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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Of course, the viability of such a solution to organizational problems depends on the assumption that the operation of a pricing system is without cost. If this assumption is abandoned, trade of contingent claims may be inferior to other modes of contracting. Costs of observing an agent's behavior, costs of unambiguously specifying the state of nature, and costs of drawing and enforcing contracts must be taken into account. As a consequence of such "transactions costs" organizational problems will emerge which cannot exist within the framework of an Arrow-Debreu-world; their explanation and optimal solution require a ramification of conventional neoclassical analysis by adopting a transactions cost perspective: alternative solutions to organizational problems are to be compared in terms of transactions costs. This is the basic proposition underlying two seminal papers of R. H. Coase (1937, 1960). It has to be stressed that transactions costs are not necessarily costs that materialize in net cash outlays; all kinds of disadvantages associated with different modes of contracting, e.g. time consumption or enforcement efforts, have to be taken into account. To be sure, such non-financial costs have to be converted into a financial cost equivalent, if an evaluation of different forms of economic organization is to be performed in monetary terms; consequently, a correct and all-inclusive calculation of relevant transactions costs often meets with evaluation problems which can not be solved without relying on rough and ready guesses. Anyway, it would be foolish to ignore non-financial transactions costs because of computational problems or to disregard the existence of tradeoffs between financial and non-financial burdens (Picot 1982: 271). Moreover, computational problems are not specific to non-financial burdens; under uncertainty, even the amount of future cash flows cannot exactly be calculated in advance. Every decision is based on more or less informed guesses; the rule that it is better to be vaguely right than precisely wrong applies to the transactions cost perspective as well as everywhere. Another problem with the transactions cost perspective is equally pervasive. Speaking of costs, it does not make sense to evaluate "all" costs; what matters are only "relevant" costs that are affected by the decision in question. Hence, transactions costs need not be taken into account if they are "sunk" costs of former decisions. Costs of drawing a statutory law already in effect are irrelevant for activities of single business firms operating in an established legal environment; likewise costs of an existing organizational form of an enterprise are sunk costs with respect to subordinate agreements with single employees. Thus, transactions costs have always to be related to specific decisions or decision levels, with due regard to the consequences for subordinate decisions, if decisions on a higher level are taken. Hence, an evaluation of the costs of establishing a legal framework has to anticipate the transactions costs incurred by business firms engaging in contractual exchange within the framework in question (Michaelis and Picot 1987: 87-88). After all, the transactions cost perspective is a starting point for a unified economic theory of organization, including both the micro- and the macro-level. To be sure, its explanatory power is neither unlimited nor equally distributed among different organizational problems; especially basic institutional changes, such as the French Revolution or the abolition of serfdom and slavery, cannot satisfactorily be explained from the

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transactions cost perspective, at least not by now. But there is neither an economic nor a non-economic approach that offers a superior, much less a satisfying, explanation for such "macrosociological" phenomena without recourse to ad-hoc arguments (Domar and Machina 1984, Schüller 1985: 263, Stigler, 1984). If elimination of a theory requires a superior one, a transactions cost perspective may be helpful even in the analysis of basic institutional change, as long as no one in the social sciences can present a positive theory of the state that offers a satisfying explanation for phenomena of the kind mentioned above. Much less is there any reason to exempt the political system and its decisions from economic analysis - neither from a positive nor from a normative point of view. This may seem far-fetched when it comes to an analysis of the employment relation; but it has to be borne in mind that the employment relation is one of the main targets of government regulation. Not only in most industrialized states but also in ancient and medieval societies the free exchange of private property rights in labour has been subject to severe restrictions imposed by authoritarian rulers, peer groups with legal privileges, or governments supported by majority voting. High enforcement costs and high violation rates notwithstanding, many of these restrictions have survived over decades or even centuries, and their final abolition was frequently accompanied by heavy shocks or breakdown of the political system. The interplay of special-interest coalitions, which lies at the heart of labor market regulation, has been analyzed elsewhere (Olson 1982); hence, the remaining parts of the paper do not deal with the evolution of institutional restraints governing the employment relation but concentrate upon how employers and employees adapt individually to a given legal framework. Individually optimal adaptation, of course, should not be mistaken for compliance, as is evident from a prospering shadow economy in heavily regulated environments; nevertheless, the shadow economy differs from the respective parts of a free labor market, because there is no recourse to the courts if a breach of contract occurs. The next section explains the dominant mode of labor contracting under a regime of free exchange in terms of transactions costs; the subsequent and last section of the paper deals with the consequences of modern labor law.

2. The Employment Relation in Free Labor Markets From the beginning, transactions cost analysis found its most important application field in the employment relation (Coase 1937, Williamson et al. 1975). It is here where the deviation of empirical contract structures from contingent claim trading is most striking; not even sequential spot markets, which under certain circumstances serve as a perfect subsitute for contingent claims, bear any close resemblance to substantial parts of the labor market. Consequently, contracts are not devised as an exchange of completely specified goods or services; instead, the parties to the contract agree ex ante, i.e. when the contract is drawn, upon the distribution of decision rights to be exercised ex post (Wenger 1984). This can easily be interpreted in terms of transactions costs. As

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it is prohibitively costly to anticipate all contingencies and the optimal actions of the coalition members when they enter into the employment relation, the implementation of the contract in concrete instances will be determined by decisions which will be taken according to the decision rights agreed upon initially. This later implementation necessarily carries distributive risks or even the danger of open distributional struggle, but has to be accepted as a flexible tool for coping with unanticipated changes in environmental conditions. Labor contracts in a free market setting are usually characterized by the reciprocal right of short-term cancellation and the clear-cut authority of the employer. The employer's authority would be of no account, if the signing of labor contracts did not presuppose sunk costs and, therefore, require a longer pay-off period. Otherwise, labor services would be contracted in infinitesimal quantities on sequential spot markets involving no need for the employer's discretionary authority. But because sunk costs arise at the beginning of the employment relation, it is mutually advantageous for both contracting parties not to discontinue employment in the normal course of events. Nevertheless, the parties insist on the right of short-term termination which reflects the transactions cost of anticipating exactly those conditions under which a future continuation of the labor contract will be disadvantageous for either one of the parties. The unilateral right to terminate the contract suggests that the employee is always able to secure at least the distributional position offered by the next best alternative. Without sunk costs, this would be sufficient to protect the worker's interests, because he would not have been better off without accepting the contract. With sunk costs to be borne by the workers, however, a mutually advantageous labor contract has to offer a wage differential over the next best post-contractual employment alternative. This quasi-rent 1 is the financial source for the amortization of their proportionate sunk cost components. Here, the right to terminate the contract is an inadequate protection for the employee, and there is no economic justification for the employer's bargaining power to appropriate the employee's surplus over the next best alternative by extorting wage concessions or by excessive use of discretionary power. Under unrestricted entrepreneurial power to redistribute cooperative rents at the expense of incumbent employees, the latter could not be induced to take over sunk costs. This may lead to the consequence that rents from team production, which could be created under a superior contractual arrangement, must be foregone. If this is true, both employer and employee have a vital interest in the protection of the latter's quasi-rents. If employees have protective rights, however, there is no guarantee that these rights cannot be exercised in order to expropriate the employer. Protection against dismissal, for example, may reduce work incentives, because the employer can not fire a worker "at will"2, but is dependent on a complicated legal procedure which increases transactions costs of discriminating against low performers. The ensuing moral hazard problems are a strong argument in favor of short-term termination rights. Hence, control of behavior and performance in free labor markets is predominantly based on "exit", when it comes to the well-known distinction between "exit" and "voice" coined by Hirschman (1970).

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To be sure, an important school of management literature believes that moral hazard problems of free labor contracts may be solved more efficiently by trust relations and common values of industrial clans with long-term stability, in which employees' "psychological success and emotional well-being" should be assured (Ouchi and Price 1978). This is the basic message of "Theory Z" (Ouchi 1981). It has to be noted, however, that mutual trust is not a viable organizational device, if a breach of trust is individually rational. Hence, it is extremely difficult to establish a viable long-term trust relation without short-term termination rights. As game theory tells us, problems of the prisoner dilemma type can be solved in repeated game-situations, if the value of the first round is sufficiently low in relation to the net present value of all future repetitions (Taylor 1976). Consequently, bargaining within employment relations, where both parties have an interest in preserving their respective quasi-rents, may lead to efficient results only if either side is entitled to short-term exit, a provision that reduces the value of the first round, thereby destroying either side's incentives to cheat (Wenger 1984). Other deterrents against cheating certainly do exist, as is shown by Theory Z with its close resemblance to "medieval views that bound men tightly to social institutions" (Sullivan 1983; 140). Wages rising with seniority, which render the worker's exit option void, enable Japanese firms to exert heavy pressure on individual employees, thereby reducing incentives to shirk; but it is very doubtful that this is a pareto-efficient solution, as long as the industrial clan in its Japanese version is associated with high levels of dissatisfaction, stress, mental illness, and even suicide rates, 3 as well as an "unfair cleavage between regular and subcontract workers" (Koshiro 1983: 83). Moreover, regular workers with life-time commitment and end-loaded wage profiles are underpaid for approximately two decades in exchange for uncertain seniority wages beyond the age of fourty. The pretended "trust relation" with their employer firm offers no protection against non-systematic risks in a competitive environment. When the so-called "Japanese employment system" had to pass its first major test, i.e. the oil shock of the mid-seventies, "big firms [ . . . ] introduced quite an unusual practice [ . . . ] (and) singled out middle-aged employees with long-term service [ . . . ] and forced (!) them to take up voluntary (!) resignation" (Tsuda 1982: 208-209). How firms handled the "trust relation" with their workers may be illustrated by quoting the president of a leading textile firm, who explained the reason for the dismissal of long-term employees as follows: "When a ship is about to be wrecked, heavier cargoes should be thrown off first to sea" (quotation from Tsuda 1982: 206). After all, there is no evidence that clans with medieval attributes embody an efficient solution to organizational problems of employment relationships within a competitive dynamic environment. Under mutual termination rights there are better opportunities to pursue individual preferences and to reduce both shirking and excessive use of discretionary power. Recent developments in Japan seem to conform with this hypothesis: social customs associated with clan organization are eroding, whereas the exit option is gaining significance even in the primary segment of the labor market, where stable long-term relationships have long been governed by the rules of the "Japanese employment system" (Wirtschaftswoche 1986, 1987).

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Nevertheless, the predominance of termination rights as a cost-minimizing device leading to efficient contract structures in a free labor market does not imply optimality of an unrestricted hire and fire policy; whenever workers receive quasi-rents in exchange for their burden of sunk costs, the optimal degree of worker protection is different from zero. Hence, even in free labor markets some protective devices may evolve; even if transactions costs of legal claims may be prohibitive, social customs induce rational employers to avoid arbitrary dismissals, because they do not want to jeopardize their reputation. It has to be borne in mind, however, that it is not at all clear to what degree social customs protecting incumbent workers and supporting the "internalization of labor markets" (Elbaum 1983) would have evolved in truly free markets without union privileges4; hence the traditional structure of labor contracts, which for the most part has not explicitly been imposed by law, cannot easily be interpreted as a free market solution, because the mere presence of union privileges may suffice to change the evolution of other labor market institutions. There is every reason to believe that workers' shares of sunk costs and, hence, the need to protect their quasi-rents are rather small in non-unionized settings and increase markedly with union power, because employers are forced to shift the burden of specialized investments at least in part to the workers, if unionization and strike activities cannot be prevented (Monissen and Wenger 1987). Consequently, what can be observed in unionized, but otherwise unregulated markets as traditional contract structure amounts to an overstatement of workers' protective needs in non-unionized settings. Nevertheless, some of the features of the traditional labor contract may even survive a complete abrogation of union privileges. Under the traditional labour contract workers' quasi-rents are partly protected by restricting the discretionary authority of the employer with respect to content and powers of decision. More important, the contracted wage level is agreed upon for a minimum contract duration with the further implicit or explicit stipulation that the wages are fixed from below, possibly in nominal terms but usually relative to a general trend of wages as stipulated by a union contract. Wage reductions for an individual employee are regarded as a breach of the implicit agreement, unless his performance is much lower than expected or his old job becomes redundant; even then, however, they are very likely to be avoided because of a strong tendency in favor of a dismissal. With zero transactions cost, this would often be an inefficient solution; but if bad performance is costly to detect and verify, finely tuned wage reductions may be inferior to an "all or nothing" solution, because the latter has at least two favorable consequences: on the one hand, the worker faces a small probability of a high penalty, a provision which allows to reduce costly control activities; on the other hand, the employer is prevented from redistribution by unjustified wage cuts. To prevent unjustified redistribution is also necessary with respect to general wage cuts affecting the whole work-force of a firm. Such wage cuts may be desirable, when a firm faces extraordinarily poor business conditons. In such settings continued employment may conflict with the economic interest of the employer, unless the work-force is ready to give up a part of their quasi-rents. With sufficient wage cuts, however, Pareto-

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efficient employment relations may be preserved. But if wage cuts must be made dependent upon credible signs of the employer's financial difficulties, it may happen that with asymmetric information and high transactions costs of removing informational asymmetries, wage reductions can not be realized without dismissal of a part of the work-force. The destruction of specific capital could become an inevitable consequence (Hart 1983). Thus, an excess sensitivity of dismissals to business fluctuations may at least partly be explained by transactions costs (Hall and Lazear 1984). The terms of the traditional labor contract, therefore, do not exclude the possibility that the quasi-rents of employees will be annihilated by ex-post involuntary dismissals.

3. The Employment Relation under Modern Labor Law The weak protection of workers' quasi-rents induced governments all over the world to restrain freedom of contract by law. Especially in Western Europe mandatory codetermination and legal restraints of the employer's right to dismiss are pervasive. One of the popular arguments is based on alleged distortions of the entrepreneurial decision calculus which is supposed to yield inefficient results, because the net present value of decisions affecting the work-force "does not include" the discounted stream of quasirents destroyed by dismissals of employees. As has been explained above, however, it is not a capitalistic management which is responsible for inefficient dismissals, but the transactions costs of ex-post bargaining for wage reductions. It has to be noted that free negotiation in the absence of transactions costs implies that the employment contract will be terminated only if both parties concerned explicitly consent. Unilateral termination will not occur as long as the other party is prepared to make sufficient concessions in order to avert the necessity to realize less advantageous alternatives outside the firm. Under these circumstances all decisions to terminate employment will be Pareto-efficient and never occur against the will of the dismissed party. Only if renegotiation of the contract is characterized by high transactions costs or legally imposed restraints, labor-saving investment decisions may, on balance, have a negative effect. Hence, we can draw an important conclusion: in the absence of transactions costs rights of employees do not change the efficiency of decisions in ex-post situations; what may be affected is the efficiency of risk allocation in ex-ante situations, because protective rights bear upon the distribution of gains or losses in different ex-post situations5. For these reasons it is obvious, that codetermination or protection against dismissal cannot have socially desirable consequences, unless they allow economizing on transactions costs or improve the allocation of risk. As far as transactions costs are concerned, it is not at all clear why codetermination or dismissal protection should solve problems that cannot be solved in a free market setting. Transactions costs, that prevent a perfect protection of employees' quasi-rents in free labor markets, cannot be assumed away only because protective rights are imposed; the major problems of a protection of quasi-rents remain unchanged, at least

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in principle. Costs of continuously assessing employment alternatives outside the firm have to be borne in any institutional setting, if a destruction of quasi-rents were to be excluded; the same is true for the interest of employees to understate their surplus over the next best alternative in order to improve their bargaining position within the firm (Monissen and Wenger 1987). Obviously, if employees were to continously reveal their true estimates to the employer, he would always know how much concessions he could extort from the employees, and labor's share would be always endangered. Just as much is there reason for the employer to conceal his own share of quasi-rents. Of course, the willingness of either side to reveal its true estimate will rapidly increase, if the other party announces a termination decision; but with or without codetermination, the resulting flow of information will come too late, if the decision has already required a longer planning period. As far as, for example, labor-saving investments are concerned, costly precommitments often prevent a reconsideration of the investment decision, even if a lower wage rate is part of a revised decision calculus. Even if all these problems of asymmetric information were reduced 6 under an extensive codetermination scheme including long-term corporate planning, as some authors indeed do believe but cannot prove (e.g. Schneider 1983), such an improvement would have to be traded off against the increased costs of ex-post settlements associated with a suspension of termination rights. Whereas termination rights set predictable limits to the possible extent of distributional conflict, there are no such limits, if the parties are bound together by an obligation to bargain until a solution is accepted unanimously. Suspension of termination rights, therefore, results in permanent haggling. As a consequence, complicated arbitration procedures 7 and increased litigation with high costs of conflict resolution can be observed 8 . In such an environment there are strong incentives to redirect the decision-making authority of labor's representatives by granting pecuniary or non-pecuniary allotments at the cost of represented employees9. But even more important are consequences which are not visible at the firm level but dispersed among customers and suppliers. By "protecting" the quasi-rents of the employees in one specific firm, the quasi-rents in related firms are completely ignored. If the costs of specific human capital are generally protected by blocking labor-saving investments, it is in the first instance to the disadvantage of the related investment industry, if the latter is characterized by a high degree of specific human and nonhuman capital. As specificity seems to be very likely in investment industries, the protection of quasi-rents in customer firms would destroy quasi-rents in these industries. The argument in favor of protecting quasi-rents by codetermination rights automatically raises a dilemma. Should everybody's quasi-rents be protected by granting decision rights, or can an economically justified criterion be presented in order to discriminate against quasi-rents of minor social importance which do not substantiate decision rights? Protecting all quasi-rents over and above scarcity values by decision rights will finally endanger an economic system based on decentralized decision-making. Within a net of interrelated economic activities the result would be tantamount to the situation where everyone decides on everything. The transactions costs of such an arrangement are

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certainly higher than the occasional destruction of quasi-rents by labor saving investment projects. For this reason, it has to be gratefully accepted that the legal systems in the western world have very wisely refrained from protecting the market value of positions endagered by the competitive forces of open markets (Buchanan and Faith 1982). If this basic principle of economic organization were abandoned by substituting pervasive codetermination for contractual termination rights, the transactions costs of economic change and progress in general would tend to become prohibitive. There remains the question of whether the suspension of termination rights in labor contracts can be justified by a criterion that discriminates in favor of employees' quasirents, whereas other quasi-rents of minor social importance should be exposed to termination rights. But even if one ignores the "narrow" economic efficiency calculus of optimal allocation and concentrates entirely on income shares, codetermination rights protecting employees in particular seem at variance with distributive justice. If one relied, for example, on the popular criterion of ranking the degree of direct material disadvantage, ohne should draw attention to the fact that the annihilation of firmspecific human capital with the ensuing income losses is very often less important than the general economic consequences of a fall in local real estate values or the collapse or decline of smaller local business firms. This suggests that in the case of a shut-down of a major factory the terms of agreement should not be negotiated with workers' representatives but with the authorities of the country or community affected. Efficiency considerations, however, are not fully reflected in such arrangements, if they are imposed on firms ex-post; optimal contracting and allocation require negotiations before a major firm settles down. Consequently, it does not seem to be economically desirable to rely on codetermination rights imposed by a central government but to enforce competition among municipal or regional authorities designing optimal investment incentives for immigrating firms. In the United States competition between states seems to prevent what centralized legislation in German labor law has achieved on behalf of pretended interests of workers. Of course, such competition is emphatically deplored by advocates of labor market regulation (Harrison 1984: 403), but there is no economic argument why governments should not be forced to compete for citizens and taxpayers, as are business firms trying to attract workers or consumers. In fact, emigration, as a termination right of last resort, is an indispensable weapon for business firms and individuals to defend themselves against failures of the political system. If a suspension of termination rights seems to be highly questionable from a transactions cost perspective, there may still be considerations of risk allocation speaking in favor of worker protection. Though the related problems are beyond the subject of this paper, some concluding remarks on the efficiency of risk allocation may be helpful. It has to be borne in mind that there is no reason to expect that codetermination rights will only be exercised to maintain the status quo10. It is indeed very likely that potential increases in the companie's market value that depend on decisions which are subject to codetermination will be appropriated by the workers, at least in part. The ultimate consequence will be that any change in business policy not initially anticipated has to be paid for by sufficiently large concessions to the workers. This will be reflected in a

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reduction of initial wages, which will, of course, grow over time as long as market conditions prove favorable. A wage level once attained tends to be protected, unless the firm goes bankrupt, and, consequently, the overall probability of wage cuts may be reduced in comparison with a system without protective rights. But this is not an improvement of risk allocation; to consider a wage reduction as a risk is tantamount to a nonsense concept of risk. An anticipated reduction in the wages of older workers, which would be the only adequate consequence of a sure drop in performance, is no risk at all11. Protection of older workers against wage cuts, which is a widely accepted goal of union policy today 12 , produces just those quasi-rents, which compensate workers for a specialized investment in form of wages below productivity during the first half of the work-life. Consequently, in labor markets, where no gifts are provided, protective rights for older workers increase the risk defined in an economically correct sense, i.e. risk in terms of the present value of life-time income. The worker who happens to join a company experiencing unanticipated favorable results will enjoy steadily increasing wage levels. In contrast, a worker starting his employment career with a firm which goes bankrupt after some time will lose a substantial part of the expected value of his life-time income. Thus, the lowering of the misspecified "risk" of wage reductions in consequence of protective codetermination rights has to be traded off for a sizeable increase in the risk of human capital as related to a worker's life-cycle. The intensified exposure to firm-specific (non-systematic) risk brought about by codetermination rights is certainly not in the interest of a representative worker entering the labor market. Payment of wages according to the life-cycle of worker performance would considerably reduce quasi-rents of employees, and the unavoidable transactions costs of their protection would not have as detrimental consequences as today and in the years to come.

Appendix: Discussion During the discussion at the conference, a vast range of problems lying beyond the scope of the paper was touched. As a consequence, it proved impossible to integrate more than a few contributions of the discussants into the final version of the written text. As a substitute, we comment separately on some selected points. 1. Economic imperialism was one of the main subjects of the discussion. According to a major fraction of the participants, political solutions based on democratic values, such as mandatory codetermination, should not be judged from a "narrow" economic viewpoint. The "narrow" economic viewpoint, however, respects individual preferences which can be easily overridden by "political solutions". The quality of "political solutions" varies considerably, as the example of the Soviet Union, perhaps the most important "political solution", shows. To be sure, western democracies leave more room for the pursuit of individual preferences; but even here, there is every reason to distrust political solutions of problems that can be solved in the marketplace. The detrimental effects of special interest coalitions capturing the political system of west-

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ern democracies has well been documented by Olson (1982); as to West Germany in particular, cases like "Flick" or "Neue Heimat" or the all-embracing involvement of political parties in tax fraud activities raise serious doubts as to whether the agents within the political system are trustworthy representatives of the voters. Political solutions based on "democratic values", therefore, do not necessarily work in the interest of voters and are often nothing more than a failure of the political system of representative democracy. Mandatory codetermination, for example, was never a primary goal of workers but was heavily promoted by union officials and their allies in the political parties, who could expect institutional support for their organization as well as additional influence and income sources from regulated labor markets. It is important to note that under direct democracy, where voters decide on political issues themselves, political agents cannot as easily indulge in their preferences for regulation; hence it is not surprising that in Switzerland, a stronghold of direct democracy, the people voted against mandatory codetermination by a margin of more than 2:1. Direct democracy within the political system apparently works against "democratization" of the economy (Brauchlin 1981: 90,101). It supports the "narrow" economic viewpoint against democratic folklore. 13 2. The debate on economic imperialism resulted in a general critique of the "commercialization" of social relations. Some discussants feared that worker motivation and trust would be destroyed if the employment relation were "commercialized"; another discussant was very displeased with Chicago economists interpreting marriage as a longterm contract or comparing protective services of the state with those of the Mafia. Trust, love, democracy, and social peace were stressed as basic principles instead of the profane economic concept of exchange. Alas, we do not live in the best of all worlds. Not even the Roman Catholic Church does rely on trust, but rotates the clergy among parishes in order to prevent the development of trusting relations detrimental to the employer (Faith et al. 1984). Love is neither a necessary nor a sufficient ingredient of marriage which for good reasons is organized as a contract with termination rights. Even where love exists, it is not free of considerations of exchange and genetically determined self-interest (Becker 1981, McKenzie and Tullock 1984): a wealthy good-looking prince will rarely fall in love with a blind, ugly scar-faced amputee unable to bear children. Moreover, many societies do not accept that a couple marries, simply because they love each other. As to democracy and social peace, there is no reason for moral arrogance with respect to different political systems. It would be foolish to expect that the democratic welfare state with territorial sovereignty will finally turn out as the last step in the evolution of protective agencies. Whatever will happen in the future - we should not forget that many achievements of former societies, as admirable as they may seem even today, were dependent upon activities nowadays regarded as criminal.14 But most important, social peace cannot be preserved by a political system that is economically not viable. One has to bear in mind, that the whole complex of codetermination and union wage policy amounts to a considerable redistribution in favor of the older generation, which aggravates the intergenerational problems inherent in the Ger-

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man social security system. Thus, the conservation of union privileges, codetermination, and many other institutional devices of modern labor law do not promote social peace, as many people still believe, but increase the risks of its breakdown when coming generations try to get rid of the burden placed on them by the older generation. 3. In defense of codetermination, a representative of Volkswagenwerk AG reported harmonious cooperation between management and the workers' council in an atmosphere of "mutual trust and information" supported by first-class trips around the world that enable workers' representatives to get acquainted with foreign production techniques on a "parity basis". First of all, this is not a viable defense of mandatory codetermination, because in a free market setting no company is prevented from creating a workers' council and letting its members fly first class around the world. Second and more important, the reported harmony seems to be more of a part of business ideology than of reality. A leading German business magazine reports a long series of plots even within the firm's management and cites as "the most influential clique members of the workers' council and union leaders", who were involved in the overthrow of two chief executive officers in the 1970s (Manager-Magazin 1986: 45). Even if one does not believe in everything that can be found in the press, the unusually high turnover of chief executive officers is not a sign of "mutual trust and information". Moreover, the rhetoric of mutual trust was not what the financial markets acquiesced in when it turned out that the firm had lost nearly half a bilion DM in a huge currency frand due to entirely insufficient internal controls (Der Spiegel v. 8.6.1987: 27-42). But third, and most important, there are data indicating that the firm may have been captured by a coalition of incumbent workers at the expense of stockholders, consumers, and the workforce outside the firm. Within the last fifteen years the firm omitted four times its dividend and in spite of the sustained economic recovery of the mid-1980s domestic employment at the end of 1986 remained below its peak level of 133970 reached in July 1971, even though the firm operates within an environment characterized by high unemployment rates and pays above-average wages to incumbents. These are the typical attributes of a monopoly of organized labor, and the outcomes bear resemblance to the economic effects of Yugoslav firms (data from the respective annual reports).

Notes 1 This measure of asset specifity can be traced back to Marshall (1920: 520, 626). 2 For a recent defense of the contract "at will", which in the United States is still the predominant form of labor contracting in the non-unionized sector, see Epstein (1984). 3 According to a recent study of Cooper (1984), Japan shows by far the highest mental ill health scores among the highly developed countries included in the study (other highly developed countries were Sweden, Germany, the United States, and Great Britain). The executive job dissatisfaction score in Japan was 34% as compared with 22% in the U.S. and 18% in Germany. Suicide rates among middle-aged male Japanese employees have risen by approximately 130% between 1975 and 1984 (Wirtschaftswoche 1986: 49).

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4 There is strong evidence that unionization would be insignificant if legally imposed union privileges were abolished. See Monissen and Wenger (1987), Reynolds (1984). What may survive in a system of free markets are employer-dominated "company unions" which differ markedly from unions in the traditional sense. Employer-dominated "unions" serve as an agency of personnel marketing on behalf of the firm and are not designed to antagonistic interest representation on behalf of employees as is traditionally understood of unions in industrialized countries of the West. 5 This implies that contingent claim trading is ruled out by restrictions of freedom of contract or prohibitive transactions costs. Of course, in an Arrow-Debreu-world where ex-post decision rights can be dispensed with, free trading of contingent claims always leads to an efficient risk distribution. 6 For an important decision problem where rather the opposite is true, see Monissen and Wenger (1987), section IV, figure 1. 7 Arbitration in labor conflicts is quite expensive, especially if arbitrators are not subject to external control. In Germany, for example, mandatory arbitration in codetermination affairs is a welcome source of income for members of the legal profession. Judges of labor courts may appoint themselves mutually as chairmen of arbitration commissions. The resulting discretionary power forces employers to tolerate high arbitration fees. For a day's work as chairman of an arbitration commission a judge frequently receives more than his monthly earnings as a civil servant (Schlochauer 1983). 8 In Germany, the number of lawsuits filed with labor courts has risen dramatically during the last two decades (Kotzorek 1985 : 312). 9 The relevant practices are mostly illegal and therefore kept secret, but sometimes emerge in the courts. Recently, a court invalidated an election of the members of a workers' council because a large automobile manufacturer had financed and otherwise supported the election campaign of "friendly" candidates (Arbeitsgericht Berlin v. 8.8.1984, 18 BV 5/84, employer's appeal denied by the Federal Labor Court, 4.12.1986, 6 ABR 48/85, Der Betrieb v. 23.1.1987: 232). The election had to be repeated and a group of radical left-wing candidates supported by no less than 43% of the voters won a substantial minority of the seats in the workers' council. Since then, the firm is haunted by continued labor unrest and permanent struggle between two factions of the work force (Frankfurter Allgemeine Zeitung v. 15.9.1987: 14). This indicates that it is essential for firms to maintain "harmonious" relations with the members of the workers' council. It is interesting to note that in the United States and Great Britain, where unions have far-reaching privileges on the firm level and on the shop floor, corruption among union officials has long been well-documented (see e.g. Taft 1964: 207-211, 685-705). There is no reason to expect that codetermination rights created in Germany during the 1970s will finally lead to different findings. 10 This is especially true since some courts have acknowledged the right of the workers' council to interfere with entrepreneurial decisions through injunction (Eich 1983). 11 Evidences for declining productivity beyond the age of fourty are pervasive. See, e.g., Dalton and Thompson (1971), who show that a drop in performance among middle-aged employees is not confined to blue-collar workers, as many people may believe. 12 This is not to say that the pervasive social custom to overpay older workers can not have other roots than unionization. Unions, however, for various reasons, inevitably bring about wage profiles favoring senior workers usually protected by explicit stipulations in the union contract. As a substitute or supplement, they promote changes in statutory law on behalf of incumbents. For a more elaborate treatment of this point, see Monissen and Wenger 1987, Section 6. 13 Of course, voluntary participation schemes can be and often are efficient (Michaelis and Picot 1987); but this does not speak in favor of legally imposed codetermination schemes, as many people may believe. Voluntary participation which can be terminated at a short notice or even at will must not be confounded with mandatory codetermination under suspended termination rights. 14 For a detached analysis of organized violence by protective agencies see Lane 1979.

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References Arrow, K.J. (1964): The Role of Securities in the Optimal Allocation of Risk Bearing, Review of Economic Studies, 31: 91-96. Becker, G. S. (1981): A Treatise on the Family, Cambridge, Mass.: Harvard University Press. Brauchlin, E. (1981): Unternehmensverfassung: Die Situation in der Schweiz. Unternehmungsverfassung als Problem der Betriebswirtschaftslehre, K. Bohr, J. Drukarczyk, H. J. Drumm and G. Scherrer (Eds.), Berlin: E. Schmidt, 81-103. Buchanan, J. M. and Faith, R. L. (1981): Entrepreneurship and the Internalization of Externalities, Journal of Law and Economics, 24: 95-111. Coase, R. H. (1937): The Nature of the Firm, Economica, 4: 386-405. Coase, R. H. (1960): The Problem of Social Cost, Journal of Law and Economics, 3: 1-44. Cooper, C. L. (1984): Executive Stress: A Ten-Country Comparison, Human Resource Management, 23 (4): 395-407. Dalton, G. W. and Thompson, P. H. (1971): Accelerating Obsolescence of Older Engineers, Harvard Business Review, 49 (5): 57-67. Debreu, G. (1959): Theory of Value, New York: John Wiley. Domar, E. D. and Machina, M.J. (1984): On the Profitability of Russian Serfdom, Journal of Economic History, 44: 919-955. Eich, R. (1983): Einstweilige Verfügung auf Unterlassung der Betriebsänderung, Der Betrieb, 36: 657-662. Elbaum, B. (1983):The Internalization of Labor Markets: Causes and Consequences, American Economic Review, 73: 260-264. Epstein, R . A . (1984): In Praise of the Contract at Will, University of Chicago Law Review, 51 (4): 956-982. Faith, R. L., Higgins, R. S. and Tollison, R. D. (1984): Managerial Rent and Outside Recruitment in the Coasian Firm, American Economic Review, 74: 660-672. Hall, R. E. and Lazear, E. P. (1984): The Excess Sensitivity of Layoffs and Quits to Demand, Journal of Labor Economics, 2 (2): 253-258. Harrison, B. (1984): The International Movement for Prenotification of Plant Closures, Industrial Relations, 23: 387-409. Hart, O . D . (1983): Optimal Labor Contracts under Asymmetric Information, Review of Economic Studies, 50: 3-35. Hirschman, A. (1970): Exit, Voice and Loyalty, Cambridge, Mass.: Harvard University Press. Koshiro, K. (1983): The Quality of Working Life in Japanese Factories, Contemporary Industrial Relations in Japan, T. Shirai (Ed.), Madison, Wisconsin: The University of Wisconsin Press, 63-87. Kotzorek, A. (1985): Zur Häufigkeit arbeitsrechtlicher Prozesse in der Bundesrepublik Deutschland, Zeitschrift für die gesamte Staatswissenschaft, 141: 312-335. Lane, F. C. (1979): Profits from Power, Albany: State University of New York Press. Manager-Magazin (1986): Der lange Krach um den elften Mann, Manager-Magazin, 16 (8): 40-55. Marshall, A. (1920): Principles of Economics, Book 6, 8th. ed., London: Macmillan, Reprint 1969. McKenzie, R. B. and Tullock, G. (1984): Homo öconomicus, Frankfurt: Campus. Michaelis, E. (1985): Organisation unternehmerischer Aufgaben. Transaktionskosten als Beurteilungskriterium, Frankfurt - Bern - New York: Peter Lang. Michaelis, E. and Picot, A. (1987): Zur ökonomischen Analyse von Mitarbeiterbeteiligungsrechten, Mitarbeiterbeteiligung und Mitbestimmung im Unternehmen, F. R. FitzRoy and K. Kraft (Eds.), Berlin: de Gruyter: 83-127. Monissen, H. G. and Wenger, E. (1987): Specific Human Capital and Collective Codetermination

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Rights, Efficiency, Institutions and Economic Policy, R. Pethig and U. Schlieper (Eds.), Berlin Heidelberg - New York: Springer, 127-148. Olson, M.J. (1982): The Rise and Decline of Nations, New Haven - London: Yale University Press. Ouchi, W. (1981): Theory Z, Reading, Mass.: Addison-Wesley. Ouchi, W. and Price, R. (1978): Hierarchies, clans and theory Z: A new perspective on organizational development, Organizational Dynamics, 1 (2): 25-44. Picot, A. (1982): Transaktionskostenansatz in der Organisationstheorie: Stand der Diskussion und Aussagewert, Die Betriebswirtschaft, 42: 267-284. Picot, A. (1985): Transaktionskosten, Die Betriebswirtschaft, 45: 224-225. Reynolds, M. (1984): Power and Privilege, New York: Universe Books. Schlochauer, U. (1983): Die betriebliche Einigungsstelle: Ein zunehmendes Ärgernis, Das Betriebsverfassungsgesetz auf dem Prüfstand, B.Rüthers and W.Hacker (Eds.), Stuttgart: Schäffer Verlag, 99-103. Schneider, H. (1983): Mitbestimmung, unvollständige Information und Leistungsanreize: Überlegungen zu einer funktionsfähigen Unternehmensverfassung, Schweizerische Zeitschrift für Volkswirtschaft und Statistik, 119: 337-354. Schüller, A. (1985): Zur Ökonomik der Property Rights, Wirtschaftsstudium, 14: 259-265. Stigler, G . J . (1984): Economics - The Imperial Science? Scandinavian Journal of Economics, 86: 301-313. Sullivan, J.J. (1983): A Critique of Theory Z, Academy of Management Review, 8 (1): 132-142. Taft, P. (1964): Organized Labor in American History, New York: Harper and Row. Taylor, M. (1976): Anarchy and Cooperation, London: Wiley. Tsuda, M. (1982): Perspectives of Life-Time Employment Security Practice in the Japanese Enterprise, Employment and Participation, V. Rus, A. Ishikawa, and T. Woodhouse (Eds.), Tokyo: Chuo University Press, 206-224. Wenger, E. (1984): Die Verteilung von Entscheidungskompetenzen im Rahmen von Arbeitsverträgen, Ansprüche, Eigentums- und Verfügungsrechte, M. Neumann (Ed.), Berlin: Duncker und Humblot, 199-217. Williamson, O . E . (1979): Transactions-Cost Economics: The Governance of Contractual Relations, Journal of Law and Economics, 22: 233-261. Williamson, O. E., Wächter, M. S. and Harris, J. E. (1975): Understanding the Employment Relation: The Analysis of Idiosyncratic Exchange, Bell Journal of Economics, 6: 250-280. Wirtschaftwoche (1986): Japan - Risse im Fundament, Wirtschaftswoche, 40 (33): 48-55. Wirtschaftswoche (1987): Die Japan AG wankt, Wirtschaftswoche, 41 (26): 38-52.

Asset Specificity, Governance, and the Employment Relation Louis Putterman

Abstract Economist's views of the employment relationship are closely related to their theories of why business firms exist as alternative resource allocating systems within market economies. The more influential theories previously proposed focus on the extraction of surplus labor (Marx), the distribution of enterprise risk-bearing (Knight), transactions costs (Coase), bounded rationality (Simon), and monitoring (Alchian and Demsetz). Oliver Williamson has proposed an alternative view which explicitly incorporates parts of the last three approaches, but emphasizes the importance of investments in enterprise-specific assets. Such investments give rise to an ex post 'hold up' problem which may cause the least-cost production method of be avoided, except within the framework of a protective governance structure such as that of a business firm. This paper focuses on Williamson's extension of his approach to explain why shareholders are the party in the enterprise coalition accorded ultimate control over the enterprise. After attempting to expound this part of Williamson's theory and noting some difficulties with it, a detailed comparison with Knight's risk-bearing theory shows areas of close overlap as well as distinctions. Next, Williamson's success in establishing a qualitative asymmetry in the degree to which various parties to the firm must bear risk is questioned, and it is suggested that ability to bear risk, which is correlated with wealth and with the ability to diversify asset holdings, explains observed risk-bearing and enterprise control patterns better than differential risk exposure. In the final section it is argued that an asset specificity view of the firm, far from demonstrating that shareholders' control is efficient, actually suggests that systems of enterprise governance which exclude workers from decision-making participation may fail to maximize coalition value and thus the total productivity of factors interacting in the firm.

Introduction It has been remarked perhaps ad nauseum in recent years that standard economic theory fails to treat the questions why there are firms and what determines their internal structure, and that the economic literature on these questions that does exist lies somewhat outside of the mainstream or at least at some remove from the central preoccupations of the discipline. Nonetheless, economists' interest in these questions Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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has continued of grow of late, and there are even indications that major breakthroughs, not only in the establishment of a new institutional economics but also in answering troubling questions regarding labor markets and the macroeconomic functioning of industrial market economies, may be forthcoming from just these areas of research. 1 The nature of the employment relationship, on the one hand, and that of the firm, on the other, are closely related in the economics literature. Standard neoclassical theory, in not providing a reason why economic relations in market economies do not always have the character of market exchanges, fails to address either the question of why there are such units as firms, or that of what governs the conditions under which labor is employed by those units (or, more specifically, why such a thing as an 'authority relation' evolves in the context of voluntary exchange interactions among juridical equals). In this paper I will first review some of better known answers to these questions in the economics literature, and then focus on a recent answer by Oliver Williamson that centers on the idea of asset specificity. Williamson's explicit effort to relate asset specificity to the internal governance structure of firms, which is quite recent and thus not yet well known, is the main subject of the paper. My discussion of it will proceed by first attempting to clarify some of the details of Williamson's argument by comparing it to a closely parallel and well known approach taken by Frank Knight in the 1920's. Then I will inquire into the convincingness of Williamson's argument in the context of his own framework of asset specificity, and will argue that the asset specificity approach to the firm is hospitable to very different conclusions about governance which have quite different normative implications for the role of labor in the enterprise.

1. Theories of the Firm and the Employment Relationship That the division of labor in society and that within the factory or enterprise are to be treated differently, at least for purposes of classification, is already clear in Adam Smith's Wealth of Nations (1937 [1776]). His classical example of the gains from specialization concerns internal specialization within a pin manufacturing enterprise, but he links such gains to the development of markets which make possible great specialization among producing units. However, the two kinds of division of labor are treated as largely symmetrical and complementary, without economically important distinction. Karl Marx's contribution to the theory of the firm, generally overlooked by modern non-marxist writers, is remarkably modern apart from its value theory. Marx may be the first important economist to place great emphasis on the distinction between firm and market, or what he refers to as 'the division of labor in the factory' and that in 'society' as a whole, 2 or again, 'the sphere of circulation' and 'the sphere of production'. The distinction plays an important role in his theory of value and surplus value: values are exchanged for equal values by socially equal agents in the sphere of circulation, or

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the market; but values, including surplus value, are generated in the sphere of production, or the factory or firm. One marxian answer to the question 'Why are there firms?' is that it is in the "hidden abode of production" (Marx 1967:176) that capital can earn a profit. Part of the argument is that "labor", as opposed to "labor power", can neither be purchased nor sold in the market. In modern terms (see, for example, Bowles 1984) effort levels are a function of the level of supervision, and not simply of the terms of the labor contract. In a sense the quintessentially anti-marxian theory of the firm is the next one to be discussed, that of Frank Knight (1957 [1921]). In Knight's theory enterprise engenders risk, and the firm comes into existence as at once producer of commodities and trader in claims to the expected value of those commodities and in the variance of that value. The entrepreneur is the party who organizes the firm, offers guaranteed rewards to those contributing labor to it, directs and controls that labor, and receives all income net of labor's and other incurred payments. This arrangement gives workers payments somewhat lower than they could earn if they were risk neutral, with zero variance; while entrepreneurs receive expected returns somewhat higher than would be forthcoming if both they and workers were risk neutral, and they absorb all of the variance. In addition to the risk premium, entrepreneurs receive the right to run the firm as a precondition to their risk bearing. Knight's theory is antithetical to Marx's, because it makes not only the labor bargain but also the very arrangements governing income claims, and the determination of which individuals play which roles, dependent on differences in individual traits and preferences as opposed to social identity or (at least in some versions) historical accumulation of wealth. The next well known contribution is that of Ronald Coase (1952 [1937]), who first no change needed posed the question 'Why are there firms?' in its modern form. Coase's answer is that there are costs of arranging transactions among distinct economic units i.e. in markets - which costs are avoided by bringing resources and activities into an entity subject to centrally planned control. Resources and activities will come to be included in a firm as long as the cost of deploying incremental resources and carrying out additional activities under central direction is lower than that under the market, but not otherwise. Coase's contribution is known more for this structure of an answer than for specific content, but he suggested a number of elements of the relevant transactions costs, including those of negotiating and drawing up contracts, discovering or agreeing to prices, and stipulating what services (the performance of which tasks) are being traded (e.g. in the case of labor). Parts of Coase's transactions cost paradigm have subsequently been developed by Williamson, and Coase's comment about the employment relationship (1952 [1937]: 281) closely anticipate the next model to be discussed, that of Simon. Simon (1951) models the employment relationship as an 'authority relation', and asks why this type of relationship should exist. He holds that it would be prohibitively costly for the employer to specify in advance exactly which tasks are to be performed by a worker at which moments in the future. Contracting anew over the task and the payment for completing it at every moment in time is also prohibitively costly. Hence, the

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employer and worker agree that in exchange for a fixed payment the employer will be allowed to select the tasks to be carried out by the worker, as contingencies unfold. The employer picks from among a set of tasks that are relatively acceptable to the worker in the sense that the latter's level of satisfaction is less sensitive to which task he performs than is the satisfaction (or profit) of the employer. This approach and the rationale for adopting it are also further illuminated by Williamson (1975), who explicitly ties the approach into a transactions cost framework. Alchian and Demsetz (1972) present a theory of the firm and of the employment relationship that differs both from that of Knight and from those of Coase, Simon, and Williamson. This theory focuses on the cost of monitoring imput services. The reason why firms exist, according to Alchian and Demsetz, is that there are economies of team production, but team production gives rise to a monitoring problem which threatens to fully offset those economies. That is, unless input contributors are rewarded according to the levels of their contributions, they will have incentives to 'shirk', and the economies of team production will not be realized. This means that an additional input, monitoring services, is required by the team. It is a peculiarity of that input which gives rise, according to Alchian and Demsetz, to the existence of the firm as a distinct institution. The peculiarity is that monitoring can not simply be purchased by the team, because it is itself difficult to observe, and because ultimately it is necessary to answer the question 'Who monitors the monitor?' Because the market is an imperfect monitor of monitors as much as it is of workers, a special incentive mechanism is required. This mechanism is constructed by having the agent who monitors the other service contributors be the central party to all of the economic relations making up the firm, which means being the party that sets the compensation levels of those inputs according to their monitored contributions, having the right to hire and fire the other input contributors, and having claim to the enterprise's income net of those payments. This answer differs from that of Knight in that the residual claim is viewed not as a reward to risk-bearing but as a necessary incentive to monitoring, and it differs from those of Coase, Simon, and Williamson in that it rejects the idea that the employment relationship contains a meaningful element of authority. While the latter difference also separates Alchian and Demsetz from Marx, and while, like Knight, Alchian and Demsetz are anti-marxian in seeing the structure of enterprise as something demanded by the workers, they are also the first of those so far discussed who make central use of the marxian idea that quantities of labor can not be purchased without reference to the elasticity of labor as a function of supervision.

2. Williamson on Asset Specificity and the 'Hold-up' Problem Although Oliver Williamson has been mentioned for his development of some of the themes of Coase and of Simon, discussion of his distinctive theory of why there are firms, and of the employment relationship and the firm's internal governance structure,

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has been reserved for this section. The discussion here will deal especially with the latest statement of that approach in Williamson (1985). Earlier, and without emphasis upon the asset specificity framework to be explored in this section, Williamson (1975,1980) explained the existence of hierarchy in the organization of production in terms of the efficiency of decision-making to be obtained by (a) concentrating the decision-making function into a few hands, so as to reduce superfluous communications and assimilation of information, and (b) putting those with superior decision-making abilities into the decision-making positions, hence 'economizing on bounded rationality'. 3 He also developed (1975, Chapter 4) the ideas of Coase and of Simon into a theory of the long-term employment relationship, emphasizing the costs of either writing contingency-anticipating contracts or of continuously revising contracts or hiring on a spot labor market. I have discussed these arguments at length elsewhere (1981, 1984, and relatedly, 1982) and will not return to them in the present paper. Following on the latter and other related work of the past decade and more, Williamson presents a distinctive theory of the firm in his current book (1985). This theory focuses on an element not mentioned by Marx (extraction of surplus labor), Knight (bearing of risk), Coase (transactions costs), Simon (bounded rationality), or Alchian and Demsetz (monitoring), namely: the problem of enterprise-specifice investment. Like Alchian and Demsetz, Williamson assumes that technological factors call for the cooperation of several input suppliers in a firm's productive activity or activities. Like Coase, he emphasizes that a firm is something other than a collection of factor suppliers repeatedly entering into a market exchange transaction. Instead, a firm manifests a set of long-term, incompletely specified contracts and has an internal governance structure performing resource allocation functions at arms length from the market. The existence of economies of scale alone can not explain the substitution of this structure for repeated exchanges. Bounded rationality, a changing environment, and costliness of negotiation help, but they do not suffice to explain the particular form which the market-superdecing production organization takes. Going beyond the existing approaches, Williamson contends that to look for transactions costs that might explain the existence of the firm in the writing up of contracts and in other visible costs of doing business is to ignore a potentially more important cost of cooperation. That cost, and frequently the major reason for the existence of the firm, is associated, according to Williamson, with investment by factor suppliers in assets specialized to an enterprise - that is, assets whose realizeable value in alternative uses is substantially below what they can achieve in the enterprise for which they are designed, and which accordingly stand to earn 'rents' from successfully cooperating in it. The costs in question include risk premia for factor owners' potential losses of rents (or quasi-rents), should the enterprise collapse or other cooperating factor-owners succeed in extracting them by means of 'hold-up' (as discussed below). Also included are the costs incurred to guard against such extraction, including those of operating protective governance arrangements.

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While enterprise-specific investment may not be a necessary reason for the existence of firms, it is a sufficient reason in the following sense. Suppose that the least cost way of producing a certain product or service involves cooperation among several agents, and the making of investments specific to this enterprise by all or several of them. There are, then, 'economies of joint or inter-specialization', but (as with Alchian and Demsetz's monitoring problem) those economies may not be realized - in this case, because the one period return from the activity does not recover the costs of the irreversable investments made in specific assets, and because market contracting can not guarantee continued operation on terms that all parties prefer to their autarky or pre-specific investment opportunities. This condition results from the fact that each party to the cooperative agreement is subject, as the future unfolds, to being 'help up' by one or more of the other parties for some portion of its quasi-rent. That is, once the irreversible investments have been made, part of the expected returns that would have justified these investments becomes a quasi-rent; i.e., it becomes more than is necessary to keep the asset in the joint enterprise by keeping its return there the highest one it can earn in any use. Realizing this, the owners of other cooperating factors have incentives to threaten to withdraw or to deal with new partners, unless the supplier in question accepts a payment closer to its ex post reservation earning - for capital goods, for example, their scrap value. Such demands can be given an air of legitimacy by alleging that circumstances have turned against the party pressing for a revision of coalition terms. Williamson argues that since potential coalition members will recognize these dangers before entering into the arrangement, the least-cost production activity will simply not be undertaken, unless insitutions can be crafted to protect the parties to the agreement after specific investments have been undertaken. One such arrangement is the vertical integration of activities into a single enterprise, common ownership, and the replacement of 'high-powered' market incentives with 'low-powered' but enterprise- (or joint value maximization) aligned internal organizational or bureaucratic incentives. Where this answer fits the problem, enterprise-specific investment may explain the formation of a firm, then. However, protective structures also take forms which are neither entirely market-like nor firm-like: arrangements that leave the parties to a cooperative endeavor as distinct entities, but cause them to interact within a regularized governance framework of ongoing exchange and periodic adjustment of terms. Among the latter arrangements falls the collective bargaining institution of industrial relations between employers and their labor forces. While Williamson's new book incorporates his previous discussion of the organization of work (1980) into one of its chapters (1985, Chapter 9), it is to his discussion of corporate governance (Chapter 12, originally published in Williamson 1984) that we must turn for an application of the asset specificity and 'hold up' problem idea to the internal organization of the enterprise, the question of who runs the firm, and the asymmetric relations between shareholders - who appoint management - and workers. Williamson identifies the Board of Directors of the modern corporation as the governing body of the firm, with ultimate oversight over managers, and asks why sharehol-

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ders, as opposed to suppliers, the local community, customers, managers themselves, or workers, elect the Board. His answer is that this power resides with the shareholders since it is they who expose themselves to unavoidable risks of expropriation, because (a) "The whole of their investment in the firm is potentially placed at hazard" inasmuch as their "claims are located at the end of the queue should liquidation occur" (1985: 304-5), (b) the assets on which they have claims include many that are either intangible or of unclear value in alternative uses, and (c) they "are the only voluntary constituency whose relation with the corporation does not come up for periodic renewal" (p. 304). Now, leaving aside (b), with respect to which the uniqueness of shareholder-owned assets can be debated, these arguments appear at first to be based upon given corporate institutions, and hence to be inadequate to the task of explaining why it is the contributors of finance who ultimately control the firm. That is, the question of why providers of finance take their place at the end of the liquidation queue and purchase assets that the firm has no obligation to redeem - why, in other word, financiers elect to bear the financial risks of the firm, rather than sharing them with or laying them off upon other parties - does not seem to have been addressed. For example, could labor not have controlled the firm and raised its financial requirements by borrowing on promise of a fixed return? If the argument is not simply to be dismissed on this ground, we must try to find something more fundamental in it, and two ideas present themselves as possibilities. First, argument (b) on the diffuseness of assets can be expanded along the lines of Michael Jensen and William Meckling's (1979) discussion of labor-managed firms and codetermination, in which those authors argue that labor-run firms that rent all of their financial requirements are impossible because many of a firm's assets, such as good will and new product ideas, must of necessity be owned by the first itself. An attempt might be made to extend this argument from asset rental to the borrowing of external funds with which to finance acquisition of intangible assets, for example by arguing that the latter assets have little or no value as loan securing collateral. Williamson hints at the latter argument when addressing the differences between shareholders and lenders (p. 307). The second possibility is to focus on the phrase "The whole of their investment in the firm is potentially placed at hazard", and to suppose that what Williamson is really getting at is that there is a structural asymmetry between suppliers of capital goods or finance, and suppliers of other inputs: namely, that while the latter provide a flow of services, leaving their input itself intact, the former supply a unit of their stock (i.e. that which yields the desired service flow), and thus expose the whole of each unit provided to potential hazards of expropriation. This fundamental asymmetry can not be altered merely by changing the form of contracts, because it results - a point not stated by Williamson - from an institutional underpinning of the liberal system of property rights: that labor can not be bought or sold, even with the assent of the worker. 4 Just how the argument, in this second interpretation, is to be tied to the framework of specific assets is problematic, but a possibility is again found in argument (b). The characterization of the assets in which shareholders hold equity shares as "numerous

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and ill-defined" and as difficult to proctect "in a well-focused, transaction-specific way" (p. 306) is contrasted with the statement that (ordinary) "[l]enders who make longerterm loans commonly place preemptive claims against durable assets. If the assets can not be easily redeployed, lenders usually require partial financing through equity collateral" (p. 307). Once equity shares have been purchased, shareholders, whether or not because the primary value of their assets is highly use-specific, are subject to a risk of loss of value that will presumably be accepted only if compensated by a high premium or if protected by a special governance arrangement. Being the party that elects the Board is the observed, governance-based solution.

3. A Comparison of Williamson's and Knight's Theories Before subjecting the above argument to critical scrutiny on its own terms, it will be illuminating to compare it with the Knightian theory, which was briefly reviewed earlier in the paper. Some of the similarities are so great that there is indeed some danger of mistaking the one for the other. Most prominently, both the Knightian theory and Williamsons's share the proposition that he who bears enterprise risk - in Knight's case, from general business uncertainty, in Williamson's from "a diffuse but significant risk of expropriation" (p. 306) - is given control rights over the enterprise lest alterable contingencies be decided according to the interests of non-risk-bearing parties. And in both theories it is the party which finances the firm that runs the firm and hires labor. The basis of the proposition that the risk-bearer will (where feasible) also exercise control is, for both theories (and in conventional risk-bearing theory in general) the idea of 'moral hazard'. Workers can not buy income insurance on attractive terms while remaining free to direct their own work, because the insurance takes away their economic incentives to work intelligently and productively. It might be possible for workers to be substantially insured, if they accepted lower wages and compensated the financiers with a high risk premium; but the fact that shareholder or owner-controlled firms commonly hire labor, rather than labor running firms and contracting with financiers, is prima facie evidence that this is usually unacceptably costly.5 Williamson, unlike Knight, claims not to be talking about the conventional risks of enterprise. Indeed, he asserts that his own transactions cost economics assumes risk neutral agents and thus, unlike Knight and the modern 'implicit contract' literature 6 , does not rely on risk aversion to explain institutional arrangements (p. 389). Why is it that, when the 'hold up' problem exposes an agent to the risk of quasi-rent (or in this case asset) expropriation, even risk neutral agents demand governance or procedural protection, or a compensating price premium? The idea clearly is that the 'hold up' possibility influences not only the variance of the returns to capital owners, but also the mean of the distribution of returns. But that is also what happens when 'moral hazard' operates, so the difference between the two phenomena once again gives way to similarity.

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The Knightian 'risk-distribution theory of governance' begins with the fact that the revenue streams and costs of a firm are uncertain, and that therefore at least one party to the firm's set of conctracts must accept an uncertain stream of returns. Who will bear how much risk, and under what terms? The first part of the answer, that whoever bears the risk will control the enterprise, is essentially shared by Williamson's approach. But with respect to the question: "Who will be both the risk-bearer and the bearer of control rights over the enterprise?" the two theories diverge. 'Risk-distribution theories' such as Knight's suggest that people sort themselves into entrepreneurs and workers according to their attitudes toward risk. One possibility is that such attitudes are more or less randomly distributed, like preferences for consumer goods and for present versus future consumption. Then the relatively risk-loving or risk-neutral become capitalists and entrepreneurs, who bear risk and control enterprises, while the relatively risk-averse become workers, who receive fixed wages and accept orders. 7 Another possibility is that in addition to random variation of attitudes to risk, there is substantial systematic variation linked to wealth: wealthier persons are observed to be generally more willing to shoulder risks than are poorer ones. Accordingly, the owners of the liquid wealth that is financial capital will tend to bear the risk in their association with risk-averse sellers of labor, and hence will also tend to control the firm. 8 The linking of governance to risk-bearing ability and the further linking of the latter to wealth suggests that industrial democracy is consistent with efficiency only in the face of a very high degree of equality of wealth and identity of attitudes towards risk. Therefore, to mandate labor participation in the absence of such conditions may be not only a disguised form of redistribution, but also an inefficient one. For labor decision-making, if it is not aligned with the incentive requirements of the actual distribution of wealth and of the (related) willingness to bear risk, could well lead to less efficient utilization of rescources and, hence, to a reduction in what given resources produce. This being the case, then even if workers gain dignity, job security, or satisfaction from participation, it might have been possible to redistribute income without altering enterprise governance and thereby to have made non-workers at least as well off and workers still better off than under mandated participation. Williamson's approach differs from these variants of the risk distribution theory of governance in that it is independent of attitudes towards risk and makes the assignment of governance rights largely neutral to income or wealth distribution.9 In Williamson's theory the assignment of governance rights flows not from a difference in relative wealth or economic power, but rather from the fundamental structural asymmetry between the worker, who provides the firm with units of a service flow, and the owner of capital, who provides units of his stock itself and thus exposes the whole of each unit to the hazard of expropriation. This difference would remain in principle, regardless of the relative scarcity of labor and capital or the relative wealths of their possessors.

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4. Asymmetry of Risk or of Ability to Bear It? In this section I turn to analyzing Williamson's explanation of governance on its own terms. A substantive judgment of that explanation hinges, in my view, on whether the argument for a fundamental asymmetry in exposure to expropriation risk succeeds in demonstrating that capital must hire labor. In evaluating that argument, I find it far from obvious that 'capital's supplying its whole self as opposed to 'labor's supplying its services alone' really does translate effectively into a quantum difference in relative risk. One reason arises out of the diversifiability of equity investment that has thus far been overlooked in my discussion. This phenomenon seems so important that it has even been proposed as an explanation in its own right of who bears risk and runs the firm. That explanation says that those who can reduce their risk by making more and smaller risky but uncorrelated investments will bear enterprise risk. The application to capital and labor is given by James Meade (1972: 426): "While property owners can spread their risks by putting small bits of their property into a large number of concerns, a worker can not put small bits of his effort into a large number of different jobs. This is presumably a main reason why we find risk-bearing capital hiring labor rather than risk-bearing labor hiring capital." Williamson contends that the diversifiability phenomenon is not relevant to explaining corporate governance, because it affects shareholders individually but not as a group, and to focus on it is thus to commit a 'fallacy of composition'. 10 If there is an element of truth in this argument, it is that each individual shareholder, however trivial and however temporary his ownership position, is affected by the terms on which equity is offered, whence the price commanded by shares will be influenced by arrangements affecting the risk borne by the shareholding body as a whole. How diversification can be left out of the picture is unclear, though, since it surely affects the willingnesses of investors to purchase whole classes of equity claims. Certainly the price of equity claims may rise when they are attached to control rights, if the latter are seen as increasing the security of the investment. But the question is whether the risk exposure of owners is so much greater than that of workers as to constitute a sufficient explanation for their exclusive claim to governance. Meade's reference to diversification suggests that, while capital collectively bears conventional enterprise risk, capital owners accept that burden at relatively low cost while laborers, despite fixed wages, are left with substantial and uninsured risks of their own. These risks are bound up with firm-specific investments including the acquisition of firm-specific skills, the foregoing of opportunities to develop alternative skills, and a family's investment in ties to a community, the value of which are all subject to sudden destruction by job loss. As Knight himself wrote: specialized skill and training [ . . . ] are acquired in connection with and for use in the particular business. The cost of acquisition is borne chiefly by the worker and if the business proves unprofitable, the loss generally falls on him. [ . . . ] it must be added that the actuarial value of the worker's risks depends quite as much on the quality of the management as is the case with those of the owner of material property.11

Indeed, the very notion that labor provides service but not substance is open to challenge. The view of 'capital, land, and labor' as co-equal productive factors each of

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which is in the self-same sense 'possessed' by its 'owner', runs up against not only the legal distinction that labor can be rented out but not purchased - which contributes to the asymmetry emphasized by Williamson's argument - but also the physical distinction that the owner of non-labor factors experiences the travails of 'his factor' vicariously, whereas the 'owner of labor' is on the scene. Contrary to Williamson, this is fact causes "the whole of their investment in the firm [to be] potentially placed at hazard", for as Knight, again, wrote: the risk of destruction and total loss is perhaps as great in fact in the case of the laborer as in the case of the property-owner, and where in the latter case the owner loses only productive power, the former loses health or bodily members or his life, which means vastly more. 12

Let it be noted that the 'hold up' problem is very much apropros. Once the worker has committed training opportunities, family roots, and, often, the advantages of youth or undepreciated education, to a specific job, the employer can frequently turn around and 'shake down' the worker for some of his 'quasi-rents'. The wage at which it is just worth staying on the job may be considerably below what was promised and anticipated when the decison was made to take it, and the employer can often threaten to relocate or replace the worker at an absorbable cost to the firm (with the given worker's loss remaining an externality to it, unless employer reputations travel with great efficiency13). If asymmetries in the risk-bearing demands upon capital and labor are in fact incapable of providing an unequivocal explanation of who runs the firm, then that question may have to be answered on a plane very similar to that of the conventional risk distribution theory, or of Meade's variant. Who will bear the risk - whether of 'hold up' or of the more old-fashioned 'moral hazard' does not seem to matter - and run the firm is again an open question, and the candidates stepping forward are propelled once again by ability to bear risk - which figures in both the wealth-linkage explanation and in that based on asset diversification. Note, too, that not only is it the party to whom riskbearing is least costly who takes control rights in exchange for some risk, but also that, as already mentioned, there is a financial reward accruing to that party, further padding the wealth cushion, and that by no means all important risks are eliminated for the economically weaker party. But even if it is agreed that one is ultimately thrown back to more conventional risk distribution and moral hazard theories, which link risk bearing to enterprise control through standard 'moral hazard' considerations, and which assign risk bearing to specific players in accordance with risk bearing abilities, is there any reason to question the final normative implication: that control is allocated efficiently in the conventional corporate model, and that there is no basis apart from redistributionist imperatives which can only inefficiently be pursued in this manner - for sharing of such control?

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5. Teams, Quasi-Rents, Profit-Sharing, and Control Many economic arguments for profit-sharing and worker participation in decisionmaking have been advanced in recent years. The purpose of this final section will be to show that an argument for these departures from traditional industrial relations can be constructed precisely in terms of a specific investment approach to the firm similar to that proposed by Williamson. Earlier, Williamson's distinctive approach to the question of why firms exist was introduced by saying that like Alchian and Demsetz, this approach assumes that technological factors call for the cooperation of several input suppliers in a value-producing activity or activities, and, like Coase, it emphasizes that the firm incorporates a set of long-term, incompletely specified contracts and an internal governance structure performing resource allocation functions at arms length from the market. The innovation of Williamson's approach is to emphasize that the members of the team of input suppliers making up the firm become peculiarly interdependent by virtue of their investments in assets specific to the joint enterprise. Partly influenced by Williamson, a number of other economic writers have adopted similar views of the firm in recent years. Moreover, the idea of a team-generated quasirent has of late been rediscovered in the work of Alfred Marshall dating back to 1890. In a passage which has recently been repeatedly cited Marshall wrote: The point of view of the employer however does not include the whole gains of the business: for there is another part which attaches to his employees. Indeed, in some cases and for some purposes, nearly the whole income of a business may be regarded as a quasi-rent, that is an income determined for the time by the state of the market for its wares, with but little reference to the cost of preparing for their work the various things and persons engaged in it. In other words it is a composite quasi-rent divisible among the different persons in the business by bargaining, supplemented by custom and by notions of fairness [ . . . ] Thus, the head clerk in a business has an acquaintance with men and things, the use of which he could in some cases sell at a high price to rival firms. But in other cases it is of a kind to be of no value save to the business in which he already is; and then his departure would perhaps injure it by several times the value of his salary, while probably he could not get half that salary elsewhere. 14

Armen Alchian has recently (1984) treated the firm as a coalition as follows: [A] group of people can by "joint" action achieve more than the sum of their separate results, where the total is not the sum of separate amounts from each member. [ . . . ] The assembly of a profitable coalition is a stochastic, costly process. Successes must be expected to cover the cost of failures if search is to be induced. [ . . . ] It follows that a successful firm is one that achieves a value exceeding that which its members could have earned elsewhere, (p. 35) In forming a coalition, some members will make investments the value of which elsewhere will be less than the value in the coalition (and also less than its costs). If its value in the coalition is higher than elsewhere, it is defined to be specific to the coalition [ . . . ] resources that are specific to the coalition are those that will lose the excess of the investment cost over the salvage value [if the coalition fails]. [ . . . ] The return on the investment cost that is non-

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salvageable if the other resource to which it is specifically dependent disappears is called the specific quasi-rent. (p. 36)

Hajime Miyazaki (1984) quotes from Marshall and notes that "Marshall emphasizes that a significant portion of composite quasi-rent is derived from the organization of business and would be lost if employer-employee connections were dissolved". Miyazaki proceed to model the process of enterprise-internal bargaining over the distribution of the joint quasi-rent. Masahiko Aoki (1984), who also quotes Marshall, suggests a theory of the firm quite similar to Williamson's but more symmetric in its treatment of financiers, managers, and workers. [T]he firm-specific resources are not embodied in a single, monolithic agent, but are dispersed among the body of shareholders and the body of employees. Those resources are firm-specific in the sense that they are value-less in isolation and productive only in their steady association with the corporate firm as a nexus for mutual association, (p. 30). [I]t may be said that employees' skills, managerial as well as productive, are, to a nonnegligible extent, the products of team efforts and can be neither appropriable nor portable individually. Is it possible, then, to generate and use those collective skills efficiently through the price mechanism? Since collective skills are never appropriable individually, the spot market of labour is not likely to provide a suitable setting in which their use is appropriately rewarded. [...] Clearly, it is more practical to control administratively investments in, and uses of, human resources. Informational efficiency is one of the primary reasons why the firm emerges to regulate the allocation of human resources through non-market, administrative procedures, (p. 27)

Aoki argues that inefficiencies, in the form of departures from a shifting locus of efficient wage and employment level contracts, will result, unless labor and shareholders' representatives (management) are engaged in a frequent negotiation process with substantial sharing of information. He identifies co-determination as an institutional device permitting such renegotiation and information-sharing. Finally, interspecialization, if not the quasi-rent idea, is also underscored by Richard Nelson and Sidney Winter's view of the firm as a complex of interacting routines. [T]he context of the information possessed by an individual [team] member is established by the information possessed by all other members. [ . . . ] To view organizational memory as reducible to individual member memories is to overlook, or undervalue, the linking of those individual memories by shared experiences in the past, experiences that have established the extremely detailed and specific communication system that underlies routine performance. (1982; 121)

The above quotations already suggest that capital or financiers have no monopoly on specific investment in the enterprise, and that the 'hold up' problem applies more or less symmetrically among the various parties to the team as coalition. What the quotations from Marshall, in particular, fail to make clear, however, is that the value realized by the coalition is not simply a matter of market conditions and of whether the coalition survives or collapses, but also of the effectiveness with which its members cooperate. Alchian writes:

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I define members of a coalition to be cooperating in attempts to maximize the coalition value. They are competing, even while cooperating, when they act in ways designed to increase their individual shares of the group total, and some or all may end up with less than if none had so behaved. This has been posed in many different descriptive terms. [ . . . ] But "in truth" it is simply a contract formation and enforcement problem. In some cases the danger is so slight as to be overlooked. In others it is so great that potential joint action is thwarted. (1984; 36)

What Alchian refers to as "simply a contract formation and enforcement problem" can also be called a problem of incentive alignment. An enterprise is now seen as a coalition of cooperating resources capable of producing a joint quasi-rent - i.e. value above the opportunity earning of its individual members outside of the team - and beset by the problem of achieving consummate cooperation in the face of (a) individualistic incentives to free-ride, which can reduce total coalition value, and (b) opportunistic incentives to 'hold up' the other parties, which can redistribute a given coalition value. Williamson's emphasis on ex post or post contractual incentives has application to all members of the coalition. What method of allocating the joint value, what method of sharing the risks due to both exogenous stochastic factors and the dangers of opportunism within the coalition, and what method of allocating decision-making prerogatives, will be most conducive to maximizing this joint value? Advocates of worker participation and profit-sharing have in recent years made the case that any solution that separates labor from the decision-making and revenue-sharing functions chokes off possibilities for the consummate participation of workers in the value-maximization process. Thus, performance motivated by reward but with reduced supervision expenditures, cooperation of the work-force in mutual supervision and encouragement rather than the familiar collaboration against management, and the upward flow of information about shop-floor cost-reducing and qualityimproving possibilities, may be out of reach of the firm that does not share revenue and the decision process with employees. Similarly, the participative firm may transform antagonistic and conflictual industrial relations into a process allowing cooperation over a wide range of issues affecting coalition effectiveness and achievement. But once participation or co-determination is introduced, does not the whole range of inefficiencies associated with the "labor managed firm", as first analyzed by Ward (1958), begin to distort the firm's appropriate adjustments to changing market conditions? More specifically, will the firm not now make inefficient adjustments with respect to employment? To answer, one must note that rather than the Ward problem of dismissing labor under profitable circumstances, so as to maximize returns per labor unit, the more recent literature has assumed inflexibility of LMF's with regard to downward labor force adjustment. Such inflexibility might give rise to positive but perhaps relatively inelastic responsiveness to changes in product demand, long-run inefficiency in inter-firm and inter-industry labor allocation - due to partial incompleteness of the labor market (the shadow cost of labor internal to the firm is not equated to a market wage, except through long-run entry and exit of competitor firms or where there is a market for worker partnership deeds) and a general inclination to treat

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labor as a fixed rather than variable cost of production (Aoki 1984: 156-62, Bonin and Putterman 1986, Streeck 1984). A fundamental question to be asked, however, is whether a qualitative step towards treating labor as a given member of the team rather than a short-run variable hired factor, does not - aside from maximizing the degree to which labor's potential contribution to coalition value is realized - also pave the way for a net social welfare improvement by partially internalizing costs of market adjustment, which are otherwise borne privately and with inadequate social accounting by workers and their families. Before concluding, it should be noted that a non-doctrinaire answer of the question who controls the enterprise may well vary, if the asset-specificity approach is correct, depending upon the degree of firm-specific investment and thus of expropriation hazard to which different parties in the enterprise are exposed. Enterprises employing workers having general or easily transferable skills but using highly product- and/or site-specific capital goods may be strong candidates for shareholder control, whereas those whose workers develop many firm-specific skills and tend to sacrifice mobility, but which use few or highly fungible capital goods, may be suitable for cooperative or partnership forms. Likewise, of two firms employing similarly non-skilled or generallyskilled labor, the one having the more intangible and firm-specific capital may be expected (or advised) to exhibit a higher proportion of equity as opposed to debt financing and a stronger degree of shareholder oversight over management. Such an explanatory approach is useful but should not be carried too far in the direction of prescription. There is some truth to the view that competition is continually sorting activities and assigning them to appropriate organizational forms, whence we observe partnerships and profit-sharing in law, medicine, and other artistic and professional practices in which human capital looms larger than physical, whereas proprietorships with bank financing are the rule for businesses with small minimum efficient scale and small, unskilled labor forces, and so forth. But the assertion that the existing incidence of participatory and co-determined enterprise forms demonstrates their limited applicability would be more valid in a world in which technologies and skills descend from heaven and are to be worked with, but not shaped, by organizations, than it is in our own world, where the needs of organizations shape the development of technology and the skill profiles of societies. In such a world the potentials of alternative organizational arrangements need not be revealed by the moment's organizational census, and human aspiration linked to good theory may have a role to play in improving the wantsatisfying properties of production enterprises at a variety of levels.

Notes 1 These themes are discussed in my introduction to a volume that contains versions of serveral of the works cited below. See Putterman 1986. 2 Marx (1967 [1867]: 350-358).

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3 On the latter point, Knight had similarly written (1951 [1933]: 17) that "undoubtedly the largest single source of the increased efficiency through organization results from having work planned and directed by the exceptionally capable individuals, while the mass of the people follow instructions." 4 This is stated also by Knight (1951 [1933]: 47-48) who, in the context of a discussion of capitalization, writes: "with human beings one can only buy their services as they are rendered; one cannot buy a human being as such, nor in general buy his services for any appreciable time in the future by making a labour contract. Such contracts are now generally unenforceable, particularly in the United States, and can rarely, and exceptionally, be bought and sold." And: "This distinction... rests on institutional facts, but is fundamental to the interpretation of modern economic relations." 5 The economic efficiency of bundling together risk bearing and decicion-making rights is unquestioned even by Dreze (1976), who, on pages 1133-35 restates the classical moral hazard argument, although the remainder of his paper demonstrates the allocative and productive equivalence of a market economy composed of worker-managed firms with one composed of capitalist firms. Drfeze ultimately sees grounds for concluding that there might be (Pareto) welfare gains to be achieved through co-determination between workers and financiers. 6 See Azaridis (1975), Baily (1974), and the more recent symposium issue of the Quarterly Journal of Economics, Supplement 1983. 7 A recent formalization of this is Kihlstrom and Laffont (1979). 8 This possibility is also consistent with the model of Kihlstrom and Laffont (see 1979: 746-747). Eswaran and Kotwal (1985), on the other hand, show that much the same result can be obtained even if agents are all equally risk-averse but have differing amount of access to imperfect capital markets, possibly also due to differing initial wealth. 9 To quote him again: "Sometimes what is referred to as power reduces to a preference for an alternative distribution of income. Those who have fewer resources would have greater purchasing 'power' if this were accomplished. But the organization of labor need not be affected on that account. [ . . . ] Indeed, if efficiency is driving organizational outcomes, modes that are efficient under one distribution of income will normally remain efficient under another." 10 "Although a well-developed market in shares permits individual stockholders to terminate ownership easily by selling their shares, it does not follow that stockholders as a group have a limited stake in the firm." Williamson (1985: 304). 11 Knight (1957: 356). 12 hoc. cit. 13 Williamson is reluctant to assume such efficiency in his discussion of the "company town": "A chronic problem with labor market organization is that workers and their families are irrepressible optimists. They are taken in by vague assurances of good f a i t h . . . and by their own hopes for the good life. Tough-minded bargaining in its entirety never o c c u r s . . . or comes too late." This is followed by an important admission: "[T]his book does not attempt a comprehensive treatment of all relevant f a c t o r s . . . I assume that the parties to a contract are h a r d - h e a d e d . . . Omissions and distortions [are more s e v e r e ] . . . when labor market organization is being studied:" Williamson (1985 : 38). 14 Marshall (1920: 626). Parts of the first passage are quoted by both Aoki (1984) and Miyazaki (1984), who will be discussed below, while both passages are quoted by Alchian and Woodward (1986).

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References Alchian, A. (1984): Specificity, Specialization, and Coalitions, Journal of Institutional and Theoretical Economics, 140: 34-49. Alchian, A. and Demsetz, H. (1972): Production, Information Costs, and Economic Organization, American Economic Review, 62: 777-795. Alchian, A. and Woodward, S. (1987): Reflections on the Theory of the Firm, Journal of Institutional and Theoretical Economics 143: 110-136. Aoki, M. (1984): The Co-operative Game Theory of the Firm, London: Clarendon Press. Azariadis, C. (1975): Implicit Contracts and Underemployment Equilibria, Journal of Political Economy, 83: 1183-1202. Baily, M. (1974): Wages and Unemployment Under Uncertain Demand, Review of Economic Studies, 41: 37-50. Bonin, J. and Putterman, L. (1987): Economics of Cooperation and the Labor-Managed Economy (Fundamentals of Pure and Applied Economics 14), London: Harwood Academic Publishers. Bowles, S. (1985): The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models, American Economic Review, 75: 16-36. Coase, R. (1952): The Nature of the Firm, 277-293: A. E. A. Readings in Price Theory, Stigler, G. and Boulding, K (Eds.), Homewood, 111.: Irwin. (Originally published in Economica, 4: 386-405, 1937). Dréze, J. H. (1976): Some Theory of Labor Management and Participation, Econometrica, 44: 1125-1139. Eswaran, M. and Kotwal, A. (1985): Risk-bearing Capacity and Entrepreneurship as Privileges of Wealth, Discussion Paper No. 85-28, Department of Economics, University of British Columbia. Kihlstrom, R. and Laffont, J.-J. (1979): A General Equilibrium Entrepreneurial Theory of Firm Formation Based of Risk Aversion, Journal of Political Economy, 87: 719-747. Knight, F. H. (1951): The Economic Organization, New York: Augustus M. Kelley. (Originally published 1933). Knight, F. (1957): Risk, Uncertainty and Profit, New York: Kelley and Millman. (Originally published 1921). Marshall, A. (1920): Principles of Economics, 8th Edition, London: MacMillan and Co. (First edition: 1890). Marx, K. (1967): Capital: A Critique of Political Economy; Volume I: The Process of Capitalist Production, New York: International Publishers. (Originally published 1867). Meade, J. (1972): The Theory of Labour-Managed Firms and of Profit-Sharing, Economic Journal, 82: 401-428. Miyazaki, H. (1984): Internal Bargaining, Labor Contracts, and a Marshallian Theory of the Firm, American Economic Review, 74: 381-393. Nelson, R. and Winter, S. (1982): An Evolutionary Theory of Economic Change, Cambridge, Mass.: Harvard University Press. Putterman, L. (1981): The Organization of Work: Comment, Journal of Economic Behavior and Organization, 2: 273-279. Putterman, L. (1982): Some Behavioral Perspectives on the Dominance of Hierarchical over Democratic Forms of Enterprise, Journal of Economic Behavior and Organization, 3: 139-160. Putterman, L. (1984): On Some Recent Explanations of Why Capital Hires Labor, Economic Inquiry, 22: 171-187. Putterman, L. (Ed.) (1986): The Economic Nature of the Firm: A Reader, New York: Cambridge University Press. Simon, H. (1951): A Formal Theory of the Employment Relationship, Econometrica, 19: 293-305.

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Smith, A. (1937): An Inquiry into the Nature and Causes of The Wealth of Nations, New York: Modern Library (Random House). (Originally published 1776). Streeck, W. (1984): Co-determination: The Fourth Decade, International Yearbook of Organizational Democracy, Wilpert, B. and Sorge, A. (Eds.), Vol. II, Chichester: John Wiley and Sons, 391-422. Ward, B. (1958): The Firm in Illyria: Market Syndicalism, American Economic Review, 68: 566-589. Williamson, O. (1975): Markets and Hierarchies: Analysis and Antitrust Implications, New York: Free Press. Williamson, O. (1980): The Organization of Work, Journal of Economic Behavior and Organization, 1: 5-38. Williamson, O. (1984): Corporate Governance, Yale Law Journal, 93: 1197-1230. Williamson, O. (1985): The Economic Institutions of Capitalism; Firms, Markets, Relational Contracting, New York: The Free Press.

An Evolutionary View on Changes in Employment Relationships: The Evolution of Organizational Control in the United States I]do Staber and Howard Aldrich

Abstract The population perspective explains organizational change by focusing on the distribution of resources in environments and the terms on which they are available. Variation within and between organizations provides opportunities for differential selection by environmental forces, and retention mechanisms preserve the selected variations. In this paper we examine changes in environmental selection criteria over the past 150 years or so, relating changes in these criteria to changes in the form of employment relationships. We focus on strategies of labor control, relating them to long-term evolutionary changes in the social, political, and economic environment of the United States.

1. Introduction Since the beginnings of industrialization, organizations and organizational forms have undergone substantial transformations. A population of small enterprises that served local markets and were directly controlled by the founding entrepreneur gave way to increasingly heterogeneous organizational types which include small businesses as well as many horizontally and vertically integrated firms, operating in a diversity of markets. In this paper we trace the historical origins and changes in the form of employment relationships, using a population perspective. Our focus is on profit-oriented organizations in a market context, and thus we ignore cooperative forms of employment relations (Aldrich and Stern 1983, Staber'and Aldrich 1986a). Organizational change will be analyzed with reference to the distribution of resources in organizational environments and the terms on which they are available. We focus on management strategies of labor control, relating them to long-term evolutionary changes in the social, political, and economic environment of the United States. We recognize that our use of the term "labor control" throughout our paper, rather than the more neutral term "employment relationship", implies we are examining relations that are inherently conflict-laden, and this is in keeping with the population perspective's emphasis on competitive struggle. From a population perspective, the effectiveness of management strategies of labor control is constrained by the particular configuration of environmental resources at any Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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given time. In the United States labor control strategies have evolved primarily in response to changes in labor and product markets. We begin with a discussion of organizational forms of labor control, and after outlining the salient aspects of an evolutionary approach, we examine long-term changes in labor control.

2. The Concept of Organizational Form The concept of organizational form is a useful tool for studying organizational change (McKelvey 1982). Within the conceptual framework of a comprehensive taxonomy, it helps us understand the diversity of organizational populations and helps us answer the question "why there are so many different kinds of organizations" (Hannan and Freeman 1977). Organizational forms can vary on numerous dimensions, and the dimensions chosen for analysis depend on the research issue at hand (Hannan and Freeman 1977). In the present analysis, we discuss historical changes in the form of employment relationships, focusing on employer strategies for controlling the employment of labor power. We examine two variable dimensions of organizational form: 1) control over the labor process and 2) the use of internal and external labor markets.

2.1 Labor Process Control structures shape the way worker behavior at the workplace is directed, evaluated, and rewarded (Edwards 1979), and are embedded in the more general control functions that define and protect organizations' boundaries (Aldrich 1979). Simple control has characterized employment relations throughout most of the industrial era, as superiors and their subordinates have been in face-to-face interaction, with only custom as a guide to proper behavior. Employers using simple (or entrepreneurial) control stress worker commitment and loyalty and rely on a very personalistic style of supervision. Hierarchical control exists when intermediary authority positions are placed between top management and the worker, primarily in the form of first-line supervisors and foremen. Simple and hierarchical control sufficed as modes of labor control in most business organizations until late nineteenth century, but a crisis of control - brought on by expanding firm size, militant unions, heightened international competition, and other forces - eventually led to the development of technical and bureaucratic control structures. Technical control is embedded in the design of machinery and work flow, thus avoiding human intervention in the direction and evaluation of labor, as in the case of assembly line technology, where personal surveillance is reduced to a minimum. Bureaucratic control involves elements of authority hierarchies and technical control but rests primarily on rules and regulations, job titles, pay scales, and other impersonal devices (Weber 1946).

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A further type of labor process control is not imposed on workers by the employer, but nevertheless affects the worker's attachment to the firm. Occupational control occurs when the content and terms of work are controlled by the social structure of an occupational group (Simpson 1985). Professionals, for example, are often thought to work without supervision, although the degree of their autonomy has been the subject of considerable debate (e.g. Child and Fulk 1982).

2.2 Labor Markets The institutional function of labor markets is to allocate labor power to specific tasks in the production process and to distribute the fruits of this labor to employed workers and, via public intervention, to the "legitimately" non-employed (Offe 1985). For the purpose of this analysis, we distinguish between internal and external labor markets. When labor power is distributed to production activities on the basis of competition between employers for workers and competition among workers for jobs, we speak of allocation through external labor markets. Although employers and workers alike pursue various strategies to limit competition within their respective "camps" (e.g. through employers associations, trade unions, occupational licensure), we refer to labor markets as external as long as negotiation and bargaining occur outside the employing organization. Internal labor markets exist when jobs are filled by promotion and reassignment from within the firm. Internal labor markets are characterized by hierarchical job ladders, fine-grained skill distinctions, and various other structural inducements for workers to stay with the firm (Doeringer and Piore 1971). Strictly speaking, internal labor markets are not markets but internalized markets, because labor power is allocated not competitively but through the directives and plans of central authorities in the organization (Williamson 1975). The two dimensions of labor control do not exist independently of one another. Internal labor markets may be viewed as a device of bureaucratic control, either because they contribute to the functioning of bureaucratic structures (Simpson 1985) or because they help employers to enforce labor discipline in the face of control-related problems (Edwards 1979, Stone 1974). Likewise, partial reliance on external labor markets my be seen as a strategy by employers for meeting fluctuating production demands with a flexible (i.e. peripheral) staff, while simultaneously binding a core workforce to the firm (Mangum et al. 1985). We consider organizational forms of labor control as arising from a dynamic interplay of developments and feedback effects across the two dimensions. Conceivably, organizations may incorporate any combination of characteristics from these dimensions.

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3. An Evolutionary Framework Our approach to changes in the form of employment relationships is an evolutionary one, as we view the origins of forms and differences between them as the result of a selection process in which survival depends on the fitness of forms vis-a-vis the environment (Carroll 1984). The population ecology model conceptualizes this process in terms of variation, selection, retention, and competitive struggle within a population of organizations (Aldrich 1979, McKelvey and Aldrich 1983).

3.1 Four Basic Processes Any kind of change reflects variation, and the evolutionary process begins with variations which may be intentional or blind. Variation refers to the outcomes of mechanisms generating diversity in organizational populations. Sources of variation include conflict over the control of resources in organizations, strategic moves, creativity, errors, or just plain luck. Whatever the source of variations, differences across norms, roles, or behaviors in organizations provide the raw material for potential changes in form. Selection refers to the external pressures exerting influence on organizations and posing contingencies resulting in population differentiation. Organizations and organizational forms surviving are those which are more effective, within existing environmental constraints, than their competitors. In capitalist economies the driving force of the selection process involves commerical viability within a competitive context. From an industrial economic perspective, organizational governance structures are viewed as the result of businesses attempting to efficiently employ their resources to minimize transaction costs (Williamson 1975). To the extent that economic efficiency depends on effective labor control, this approach is consistent with the Marxist argument that employers use whatever form of labor control is best suited to ensure worker discipline (Edwards 1979). Organizational change, then, is viewed as a response to selection pressures rewarding efficient transactions with labor, suppliers, customers, or anyone making critical claims on organizational resources. Retention refers to the mechanisms and processes that facilitate the persistence of selected forms. Forms may persist because the niches they occupy have not changed, because they continue to be most efficient in extracting critical resources from the environment, or because of internal structures which inhibit deviations from previously selected forms, such as bureaucratic rules and structures. What is preserved through retention are the technological and managerial competencies that all enterprises in a population use, collectively, to exploit the resources of their environment. The survival of a particular business is not terribly consequential to the survival of the population as a whole, as the total population's survival depends on the entire pool of technological and managerial competencies. The variations possessed by a particular enterprise contribute to the total pool but do not determine its collective fate.

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Competitive struggles occur over resources and opportunities for obtaining them, fueling the selection process. Sometimes opportunities are so diverse and resources so abundant that a high proportion of businesses are successful and the business population grows rapidly. In new industries first movers have substantial advantages and enjoy rapid growth. As industries evolve, however, or resources become more scarce, shakeouts occur and competition increases the mortality rate, with populations stagnating or declining. Underlying the principle of competitive struggle is the population ecologist's assumption of the structural inertia of most organizations and organizational forms (Aldrich and Auster 1986, Hannan and Freeman 1977). Most organizations retain the forms they are created with, and transformations to new forms are rare. Population change occurs because of a shifting balance of births and deaths, rather than through the transformation of existing organizations. Competition for resources provides the dynamic force that spells the end for organizational forms not suited to new conditions, such as firms that do not adopt new forms of labor control as environments change (Edwards 1979). Throughout the past century of industrialization in the United States, rates of business formation and dissolution have been quite high (Aldrich and Auster 1986). Although precise figures are lacking from earlier eras, we know that very few firms created in the last decade of the nineteenth century survive today. Writing of an even earlier era, Hannan and Freeman (1977: 960) noted that "of the thousands of firms in business in the United States during the Revolution, only 13 survive as autonomous firms and seven as recognizable divisions of firms". Since the Second World War, information on business births and deaths has been more readily available. In recent years about onehalf million businesses (at least) have been established each year, and nearly that many have been dissolved. Organization theorists and others concerned with employment relations have been slow to realize the implications of these figures. By studying only employment relations in surviving businesses - which is what most labor economists, human resource management researchers, and other social scientists study - the fundamental volatility in the organizational population as a whole is overlooked. Investigating employment relations in the cross-section implies that all the phenomena relevant to explaining change in relations are present and accounted for, but clearly this view is incomplete. From an evolutionary pespective, explanations of change must start from the observation that most businesses do not survive, and very few make the transformation from one form to another. Accordingly, we taken an historical, explicitly dynamic look at the problem of changing employment relations.

3.2 Environmental Characteristics The population perspective thus helps explain the diversity of organizational forms at any given time and can be used to draw attention to particular forms of employment relations. This approach is less concerned with the intentions and behaviors of specific

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actors within particular organizations than with the effects of changes in resource environments on the distribution of forms across organizations. We assume that the ultimate objective of most organizations is survival, and thus management is obligated to adopt those control structures which are most consistent with environmental opportunities and constraints. Although management may possess some degree of freedom in the short run, its discretion is severely limited in the long term by the nature and availability of vital resources. Environments may be characterized in terms of the level and accessibilty of economically critical resources. Our analysis focuses on labor supply, the factors that affect labor supply, and conditions affecting the survival chances of organizations with particular forms of labor control. We conceptualize the resource environment in terms of two dimensions: (1) environmental capacity, the relative level of labor resources available to an employer, and (2) environmental variability and uncertainty, the degree of fluctuation in labor supply over time and its predictability, and also the degree of variability and uncertainty in an industry's general resource pool. The nature of the resource environment has systematic effects on the way business organizations attempt to adapt themselves to external constraints and opportunities. For example, environments with stable and abundant labor supply tend to support large and complex organizations with bureaucratic labor control structures and well developed internal labor markets. By contrast, smaller organizations with simpler and more flexible forms of labor control are more likely to succeed in unstable and scarce labor resource environments. Organizations that are highly adapted to particular external circumstances may be adversely affected by significant changes in that environment.

4. The Evolution of Labor Control Structures For the sake of exposition, we divide the history of the American economy into four epochs: (1) the transition from the prefactory to the factory system, occurring in the early to mid-nineteenth century; (2) the transition from competitive to monopoly capitalism, occurring in the late nineteenth and early twentieth centuries; (3) the transition from early to advanced monopoly capitalism in the post-World War I era; and (4) the period since 1973, a year marking the end of the unprecedented high growth rates since World War II. During the last decade of dramatic economic change, we observe a marked shift toward flexibility in employment relations, reflected in a change in the industrial relations structure toward more decentralized decision-making and narrower bargaining units. Each of these four periods shows distinct variations in labor resource environments and in dominant organizational forms of employment relations. Our task is to document those elements of the selection process that were important in determining which forms were retained under changing environmental conditions. Given space limitations, we can only highlight the most significant changes, rather than catalog all of them.

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4.1 Handicraft to Factory Production Throughout the colonial period until after the Civil War, most production organizations in the United States were oriented toward local markets and operated on a very small scale with a heavy reliance on handicraft techniques (Bruchey 1965). Emphasis on selfsufficiency, the limited ability of farmers to buy manufactured goods, shortages of capital funds, and other resource limitations constrained the size of markets and restricted the growth of large-scale manufacturing. Control of labor throughout this early period was primarily in the form of simple control, involving face-to-face interaction between owners and workers. Most employed persons worked on farms or plantations, where personal contacts presumably were frequent and remuneration only partially in the form of wages. In the other sectors of the economy relations between owners and workers rested on a more explicit wage-labor contract, with landless workers having no alternative but the selling of their labor power. The shift to factory-based production occurred as a result of expanding markets, made possible by improved modes of transportation and communication (Chandler 1977). Changes in laws of incorporation and in financial markets gave businesses readier access to capital for expansion, and enlarged markets made it possible to reduce unit production costs by introducing new production techniques. Expanding markets also meant that output could increase enough to justify a finer division of labor than previously. Piece rates were replaced by a wage system, although the attempted abolition of piece rates provoked such conflict that the system persisted in some industries until the end of the nineteenth century (e.g. boot and shoe manufacturing) and in others well into the next century (machine tools). The transition to the factory system had far-reaching implications for the way labor was employed in the production process. Craftsmen worked with their own hand tools, whereas industrialization meant the use of machines owned by employers. Self-employed craftsmen set their own remuneration schedules, and farm workers often shared in the fruits of their labor, whereas factory employers controlled remuneration and resisted bargaining over wages. Labor was largely unorganized, and continuing immigration made labor compliance nonproblematic. Most manufacturing firms were very small, specialized, and therefore dependent on other producers and suppliers for essential goods and services (Chandler 1977), and they relied on external labor markets as a source of labor resources. Factory employment during this period was drawn largely from the "secondary" work force, including unmarried women, children, and new immigrants without sufficient capital to purchase land. Manufacturers were preoccupied with the problem of chronic shortages of unskilled labor, brought about by the abundance of western land which siphoned off many potential industrial wage earners (Habakkuk 1962). Management attempts to economize on the use of labor met little resistance from workers who, given the scarcity of labor, did not feel threatened by the introduction of new machines and techniques. Without displacing anyone, mechanization increased labor productivity and possibly

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brought some increases in wages. Only in few instances did worker resistance retard the introduction of new technology, as in boot and shoe manufacturing (Yellowitz 1977). The opportunities available at the frontier maintained a steady pressure on aspiring industrialists to enhance labor productivity and kept wages in the industrial sector well above those paid by competing manufacturers in England and on the European Continent. In summary, this era of transition from handicraft to factory production was characterized by the development of increasingly capital-intensive organizations, responding to the relatively high costs of unskilled labor. In an environment of low levels of worker organization and of collective resistance simple control structures and reliance on competitive external labor markets sufficed to manage most of the labor relations in the typical organization.

4.2 The Rise of Large Firms During the second half of the nineteenth century, major sectors of the American economy gradually became dominated by large, administratively complex corporations, as consumer markets expanded and major improvements in transportation and communication facilities permitted an increase in the scale of production (Chandler 1977). An increase in the rate of net immigration during this period stimulated industrial employment, while worker resistance to industrial growth was initially inhibited by the high level of geographical labor mobility (Thernstrom 1968). In time, however, the increased size and complexity of enterprises created problems that were met by changes in organizational form. The growth in economic concentration began to be opposed by a growing working class movement. In the late nineteenth century labor was becoming a "problem". Growing working class militancy, the increasing strength of unions, control loss through increasingly lengthy command chains, and the unavailability of professional managers occupied more and more managerial attention. Managers of firms in many industries found they had to concern themselves with the control of their workforce, rather than allow their subordinates to fend for themselves in dealing with employees. Welfare capitalism, technical control, and "scientific management" were the results of a variety of tactics adopted by employers to manage the "labor problem". Traditional methods of labor control had lost much of their effectiveness relative to the rationalized methods advocated by proponents of "scientific management" and technical control. Many larger firms had made the transition from simple control to some form of hierarchical control in which foremen, managers, and supervisors directly controlled their workers, rather than allowing occupational control or supervision by owners themselves. Those firms not adopting new forms either failed or were bought up by others. The system of vertical lines of communication left a great deal of discretion in the hands of lower-level supervisors, who were generally untrained in managing other persons. This loose arrangement encouraged arbitrariness and thwarted top management's attempts at tighter control over labor costs.

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Technical control was both a cause and a consequence of labor struggles against management, but few employers could afford the machinery which would completely eliminate worker discretion. The social organization of production remained unchanged in most firms, as they continued to rely on foremen or inside contractors to control the behavior of shop-floor workers. Machine-based control finally spread when the intensification of competitive pressures in the marketplace drove employers to search for new ways to cut costs. Any variation in organizational processes that increased profitability by lowering unit costs gave a firm a selective advantage over competitors, although the diffusion of innovations made the advantage short-lived. Full-scale technical control, of course, was possible only in industries with mass-production technologies, such as automobile manufacturing and meat packing. "Scientific management" as a technique to rationalize the allocation of human resources was similar to technical control in that it implied fragmentation of the labor process. Even though it never enjoyed widespread adoption in its pure form, the orientation and ideology underlying scientific management had a significant effect on control processes. For example, its principles were applicable not just to machine-based tasks but also to administrative work whose scope had expanded in tandem with increased needs for coordination in complex organizations. Welfare capitalism emerged in the late nineteenth century as a form of labor control, as employers sought to counter the growing concern among the workforce and the general public about the dehumanizing effects of rationalized work. Welfare capitalism was a rather diffuse system, but generally included special consideration for workers' physical comfort, opportunities for recreation, savings and loan plans, insurance and pensions, and provision of company-built homes. Advocates stressed its benefits in stabilizing labor forces and promoting worker loyalty, but combating unionism and strikes were also important objectives. In summary, the period from the Civil War to 1920 was an era of dramatic change in the population of business firms. It marked the beginning of industries for mass-produced consumer goods and the development of integrated resource-based and producer goods industries. Many organizations grew in scale and administrative complexity, and as labor became a "problem", firms adopted technical control of the labor process, while others relied on "scientific management" and welfare capitalism. Selection criteria had changed to reward those managements of large enterprises that moved beyond simple forms of labor control to develop more rationalized control structures. Most enterprises, however, were small and continued to rely on simple and hierarchical labor control devices.

4.3 The Rise of Managed Labor Markets By 1920, the population of economic organizations had become highly differentiated in the range of goods and services produced. Most gainfully employed persons now worked for employing organizations rather than for themselves, producers increasingly

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served regional or national rather than local markets, and a growing number of businesses in the distributional industries were directly affiliated with major manufacturers. As the opportunities for monopolistic control were exhausted, in part by growing legal restrictions from the national government, innovation shifted in the direction of new techniques for stabilization of the business environment. The ending of free immigration in the 1920s brought tightened labor markets during the war years of the 1940s and 1950s and a corresponding increase in female labor force participation, particularly among married women (Easterlin 1968). Brownlee (1974: 218) noted that "without this expansive source of female labor, mainly white, the nation would have had to look abroad once again for its labor supply, make heavier investments in enhancing the quality of labor, introduce further labor-saving technology and organizational change, or accept a slower pace of economic growth". A major distinction between labor control systems of the nineteenth and twentieth centuries is the present accommodation of labor organizations within a legally sanctioned collective bargaining framework. Federal recognition of the right to organize and the success of industry-wide organizing by the AFL and the CIO produced a major change in the climate of labor control. Union gains in the 1930s occurred particularly in the mass production, large production-site industries such as automobiles, electrial goods, chemicals, and steel. Strong unions became a "third party" to employment relations, as employers no longer confronted employees as an unorganized mass of individuals. However, developments in the 1970s and 1980s showed that union strength depends partially on the environment of an industry or firm, as no amount of organizational strength could compensate for the fragmented and increasingly competitive economic environment faced by the steel, trucking, automobile, and other "smoke stack" industries (Katz and Sabel 1985). In addition to wage demands, job security issues gained emphasis, and organizational attention turned to reducing the costs of labor turnover. Both unionization and the increased interdependency of labor tasks within a highly complex organizational structure raised the costs of replacing workers and provided an incentive for innovations aimed at reducing labor turnover within the enterprise. The increased length and stability of employment contracting, although it provided a less risky environment for human capital investments, also reduced an organization's ability to respond quickly to new and unanticipated economic conditions. From a population ecology perspective, improvements in mechanisms to limit labor turnover in large firms with a complex division of labor raised their productive efficiency relative to competitors, but only in the context of relatively prosperous and stable economic conditions. Bureaucratic control evolved from the same rationalization of organizational processes that spawned "scientific management". New procedures, such as comprehensive job descriptions, formal grievance procedures, and welldefined career ladders, were introduced piecemeal and did not completely eliminate older forms. Internal labor markets (Doeringer and Piore 1971) are an essential aspect of bureaucratic control. Linking jobs in a hierarchy of job grades rewards workers for their loyalty to the firm. Not only does this mechanism reduce labor turnover and induce workers to acquire firm-specific

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skills, but it also reduces worker solidarity by increasing competition among workers for jobs of a higher grade. Bureaucratic control gained selective advantage over other forms, because it depersonalized the exercise of power. Costly struggles over the legitimacy of orders were thus avoided. American labor unions have generally not opposed the evolution of bureaucratic control, as they see bureaucratization as a means of protecting negotiated gains. As Stone (1974) suggested, unions have generally cooperated with the elaboration of internal labor markets, for they have viewed it as a more universalistic way of allocating pay and fringe benefits. Thus, the introduction of bureaucratic forms of labor control can be viewed in light of a general shift toward more managed and more predictable conditions both in labor and product markets.

4.4 A Decade of Change: After the "Oil Shock" The American industrial relations system has frequently been noted for its uniqueness, with its relatively decentralized bargaining structure, weak labor movement, employer hostility to organized labor, and the political emphasis on market processes rather than corporatist relations (Salisbury 1979). In the past decade, however, many employers have opted for even more workforce flexibility to maintain their productive competitiveness. Changing environmental conditions have forced the managers of many older, larger organizations into a transformation of their labor control processes. Newly created small businesses, as well as many established firms, currently display many of the characteristics of simple control, a form of labor control from the previous century. The four-fold increase in world oil prices in 1973/74 marked the end of an era of unprecedented growth of industrial economies. With that event began a period of world economic stagnation and industrial adjustment with far-reaching social, economic, and political consequences. Each industrialized country sought to reallocate economic resources - within the parameters of its traditions, political culture, and structure - to maintain or restore its competitive position in the world market. Foreign competition was particularly devasting to the American auto, steel, apparel, and electronic goods industries. The impact of adjustment policies on employment relations reversed - or at least halted - the long-term trend towards rigid and centralized industrial relations structures in many countries (ILO 1985, Juris et al. 1985). Uncertainty and variability were heightened for many United States' industries by the wave of deregulation that began in the late 1970s. Beginning with the airline industry, the federal government began weakening or totally eliminating national controls over inter-state trucking, banking, and other industries. For example, deregulation of the trucking industry lead to a sharp increase in the number of births and deaths of trucking firms, and the removal of the previously protected market enjoyed by the industry forced carriers to find ways to cut labor costs. The 1982 National Master Freight Agreement between trucking firms and drivers "contained a number of changes in

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workrules which provide employers with the opportunity to improve productivity and efficiency of operations" (Block and McLennan 1985: 357). The new environment of fierce competition and variability has improved small businesses' chances to enter new markets and develop new niches. Early indications are that small- and medium-sized enterprises have indeed been playing an increasing role in the development of new products and industries in recent years. Small businesses have become important as the generators of new employment in the United States (Birch 1979) and elsewhere (Storey 1983). For example, Birch (1979) showed that firms with fewer than 20 employees accounted for about two-thirds of new jobs in the United States between 1969 and 1976, a finding replicated for later periods (U.S. Small Business Administration 1985). The persistence of the trend toward smaller-scale production and the common pattern observed in many advanced industrial societies seem to indicate that the long-term decline of the small business sector - and the consequent displacement of simple control - may have come to a halt (Bechhofer and Elliott 1985). Given their small investments, small and specialized business organizations may be particularly suited to highly unstable environments, as long as the magnitude of change is small (Freeman and Hannan 1983, Staber and Aldrich 1986b), while large corporations find it more difficult to adjust to economic change. Small firms, relying upon external labor markets, can easily hire and fire unneeded workers to respond rapidly to product demand fluctuations, particularly in the American legal context where the principles of advance notice and severance pay are not well developed (Harrison 1983, Thurow 1985). Large firms, often committed to internal labor markets, must struggle with established practices, entrenched unions, and institutional rigidities in labor relations, as they attempt to modernize existing workplaces. Despite such structural constraints, preliminary evidence at the industry and sectoral level suggests that changes in wage structures have followed the basic trend of structural change in the economy (Krupp 1985). There are strong pressures toward wage differentiation across industries which experience differential growth rates. At the company level, firms in the United States place a great emphasis on local management of resources, more flexibility in internal and external labor markets, efforts to reduce union power, plant relocations, a shift in the locus of decision-making from company to plant, and, as in other countries, reliance on flexibility in the labor relations system (Thompson and Juris 1985). Many employers, particularly in high-wage industries with lower productivity performance relative to foreign competitors such as steel, automobiles, and textiles, have responded to competitive pressures by undoing some of the labor market rigidities which characterized previous years (Block and McLennan 1985). Prior to the mid-70s, when many companies operated in relatively protected product markets, unions had successfully negotiated standardization of wages and fringe benefits across companies in the same industry and across plants in the same company, and achieved job control through legalistic procedures and detailed job classification systems. The early 1980s brought concession bargaining, COLA changes, modifications in work rules to permit flexibility in the employment of labor, as well as a new wave of laborsaving technology.

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Employers in some industries moved to a two-tier wage system, with new employees paid at a lower rate than present ones, as in the airlines, electrical utilities, building construction, and aerospace industries. Some firms have resorted to declaring bankruptcy followed by reorganization as a way of ridding themselves of union constraints. Early indications are that even in some professional fields, such as engineering, accountancy, and lower-level management, computerization of the labor process may have significantly reduced the scope of occupational control by transforming professional work into routine tasks (Larson 1980). The extent to which semi-professions and professions are becoming as technically rationalized - and thus subject to bureaucratic and technical control - as many lower-status occupations is difficult to predict, but environmental constraints certainly favor that tendency. Many employers are increasingly relying on external labor market flexibility to protect their more stable internal labor markets. A recent study of a nation-wide sample of 882 firms showed substantial use of temporary workers in the form of call-ins, limitedduration hires, and temporary help services (Mangum et al. 1985). Large firms rely more heavily on temporary workers than small- and medium-sized firms, given their difficulty in reforming their rationalized hiring and firing systems. Furthermore, firms exposed to fluctuating product demand were more likely to use temporary workers than stable firms, because temporaries could be added or dropped quickly, protecting the core of "permanent" workers. Employers relied on external sources for temporary help whenever they sought non-specialized and firm-nonspecific skills. The use of temporary workers and subcontracting was seen by employers as a buffer to make primary internal labor markets economically feasible. Indeed, temporary help service organizations constitute a rapidly growing industry in the United States. The most recent decades of economic change can best be understood in terms of employer strategies to achieve greater flexibility in hiring and layoffs, work rules, compensation packages, and seniority rules. Such efforts have shifted some of the risk of employment to lower levels in the employment relationship, and have slowed the trend toward bureaucratized internal labor markets in larger firms. Bureaucratic controls, described by Edwards (1979) in fairly positive terms from a large firm's point of view, use job descriptions and job classifications which can actually limit employer discretion, and thus we might describe recent developments as a partial return to the more "open" procedures of earlier eras that enhanced employers' options.

5. Conclusion The changing distribution of resources and the terms on which they are available have led, in part, to the evolution of employment relationships over the past century. The apparent slow pace of aggregate change in the total number of U.S. businesses and the apparent immortality of large firms often blind us to the volatility of the underlying processes. Hundreds of thousands of organizations are created and dissolved each year,

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and even large firms experience problems that limit their potential for transforming to more adaptive forms. The population perspective, taking an evolutionary view, treats selective additions and deletions in the business population as the central force in organizational changes. Evolution of labor control processes from simple, entrepreneurial control to bureaucratic, structural control has not been a smooth, unilinear, irreversible process. Instead, changes in environmental resource capacity, uncertainty, and variablity produced a complex pattern of differing types of control in different industries. Some forms of control, such as the personalistic orientation of entrepreneurial control, survived intact in some sectors of the business pupulation, and have enjoyed a resurgence, as environmental conditions changed in the past decade. Other forms, such as technical control, have been substantially transformed through modern technology, as witnessed by the increasing use of CAD-CAM (computer-assisted design and manufacturing). Our discussion has focused on a very broad gauge view of changes in employment relationships affecting the nature and degree of management discretion over labor. Future research should begin with the population perspective's insight that organizational forms of labor control result from a dynamic interplay of organizational forms and environmental characteristics. We end on a note of caution: from an evolutionary viewpoint, in the future anything is possible. Indeed, human creativity continuously generates types of variation unimagined by previous generations. Marx noted that people must make their own history with the resources that are available at the time, but he also implied that out of this process of making history, new and unprecedented developments might arise. Accordingly, we would not be so foolish as to predict the shape of employment relationships ten years hence!

References Aldrich, H. (1979): Organizations and Environments, Englewood Cliffs: Prentice-Hall. Aldrich, H. and Mueller, S. (1982): The Evolution of Organizational Forms: Technology, Coordination, and Control. Research in Organizational Behavior, Vol. 4, Cummings, L. and Staw, B. (Eds.), Greenwich: JAI Press, 33-87. Aldrich, H. and Stern, R. (1983): Research Mobilization and the Creation of U.S. Product Cooperatives, 1835-1935, Economic and Industrial Democracy, 4: 371-405. Aldrich, H. and Auster, E. (1986): Even Dwarfs Started Small: Liabilities of Age and Size and Their Strategic Implications. Research in Organizational Behavior, Vol.8, Cummings, L. and Staw, B. (Eds.), Greenwich: JAI Press, pp. 165-198. Bechhofer, F. and Elliott, B. (1985): The Petite Bourgeoisie in Late Capitalism, Annual Review of Sociology, 11: 181-207. Birch, D. (1979): The Job Generation Process, Cambridge: MIT Program on Neighborhood and Regional Change. Block, R. and McLennan, K. (1985): Structural Economic Change and Industrial Relations in the United States' Manufacturing and Transportation Sectors Since 1973. Industrial Relations in a Decade of Economic Change, H. Juris et al. (Eds.), Madison: IRRA, University of Wisconsin, 337-382.

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Brownlee, W. E. (1974): Dynamics of Ascent: A History of the American Economy, New York: Alfred Knopf. Bruchey, S. (1965): The Roots of American Economic Growth, 1607-1861, New York: Harper and Row. Carroll, G. (1984): Organizational Ecology, Annual Review of Sociology, 10: 71-93. Chandler, A. (1977): The Visible Hand, Cambridge: Harvard University Press. Child, J. and Fulk, J. (1982): Maintencance of Occupational Control: The Case of Professions, Work and Occupations, 9: 155-192. Doeringer, P. and Piore, M. (1971): Internal Labor Markets and Manpower Analysis, Lexington: Heath. Easterlin, R. (1968): Population, Labor Force, and Long Swings in Economic Growth, New York: National Bureau of Economic Research. Edwards, R. (1979): Contested Terrain, New York: Basic. Freeman, J. and Hannan, M. (1983): Niche Width and the Dynamics of Organizational Populations, American Journal of Sociology, 88: 1116-1145. Habakkuk, H . J . (1962): American and British Technology in the Nineteenth Century, Cambridge: Cambridge University Press. Hannan, M. and Freeman, J. (1977): The Population Ecology of Organizations, American Journal of Sociology, 82: 929-964. Harrison, B. (1983): Comparing European and American Experience with Plant Closing Laws, Industrial Relations Research Association Proceedings, Dennis, B. (Ed.), Madison: I R R A , University of Wisconsin, 120-128. International Labour Organisation (ILO) (1985): Changes in Economic Structures in Europe and their Effects on Industrial Relations, Labour and Society, 10: 163-173. Juris, H., Thompson, M. and Daniels, W. (Eds.) (1985): Industrial Relations in a Decade of Economic Change, Madison: I R R A , University of Wisconsin. Katz, H. and Sabel, C. (1985): Industrial Relations and Industrial Adjustment in the Car Industry, Industrial Relations, 24: 295-315. Krupp, H.-J. (1985): Challenges of Structural Change for Economic Policy, Labour and Society, 10: 211-222. Larson, M. S. (1980): Proletarianization and Educated Labor, Theory and Society, 9: 131-177. Mangum, G., Mayall, D. and Nelson, K. (1985): The Temporary Help Industry: A Response to the Dual Internal Labor Market, Industrial and Labor Relations Review, 38: 599-611. McKelvey, B. (1982): Organizational Systematics, Berkeley: University of California Press. McKelvey, B. and Aldrich, H. (1983): Populations, Natural Selection, and Applied Organizational Science, Administrative Science Quaterly, 28: 101-128. Offe, C. (1985): Disorganized Capitalism: Contemporary Transformations of Work and Politics, Cambridge, MA: MIT Press. Salisbury, R. (1979): Why No Corporatism in America? Trends Toward Corporatist Intermediation, Schmitter, P.C. and Lehmbruch, G. (Eds.), Beverly Hills: Sage, 213-229. Simpson, R. (1985): Social Control of Occupations and Work, Annual Review of Sociology, 11: 415-436. Staber, U. and Aldrich, H. (1986a): A Population Perspective on Underemployment in Alternative Organizations, International Journal of Sociology and Social Policy, forthcoming. Staber, U. and Aldrich, H. (1986b): Government Regulation and the Expansion of Trade Associations: An Exploration of Some Ecological Propositions, Population Perspectives on Organizations, Aldrich, H. et al. (Eds.), Vol.24. Uppsala: Acta Universitatis Upsaliensis. Stone, K. (1974): The Origins of Job Structures in the Steel Industry, Review of Radical Political Economics, 6: 113-173.

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Storey, D. (ed.) (1983): The Small Firm: An International Survey, London: Croom Helm. Thernstrom, S. (1968): Urbanization, Migration, and Social Mobility in Late Nineteenth Century America, in: Bernstein, B. (Ed.), Towards a New Past: Dissenting Essays in American History, New York: Pantheon. Thompson, M. and Juris, H. (1985): The Response of Industrial Relations to Economic Change, Industrial Relations in a Decade of Economic Change, Juris, H. et al. (Eds.), Madison: IRRA, University of Wisconsin, 383-407. Thurow, L. (1985): America, Europe and Japan, The Economist, November 9: 21-26. U.S. Small Business Administration (1985): The State of Small Business: A Report of the President, Washington, D . C . : USGPO. Williamson, O. (1975): Markets and Hierarchies, New York: Free Press. Yellowitz, I. (1977): Skilled Workers and Mechanization: The Lasters in the 1880's, Labor History, 18: 197-213.

X-Efficiency, Managerial Discretion, and the Nature of Employment-Relations: A Game-Theoretical Approach Harvey Leibenstein and Klaus Weiermair

Abstract Using the constructs of X-efficiency theory this paper develops an analysis of comparative employment relations. They are viewed as resulting from different combinations of efforts and strategic options open to management and workers and are shown to be heavily influenced by convention and norms. Conclusions from the gametheoretical model are subsequently compared and found compatible with findings from organisation theory. The last part of the paper describes sources and determinants of effort conventions and speculates on their international variability.

1. Introduction For the last decade or so, a considerable amount of interest has been devoted to the study of firm internal organisation in general and human organisation in particular. As far as the economics profession has been concerned, three separate, though interrelated, factors appear to have accounted for this sudden upsurge of intellectual curiosity. Among the first reasons which have made economists analyze more closely the organisational characteristics and make up of firms were market phenomena which appeared to defy traditional economic interpretation. Prominent among the latter have been secular declines in productivity growth, declining work intensity, and lagging innovation efforts in a number of industrialized countries, but notably, the U.S.A. 1 At the same time, and this has probably been the second stimulus for intensified research endeavours, Japan has demonstrated the viability of continued growth and innovation, albeit with firms displaying differing employer-employee relations and having different forms of work organisation (Clark 1979, Ouchi 1981, Pascale and Athos 1981, Vogel 1979). Finally, spirited by earlier advancements in neighboring behavioral science disciplines, there has been an evolution in economic theories of production and organisation. In the course of these idea developments, which probably began with the "decision science" approach of the Carnegie school, a number of implicit assumptions and/or omissions of neoclassical production theory came under close scrutiny. Of particular interest in this context were the incomplete nature of labor contracts and specification problems of the production function associated with variability of efforts and motivation. Among the numerous existing critiques and revisions of neoclassical production theory, two approaches have survived the test of time and have become established as Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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separate paradigms. The first one simply extends utility maximization to all individual choices under constraint and, in addition, also considers institutional restrictions and transaction costs. As a school of thought, it encompasses both work in property right theory (Alchian and Demsetz 1972, Furubotn and Pejovich 1974) and the transaction cost literature (Coase 1969, Williamson 1964, 1975 a, b, 1980). The second approach builds upon the X-efficiency theory framework (Leibenstein 1966) and extends the theory's arguments to comprise managerial and worker behavior in alternate environments (Leibenstein 1976,1984 a, b). Either approach has sought to construct a general economic theory of organisation and as such provides us implicitly with general and testable theories of work organisation and the employment relationship. In order to be credible, the latter have to provide valid explanations as to the differing nature and form of employer-employee relations across time, place, industry, and jurisdiction. Equally, they have to demonstrate why and how alternate employment structures relate to specific outcomes, ranging from productivity and cost behavior to turnover, job satisfaction, and/or demands for co-determination. Expositions of property right and transaction cost theory to the extent that they have engaged in analyses of comparative employment structures have done so under the strict assumption of economic forces (e.g. property rights) as the sole determinants of motivation (Williamson 1985). Based on evidence from industrial psychology and organisation theory (Argyris 1960, Hackman 1976, Herzberg 1966, Maslow, 1971), we believe the property right/transaction cost approach to be too restrictive with respect to its treatment of rationality and effort motivation. Thus, we build our arguments instead on X-efficiency theory. The latter departs from neoclassical theory in that it relaxes the assumption of maximization behavior in terms of a complete attention to opportunities for gains and to concerns for constraints. Instead, a concept of selective rationality is used which is determined by the personality of economic actors and the economic context of their decision-making; thus, contextual pressure and personality (taste for constraint concern) determine the extent of the deviation from maximizing behavior (Leibenstein 1978 c: 328-329). The paper will proced as follows, part II will provide a treatment of employment relations and effort motivation under varying management regimes, part III will discuss organisation theoretical perspectives of employment relations and comparative management and compare them with predictions from X-efficiency theory, part IV will analyze interdependencies between norms and motivation, and summary and conclusions are provided in part V.

2. Comparative Management Systems: A Game and Convention Theoretical Analysis Variations in both organisation design and X-efficiency arise as a consequence of varying levels of motivation offered by firms and varying levels of effort offered by

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employees. In particular, X-inefficiency can be viewed as the result of a combination of both low levels of effort and motivation. Thus, a system of management is determined in part: (1) by the motivational forces within the firm, and (2) in part by the motivational forces (such as degree of competition) outside the firm, which in turn penetrate the firm, which in their turn, if strong enough, cause changes within the firm. The choice problem, so it will be argued here, is different from standard economic theory in that the outcome depends on the strategic decisions of various economic agents within the firm. Thus, it can be shown that in essence productivity is a theory of games problem and, more specifically, a latent prisoner's dilemma (PD) problem. Conventions will be shown to help avoid the PD outcome, though they can lead to non-optimal solutions. The basic ideas to be developed have already been published elsewhere (Leibenstein 1982, 1984 a, b), however the ideas are repeated here to have the arguments in one place. In order to obtain our results, we introduce two assumptions (based on X-efficiency theory) which differ from the assumptions of standard micro theory. Assumption I: (a) Relaxation of the Maximizing Postuate: We assume that there is a relation between the degree of calculating behavior and a sense of pressure. This relation is that of a bell shaped curve where pressure is the independent variable and degree of calculating behavior is the dependent variable. At low pressure levels people hardly calculate and base their behavior on (1) habits or (2) conventions. As pressure increases, more effective calculating procedures are introduced up to the point where "calculatedness" is as complete as possible for the person involved. This latter type of behavior approximates utility maximization. Beyond some point, too much pressure results in disorientation and lower performance. Our emphasis will be on (1) the low pressure and (2) on the optimum pressure segments of the curve. This assumption is consistent with and an expression of the Yerkes-Dodson Law in psychology which has been repeatedly confirmed in a large variety of experiments since 1908.2 (b) We also assume the existence of inert areas so that within certain values of the independent variable the dependent variable does not change. In other words, the independent variable has to go beyond the inert area bound in order to stimulate a change in the dependent variables. Assumption II: Incomplete Contracts: We assume that firm association (employment) contracts are incomplete in the sense that the payment side is fairly well specified, but the effort side, for a variety of reasons, is either unspecified or specified only in terms of some rough lower boundary. The firm can offer its members a wide variety of monetary rewards and working conditions including career opportunities. Thus, every set of wages and working conditions contain within it some motivating force. Hence, there is a sense in which the firm may be said to choose among different motivating systems. However, there is no oneto-one correspondence between the motivating systems and the amount of effort that employees offer. Furthermore, for each motivating system there is a range of effort

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level responses possible. Viewed in the context of demand and supply analysis, one might thus envisage a system where firms supply incentives and have a demand for different levels of motivation and where in turn workers supply various levels of effort (motivation) and demand various amounts of incentives and rewards. Assumption II suggests the possibility of effort discretion on the part of firm members. At the same time, the assumption of non-maximization under low pressure implies that managers will not necessarily have the incentive to get the most out of their employees. In any event it is clear that each side can make strategic decisions. The nature of such decisions are indicated below in table 1 and figure 1.

Table 1 Management Accept Peer Std.

Full Commit

Mt

m2 20

Full

\

_

30

25

20

\

Peer

3

8 \

8

10

\

15

e2

Std.

25

\

\ Selfish

M¡

\

\ ai c .o

M„

Mgr. benefit

Convention

E

LU

En Figure 1

4 4

3

30

M,

10 \

5

e3

Max

Ei

m3

E,

Commitment

E,

Min. Cost per Man

\ PD solution

15

5

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83

In table 1 we show three basic strategic options available to each side. For employees these are: (1) Maximum commitment: i.e. an effort level that involves the most he can do for the firm on a long-run basis, (2) Peer group, i.e. an effort level below the maximum and similar to what other employees put forth, and (3) Selfish max, under which the employee puts forth as much effort as possible for his own purposes rather than firm interests. The firm also has three strategies: (1) It can offer wages and working conditions (Ml) that maximize that benefit to employees. (2) The firm can accept the peer group standard and pay accordingly. (3) It can try to minimize the cost per effort unit. As the payoffs are written, it is clearly a prisoner's dilemma (PD) situation, since employees will want to choose E 3 , no matter what management chooses, and management will want to choose M3 for every choice of the employees. Similar ideas are presented in figure 1 for the case of n x n options. Assume each line is divided into n segments. The employer has n motivating options M 1; M 2 . . . M n , such that M, > M 2 . . . > M„. This means that the wages and working conditions contained in Mj cost more than M2 and confer more benefits to employees than M 2 , and so on for M 3 , etc. Similarly, E t involves more effort than E 2 , etc. Note that each value high up on the South-East North-West diagonal is a Pareto improvement over those lower down. Also, for any horizontal movement westward we have shifts in favor of management, while vertical movements down are moves in favor of the employees. The direction of values along the diagonal implies that the greater the adversarial behavior on both sides the lower the effort, or the effort quality, and the lower the productivity. It is quite straightforward that increased adversarial behavior by employees implies less valuable effort. But, it should be equally clear that if managers attempt to minimize cost per effort unit, (which includes outlays on the work environment), this increases resentment among employees, so that the effort level is lower than otherwise. It should appear clear that the relative evaluations in the diagram which imply the nature of the payoff table lead to the prisoner's dilemma solution. For every effort option that employees will choose, the management will want to choose motivational system M n , and for every motivational system, the employees will want to choose effort level E n . The outcome is clearly the prisoner's dilemma outcome, since all cooperative outcomes along the diagonal involve Pareto improvements over the outcome E„M„.3 We must emphasize that the prisoner's dilemma outcome determined by the latent two sided adversarial relations between employees and managers is just one of many prisoner's dilemma situations in the firm as a system. At every level in the hierarchy there are other prisoner's dilemmas expressed by the idea of free rider incentives.4 It makes sense for every employee to feel that other employees should work relatively effectively so that the firm may prosper and that his job and career be assured. But since each employee is only one of many, there is no necessity for any one employee to feel that he himself has to put forth a maximal effort, since his contribution is minute compared to contribution of all others. Thus, each employee may feel that he should follow the free rider incentives and allocate his efforts towards his own rather than the firm's interests. In other words, each employee, if he were a maximizer, would operate on the basis of

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"the selfish max strategy". Exactly the same sort of thing holds for managers at every level in the managerial hierarchy where the group of managers remains relatively large. It is worthwhile to keep these ideas in mind when we discuss conventions as solutions to the prisoner's dilemma problem, since it will turn out that the conventions that solve the adverserial prisoner's dilemma also solve simultaneously the free rider incentives type of prisoner's dilemma.

3. Comparative Employment Relations and Management Systems: An Organisation Theory Perspective This section investigates motivational forces within the firm as viewed by organisation theory and compares them to the constructs of the X-efficiency paradigm. In its wider context of work organisation, job structures, patterns of communication and information transmission, and rewards/incentive system the employment relationship can be said to form the center piece of analysis in organisation theory. The latter postulates work organisation and incentive systems to be interrelated and both effecting in turn effort motivation. 5 A convenient point of departure for the analysis of effort motivation and one increasingly being used in organisation theory is a classification of employer-employee relations as "implicit psychological contracts" of varying substance (e.g. Argyris 1960, Gabarro 1979, Ouchi and Johnson 1978). Three particular types of human organisation and their associated control and rewards system (management system) can be specified along a continuum of possible implicit contract configurations. They are often referred to as theory X6, Y, or Z configurations or as "markets, bureaucracies, and clans" exchange relations (Ouchi 1980). Figure 2 below provides an overview of the human organization design characteristics associated with either prototype of psychological contract. 7 Reading from left to right, we observe an enrichment of the psychological contract from a pure contractual employment relationship (extreme left) to one of rich reciprocal social exchange with personal ties and empathy (extreme right). Reading from top to bottom, we find the typical variety of human organisation, human resource strategies, and human resource management practices associated with different types of psychological contracts. On the far left side a work environment and coinciding human resource policies are shown which organisation theory commonly refers to as "Taylorism" or organisation design of the Theory X variety (McGregor 1960). It usually entails organisation structures characterized by strong and deep divisions of labor, containing narrowly described jobs and effort levels, monitored through appropriate tight performance controls, work rules, and policy manuals. The organisation relies heavily on intent as opposed to motivational signals. At the prevailing wage contract, which in turn is set by the market, workers can always and without extra cost find employment elsewhere. The relationship between employer and employee therefore is limited and for short run duration. Worker incentives and rewards are merely of the extrinsic

X-Efficiency, Managerial Discretion, and the Nature of Employment-Relations Theory X (Markets)

Theory Y (Hierarchies)

Theory Z (Clans)

Nature of the employment relationship

Unstructured firm-internal labor markets (all jobs are ports of entry to the firm, short run attachment of worker to the ogranization)

Internal labor market structure with contractual specification (job and promotion ladders conditioned by idiosyncratic training) varying worker attachment to the firm across various job and manpower categories

Structured internal labor market without contractual agreements, high level of worker training, long run or lifetime attachment of worker to the firm

Incentive and rewards system

Employee contribution limited to economic services

Leadership style

Autocratic

Nature of implicit psychological contract

Employee as agent of principal Control through explicit contract (no psychological contract)

85

Commitment of employees far beyond economic contribution -

Explicit control (directing, monitoring, rewards and penalties)

Supportive leadership participation Employee shares goals and shares in decision making Inplicit control through internalization of goals and values

Figure 2: Spectrum of Varying Employment Relations and Embedded Implicit Psychological Contract

variety, rendering the employment relationship void of any implicit psychological contract. Indeed there is no relationship to speak of but merely a short-term employment contract to be monitored closely through a system of management and style of supervision usually described as autocratic. A fair amount of classical and neoclassical economic reasoning on organisational functioning is closely associated with this world of Taylor, in which problems of organisation and coordination reduce to a metering of joint production and a mere policing of shirking (Alchian and Demsetz 1972).8 X-efficiency theory on the other hand treats the forementioned "Tayloristic" organizing mode as one possible subset of varying effort utility relations which result from the choice of (directed) work efforts. Particularly Xefficienty theory predicts for this form of human organisation small effort adjustments on account of vertical and horizontal relations, high costs of effort adjustment, and steep effort utility functions. 9 Also under this form of employment relationship and associated personnel policy regime employees are predicted to work to rule and offer only perfunctory cooperation void of any effort stretching, motivational consequences, all of which have been confirmed in a number of organisation studies (Lawrence and Dalton 1970, Roethlisberger and Dickson 1939). The middle of the spectrum describes an employment relationship which no longer is purely contractual in nature but which now also contains social norms and work rules in

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order to curb distrust between workers and management. Where before the firm's human resource strategy has been the recruitment of the right skills at the right time, human resource management now is more concerned with holding employees for longer periods of time through appropriate measures of promotion and training. The ensuing employment relationship no longer is strictly short term and workers and employers are no longer exchangeable at zero transaction cost. Human resource policies in this form of work organisation and employment relationship typically involve the development of complex bureaucratic rules and norms aimed at regularizing and standardizing selection, training and promotion of workers in well developed organisation-internal labor markets (Doeringer and Piore 1971). Acceptance of authority and rule compliance, both of which hinge upon the social acceptance and/or legitimacy of authority relations at the work place (Weber 1947), become an integral part of the employment relationship and the organisational functioning of internal labor markets. Procedures of internal labor markets are designed to provide greater transparencies with respect to work rules as well as a greater trust in these rules (Weiermair 1984). According to organisation theory, the latter helps reduce some of the problems (costs) associated with information overload and control (effort) loss inherent in the "strong thumb, no finger" strategy of Tayloristic organisations but does so at the cost of making the employment relationship more calculative (Pfeffer 1978). In rationalising internal labor market structures, economists of neoclassical persuasion have either focused on firm-specific aspects of training (Becker 1964) or on differing governance structures of employment relations through formal arbitration and grievance procedures (Williamson 1980). Unfortunately, neither approach has considered causal linkages between altered psychological foundations of internal labor markets (e.g. enriched psychological contract) and resultant levels of worker effort and motivation leading in turn to labor cost consequences for the firms. In contrast, X-efficiency theory once more can directly connect with organisation theory's prime concerns of effort and motivation variability under alternate forms of organisation. Specifically, greater intra-organisational consensus over performance rating prodecures, promotion and training sequences, and/or other sanctioned incentive schemes will according to X-efficiency theory flatten the declining portion of workers' effort utility functions (Leibenstein 1976: 114), thus leading to an increase in discretionary effort. Similarly, the establishment of internal labor markets may in itself lead to shifts in effort behavior through positive effects on peer pressures. Finally, increased trust in better defined and/or mutually agreed upon effort standards on account of the regularization of internal labor market rules (norms) produces lower utility costs of effort adjustment, thereby affecting managerial discretion in the allocation of labor. Organisation theory refers to the third form of human organisation and associated personnel strategies of the firm (shown in Figure 2 on the far right) as Theory Z (Ouchi 1981). This organizing mode entails the existence of an organisational climate or culture which facilitates the establishment of clans. Clans stress longer-term reciprocity with employees. They use legitimate authority and common beliefs and traditions as control devices. The traditions both explain and reinforce workers' commitments (Salancik 1977). Performance evaluation takes place "through the subtle reading of signals which

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can not be translated into explicit, verifiable measures" (Ouchi 1980: 136). Clans substitute goal congruence for more extensive monitoring. They substitute socialization in situations where output control or behavior control is not possible. Monitoring costs are likely to be lower in Z type organisations as there is less scope for deceptive shirking. Slow evaluation processes in the context of life time or at least long term employment make the distortion of information flows to obtain personal benefits unlikely over long periods (Crawford 1983). Evidence on the organisational effectiveness of clans found in many large Japanese companies (Clark 1979, Ouchi 1981, Vogel 1979) and some American companies (Ouchi 1981, Peters and Waterman 1982) can again be reconciled with predictions from X-efficiency theory. For greater performance pressures from peers and the development of organisational traditions together with increased skill flexibilities on account of cross-training and continual learning in Z type organisations (Ouchi and Johnson 1978) both widen and shift the representative effort utility function of employees (Leibenstein 1976: 127ff.). Greater trust in the reward system of type Z organisations furthermore implies lower cost of effort adjustment. The final predicted outcome is therefore both a higher level of motivation and effort in the firm and more scope for potential effort stretching (effort discretion). The latter may be of importance to the organisation during times of harsh adjustment or crisis. Not included as determinants of the employment relationship in Figure 2, but recognized by organisation theory as factors determining organising modes and effort levels in firms, are differing personality trait among organisation members and varying market conditions (e.g. Mintzberg 1973, Shrivastava and Schneider 1984, Starbuck 1976). Both mainstream economics and X-efficiency theory follow organisation theory in postulating a negative relationship between increasing levels of market concentration and the equilibrium level of effort within the firm. Efficiency questions regarding the nature of decision making and managerial work are however only raised by the former using the concept of selective rationality (Leibenstein: 71 ff.). This is of considerable importance (especially for microeconomics), as X-efficiency theory allows efficiency variations to directly result from or reside in the decision making process of the organisation itself, analogous to investigations in organisation theory but contradictory to neoclassical economic analysis.10 Varying psychological contracts between employers and employees over motivation and effort levels have been shown in the past sections to constitute major explanatory elements in the analysis of the employment relationship. Put differently, the employment contract is incomplete in nature but becomes completed through a further psychological contract. At the same time group norms were said to play a key role in affecting the formation of psychological contracts. In turn this is particularly relevant if employment relations are to be analyzed across different jurisdictions or over longer periods of time. In the remaining section we will therefore present some reflections on the development of norms and conventions as they relate to effort and motivation levels within the firm.

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4. Norms, Conventions, and Motivational Consequences Treatises as to the causes of variations in effort norms and conventions among time, place, and industry should properly be dealt within a general theoretical discussion of norms and conventions, which for lack of space can not be provided in this paper.11 Rather we will limit our selves to a discussion regarding role and impact of existing effort conventions. 12 In the first place a distinction has to be made as to the generality and applicability of norms, conventions, and institutions. A norm is defined subsequently as a standard which individuals set without considering the extent to which others adhere to the same standard or whether different individuals expect others to adhere to this standard. Conventions on the other hand are local norms with a high regularity of behavior and a high degree of expectation that others will adhere to. Thus, norms are a subset of conventions. Finally, a non-local convention is labelled an institution (Leibenstein 1984 a: 77). E.g. firms may have different norms as to the timing and lengths of their tea and/or lunch breaks, which, once they have become a regular group phenomenon, represent conventions: finally, if every employee and manager in a larger area (jurisdiction) expects the tea break to last say from 10-10.15 and everyone is expected to follow this convention, we speak of the tea break at 10 o'clock as an institution. Norms and conventions provide coordinated solutions when there is more than one organisational outcome possible. Norms and institutions have a positive economic value if coordinated solutions (e.g. everybody taking the tea break at the same time) are economically superior to uncoordinated ones. "Efficient" norms and conventions are therefore those which permit Pareto superior results over alternative outcomes based on individual rational choice. As shown previously in Figure 1 and discussed subsequently in terms of alternate forms of employment relations, a variety of coordinated choices (conventions) from the prisoner's dilemma to the reciprocal exchange of full commitment can materialize. This in turn raises questions regarding the optimality and stability of existing conventions. If the notion of inert areas in decision-making from X-efficiency theory is accepted (Leibenstein 1976), it becomes easy to reconcile the existence and persistence of non-optimal conventions. For suboptimal conventions may not be changed if the gain for any individual in shifting conventions is likely to be less than the cost of attempting to persuade everyone to move away from the current convention and adopting a new one. The cost of gathering and distributing information and of persuading all other group members of the desirability of the change will be greater the larger the group and the greater the likelihood of sanctions from those adhering to existing conventions. In addition, there is the free rider problem which in itself may constitute a convention. Furthermore, since a contemplated change of conventions can not be based on observable actual cost but must rest upon subjective assessments, perceptions, assumptions, and anticipations surrounding differently coordinated solutions, cost biases on account of differing values and/or personality traits among members of organisations are likely to occur.13 The dynamics of exaggeration

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preventing the adoption of superior conventions or more frequently the decay into inferior solutions (e.g. effort entropy [Leibenstein 1976: 163-172]) as e.g. the evolution of an adversarial system of industrial relations has been most aptly described in A. Fox's account of escalating mistrust and decaying industrial relations in Great Britain (Fox 1974). Thus, the game theoretical approach in Figure 1 can now be combined with the notion of conventions contained in theory X, Y, Z yielding Figure 3 below. The latter displays upper bound sanctions for X, neutral sanctions for Y, and lower bound sanctions for Z type conventions. The shaded areas depict unstable situations, which are unstable from either a worker or management perspective.

Figure 3: Management System and Effort Conventions

The use of inert areas (effort discretion) from X-efficiency theory in conjunction with the notion of existing conventions thus allows us to interpret the empirical findings of widely differing effort standards and associated productivity differences among otherwise identical firms (see e.g. Pratten 1976). Effort conventions need not stay indefinitely where they have originally been established. Sufficient threats and/or shocks to effort conventions embedded in the employment relationship are likely to change both the perceived effort utility functions of organisation members and the associated cost of effort adjustment. A case in point are the various survival shocks suffered by the Chrysler corporation in the early eighties which led to a reconsideration of labor contracts that could never have occurred in absence of shocks of this sort. It is of interest to note the convention which solves the adversarial behavior problem between groups also simultaneously provides a solution for the free rider incentive problems within groups; i.e. the convention that will usually prevent people from pursuing what would otherwise be a free rider incentive. But there is another aspect involved - the postulate that we started with in this section, namely, the relaxation of utility maximization. We assumed that when pressure is low non-calculating procedures are employed. It is easier for individuals to choose a convention which solves the prinsoner's dilemma problem if the choice procedure involves a non calculating

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stimulus-response mechanism. Thus, our non-maximization assumption allows us to see a little more readily how we obtain the convention solution to the PD problem. If calculating behavior was always employed then individuals would always consider whether it pays to follow the convention or to flout it. We would expect that in many cases flouting the convention would make sense. Under such circumstances effort conventions would be rather weak and the prisoner's dilemma outcome would almost always reappear. The fact that people under normal low pressure conditions do not calculate enables them to stick to the convention with ease. Furthermore, under such circumstances people are likely to go to the trouble to employ sanctions against those who do not support the conventions. Otherwise they would follow the free rider incentives and let others do the convention policing work. Hence, the existence of non-calculating behavior is supportive of the notion that people will normally adhere to conventions, and help in their enforcement through the voluntary application of sanctions. To the extent that conventions are supported by sanctions it matters as to the circumstances under which sanctions will be applied. There are three possibilities: sanctions may be applied in terms of deviant behavior beyond some upper effort bound or beyond some lower bound or they may be neutral with respect to focus. E.g. the upper effort bound focus in the form of controlling "rate busters" appears stronger enforced in British industrial relations, while at least in some Japanese echelons of management working conventions involve a lower bound focus. From a general perspective employment relations are affected by effort conventions set either by the historical evolution and development of in plant work rules and effort standards or adopted outside the firm, notably through socialization in differing systems of education and training. In evaluating the employment relationship and associated systems of management from a comparative perspective, we therefore have to consider both intra and inter firm effort conventions. Among the reasons for international variations in effort conventions the following is worth noting: - As compared to the U.S.A. or Canada, in Japan and some European countries the latent adversarial problem appears to have been solved better, e.g. through the adoption of higher effort level standards. - Type Z firms found most frequently in Japan offer a more highly motivating mix of non-monetary rewards yielding higher effort standards. - The broad psychological and cultural characteristics of some jurisdictions but notably Japan, may enable a greater response to non-monetary motivators re-inforcing tendencies towards higher effort conventions.

5. Summary and Conclusions We have shown that there is a symbiotic relationship between X-efficiency theory and organisation theory - that the different classes of organisation theory can be fitted into

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the X-efficiency framework - furthermore, this approach suggests something about the role of m a n a g e m e n t . We hazard a f e w conjectures in this direction. A s w e m o v e f r o m less to m o r e efficient m o d e s of organisation, the p o w e r of management as a direct force appears to decline. Thus, under the Tayloristic form, it is sufficient for m a n a g e m e n t alone to i m p o s e Tayloristic "Thumbs-down" methods. A s w e m o v e to the McGregor's Y Theory form, m a n a g e m e n t plays a lesser but still significant role. Conventions and trust d e v e l o p e d by past relations and "psychological contrasts" e m e r g e . The sanctions that uphold the conventions are neutral. Without shocks to their system m a n a g e m e n t would find it difficult to m o v e the system much b e y o u n d its current productivity level. U n d e r the "clan" regime the direct m a n a g e m e n t role is limited, since m a n a g e m e n t is just part of an organic form of organisation in which all participants play a role in a broad consensus type of decision-making. Nevertheless, w e should n o t e that it is very difficult for managers to m o v e their organisation f r o m the X or Y m o d e into the Z m o d e , in part because managers are likely to be reluctant to give up the p o w e r required to experiment with this m o d e of organisations which is likely to have a long rather than short run payoff (Klein 1976).

Notes 1 For only a small sample of research evidence in this field see e.g. Kendrick (1980), James O'Toole (1981), Reich (1982) and Scherer (1983). 2 See Atkinson and Birch (1978) for a detailed treatment of many aspect of this phenomenon. 3 Note E n is not "the" minimum effort and M„ is not "the" minimum expenditure on wage/working conditions, rather E„ is the highly monitored (controlled) effort and M„ is the minimum outlay associated with highly monitored work and pay. Beyond En Mn "optional" effort and "optional" provision of wages and working conditions are involved. 4 See McMillan (1979) for a survey of the free rider literature. 5 This is a standard treatment which can be found in any text on organisation; e.g. Galbraith (1977). 6 This is not to be confused with X-efficiency theory which has no relationship to McGregor's theory X (McGregor 1960). 7 Similar conceptualizations can be found in McMillan (1984), Tomer (1984), Weiermair (1985). 8 This corresponds to the E„ M„ point in Figure 1. 9 An exhaustive treatment of X-efficiency theory and its psychological foundations of work behavior can be found in Leibenstein (1976), for an application to organisation design see Weiermair (1984). 10 Dimensions of the argument and their methodological implications for the theory of the firm have been discussed in: de Alessi (1983), Leibenstein (1978b and c), and Stigler (1976). See also Nelson and Winter (1973 and 1982). 11 For the development of general theories see Lewis (1969), Schotter (1981) and Ullmann-Margalit (1977). 12 This section combines arguments contained in earlier work (Leibenstein 1982, 1983, 1984a, b). 13 E.g. a fair amount of research on organisation design and the structure and control of work organisation has unveiled the importance of varying belief systems, management values and organization cultures (Davis and Taylor 1979, Klein 1976, Piore 1967).

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References Alchian, A. A. and Demsetz, H. (1972): Production, information costs and economic organisation, American Economic Review, 62: 777-795. Argyris, C. (1960): Understanding Organisational Behavior, Homewood, Illinois: The Dorsey Press. Atkinson, J. W. and Birch, O. (1978): Introduction to Motivation, New York: Van Nostrand. Becker, G. S. (1964): Human Capital, New York: Columbia University Press. Cable, J. R. and Fitz, R. (1980): Productive efficiency incentives and employee participation: Some preliminary results for West Germany, Kyklos, 33 (1): 100-121. Clark, R. (1979): The Japanese Company, New Haven: Yale University Press. Crawford, R. C. (1983): Organizational Structure and Productivity: The Economics of Theory Z, paper presented at the Second U.S.-Japan Business Conference, Tokyo. Davis, L. and Taylor, J. (Eds.) (1979): Design of Jobs, Santa Barbara: Goodyear. Fox, A. (1974): Beyond Contract: Work, Power and Trust Relations, London: Faber. Furubotn, E. G. and Pejovich, S. (Eds.) (1974): The Economics of Property Rights, Cambridge, Mass.: Ballinger. Gabarro, J. (1979): Socialization at the top - how CEOS and subordinates evolve interpersonal contracts, Organisational Dynamics, Winter, 3-23. Galbraith, J . R . (1977): Organization Design, Reading Mass.: Addison - Wesley Pub. Hackman, R. J. (1976): Attributes of Organisations and their Effects on Organisation Members. Handbook of Industrial Psychology, Dunette, M.D. (Ed.) Chicago: Rand McNally, 1065-1067. Herzberg, F. (1966): Work and the Nature of Man, Cleveland: World Publ. Corp. Kendrick, J. W. (1980): Surveys of the Factors Contributing to the Decline in Productivity Growth. The Decline of Produtivity Growth, Federal Reserve Bank of Boston Conference Series 22, 1-21. Klein, L. (1976): New Forms of Work Organization, Cambridge: Cambridge University Press. Lawrence, P.R. and Dalton, G.W. (1970): Organizational Structure and Design, Homewood, 111.: Irwin. Leibenstein, H. (1966): Allocative Efficiency vs. 'X-Efficiency', American Economic Review, 56, June, 392-415. Leibenstein, H. (1969): Organizational or Frictional Equilibria, X-Efficiency and the Rate of Innovation, Quarterly Journal of Economics, 83, November, 600-623. Leibenstein, H. (1972): Comment on the Nature of X-Efficiency, Quarterly Journal of Economics, 86, May, 327-331. Leibenstein, H. (1973 a): Competition and X-Efficiency: A Reply, Journal of Political Economy, 81, May/June, 765-777. Leibenstein, H. (1973 b): Notes on X-Efficiency and Technical Progress. Micro Aspects of Development, Ayal, B. E. (Ed.) New York: Praeger, 18-40. Leibenstein, H. (1975): Aspects of the X-Efficieny Theory of the Firm, Bell Journal of Economics, 6, August, 580-606. Leibenstein, H. (1976): Beyond Economic Man: A New Foundation for Micro-Economics, Cambridge: Harvard University Press. Leibenstein, H. (1977a): X-Efficiency, Technical Efficiency, and Incomplete, Information Use: A Comment, Economic Development and Cultural Change, 25, January, 311-316. Leibenstein, H. (1977b): X-Efficiency Theory, Conventional Enterpreneurship and Excess Capacity Creation in LDCs, Economic Development and Cultural Change, Supplement, 25, 288-299. Leibenstein, H. (1978 a): General X-Efficiency Theory Economic Development, New York and London: Oxford University Press.

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Leibenstein, H. (1978b): X-Inefficiency Xists-Reply to an Xorcist, American Economic Review, 68, March, 203-211. Leibenstein, H. (1978 c): On the Basic Proposition of X-Efficiency Theory, American Economic Review Proceedings, 68, May, 328-334. Leibenstein, H. (1979 a): A Branch of Economics is Missing: Micro-Micro Theory, Journal of Economic Literature, 17, June, 477-502. Leibenstein, H. (1979b): X-Efficiency: From Concept to Theory, Challenge, 22, September/October, 13-22. Leibenstein, H. (1982): The Prisoner's Dilemma in the Invisible Hand: An Analysis of Intrafirm Productivity, American Economic Review, 71, 5, 92-97. Leibenstein, H. (1983): Property Rights and X-Efficiency: Comment, American Economic Review, 73, 831-842. Leibenstein, H. (1984 a): On The Economics of Conventions and Institutions: An Exploratory Essay, Zeitschrift für die gesamte Staatswissenschaft, 140, 1, 74-86. Leibenstein, H. (1984 b): The Japanese Management System: An X-Efficiency - Game Theory Analysis, The Economic Analysis of the Japanese Firm, Aoki, M. (Ed.), North Holland: Elsevier, 331-357. Magaziner, I. and Reich, R. S. (1982): Minding America's Business: The Decline and Rise of the American Economy, New York: Harcourt, Brace, Jovanovich. Maslow, A. H. (1971): The Farther Reaches of Human Nature, New York: Penguin Books. McGregor, D. (1960): The Human Side of Enterprise, New York: McGraw-Hill. McMillan, C.J. (1979): The Free Rider Problem: A Survey, The Economic Record, 55, 95-107. McMillan, C. (1983): Japanese Industrial System, Berlin: de Gruyter. Nelson, R. and Winter, S. G. (1973): Toward an Evolutionary Theory of Economic Capability, American Economic Review, 63, 440-449. Nelson, R. and Winter, S. G. (1982): An Evolutionary Theory of Economic Change, Cambridge and London: Belknap Press. O'Toole, J. (1981): Making America Work: Productivity and Responsibility, New York: Continuum Ouchi, W. G. (1980): Markets, Bureaucracies and Clans, Administrative Science Quarterly, March, 129-141. Ouchi, W. G. (1981): Theory Z: How American Business Can Meet the Japanese Challenge, Reading Mass.: Addison-Wesley. Ouchi, W. G. and Johnson, J. B. (1978): Types of Organizational Control and their Relationship to Emotional Well-Being, Administrative Science Quarterly, 28, June, 293-317. Pascale, R. T. and Athos, A. G. (1981): The Art of Japanese Management: Applications for American Executives, New York: Simon and Schuster. Peters, T.J. and Waterman, R . H . (1982): In Search of Excellence: Lessons from America's Best Run Companies, New York: Harper and Row. Pfeffer, J. (1978): Organizational Design, Arlington Heights, 111.: AAM Publishing Corp. Piore, M. (1967): The impact of the labor market upon the design and selection of productive techniques within the manufacturing plant, Quarterly Journal of Economics, 62, 603-623. Roethlisberger, F. J. and Dickson, W. J. (1939): Management and the Worker, Boston: Harvard University Press. Rozen, E. M. (1985): Maximizing Behavior: Reconciling Neoclassical and X-Efficiency Approach, Journal of Economic Issues, XIX, 3, 661-685. Shrivastava, P. and Schneider, S. (1984): Organizational Frames of Reference, Human Relations, 37: 795-809. Starbuck, W. H. (1976): Organizations and their Environments, Handbook of Industrial and Organizational Psychology, Dunnette, M. D. (Ed.), Chicago: Rand McNally, 1069-1123.

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Stigler, G. (1976): The Xistance of X-Efficiency, American Economic Review, 66, 213-216. Tomer, J.F. (1984): Working Smarter the Japanese Way: The X-Efficiency of Theory Z Management, The Management of Productivity and Technology in Manufacturing, Klaindorfer, P. R. (Ed.),New York: Plenum Press, 199-227. Vogel, E. (1979): Japan as Number One: Lessons for America, New York: Harper and Row. Weber, M. (1947): The Theory of Social and Economic Organization, (T. Parsons and M. A. Henderson trans.), London: The Free Press. Weiermair, K. (1984): Heterogeneity in Production and Organisation Design: Comparative Economic Perspectives of Organizational Innovativeness, 11th Annual EARIE Conference, Fontainebleau, France. Weiermair, K. (1985): Worker Incentives and Worker Participation: On the Changing Nature of the Employment Relationship, Journal of Management Studies, 22, 5, 547-570. Williamson, O. E. (1979): Transaction-Cost Economics: the Governance of Contractual Relations, The Journal of Law and Economics, 12, 233-261. Williamson O. E. (1980): The Organization of Work: A Comparative Institutional Assessment, Journal of Economic Behavior and Organisation, 1, 39-60. Williamson, O . E . , Wächter, M. and Harris, J . E . (1975): Understanding the Employment Relation: The Analysis of Ideosyncratic Exchange, Bell Journal of Economics, 6, 250-278.

Management from an Institutional/Biological Perspective Hoyt N. Wheeler

1. Introduction "Management" is a phenomenon which must be understood in some depth and with some perceptiveness, before it can be usefully considered for comparative purposes. It is a phenomeneon which exists throughout work organizations in industrial societies. Precisely what it is and how it operates is, however, perhaps not well understood. It is the purpose of this paper to suggest a perspective on management which is believed to have potential of improving our understanding of it. This perspective is constructed from a combination of the ideas of institutional scholars with respect to work organizations and those of biologists with respect to the human beings which operate within these organizations. As this is a first statement of this combination of ideas, it is seen as highly tentative and subject to modification. There is at least some surface plausibility to the argument that it is necessary to view both the work organization and the human beings within it in order to understand important operations of those human beings in the organization. It is clear that the thing that we call "management" occurs only within human social organizations. It is also clear that it is the peculiar animal homo sapiens who does the acting as a manager. It would seem to be reasonably obvious that one would need to understand both the role and function of the person within the organization and the nature of the person himself or herself in order to get a full grasp of the phenomenon. Indeed, when we speak of a "manager" we speak of a human being occupying a particular role or function. This paper will first consider what management is, in the sense of what it means to occupy that role or function in a work organization. It will then analyze the effects of certain aspects of human nature upon individuals operating in the role as so defined. Last, it will discuss the implications of this perspective for what we would expect to be true of managers, and managers' responses to constraints imposed by environmental forces.

2. What Is "Management?" The basic American textbook definition of management is that it is the "process of planning, organizing, leading, and controlling the efforts of organization members and using all other organizational resources to achieve stated organizational goals" (Stoner 1982: 8). Another traditional definition is "the art of getting things done through people" (Stoner 1982: 7). Managers are seen by some as the agents of the shareholders. Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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In this position they stand as the surrogates for the owners of the physical property of the private organization and of the business as a going concern (Chamberlain/Cullen 1971). The above definitions are useful for some purposes. However, one of their weaknesses is that they fail to state explicitly the purposes for which the management process takes place. Of course, implicit in the definition of managers as the agents of the shareholders is managers serving the interests of shareholders. Jack Barbash (1984) has taken this one step further and has argued that management, whether private or public, has the role and function of serving the efficiency interest. That is, it is the manager who must be vitally concerned with the "bottom line", i.e. profitability. A somewhat similar view is expressed by Neil Chamberlain and Donald Cullen (1971) in their view of managers as "coordinators of bargains" between various members of the organization. This approach sees managers as working out the relationship between the inputs of the workers, and the outcomes which they receive for those inputs, and the overall relationship between inputs and outputs for the firm, so that the firm is able to survive and prosper. In the labor laws of the United States there is a distinction made between "employees" and "supervisors" (National Labor Relations Act). Those workers who are "supervisors" are outside of the protection of the National Labor Relations Act, as they are considered allied with management rather than with the rank-and-file workers. The definition of "supervisor" contained in the law is rather complex. However, it has become reasonably clear through the case law over the years that a crucial aspect of the definition involves whether the worker is one who responsibly directs the work of others. This definition picks up two aspects of those previously discussed. First, it has to do with the direction of the activity of others, making the management role directing others, rather than doing. In addition, it picks up the notion of responsibility for the work of those others to higher managers in the hierarchy and, ultimately, to the shareholders. From the above ideas it is possible to construct a useable definition of management in terms of the institutions in which the phenomenon is embedded. First, the American legal definition is a useful building block. Direction of others is an element of management. Responsibility upward in an organizational hierarchy for the consequences of that direction is also a part of the management function. Second, it is clear that the purpose served by a manager's direction of others is, at least in major part, involved with the bottom line. That is, in Barbash's terms, it is the efficiency interest which must be served. It is clear that, at least in the United States, others generally expect of managers that they produce profitability for the organization. The role, therefore, involves serving the interest of efficiency. Given these social expectations and the practical necessity for someone in an organization to worry about efficiency, it seems that the self-interest of managers is generally served by their serving the bottom line, at least to a reasonable degree. The condition for their continuation in the job of manager would ordinarily be that they serve bottom line purposes well enough to satisfy the shareholders.

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One of the difficulties with our conceptualizing the functions of management in a complex industrial society is that much of our thinking about management has been conditioned by our inclination to view a manager as simply a stand-in for a traditional entrepreneur. It must be recognized that the manager is himself an employee. That is, the manager receives pay in exchange for a promise to obey those above him or her in the hierarchy (Commons 1968). Yet, as a carpenter or a plumber has a particular role in an work organization, so does a manager. The manager has a task which is connected with producing the intangible of profit or efficiency rather than the tangible of a manufactured good. It should be noted that although this discussion has been aimed at management within private profit making organizations, managers in the public sector must operate within a cost-discipline which is quite similar to that of profit (Barbash 1984). Management as here defined is a particular, definable situation for the human being who performs this function. The authority over others below and responsibility to those above places managers in a particular position in the social hierarchy of the work organization. They, unlike workers who do not direct others, are in the position of exercising social dominance. In addition, their concern with efficiency is one which often places them at odds with deep and abiding concerns of other employees which relate to receiving adequate pay without being overworked (Barbash 1984). It is not, of course, true that the managers have no concern about the interests of other employees. It is, rather, that the manager has other very pressing interests to attend to, and can not be expected to have the same degree of concern about the income and avoidance of painful effort by other employees that those employees themselves might have. The view of management which is set out above is consistent with an institutional approach to management and labor. Indeed, it rests in large part upon the thinking of an "institutional" scholar, Jack Barbash. It is believed by this writer that such approach to management is a necessary condition for an understanding of it as a phenomenon. This understanding can, however, be substantially enriched by adding to it the understandings that can come from some of the new biologically-based knowledge about human beings and their fundamental roots of behavior. It is to this task that the next section of this paper turns. Because it is essentially an extension of institutional thought, the total approach is labeled "institutional/biological".

3. "Human Nature" and Management When one views the literature on management, it becomes quickly apparent that there is a gaping hole in this body of knowledge. This is in respect to the nature of the human beings who serve as managers. Managers are indeed human, but you would never know it from a review of the literature. Whether it is of any use to explore the effects of "human nature" upon managerial behavior depends on the answers to several questions. These are: Is there such a thing

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as "human nature?" If there is, does it have any implications for understanding management in human work organizations? What differences, if any, do the fundamental aspects of human nature make in the role and behaviors of managers?

3.1 Does Human Nature Exist? Obviously, human beings share certain common characteristics. These common characteristics make up something that might be called "human nature". To raise the inquiry to a level useful for our purposes, the fundamental question becomes whether there are enduring characteristics of human beings which influence our behaviors in important ways as we relate to one another in social organizations. This question has at times been framed (inaccurately) in terms of a debate between whether "nature" or "nurture" determine human behavior. Any argument that involves the proposition that there are inherent, inherited, human predispositions must start with the work of Charles Darwin. In his classic The Origin of Species Darwin (1979) laid the foundations of modern biology. Darwin's argument was essentially that, to serve what he termed "Natural Selection", those characteristics of a living thing which were profitable to the species for survival purposes would tend to be preserved, since offspring with that trait would have a survival advantage. The characteristics of the human animal are shaped, therefore, at least in part, by the operation of the heavy hand of natural selection. The characteristics, and indeed, behaviors, tending to favor survival endure for that reason. The application of Darwinian ideas to human beings is generally believed to have been attempted by the "Social Darwinist" Herbert Spencer (1959) and his followers. Although Spencer's views are basically incompatible with Darwinian theory and tend to confuse moral "oughtness" with biological mechanics, they influenced both the popular and scientific views of Darwinian ideas as they applied to human behavior. The analysis and social conclusions of the Social Darwinists deservedly discredited them, and, though undeservedly, Darwinist thought in general as it applied to the human animal. A biological view of human behavior only began to emerge into respectability in the 1960's with the work of some pioneering scientists laboring in the field of ethology, the "naturalistic study of whole patterns of animal behavior" (Wilson 1980: 5). The ethologists believe that man is an animal and can only be understood as such. This means: as a being of both instinct and rationality. The usefulness of seeing man in this way is argued for by Desmond Morris in his book, The Naked Ape: "I am a zoologist and the naked ape is an animal. He is therefore fair game for my pen and I refuse to avoid him any longer simply because some of his behavior patterns are rather complex and impressive. My excuse is that, in becoming so erudite, Homo Sapiens has remained a naked ape nevertheless [ . . . ] there is no hope of quickly shrugging off the accumulative genetic legacy of his whole evolutionary past. He would be a far less worried and more fulfilled animal if only he would face up to this fact" (Morris 1967: 9).

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Some of the most powerful work performed by an ethologist has been by Irenaus EiblEibesfeldt. Eibl-Eibesfeldt (1972) concluded on the basis of an impressive body of evidence that physical structures are the ultimate source of behavior patterns. In his book Love and Hate he examined a large number of behavioral similarities across many different civilizations. It is the existence of common behaviors over a variety of societies that mainly persuades Eibl-Eibesfeldt that these behaviors are innate. He found, for example, that aggressive behavior has never been found to be entirely lacking in any human group, and has common expressions across societies. Other behaviors which appear to be a part of the human condition are "threat" displays, attempting to make ourselves taller or exaggerating the width of our shoulders, assuming an aura of calm or a haughty expression, a facial expression of rage, and the stamping of feet to express anger. Niko Tinbergen is another distinguished scientist who has concluded that there is such a thing as human nature, based upon evidence similar to that of Eibl-Eibesfeldt (Tinbergen 1978). The Noble prize winning biologist, Konrad Lorenz, is perhaps the most famous proponent of this approach (Lorenz 1966). In recent years a great deal of attention has been given to the work of Edward O. Wilson, the author of the book Sociobiology: A New Synthesis (Wilson 1975). In that book, which was published in 1975, and in his later work Wilson has argued with a great deal of scientific rigor for the existence of such a thing as "human nature". As Wilson maintains, the existence of innate human predispositions which make up human nature does not make for solely mechanical predetermining conditions. That is, innate engines of behavior influence behavior but do not determine it. The operation of one instinct is moderated by the operation of other instincts, by reason, and by culture. It is clear from Wilson's work that one must be extremely conservative in concluding that particular human behavioral tendencies are innate. Indeed, Wilson gets into a great deal of trouble when he tries to extend the argument from a conservative determination of the innateness of certain basic traits to remote political and social conclusions. Wilsons's work also makes it clear that the mere fact of a wide distribution of a particular behavior among the human race is not sufficient, in and of itself, to conclude that that behavior is innate. Rather, it is necessary in addition to have a plausible tie between that behavior and natural selection. It is only when this second condition is met that it is supportable to argue that a particular behavior predisposition has genetic roots. It should be recognized that there are distinguished scientists and scholars who argue with great heat, and some reason, that there is no such thing as instinct in human beings (Montague 1976). Where the argument is simply over how much influence instincts have, the differences between the ethologists and sociobiologists on the one hand and their critics on the other hand are not particularly great. However, the extreme behaviorist view of some scientists argues essentially that instinct either does not exist or that it is not at all important. This writer is of the opinion that such a view is incorrect, and that the great weight of the evidence is supportive of the fundamental proposition that there is such a thing as innate human predispositions.

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There are admitted weaknesses in the work of both the ethologists and Wilson. Yet, their conclusion is well supported that, as Wilson states, a definable human nature is "one hodge-podge of many conceivable" (Wilson 1978: 23). The work of the ethologists, the sociobiologists, and their critics has been well synthesized by the British moral philosopher, Mary Midgley, in her excellent book Beast and Man (Midgley 1978). Midgley's argument is essentially that the "rival fatalisms" of nature or nurture are rather foolish. According to her, it is obvious that nature and nurture are complimentary, rather than competing, explanations of human behavior. Accordingly, it is not only possible, but necessary, to use both instinctive and rational, or cultural, considerations in order to understand the behavior of human beings.

3.2 Relevance of Human Nature Are there any aspects of human nature which are relevant to our consideration of the nature of management? Although there are probably several, the outstanding one is the human predisposition towards social dominance. This is so because management, as we have defined it, operates within a social hierarchy. The construction of hierarchies, and a wide range of behaviors within such hierarchies, relate to a fundamental human predisposition, that of social dominance. What ethologists and sociobiologists label "social dominance" does seem to exist in human organizations. This "set of sustained-aggressive-submissive relations" (Wilson 1980: 137) taking place within a hierarchy or "pecking order" is rather readily apparent in human work organizations. There is considerable evidence that social dominance orders are innate among social animals. Konrad Lorenz argues, "a principle of organization without which a more advanced social life cannot develop in higher vertebrates is the so called ranking order" (Lorenz 1966: 40). Desmond Morris observes: "In any organized group of mammals, no matter how cooperative, there is always a struggle for social dominance. As he pursues this struggle, each adult individual acquires a particular social rank, giving him his position, or status, in the group hierarchy" (Morris 1969: 41). According to Morris, this hierarchy system is "loaded" into us as primates and is the "basic way of primate life" (Morris 1967: 120). Social dominance orders, and the tendency to establish them and operate within them, have been persuasively argued for as innate human behavioral mechanisms. The anthropologists Tiger and Fox have concluded that these tendencies are "part of our primate structure". According to them, human beings "refine this reflex endlessly; we humilate others; we are rank-makers and flag-planters" (Tiger/Fox 1970: 33). A persuasive argument to this effect is developed at length by George Maclay and Humphrey Knipe in their book The Dominant Man (1972). Although they have spoken in other terms, psychologists, sociologists, and industrial relations scholars have observed the ubiquity and importance of social dominance hierarchies in human work organizations. The psychologists who have spoken to this

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include Alfred Adler (1927), Abraham Maslow (1937), and David McClelland (1966). The sociologists Robert Dahl and Charles Lindblom have spoken of the "vital and ubiquitous role of hierarchical process." (Dahl/Lindholm 1953: 230). Amitai Etzioni (1975) has made a similar observation. Students of industrial relations such as Jack Barbash (1984) and William Whyte (1955) have also noted the existence and importance of these hierarchies and the tensions which they generate. Knowing that there are patterns of social dominance in human work organizations, and that these are based, at least in part, on innate human predispositions, is of at least passing interest. The question is whether this gives us any real assistance in dealing with important issues with respect to the operation of these systems by managers who occupy positions in them. In would seem that this could be helpful in three main ways. First, it should keep us from being surprised to find that hierarchies exist within organizations, even within sections of them where efforts have been made to eliminate hierarchy. Second, we are alerted to the fact that there are certain behaviors that are ordinary and natural concomitants of the existence of social hierarchies. We should both expect them to exist and understand from whence they come. Third, we should know that, since these are not "closed" instincts which are mechancial and unalterable, they may be influenced by the operation of other instincts, rationality, and social pressures and norms. In any hierarchy of a work organization we find, as we would expect, that managers have certain symbols of social dominance status.They receive a large share of resources of the social group, they may costume themselves in a distinctive manner, and they possess certain privileges or "perks", such as parking spaces, large offices, and segregated eating facilities. One finds social dominance symbols in body language, such as "executive bearing", the ability to "stare down" subordinates, and the general sureness of action and demeanor that characterizes social dominants in all primate hierarchies. Punishment is, of course, "naturally" passed from the top of the hierarchy to the bottom of the hierarchy rather than the reverse. As we would expect in social dominance hierarchies, we find that mangers are attached to their position and its dignity and respond vigorously, sometimes even brutally, to threats to their status. This, of course, creates inherent difficulties when one attempts to devise egalitarian forms of organization, as the dominant managers would be expected to resist challenges to their power and authority. One should be careful not to draw normative implications from this. Human beings in positions of social dominance have a predisposition to act in the ways which have been described. This does not mean that it is either "good" or "bad" for them to do so. Although all human beings share some tendency to behave in certain ways in social dominance hierarchies, some will have these tendencies to a greater degree than others. Individual differences in what Abraham Maslow has called "dominance feeling" (Maslow 1937: 404-429) and McClelland has termed "n power" (McClelland/Burnham 1966: 101) have long been well documented. In the process of selecting managers it is obvious that these differences should be taken into account. A manager who is completely devoid of the characteristics required to occupy a dominant position in a social hier-

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archy should probably not occupy such a position. On the other hand, one whose need for power is so strong as to lead him or her to be oppressive of subordinates should also not occupy such a position. The other side of the social dominance coin is the response of the subordinate. There is a "status tension" in social dominance hierarchies which results from individuals struggling for positions within them (Morris 1969). The existence of this tension should be recognized, and its positive as well as its negative aspects utilized in management. An important aspect of it is the desire for freedom from dominance by others, which is a part of the basic human social dominance tendency. An anamolous feature of the human predisposition to form und struggle for position in hierarchies is the so-called "thirst for obedience", (Milgram 1965: 371) or ability to be on the receiving end of social authority. Social dominance systems would not work, unless human beings had some ability to accept positions below that of the highest. It is, therefore, natural for human beings to not only form hierarchies and struggle for position in them, but also for them to have the ability to accept other than dominant positions in the hierarchy. It is important to note that social dominance inclinations do not exist in a vacuum. That is, they are only a part of the "parliament of instincts", identified by ethologists and sociobiologists (Lorenz 1966: 81-82). Consequently, other instincts, such as those of love and nurturing and to pursue material resources, compete at any given time with the inclination to engage in social dominance behaviors. Indeed, it could be argued that these other inclinations are the place that one should turn to to affect inclinations with respect to social dominance. What this suggests is that if one wishes to moderate the operation of inclinations toward social dominance, it makes sense to make use of, and appeal to, other similarity fundamental instincts (Wheeler 1985: 113-139). From even a hasty review of the notion of human social dominance such as that sketched out above, it seems reasonably apparent that to our understanding of management ought to be added the idea that managers operate in a social dominance hierarchy which has certain characteristics and concomitants. Understanding the human being who operates in the role helps us to better understand the role. Indeed, we see the role itself as having been created out of basic human needs rather than as a purely cultural or economic invention. This is the reality with which we are working in dealing with the response of management to variety and change in the social and political environments, and the constraints produced by the forces in these environments.

4. Management Response to Varying Conditions and Constraints A number of ideas about managerial response to variations in conditions, and reaction to constraints, are suggested when one takes an institutional/biological perspective. These have to do with managerial flexibility in general and with the response to specific constraints, such as those of international competition, public policy, market power of job seekers, and unions.

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It would seem, first, that there are some severe inhibitions on managerial flexibility to respond to changing conditions. Hierarchies do exist, are relatively resistant to abolition, and possess certain characteristics which are at least somewhat difficult to change. Along with having human beings as managers in traditional roles in hierarchically organized organizations will come some rather strong tendencies. What this suggests is that change, although not impossible, might be expected to be difficult if it runs counter to the usual operation of a social dominance order. The most obvious area of difficulty in this regard is the creation of industrial democracy. Democracy's egalitarianism is clearly uncongenial to organizational hierarchy. If it is to come into existence, it must be based upon appeals to other human tendencies. If, for example, it can be shown to have payoffs in terms of material resources for the social dominants, this may be a useable strategy. In addition, norms of love, affection, and solidarity with other human beings are also fundamental roots of human behavior which can be explictly appealed to in order to construct democratic forms. Industrial democracy is not impossible, nor is it "unnatural". It simply is based upon different human inclinations than those which are a consequence of hierarchical systems. One need not give up hope for democracy, but should recognize that its establishment runs counter to some strong tendencies held by occupants of powerful organizational positions. If constraints created by international competition demand higher quality and efficiency, and lead one to believe that more democratic work forms would be more effective, then the considerations noted above come into play. That is, one should expect difficulty in setting up such democratic forms as quality circles. However, the creation of norms favoring this, appeals to nurturing and social tendencies, as well as to material rewards, all are useable strategies. Public policy as expressed in government regulation is one of the major constraints with which managerial discretion must deal. In Western Europe and, at least until quite recently, in the United States, government action in the area of employment discrimination and safety has been a particularly compelling regulator of managerial behavior. Government policy expressing the public interest could be viewed, of course, as a major interference with the predominant role and function of management, which is to serve profitability or efficiency goals. It could also be viewed as simply a broadening of the purposes which it is required that managers serve. However it is viewed in terms of its relationship to the goals of firms, it is quite clear that these rules do limit the discretion of management, or sometimes the joint discretion of management and an organization of workers. To the degree that they constrain managerial behavior, they do detract from the authority and status that managers have as dominants in organizations. Accordingly, one would expect managers to resist this, at least to some degree. For public policies to succeed, it would be expected that there would have to be either penalties for violations imposed on the managers themselves, or appeals to strong tendencies which compete with social dominance tendencies. It may be that regulation works more effectively in an area such as safety, where the tendency of human beings to be nurturing and caring to others seems very obviously involved. Here, there are tendencies which can compete with the dominant's tendency to exercise decision mak-

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ing powers in a broad manner. The same situation may or may not be true with respect to employment discrimination, as it may not be so obvious that other fundamental human tendencies are operational. The relationship between managers and job seekers exercising their market power with respect to new employment is an interesting one to view in an institutional/biological perspective. Job seekers are not part of the organizational hierarchy until they accept the jobs. One would expect, therefore, the dealings between managers and them to be relatively free of the sorts of tensions expected between occupants of niches within an hierarchy. While managerial discretion is certainly limited by the bargaining power of skilled workers, or those with workers in general in a situation of labor shortage, one would not expect this to be resented so deeply, or responded to at such a deep level. This transaction more approximates that of a simple market transaction, where one is buying and the other selling. On the other hand, the constraints imposed upon managers by labor unions would be expected to bring out the strongest tendencies with respect to the assertion of social dominance status. From the perspective of a dominant in any primate organization the worst thing that can happen is for a collective of subordinates to "mob" the dominant. This is the ultimate challenge to the dominance hierarchy, as it attempts to rearrange power in a fundamental way, and places subordinates on the same level as the superiors. One would therefore expect strong resistance. In order for management to be made receptive to this one would expect it to be necessary to either appeal to strong countervailing tendencies or exact several penalties. The problem with appeal to countervailing tendencies is that the main one to which one might look would be nurturing tendencies linked to parental care for young. This becomes impossible, however, where the subordinate is aggressively asserting independence. One would expect, therefore, that managers might only accept the constraints imposed by trade unions where there is no alternative consistent with their own deep self interest.

5. Conclusions In this paper an attempt has been made to state in a preliminary fashion a somewhat different approach to management. This institutional/biological approach is believed to have some potential for giving new insights into the phenomenon of management. This is appropriately labeled an institutional/biological approach, as it does operate within the framework of institutional analysis, yet adds biological understandings of human nature. It is hoped that this statement of these ideas challenges scholars to enlarge our understanding of management. Today's shifting and complex environment of management would seem to require some new thought.

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References Alder, A. (1927): Understanding Human Nature, Greenwich, Conn.: Fawcett. Barbash, J. (1984): The Elements of Industrial Relations, Madison: University of Wisconsin Press. Chamberlain, N. W. and Cullen, D. E.: The Labor Sector, 2nd ed., New York: McGraw-Hill. Commons, J. R. (1968): Legal Foundations of Capitalism, Madison: University of Wisconsin Press. Dahl, R. A. and Lindblom, C. E. (1953): Politics, Economics and Welfare, New York: Harper and Row. Darwin, D. (1979): The Origin of Species, Baltimore: Penguin. Eibl-Eibesfeldt, I. (1972): Love and Hate, New York: Holt, Rinehart and Winston. Etzioni, A. (1975): A Comparative Analysis of Complex Organizations, New York: Free Press. Lorenz, K. (1966): On Aggression, (trans, M. K. Wilson), New York: Harcourt, Brace and World. Maslow, A. H. (1937): Dominance-Feeling, Behavior, and Status, Psychological Review, 44: 404-429. Maclay, G. and Knipe, H. (1972): The Dominant Man, New York: New American Library. McClelland, D. C. and Burnham, D . H . (1966): Power is the Great Motivator, Harvard Business Review, 54, 2: 100-110. Midgley, M. (1978): Beast and Man: The Roots of Human Nature, Ithaca, NY: Cornell University Press. Milgram, S. (1965): Some Conditions of Obedience and Disobedience to Authority, Human Relations, 18: 57-76. Montague, A. (1976): The Nature of Human Aggression, Oxford: Oxford University Press. Morris, D. (1967): The Naked Ape, New York: Dell. Morris, D. (1969): The Human Zoo, New York: McGraw-Hill. Spencer, H. (1959): Social Statics, London: Chapman and Sons. Stoner, J. A . F . (1982): Management, 2nd ed., Englewood Cliffs, N.J.: Prentice-Hall. Tinbergen, N. (1978): On War and Peace in Animals and Man, The Sociobiology Debate, Caplan, A. S. (Ed.), New York: Harper and Row, pp. 86-89. Tiger L. and Fox, R. (1970): The Imperial Animal, New York: Holt, Rinehart and Winston. Wheeler, H . N . (1985): Industrial Conflict: An Integrative Theory, Columbia: University of South Carolina Press. Whyte, W. F. (1955): Money and Motivation, New York: Harper and Row. Wilson, E. O. (1975): Sociobiology: The New Synthesis, Cambridge, Mass.: Belknap Press. Wilson, E. O. (1978): On Human Nature, Cambridge, Mass.: Harvard University Press. Wilson, E. O. (1980) Sociobiology, (abridged ed.), Cambridge, Mass.: Belknap Press. National Labor Relations Act, Sees. 2(2), 2(11).

The Analysis of the Employer Employee Relationship from the Perspective of the Business Politics Approach Gtinter Dlugos, Wolfgang Dorow,

Frank C.

Danesy

Abstract While executing the tasks pertaining to their specific assignments, managers may find their discretion constrained by various factors. Taking their functions as employers into consideration, specific constraints which limit the discretion of both parties of the work relationship will be analyzed. In spite of mutual constraints, the interactions between employers and employees can clearly not be characterized as being entirely conflicting. Nor can they, however, be characterized as being entirely consensual. While management related research has frequently emphasized, either explicitly or implicitly, the consensual aspect of the employer employee relationship, the conflict related aspect has, by and large been neglected. On the basis of a systematic analysis of the goals pursued by employers on the one hand and employees on the other, the Business Politics Approach categorizes constraints which hinder the realization of these goals. Bearing the specific interests of both, the employers and the employees in mind, the authors will examine the two causes of conflict emergence as they have been identifield by the Business Politics Approach. Independent of the cause of a given conflict, the conflicting parties may react either by "exit" i.e. by revising their primary goals, thus evading the conflict or by "voice" which entails confronting and handling the conflict. The Business Politics Approach has identified the two basic methods of conflict handling, which will also be discussed in the following. Thus a formal instrumentarium will be developed with which employer employee conflicts can be analyzed with regard to the causes of conflict emergence, the pertinent power bases, and the actions with which conflicts can be handled.

1. The Enterprise and its Members Enterprises are established in order to fulfill purposes. The fundamental purpose of an enterprise is to supply external actors with goods and services, and to supply internal actors with nominal goods. The external actors are private and public households as well as other enterprises. Internal actors are members of the enterprise. Viewed from the perspective of this (membership) function, the two fundamental purposes of the enterprise are brought into a means-end-relationship. The fulfillment of ones own Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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needs is the end which is achieved by means of participating in the supply of goods or services to others. The members of an enterprise are staff members1 - who in that function contribute work performance - and shareholders who contribute capital utilization possibilities and agree to accept liabilities. Actors who contribute work performance and who simultaneously contribute capital unite both enterprise membership functions in their person. Under the legal aspect, two staff functions may be differentiated: employers and employees. Employers take employees into service, and have the authority to direct them. Employees contribute work performance, which is subject to direction. The question of which staff members are to be considered employers and which are employees is determined by the legal framework and the specific agreements in the constitution of the enterprise. Depending on the enterprise's legal form of ownership, two ownership functions can be differentiated: proprietor and shareholder. Proprietors are the owners of sole proprietorships or partnerships; they are also employers due to the legal framework in which they operate. Shareholders own shares of the corporation's equity. If they are also staff members, they can either be employers or employees. In the following, the expressions utilized to differentiate the members' functions within the enterprise also designate persons who assume those functions.

2. Employers and Employees as Opponents in Individual and Collective Exchange Relationships Statements regarding ends and means as components of goal systems are demands and pledges in the framework of an exchange relationship. These stand in opposition to the demands and pledges of the exchange partners 2 . Taking their pursued ends into consideration, and disregarding their specific staff functions, staff members perform their work as an equivalent for the income which they receive. Apart from these fundamental components of the exchange relationship, it is possible to infer complementary demands on the basis of empirical findings3 assisted by way of deduction. Thus, staff members are also interested in job security, as well as possibilities of selfactualization and participation, and demand that certain technological and social conditions be fulfilled. These demands and pledges of the staff members inversely oppose the pledges and demands of those actors who hold an opposing function within the enterprise. In this way, the proprietor makes a contract with himself, the staff member in an enterprise makes a contract with the corporate body, and the employees make contracts with the employer.

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Employers and employees are the adversaries in an exchange relationship on the individual level. Frequently, employee representatives within the enterprise act as negotiating partners on the employees' behalf. On the collective level, employer associations and unions (employee associations) represent the demands and pledges of their members. They make contracts pertaining these pledges and demands without, however, actually exchanging the promised and demanded goods at that level. This relationship encompasses the central elements of an exchange relationship. None the less it remains incomplete because it does not include the actual exchange. The individual-collective relationships which exist between the coalitions and their members, by contrast, represent complete exchange relationships. The members pay dues and demand that their association support them, and represent their interests. These interests include contractual agreements at the collective level to secure the individual demands as well as financial support during industrial conflicts. (Figure 1 gives an overview of the employer-employee relationships.)

P: Pledges, D: Demands Figure 1: Employer-Employee Relationship

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3. Non-Conflictive and Conflictive Interaction The employer-employee relationship on the individual level is established throught the employment contract the variability of which is limited through labour legislation, tariff agreements at the collective level, and often through agreements with the employees' representatives in the enterprise. Within this framework, the employer may specify the obligations of the employees by directing them. Exercising the right to direct serves the coordination of task fulfillment, which in turn includes the distribution of authorities, and the specification and securing of task completion processes. Coordination can occur in a non-conflictive interaction in which authorities are distributed and accepted, tasks are allocated and assumed and supportive instructions are given at the workplace. Non-conflictive interactions can also occur between employers and the employees' representatives within the enterprise, as it occurs in the event of mutual informing, hearing and consultation. Such non-conflictive interactions can also occur between employer associations and unions as well as between these associations and their members. Coordination occurs as a conflictive interaction whenever incompatible demands and pledges are made at the individual level, and it is not reacted to either by adaptation or by terminating the relationship which is jeopardizing their goal realization process (policy revision). In this event coordination involves goal securing activities (conflict handling), which may be counteracted by the goal securing activities of the employees in their effort to reduce the jeopardy with which their goals are confronted. Conflictive interactions may also occur at the other aforementioned levels. Non-conflictive interactions are to be analyzed primarly under the technological aspect of coordination4. By contrast, the analysis of conflictive interactions is to be performed under consideration of the politological aspect of coordination, with which the question of conflict recognition and handling is emphasized. Beyond that, the economic aspect, which emphasizes the financial effects, is of particular importance for both types of interaction. The integration of these economic and politological aspects is the concern of the Business Politics research approach 5 . This approach emcompasses the conflictive interactions of the entire business sector, and thus includes the conflictive interactions in the employer employee relationship.

4. The Two Causes of Conflict Emergence The individual exchange relationships between employers and employees, the individual-collective relationships between the associations and their members, and the collective exchange relationships between the employers' associations and the unions are all based on mutual demands and pledges and thus on mutual expectations of fulfillment. If conflicts are to be defined as an opposition between individuals or groups which are latent (unperceived by both actors), potential (perceived by only one actor) or manifest

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(perceived by both actors)6, then exchange relationships are conflictive whenever the adversaries have diverging opinions regarding the mutual pledges and demands. The essential precondition for successful conflict handling is the detailed ascertainment, not of the extensive, but rather of the immediate causes for a conflict, which are centered in the individual sphere of the opposing actor. An exchange relationship, which has been initiated as the result of a rational goal setting process7, is that which has been determined to be the optimal alternative by each exchange partner. Each partner establishes his optimal alternative on the basis of an amalgamation and comparison of values, which are assigned to the consequences of each alternative and each demand and pledge.The decision regarding the initiation and maintenance of the exchange relationship is thus based on the expected consequences and be based on the consequence-values. The former may be rest on experiences or on general statements of regularity, while the latter represents the subjective perception of the expected consequences within the value system of the individual. Thus, the analysis of exchange conflict emergence can be limited to the examination of two and only two causes of conflict: the disadvantageous realization of expected consequences and the disadvantageous alteration of consequence values (Figure 2). Following the aformentioned definition of conflict, these can be latent, potential, or manifest.

(1) Direct causes of conflict emergence:

Disadvantageous realisation of expected consequences

Disadvantageous alteration of consequence values

(2) Differentiated by exchange components:

Insufficient fulfillment of ones own demands

Insufficient fulfillment of ones own demands

(3)

Brought about by internal: external: events

Excessive claims to ones own pledges

Excessive claims to ones own pledges

Misconceptions

Changes in ones expectations

Breach of agreement by the adversary

General change of values

Figure 2: Causes of Conflict Emergence

The disadvantageous realization of expected consequences can be the result of insufficient fulfillments of ones own demands or of excessive claims to ones own pledges. Both can be brought about either by a misconception or by the exchange partner's breach of agreement. Examples which can be cited in this context include situations in which an employee expects a certain voluntary premium, or predetermined salary, which he, however, does not receive, or such instances in which the required work performance is greater than the employee expected, or greater than was agreed upon. The exchange relationship may become conflictive if the employee does not perform as well as the employer expected, or as the employee agreed to, or if the decision sharing which the employer agreed to have to some limited extent is taken advantage of more than expected by the employer or than agreed upon between the employer and the employee.

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The second cause for exchange conflicts is the disadvantageous alteration of predetermined consequence values which can also be brought about by an insufficient fulfillment of ones own demands or by excessive claims to ones own pledges. The reasons for this are, however, either changes in expectations or general changes in values8. The exchange relationship can become conflictive for the employee, because the salary, which was agreed upon no longer meets his expectations or is no longer adequate in the face of rising living costs or because it is becoming increasingly difficult for the employee to bring his performance to par due to his age, or because work morale has generally declined. For the employer, the disadvantageous alteration of consequence values may result from an increase in his expectations regarding his performance requirements, or from a general increase in work morale. The exchange relationship may also become conflictive due to it becoming increasingly difficult to pay the salaries which he agreed to because of a declining business prospects or because the general salary level has decreased. Conflict emergence in the incomplete collective exchange relationship between employer associations and unions is associated with a particularity: the event which triggers the conflict may be related to either of both conflict causes on the individual or collective level. In the first instance, the associations pull the conflicts which emerge between their respective members to the collective level; in the second, the mutual direct demands and pledges of the associations conflict. In both instances, the conflict between the associations can lead to conflicts between the associations and their members. The two aforementioned conflict causes can bring about conflict regarding each exchange related binary set of demands and pledges. Thus an exchange relationship can be totally conflictive. It can, however, also contain elements of consensus. This may even be the case when one of the parties is at an exchange advantage. The relationships between these elements can be portrayed by means of a conflict-consensus-matrix9, which should simplify the process of ascertaining the advantages and disadvantages of an exchange relationship. By entering threshold values into the matrix, which represent the latitude of acceptance, the rationality behind goal securing and conflict handling actions can be increased.

5. The Revision of Primary Goals vs. the Handling of Conflict The emergence of an exchange conflict upon transgression of an acceptance threshold presents the adversaries with the problem of deciding whether to revise their jeopardized goal or to secure the actualization of their goal by means of conflict handling. Those goals, which are either to be revised or to be secured, consist of the demands and pledges which have been directed toward the adversary. Such goals, which are termed policy goals10, are to be distinguished from those which are related to securing or conflict handling actions. With regard to the two components of policy goals, the

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revision of policy goals can either entail reducing demands or increasing pledges on the one hand (adaptation) or the termination of the exchange relationship (exit) on the other. Thus the dichotomy which is often associated with possible reactions to conflict (i.e. exit and voice) must be modified: exit is only one of two ways in which policy goals may be revised11. If the revision of a policy goal is to be undertaken, not by accepting disadvantageous changes in pledges or demands (adaptation), but rather by terminating the exchange relationship (exit), this measure is also linked to the assumption that it is possible to initiate a new exchange relationship. At the collective level this possibility does not exist. Negotiations can only be interrupted. If the interruption of negotiations is considered possible at the individual level, the transaction costs12 must be deducted from the expected benefits of the new relationship and then be compared with the disadvantages which could be associated with maintaining the current relationship. It is not until this comparison has been completed, that a rational decision regarding the type of policy goal revision is possible. If the possibility of conflict handling (voice) within the current exchange relationship exists, a choice is to be made between the consequences of those alternatives which may be used to handle the conflict. Thus, the actor is faced with a special type of goal setting process which pertains to securing of primary goals, and shall be termed political goal setting process. The ultimate goal of conflict handling is to confine the adversary's discretion in order to secure the actualization of ones own policy. During the course of this (political) goal setting process, the possibilities of deactivating conflicting discretion, the complimentary and competing effects and the costs, all of which are related to goal securing alternatives, must be taken into consideration. Assuming rational behavior, the last step in the process of deciding between policy revision and conflict handling encompasses the comparison of the results of both, the policy-related and the political decision processes, as well as the decision regarding the most favorable reaction to the exchange conflict.

6. The Two Basic Methods of Conflict Handling The many goal securing alternatives which are discussed as methods of conflict handling in related literature 13 , can be devided into two broad categories: the delimitation of the adversary's goal setting process (goal delimitation) and of his environment (environmental delimitation). These reflect the two areas which can be influenced, so as to confine an adversary's discretion (Figure 3). The delimitation of a goal setting process involves taking communicative influence on the adversary with the purpose of preventing his goal setting or goal actualizing process. The alternatives related to goal delimitation are persuasion, manipulation, and the conditional announcement of positive or negative sanctions. Persuasion encompasses the conveyance of information to ones best knowledge, and is assumed to be suited for

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environment delimitation

correcting the adversary's decision. By contrast, manipulation, which may at times be difficult to distinguish from persuasion, entails a conscious effort to dilute, overload, distort, or falsify the information conveyed to the adversary. With the conditional announcement of sanctions, the adversary is offered improved consequences in the event that he complies or is threatened with negative consequences in the event of his non-compliance. While persuasion and manipulation can be aimed at all phases of the adversary's goal setting process, the conditional announcement of sanctions can only be directed at the phase in which the adversary analyzes the consequences of his alternatives. The effectiveness of a conditional sanction announcement is subject to certain limitations which result from the admissibility of the announced sanction. If the adversary is not prepared to receive the information which is to be directed towards him, it is necessary to attract his attention before the actual goal delimitation process can begin. This process may be considered successfully completed, when it has resulted in a sufficient restraint of the adversary's conflicting discretion. While the adversary is still at liberty to choose between alternatives when being subjected to goal delimitation, the delimitation of an environment factually limits the adversary's scope of action. The environment components which serve this purpose and can be altered through delimitation actions are the public opinion, legislation and jurisdiction, contracts, cooperation readiness on behalf of the adversary's opponents, organizational structures, and physical factors (i. e. mobility, and access and availability constraints).The actions of environmental delimitation can either be indirect or direct. Indirect actions are aimed at the goal setting processes of third parties who, in some way, limit the adversary's environment. These actions are connected to the intent of having them impose restrictions on the adversary. They include influencing puplic opinion, legislation and jurisdiction, and the opponents' readiness to cooperate. By contrast, direct actions of environmental delimitation do not progress through others.

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They are focussed on the alteration of those environmental components which directly constrain the adversary's scope of action. This type of delimitation includes exercising legal rights, limiting ones own readiness to cooperate, the alteration of organizational structures and physical factors. As in the process of goal delimitation the process of environmental demarcation may be considered successfully completed, when it has resulted in a sufficient restraint of the adversary's conflicting discretion.

7. The Determinants of Employer Discretion The previous differentiation between policy goals and political goals also makes it possible to differentiate discretion. The discretion of the employers as well as of the employees may be devided into sectors which pertain to policy and political activities. Bearing the conference theme in mind, the analysis of employer and employee discretion which - at least in part are mutually dependent - will, in the following, be limited to the elaboration of those determinants which confine the two sectors of employer discretion. The policy activity sectors of employer discretion are confined by environmental components which were developed above and the policy goal systems of the employees. As environmental components, legislature and jurisdiction, tariff agreements, and contracts confine the policy activity sector on basis of legal categories (property rights of the policy sectors)14. Moreover, the remaining environmental components can also have constraining effects. Within the relatively stable framework those constraints which are derived from the employees policy goal systems through pledges and demands can in general be viewed as being variable if demands on the one hand and pledges on the other can be substituted and the demands are not absolutely constrained, but rather constrained only relative to the fulfillment of the demands. The knowledge of the employees' policy goal systems, which are influenced by personal factors and also by the societal value system as well as by union goals in the event of union membership, simplifies the assessment of their willingness to adapt. If the employees are willing to adapt even if this entails a deterioration of their own situation, then the policy activity sector of the employers' discretion can be expanded to that extent. However the side-effects may in turn lead to constraints. Examples for such side-effects are the deterioration of the work relationship or the organizational climate. If the employees do not react by adapting, but rather by the discontinuation of the work relationship, the employer is disengaged from his contractual obligations. He must, however, accept transaction costs in the policy activity sector in the event that a new employee must be hired. The employers' possibility to expand the policy activity sector of his discretion by firing an employee is usually also limited by all protection regulations and perhaps by his obligation to render severance pay. The political activity sector of employer discretion becomes relevant when a conflict is to be handled within an existing work relationship. Like the policy activity sector, the

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political activity sector is also constrained by legislature and jurisdiction, tariff agreements and employment constracts. In comparison to the effect of these environmental components on the policy activity sector, they turn to the political activity sector the handling possibilities for securing the realisation of policy goals (property rights of the politics sector). Beyond these components, public opinion and cooperative relationships with solidarity effects on the employers side may also have a considerable influence on the constraints of the political activity sector. Transaction costs which in this context arise as transaction costs of the political activity sector (delimitation costs) and which are set in relation to the positive effects of a successful attempt to secure the policy activity sector, also have a constraining effect. While the policy activity sector of the employer's discretion is also delimited by the policy goal system of the employees on the basis of the employer-employee exchange relationship, the employer's political activity sector remains unincumbered by the employees' political activity sector since there is no clear mutual bond at this level. Apart from these general constraints of the politics activity sector, specific constraints may arise depending on the reaction of the delimited actor. This goal delimitation will remain without effect, if the adversary refuses to accept information which is ment to persuade or possibly manipulate or to announce sanctions. This also holds true for the goal delimitation of a third party within the framework of an indirect environmental delimitation of the employees, if the third party refuses to accept information. This kinds of constraints to the political activity sector do not effect the actions related to direct environmental delimitation, since they do not involve the assistance of third parties or require the acceptance of information by the adversary. Because of asymmetrical developments in labour legislature, the employer's possibility of applying this form of delimitation has been reduced 15 . Beyond this, the negative side-effects, particularly those of the direct forms of delimitation, like the above mentioned deterioration of individual work relationships of the deterioration of the organizational climate should be taken into consideration. These side-effects make advisable to refrain from utilizing this form of delimitation. Taking the effectiveness aspect of goal and environment delimitation into consideration, the constraints must also be viewed with regard to their dependence on the type of conflict cause. Conflicts attributed to pledges which were not kept, expectations which were not fulfilled increased expectations or changes in societal values make different measures necessary and in turn lead to specific constraints of the political activity sector. Policy activity sectors and political activity sectors can also be differentiated at the collective level of the employer employee relationship and with regard to the coalition members. In the same way the discussed discretion constraints apply at this level.

Notes 1 For the interpretation of the employment relationship as membership in the enterprise see Sóllner (1984: 246). 2 For the critique of the interpretation of the employer employee relationship as an exchange relation-

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15

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ship see Nutzinger (1978). Hie weakness of this critique are discussed in Dorow/Weiermair (1984: 204). e. g. see Ruhl (1974) and Seiwert (1979). For the technological instrumentarium of coordination see Kieser/Kubicek (1983: 103-132). For details regarding this approach see Dlugos (1981b and 1984), Dorow (1982). Dahrendorf (1962: 201) differentiates between latent and manifest differences and includes intrapersonal differences. Model of a rational goal setting process: Dlugos (1981a: 655). Dlugos (1981a), Dorow (1981). Dlugos (1981a: 658). For a detailed account of the difference between policy goals and political goals see Dlugos (1981). In the following, the term "political" will be used as if pertains to politics, but not to policy. For the exit/voice approach see Hirschman (1974). Hirschman regards "exit" as an economic and "voice" as a political reaction to conflict. For the types of transaction costs see Picot (1982: 270-273). See Williamson (1979) for the transaction cost approach. Hellriegel/Slocum/Woodman (1986: 496-507). For the basic contributions to the property rights approach see Furubotn/Pejovich (1974). With the following differentiation of activity sectors which goes beyond their differentiation, the various categories of property rights as elements of design become registrable. See Zander (1987) on the possibilities of the cooperative resolution of conflict.

References Dahrendorf, R. (1962): Elemente einer Theorie des sozialen Konfliktes. Gesellschaft und Freiheit, R. Dahrendorf (Hrsg.) München 1962 Dlugos, G. (1981a): The Relationship Between Changing Value Systems, Conflicts, and ConflictHandling in the Enterprise Sector. Management Under Differing Value Systems. Political, Social and Economical Perspectives in a Changing World. G. Dlugos and K. Weiermair (Eds.) in Collaboration with W. Dorow. Berlin, New York 1981: 651-676 Dlugos, G. (1981b): Von der Betriebswirtschaftspolitik zur betriebswirtschaftlich-politologischen Unternehmungspolitik. Die Führung des Betriebes. Herrn Prof. Dr. Dr. h. c. Curt Sandig zu seinem 80. Geburtstag gewidmet. M. N. Geist und R. Köhler (Hrsg.) Stuttgart 1981: 53-70 Dlugos, G. (1982): Beziehungen zwischen Wertwandel, Konflikt und Konflikthandhabung im Unternehmungssektor. Bedürfnisse, Werte und Normen im Wandel. Bd. 2: Methoden und Analysen, H. Stachowiak zusammen mit T. Herrmann und K. Stapf (Hrsg.) München u. a.1982, p. 293-319 Dlugos, G. (1984): Die Lehre von der Unternehmungspolitik - eine vergleichende Analyse der Konzeptionen. Die Betriebswirtschaft, 44: 187-305 Dorow, W. (1981): Values and Conflict Behavior: An Exploration of Conceptual Relationships. Management Under Differing Value Systems. Political, Social and Economical Perspectives in a Changing World. G. Dlugos and K. Weiermair (Eds.) in Collaboration with W. Dorow. Berlin, New York 1981: 677-702 Dorow, W. (1982): Unternehmungspolitik. Stuttgart u. a. 1982 Dorow, W. und K. Weiermair (1984): Markt versus Unternehmung: Anmerkungen zu methodischen und inhaltlichen Problemen des Transaktionskostenansatzes. Betriebswirtschaftslehre und

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Nationalökonomie. Wissenschaftstheoretische Standortbestimmungen und Perspektiven, G. Schanz (Hrsg.) Wiesbaden 1984: 191-223 Furubotn, E. G. und S. Pejovich (Eds.) (1974): The Economics of Property Rights. Cambridge, Mass. 1974 Hellriegel, D., Slocum, J. W., and Woodman, R. W. (1986): Organizational Behavior. Fourth Edition. St. Paul et al. 1986 Hirschman, A. D. (1974): Abwanderung und Widerspruch. Tübingen 1974 Kieser, A. und H. Kubicek (1983): Organisation. 2. Aufl., Berlin, New York 1983 Nutzinger, H. G. (1978): The firm as a social institution: The failure of the contractarian viewpoint. Participation in Betrieb und Gesellschaft. I. Backhaus, T. Eger und H. G. Nutzinger (Hrsg.) Frankfurt a.M., New York, 1978: 45 Picot, A. (1982): Transaktionskostenansatz in der Organisationstheorie: Stand der Diskussion und Aussagewert. Die Betriebswirtschaft, 42: 267-284 Raiser, T. (1969): Das Unternehmen als Organisation. Kritik und Erneuerung der juristischen Unternehmenslehre. Berlin 1969 Rühl, G. (1974): Menschengerechte Arbeitsplätze durch soziotechnologische Systemgestaltung. Qualität des Lebens am Arbeitsplatz. Schlaffke, W., G. Rühl und R. Weil (Hrsg.) Köln 1974 Seiwert, L. (1979): Was wollen die Mitarbeiter. Personal, 4: 149-154 Söllner, A. (1984): Grundriß des Arbeitsrechts. 8. Aufl., München 1984 Williamson, O. E. (1979): Transaction-Cost Economics: The Governance of Contractual Relations. The Journal of Law and Economics, 22: 233ff. Zander, E. (1987): Chances for Flexibility in Cooperation between Company Management and Workers Council. Management under Differing Labor Market and Employment Systems. G. Dlugos, K. Weiermair, W. Dorow (Eds.) in Collaboration with F. C. Danesy. Berlin, New York 1988, p. 395

C. Management and Labour Market Systems

Work Ethics in Transition Burkhard

Striimpel

Abstract Time series of survey data indicate that German workers are disengaging from their work. Over the last ten to twenty years, evidence of decreasing work satisfaction, stronger preferences for leisure over work, and a weakening of the traditional work ethic has been accumulating. This trend has been more pronounced for blue-collar workers and low-level white-collar workers, for young persons, and for people employed in the primary and secondary sector. Some explanatory hypotheses are proposed and tested against the evidence. The consequences of the changing orientation towards work and of the underlying environmental changes are being studied on two levels: productivity and the well-being of the labor force. Adjustment strategies of business are discussed.

Introduction In order to be understood, changes in work ethics must be seen in the general context of economic and social trends. The comparison over the medium term of several decades is particularly appropriate for this. In the fifties and sixties Western nations created the basis for mass prosperity, which was supplemented somewhat later by the expansion of the welfare state. The period of unprecedented post-war growth rates was followed by the recent twelve years of "économie problématique" introduced by the oil shock. The subsequent decade failed to satisfy the standard macro and micro economic goals and aspirations. Successive generations within the present working population acquired their formative experiences as consumers, workers, or organizational operatives under entirely different conditions. People in the generation born before 1935 had grown up with war, poverty and the concomitant authoritarian values. For those born later, the satisfaction of basic material needs was a matter of course. Civic participation and a broad range of personal lifestyles to choose from were never in question. Basic values changed in the direction of permissiveness, personal autonomy, and hedonism (Inglehart 1977). The postwar decades witnessed radical demographic and economic changes that reshaped the situation of the private household in western nations. The average age at which people married rose, the number of children in the family decreased, and Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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married women joined the labor force. The father as the sole breadwinner of the family became the exception rather than the rule. Married women, husbands with working wives, and singles are now in the majority. Occupational structure has changed decisively. In 1950 62 % of the labor force was employed in the primary or secondary sector (agriculture, mining, and manufacturing). In 1980, this was true for only 38 % of the workers. Conversely, the share of service employment increased. The educational revolution resulted in a generation gap. In 1960, 76 % of the youngsters in the Federal Republic of Germany had no formal education beyond primary school. By 1980 that figure had dropped to 46 %. The share of students completing secondary school or college rose from 24 % to 54 % over the same period. The effects of the oil crisis were significant, too. The standard of living was maintained, even somewhat increased, but for the first time in twenty years young people were confronted with a difficult situation on the labor market. Overemployment abruptly turned into prolonged underemployment, to which there is still no end in sight. In this situation unemployment statistics are only the tip of the iceberg of the underlying condition. Many employed persons must accept their second or third-choice jobs or apprenticeships and must continue to tolerate unsatisfactory work arrangements rather than switch to more preferred lines of work, as they would do in better times.

1. Hypotheses From this admittedly sketchy description of changes in the composition of the labor force and its economic and social situation, four hypotheses for changes in the attitude toward work can be derived - alienation, structural change, threat of job loss, and postmaterialism. Each hypothesis highlights different underlying phenomena. The first hypothesis, that the employed person has become increasingly alienated by technologically more complex work settings based on the division of labor, is rooted in Marxist tradition. The second hypotheses, which springs from the aforementioned changes in the sectoral and educational composition of the labor force, is that the rising share of service occupations has made work physically more comfortable and more communicative. The third hypothesis postulates that the loyalty felt by employed persons toward their work increases if they are heavily dependent on their present jobs. If, in turn, employed persons perceive an improvement in conditions on the labor market when other jobs are within reach, then they can better afford to criticize their work and their employers and, in a psychological sense, can afford greater disengagement than at times when the demand for labor is low. The proponents of this hypothesis would expect loyalty to one's work and employer to have diminished until the mid-1960s, when there was a labor shortage, and to have increased later. Finally, the postmaterialism hypotheses postulates that a change in orientation to work results from changing demands emanating from changes in the ideologies, life goals, and values of the employed.

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2. Findings The survey results presented in the following tables and figures were obtained in the international comparative project entitled "Jobs in the 1980s," the G e r m a n c o m p o n e n t of which was directed by Elisabeth N o e l l e - N e u m a n n , Michael v o n Klipstein, and this author (Yankelovich 3 et al. 1984, N o e l l e 2 - N e u m a n n and Striimpel 1984, and v o n Klipstein 1 and Striimpel 1984, 1985). While the indicators of change rest o n different con-

60

62

6t

66

68

70

72

K

76

78

90

82 years

Figure 1: Germany, 1958-1982: Satisfaction with Work, with Income, with Life Generally The data from this and the subsequent Charts and Tables is based on representative cross-sections of German adults, each sample consisting of at least 1000 persons in the Federal Republic of Germany (incl. West Berlin), collected by the Institut fur Demoskopie Allensbach, unless otherwise noted. Question wording see Figure 4.

62

61

66

66

70

72

7t

76

78

60

82 years

Figure 2: Changing Preferences for Leisure over Work 1961-1983 (German Workers) Question: "Which hours do you like best - the hours while you work or the leisure hours, or do you like both?"

Burkhard Strümpel

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100 90 .e o .o -2O CJ

Managerial, professional

70

3 "3.

60

o ?

50

JD IE 5

1.0

C a) o Si

Self-employed

80

Clerical, white-collar Craftsmen, foremen Unskilled, blue-collar

30 20

28 % 1.5 maximal difference

10 1111111111111111111111111 0 1950 1955 1970 1975 1980

years

Figure 3: Preference for Leisure over Work 1 9 6 3 - 1 9 8 2 Question: "Which hours do you like best - the hours while you work or the leisure hours, or do you like both?"

Figure 4: Discretion on Job (Self-Assessment) Question: "To what extent are you able to apply your work experience and your capabilities and strenghts to your present job? 1 on this card would mean that you are able to apply your work experience and your capabilities and strengths to a very limited extent, 11 would mean to a very great extent." * (low discretion = 1 - 3 on scale)

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ceptual and methodological efforts, the following conclusions seem to be relatively unequivocal. First, we found a long-term decline in the loyalty of workers toward their work as evidence for decreasing satisfaction (see Figure 1), a shift toward leisure interests (see Figure 2 and 3), a weakening of the authority of the work role (see Table 1), a reduction of subjectively perceived freedom and participation in on-the-job decision-making (see Figure 4), and a rising share of workers who preferred more leisure over more pay (see Table 2). Second, we found the trend toward disengagement to be dominated by the young age cohorts (Figure 5). They are in a phase of adjustment and are confronted with the necessity to adapt their needs and aspirations (which are shaped by the prosperity of their elders) to the reality of the labor market and the workplace. They are the ones most affected by the dark side of mass unemployment. They are the ones who must bear the brunt of the adjustment to today's precarious economic environment, not the old cohorts, many of whom are protected by permanent employment contracts. Third, the described changes have affected different parts of the socio-economic spectrum to different degrees. The decrease in job satisfaction or perceived decline in discretion seemed to be less pronounced among employed persons with high occupational status than among their lower-ranking colleagues. It is the bulk of the blue-collar workers and lowerwhite-collar employees who appeared to have lost some of their enthusiasm for work (Figure 6). What is behind this schism between people and groups of different occupational status? Are we witnessing a new distributional conflict centering, this time, not around money but rather around the quality of employment? Table 1: Commitment to Work 1982/83 (1967) (Workers in 4 nations) W. Germany in % A B

(1967)1982 (54) 41 (33) 41

Age A B

-29 32 50

USA

Sweden

68 24

30-54 44 39

5558 27

-29 61 30

Great Britain

56 36 30-54 70 22

5573 18

-29 45 45

66 30 30-54 58 33

5555 38

-29 57 39

30-54 69 28

5574 19

Occupation

A B

Whitecollar worker

Bluecollar worker

Whitecollar worker

Bluecollar worker

Whitecollar worker

Bluecollar worker

Whitecollar worker

Bluecollar worker

47 34

34 53

72 20

61 29

64 24

43 51

80 17

54 41

Question: "Here are two persons talking about their job. A says: I am fully committed to my work and often do more than I am required to do. My job is so important to me that I sacrifice a lot for it. B says: In my job I do what I am asked to do: nobody can complain about me. But I don't see the point of extra exertion. After all, my job is not that important to me. Which of the two says what you also tend to think, A or B?" Source: International survey "Jobs in the 80's" Yankelovich et al. 1984

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Table 2: Preferences for More or Less Working Time in Relation to Earnings German workers 1982 More Working Hours Preferred Same as now Less Working Hours Missing/Don't Know

1968

8% 61% 27% 4%

40% 54% 6%

100%

100%

-

Question (1982): "Is your present number of working hours what suits you best, or would you prefer longer or shorter working hours? We presume, that payment would increase or decrease to a commensurate degree." A. Current weekly working hours OK. B. Longer weekly working hours better. C. Shorter weekly working hours better. Don't know. Question (1968): "There are people who would prefer to work longer hours if they would be paid accordingly. Others would prefer to work fewer hours even if they earned less. How about you?" Source: International survey "Jobs in the 80's", Germany 1982, Israel 1982 (1982) Katona, Striimpel, and Zahn 1970, p. 221 (1968)

F o u r t h , W e s t G e r m a n y s e e m s t o o c c u p y a special p o s i t i o n in t h e rank o r d e r of various W e s t e r n c o u n t r i e s . T h e G e r m a n s a p p e a r t o b e particularly critical t o w a r d w o r k (Tab l e 1 - 1 in Y a n k e l o v i c h et al. 1985, p. 19 a n d t h e c o m p a r a t i v e data p r e s e n t e d t h e r e i n ) . O n e of t h e m a n y e x a m p l e s of this attitude is t h e distribution of t h e a n s w e r s t o t h e

60 and older ¡.5-59 years 3 0 - U years 16-29 years "62

6t

66

68

70

72

74

76

78

80

82 years

Figure 5: "Commitment" or "Pursuit of Pleasure" Question: "Two people are talking about life: The first one says: I want to enjoy my life and don't want to work more than I have to. You know you only live once and the main thing is that you get something out of your life. The second one says: I consider my life a commitment for which I live and which will take all my strength. I want to work hard and get somewhere even if it will be difficult for me. Which of the two is right in your opinion?"

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60

m

unskilled, blue collar foremen, craftsmen

r r ^ wwhhiittee--ccoollllaarr,, clerical eg

1973

1982

managerial, professional

years

Figure 6: Job Satisfaction by Occupational Status Question: "Are you fully satisfied with your present job (life generally, income), only partly, or not at all?"

question "To what extent do you feel loyalty to your employer?" Not only were the West German responses of loyalty (29 %) fewer than those obtained in Sweden (40 %) and the United States (44 %), the variance of that loyalty between blue-collar und white-collar members of the labor force was wider in the Federal Republik (16 % : 35 %)than in Sweden (35 % : 45 %), and the United States (41 % : 46 %). In short, Germans tend to express less loyalty to their employer and to voice more complaints about their treatment by superiors than employed persons in other countries do.

3. Interpretation How can these findings be explained? I shall examine each of the four hypotheses in turn. First, the alienation hypothesis, according to which working conditions have deteriorated, does not seem to be supported by the data. Take, for example, the answers given to the question »How would you compare your present working conditions with those ten years ago? Has there been an improvement, a deterioration, or no change?" Favorable responses were elicited from 80 % of those who had been in the labor force ten years ago. Most of those respondents had experienced technological changes in their work and described their present work as more responsible (60 %) and cleaner (55 %). Only 25 % complained that their work had become more monotonous as a consequence of technological change. Most of the respondents did not use technological change as a whipping-boy for the poor spirit permeating the work sphere. For most of the people interviewed, work has become more interesting and comfortable, albeit not less stressful. Yet there is an important exception: unskilled blue-collar workers. To be sure, even these low-status workers report about more cleanliness on the job and about working

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conditions that are less physically demanding. But half of them - as opposed to only one-fifth of all other employed persons - described their work as having become more monotonous through technological change. Only one-quarter of the unskilled workers, as compared to two-thirds of the other occupational groups, reported that work has become more interesting. In other words, the alienation hypothesis appears to have some merit for explaining the drastic reduction in the work involvement of the lower echelons. The hypothesis linking the growth of the service sector to the change in work motivation leads one to presume an improvement in the commitment to work. One is therefore tempted to discard the hypothesis, but that would be premature. Although it fails to explain the decline of work involvement, our data suggests that the identification with work has been weaker in the shrinking sectors (agriculture, mining, and manufacturing) than in those sectors whose importance has increased both absolutely and relatively in recent decades. Workers in manufacturing are clearly less loyal than those in the service sector (Striimpel 1985). Had employment in the manufacturing sector not declined over the last thirty years, work commitment would have diminished even more. Similar inferences may be accurate for the size of enterprises as well. The share of employment in large enterprises offering lower-quality employment has increased. At least the cross-section data is consistent with a line of thought linking the added concentration of the economy to the growing mismatch between individuals and their work. The third hypothesis, which postulates work satisfaction and high loyalty to work in periods of underemployment, also appears to be incompatible with the evidence at first glance. After all, there are millions of unemployed people and, as the workers see it, there is a precarious labor market. Signs indicating an increase in work satisfaction have been only very recent. Nevertheless, with unemployment reaching and surpassing the 10 % mark in several regions of West Germany, the threat of losing one's job has become so acute that the very fact of having a job now appears to strengthen one's loyalty to work and employer (see Figure 7). 80r

0 201 1 io01 I I I I I I I I I I I I I 60

62

6t

66

68

70

72

I I I I I I I ' 7t

76

7B

80

62 years

Figure 7: Job Satisfaction by Age 1962-1983 (Percent fully satisfied) Question: "Are you fully satisfied with your present job, only partly, or not at all?"

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Lastly, let us examine the postmaterialism hypothesis. Repeated surveys ranking the importance of various job attributes indicate that the importance of "intrinsic" job characteristics such as interesting work and pleasant relations with one's boss and fellow workers has increased at the expense of "extrinsic" material rewards. Moreover, analysis has revealed that intrinsic rewards - particularly those of having a say in decisions affecting one's workplace, receiving recognition, being able to use one's abilities, and being protected from physical hardships and hazards - are more highly correlated with job satisfaction and other indicators of job involvement than are extrinsic rewards such as wages and fringe benefits. Table 3 suggests that a new generation of workers is approaching work with a novel mix of aspirations generated by a changed Zeitgeist emphasizing postmaterialist goals and life-styles (Inglehart 1977) and transmitted by an extended period of full-time formal education. Table 3: Objectives of Work in W. Germany 1973-1983 Most important demands

unskilled blue-collar workers

% High income Interesting/responsible work Job security

skilled blue-collar workers

%

lower level white-collar

%

upper level white-collar

%

all workers

%

1973

1983

1973

1983

1973

1983

1973

1983

1973

1983

69 58

47 67

74 73

55 76

63 78

47 81

57 76

53 89

67 71

50 79

78

85

77

85

77

85

77

75

77

84

Source: Allensbacher Archiv, IfD-Survey 2096, 4020 Question: "There are various criteria according to which a job can be judged. Several of these are listed on this card. Please select the three items that are most important to you."

4. Consequences The data and interpretations presented here stress the mismatch between the Germans and their work. Are these results plausible? Is it possible that West Germany, one of the leading economic powers, a nation with an astounding export record, a country admired for its high-quality products and its peaceful industrial relations, trails so far behind with respect to the motivation and loyalty of her workers? The statistics show that the economic growth of West Germany since 1970 has not exceeded that of other large industrial countries. The Federal Republic ranks somewhat lower than France, Italy, and the United States and is far inferior to Japan. By contrast, Germany's productivity is far higher than that of other industrialized countries. Correspondingly, the number of jobs has been decreasing. The Federal Republic of Germany is the only large industrialized country whose labor market has failed to absorb the baby boom of the early 1960s through an increase in the number of

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jobs. While employment in the United States rose by 29 % between 1970 and 1979, the labor force in the Federal Republic of Germany shrank by 4 %. Productivity, however, increased only 8 % in the United States between 1973 and 1980 as compared to 26 % in West Germany. It is easy to achieve high rates of increase in productivity by eliminating jobs with low productivity. It appears that the impressive record of productivity cannot be isolated from the evidence that the overall number of jobs has declined. It must also be remembered that German industry is sustaining high levels of productivity and above-average rates of growth precisely because German employers are defusing the problem of morale by pursuing strategies designed to limit the impact of negative work attitudes on productivity. They substitute machines for workers and take special care to hire those workers least affected by postmaterialist values. Recent studies of German industry suggest that life-style and outward appearance, in addition to skill level and past work experience, have become all-important criteria in hiring decisions. The person who has deviated from the usual pattern of career development by, say, interrupting employment to travel around the world or who expresses interest in a temporary reduction of hours for family reasons, faces discrimination in personnel selection (Hohn and Windolf 1984). The key role of foreign workers (mainly Yugoslavs and Turks) in the German economy points in the same direction. The more one succeeds in replacing the most disappointed and alienated workers with machines or foreigners, the less impact the problem of declining loyalty towards work and employer will have on the economy. It would be a mistake to blame employers exclusively for the failure to maintain high levels of employment and motivation within the work force. Rather, the special German version of the mismatch between values and jobs is more deeply rooted than can be explained by insensitivity on the part of management. Germany may be only the most striking example of the impact that the new expressive values have on industrial economies. Many of the recruits to these values hold the following attitudes: - skepticism about the imperatives of technology and quantitative growth - sympathy for alternative life-styles outside the official economy - alienation not just from work in large organizations but also from mass production and big government organizations - preference for shorter and more flexible working time, even at the expense of income, coupled with considerable sensitivity about the effects on health or workrelated stress. In short, the peculiar combination of affluence and dearth of opportunities in the German labor market has promoted tendencies of withdrawal and disengagement from full-time paid work. Work is necessary, important, perhaps even interesting, but it must conform to very strongly held notions about a satisfying, meaningful, and autonomous life-style, unencumbered by the economic imperatives of the work role. It would be false to deplore the quest for a "new balance" between the spheres of paid work and leisure or autonomy. Rather, the urgent tasks of redistributing workers from the fulltime employed to the unemployed can only be facilitated if many of the former feel "overemployed" and materially fairly saturated. And the chance to engage in satisfying

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Table 4: Working Hard vs. Taking Care on Oneself (German Workers) All workers "I prefer to make every effort during my working years so as to achieve as much as possible" "I prefer to take care of myself and not strain myself so much at work, so as to stay healthy and enjoy my old age."

(%)

(%)

18-29

30-44

45-59

60 and over

49

44

49

53

63

27

29

27

26

21

(%)

(%)

(%)

Source: Allensbach Archives, IfD survey 4135, May 1983

and productive leisure-time pursuits is greater as long as the work role uses up less time and energy (see Table 4). This interpretation of the data is consistent with the peculiarity of Germany's industrial relations. German workers failed to insist on wage increases matching the gains in productivity. To foster rapid reconstruction of the German economy, unions were long able to practice wage restraint without incurring the wrath of the rank and file. The proposal of the Minister of Commerce at that time, Schiller, to increase wages and salaries by 5 % as a pump-priming measure during the recession of 1967 failed to win support even from would-be beneficiaries. In 1984 the last wave of strikes focused on demands for shorter work hours rather than for higher wages. Stereotypes like "we are living beyond our means" or "the next depression is just around the corner" are testimony to a pessimistic, almost apocalyptic frame of mind (Katona and Striimpel 1978). Uncertainty is generating restraint in consumer demand, which has lagged behind income increases. The savings rate for disposable income has increased drastically over the last few decades, particularly among low-income groups. What do the particular tendencies toward disengagement by German workers imply for the performance of business? German business in the past has succeeded in overcoming the national penchant for consolidation or even withdrawal. The peculiar reluctance of the Germans to yield to the temptations of consumption and income acquisition has jeopardized neither economic growth nor increasing export surpluses. During the periods of rapid post-war growth, the German economy, thanks to its intensive involvement in foreign trade, was already capable of compensating for the high leisure preferences of German workers by absorbing millions of foreign workers, while lagging consumer demand was supplemented by high and growing export surpluses. At present, the economy is following still another strategy of assuring that the withdrawal symptoms of the German workers do not filter through to the balance sheets: the strategy of drawing on selective hiring practices, labor-saving technology, and, again, relying on foreign workers to fill the jobs not desired by the natives.

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Some steps in this direction merit attention. IBM has entrusted the development of its personal computer to a small autonomous group of engineers and system analysts freed from the usual hierarchical constraints and evaluation procedures. BMW has designed a program of "value oriented personnel policy", attempting to reconcile the exigencies of the organization with the demand for individual options and latitude; it is hoped that workers will be induced by a congenial work environment to strengthen their identification with their work and employer. Even under the present conditions of a comfortable "loose" labor market, seen from the perspective of the employers, the latter would not be well advised to limit their hirings to applicants subscribing to the old-type values of discipline and subordination. It is often the most creative who approaches his work with a high expectation and who reacts through inner resignation, should his expectations be disappointed. It often pays for the employers to generate and extend the leeway for autonomy in solving the work assignments for flexible work schedules. In order to free creative thinking from bureaucratic constraints, it may be appropriate to arrange semi-autonomous workgroups for decentralized work outside of the comprehensive control of the head office.

References Hohn, H. W. and Windolf, P. (1984): Arbeitsmarktchancen in der Krise, Frankfurt am Main: Campus. Inglehart, R. (1977): The Silent Revolution, Princeton: Princeton University Press. Katona, G. and Striimpel, B. (1978): A New Economic Era, New York: McGraw-Hill. Klipstein, M. v. and Striimpel, B. (1984): Der Überdruß am Überfluß - Die Deutschen nach dem Wirtschaftswunder, München and Wien: Olzog. Klipstein, M. v. and Striimpel, B. (Ed.) (1985): Gewandelte Werte, erstarrte Strukturen - Wie die Bürger Wirtschaft und Arbeit erleben, Bonn: Neue Gesellschaft. Noelle-Neumann, E. and Strümpel, B. (1984): Macht Arbeit krank? Macht Arbeit glücklich? München: Piper. Pawlowsky, P. (1986): Arbeitsorientierungen im Wandel, München: Minerva. Strümpel, B. (1985): Arbeitsmotivation im sozialen Wandel, Die Betriebswirtschaft, 45,1 : 42-50. Yankelovich, D . , Zetterberg, H., Strümpel, B., and Shanks, M. (1985): The World at Work, New York: Octagon.

The Inflexibility of Labour-Market Related Institutions Some Observations for Germany Norbert Walter

Abstract While in a narrow sense the unions and the employers' associations and the labour office are responsible for the rigidities, the core of the problems is more deeply rooted in a misguided incentive system imposed by economic policy. A well-established system of subsidies and transfers, financed by a system of high marginal taxes and contributions, reduces the incentives to work in the official economy. A system of bureaucratic rules and controls is assumed to protect the weaker individuals, but it proves to discriminate them. On the basis of this disincentive system for the official economy, the wage policy of unions and employers' associations is not forced to consider market forces. Moral hazard gains ground, leads to overly high wage settlements for weak firms, branches, regions, and for workers with insufficient qualifications. Firms confronted with wages above the equilibrium level emigrate to low wage countries, rationalize production, or reduce output, i.e. domestic employment is pushed artificially down. High tariff settlements spread to non-union workers and non-organized firms, since wage settlements can be declared official minimum wages by the government. This happens in sectors where unions are weak and firms outside the employers cartel are numerous. Since the barriers to exit from the labour markets have been increased substantially, not only by direct job protection but also as a consequence of a massive rise of payments which are due in case of dismissal, the barriers to entry have increased as well, very much to the disadvantage of the young and those who by accident become unemployed.

1. Introductory Remarks Ten years after World War II Germany seemed to have overcome mass unemployment. After 1955 the number of unemployed fell below 1 million (i.e. less than 5 p.c. of the labour force) and reached a minimum at the beginning of the 1970s. Since then, however, unemployment has increased. The unemployment rate, less than 1 p.c. during Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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the 1960s, rose to almost 10 p.c. in the early 1980s. While this was not even half of the rate of the early 1930s and while the social consequences of unemployment were definitely less dramatic in the 1970s and 1980s compared to those in the Great Depression, unemployment is the most urgent problem of economic policy in Germany.

2. Causes of Unemployment A series of hypotheses are put forward to "explain" the massive increase of unemployment (Soltwedel 1984: 6-22). Since unemployment jumped after the two oil price increases in the 1970s, these events are considered by some as the main causes for the worsening of the situation. Others claim, that the reaction of macro-economic policies, especially the anti-inflation-course, was responsible for the recession and consequently for the slump in the labour market. The shift towards "monetarism" and the phobia against public deficits are believed to be at the core of the problem. Others do not share the demand-side - Keynesian - explanation of the negative trend in labour markets but argue that an abrupt change in the development of the labour force is explaining the problems of the 1970s and 1980s. It is obvious that in Continental Europe the effects of the "post-war baby boom" began to affect the labour market around the middle of the 1970s, i.e. with a delay of some 5 years compared to the U.S. On top of that, women participation rates increased for supposedly "autonomous" reasons. Women's lib, the desire to have fewer children and better education contributed to the large increase of the labour force (Boss 1982). Others argue that the process of technological progress intensified the segmentation of labour markets, so that supply and demand could not match at an aggregate level. It is believed, that only very specific (government) measures - like special work programmes - could do the trick, since it was all to obvious that some segments of the labour force were permanently underemployed. While many of the above-mentioned positions do have their merits to describe - or for a short period of time even to explain - labour market difficulties, they all neglect the importance of wage costs. Relative prices do matter in the equilibrating process of the labour market. This neoclassical view and its empirical validity is discussed in recent publications (Minford 1983, Roth 1982). "It is a widespread opinion among economists - and one which we fully endorse - that the proximate cause of unemployment is excessively high wage costs, either produced by high wages or by low productivity" (Minford 1983 : 2). Two factors are often identified "which prevent real wages and productivity from adjusting naturally to shifts in technology, demand, and industrial structure, and relocating those freed from one sector into other sectors" (Minford 1983: 2): first, the transfers, subsidies and taxation, and second the power of labour related institutions. Both factors are strongly interrelated and, thus, their respective effects can hardly be identified via empirical research.

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Before identifying the specific characteristics of the institutions of the German labour market, it seems worthwhile describing some important features of the present situation in some detail.

3. The Trends in the German Labour Market The massive increase of unemployment, the strong build-up of short-time working, and the enlargement of the group of so-called discouraged workers ("Stille Reserve") in the 1970s took place in a period of massive government spending and high public deficits (as a consequence of a series of employment programmes) and in a period of relatively strong monetary expansion (almost 10 p.c. expansion of after some 7 p.c. in the 1960s). Only in the course of the 1980s both policy instruments were redirected towards an antiinflationary course. The public sector deficit declined from some 5 p.c. of GNP to some 1 1/2 p.c. in 1985, and monetary expansion was reduced to some 4 p.c. during the first half of the 1980s. After 1982, however, unemployment stopped rising, short-time working almost disappeared, and some employment gains could be observed. Although shocks like the oil price explosions occurred world-wide and though demand management was highly synchronized in industrial countries - also via annual summit meetings - , the labour market trends differ substantially between countries: while in the 1970s and the 1980s the number of employees in Japan and the U.S. increased substantially (some 7 and 20 million people, respectively), European labour markets remained in the doldrums. Since demographic trends certainly were not in favour of the U.S. or Japan - the opposite is true - , there must be other explanations for the divergency. (Total relative wage costs are an important explanation. See next chapter.) It is worthwhile noting that unemployment is not a phenomenon which is distributed evenly over Germany. There are strong regional, sectoral, and professional differences. While the south of the country as well as many branches of the export and investments goods industry are expanding their staff, the north, many basic material branches, and less qualified persons (plus increasingly those wrongly qualified) suffer from rising unemployment. Every second unemployed person has not finished a professional education; unemployment is more than twice as high in the North-West as in the Southwest. Unemployment is especially high for females, for guest-workers, and for persons looking for a part-time job. The public discussion of the employment problem in Germany is highly emotional. It lacks the preparedness to listen to arguments and to carefully observe foreign experience. Due to the fascination of the institutional status quo, the measures taken to "solve" the problem hardly leave hope for improvement. Instead, we find a sentiment to administrate the scarcities (Verwaltung des Mangels). Thus, the most "acceptable"

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instruments to deal with the problem are the reduction of the work-time (for all persons) in various forms (work-week, longer vacation, early retirement), a collective action to lengthen education, and the increase of unemployment benefits.

4. Excessively High Wage Costs - At the Root of the Employment Problem Some frictional or search unemployment is fully compatible with the preferences of citizens and the maximization of welfare of a society. Mass unemployment, however, hints towards distortions of the market mechanism. To blame the market system itself for the failure of clearing the (labour) market, based on the assumption of a backward bending labour supply curve, seems to be a proposition that does not pass empirical tests: how could it be explained that in cases of high unemployment in the official sector of an economy the shadow economy is offering a growing number of jobs? Another even more fundamental argument, namely that demand for goods and services has approached the saturation point and does not warrant additional employment, does not fit to the rather aggressive conflicts over the income distribution. Obviously, higher income still has a high preference in the view of the citizens, a fact which is not compatible with the saturation thesis. Labour can not escape market rules which are valid for all factors of production, like soil or capital. If wages and other cost elements of labour (fringe benefits, costs of labour legislation) do not correspond to the demand for labour, which depends above all on the relative costs of other factors of production (changing in the course of technological changes), unemployment will rise. Or, as Lester Thurow phrased it: "While America and Europe are often seen as similar, their labour markets are in fact very different. Relative to the price of capital, American wages were 37 p.c. lower in 1983 than they were in 1972. This has not happened in Europe. Wages have risen relative to the price of capital until very recently [ . . . ] If one looks at what happened to unemployment rates in the past decade (up from 2 p.c. to more than 11 p.c.) under the current system it is difficult to imagine that the current system can continue" (Thurow 1985).

As a consequence of relatively high labour costs, European and German production is extremely capital intensive. This should not be understood as an argument to control technical progress by government action. Under the circumstances prevailing in Europe the optimal solution was to substitute capital for labour. To control technical progress (ceteris paribus) would be a means to reduce European welfare.

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5. Cartelized Labour Market In Germany we have a widespread anti-trust legislation, however, it is not valid in a number of cases (banks, insurance firms, many services). Particularly important is the exemption for unions and employers' associations. These two institutions are not only free to rule out competition but are even asked to "organize" the wage settlements in an "orderly way". If there is a threat for the collective arrangements to become ineffective, since "outsiders" are numerous, any goverment has been prepared to legally enforce the tariff settlements to the non-union, non-employers associations-sector (Erklärung der Allgemeinverbindlichkeit). Thus, an important functional part of the German economy is not exposed to market forces. The most important cost factor, labour income, which should be flexible in times when the capacity to adjust is extremely important for the survival of firms and the sustainability of jobs, is not governed by market considerations. The wage cartel, as every cartel, is induced to improve its own situation at the expense of others. This proved to be true for the labour cartel, too. In order to keep employment constant or to increase it (in order to absorb the "post-war baby boom" plus the increase of female participation), an increase of tariff wages below the actual productivity increase would have been necessary as well as a substantial differentiation of wages as to regions, sectors, and qualifications. This would have implied constant or even declining wages in weak branches like steel, shipbuilding, or construction, it would have ruled out wage increases for teachers and for apprentices in the 1980s. In a series of cases also a cut-back of fringe benefits would have been in the interest of job security and the creation of new jobs. The strategy of unions and employers' associations was in the (short-term) interest of those who remained in business and kept their job. However, for marginal or submarginal workers such a policy took away job opportunities. Such a strategy for wage policy does only make sense in a period of full employment, when a quick movement of workers from weaker to stronger firms is necessary in order to foster growth by allocating labour quickly towards the more productive firms. In a situation of high unemployment, however, a structural change enforced by high wage costs is truly suboptimal. It is better to have voluntary labour movements into activities which are more rewarding compared to the old ones than to enforce the dismissal of workers in order to make them more prepared to change location or profession. The centralized bargaining process brought about almost uniform increases of tariff wages across regions. While, for example, wages for qualified workers differed by 15 p.c. across regions in the metal-working industry in 1968, this differentiation has almost vanished by the beginning of the 1980s. Thus, the locational advantage of regions which were at an overall disadvantage disappeared, and unemployment increased steeply in those regions. But not only regional wage differences tended to disappear. Even the orientation of wage settlements at productivity trends in different branches was reduced, since each

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year the first wage settlement of the (annual) wage round sets the tone for the other decisions. Wage increases hardly differed to a remarkable extent across branches. This tendency (ReichseinheitsabschluB) made structural problems more permanent, and weak branches can hardly survive under such circumstances. This is the more so, since as a rule aggressive unions (like the metal-worker union or the public sector union) take the lead in the wage bargaining process. In order to illustrate this behaviour a table of wage and productivity increases for several branches in 1973 and 1981 is given below (Table 1). Table 1: Tariff Wages and Productivity in West Germany Increase Year over Year 1973

1981

Sector

Wages

Productivity

Wages

Productivity

Mining Iron industry Chemical industry Machinery Automobiles Electric engineering Furniture industry Printing Textiles Clothing Food

12,8 13,8 12,0 13,4 13,3 10,9 11,4 10,6 13,0 10,4 11,7

5,5 13,4 10,8 3,6 4,9 7,5 2,8 4,1 4,7 -2,9 3,4

7,0 3,8 6,1 4,4 6,0 6,0 4,5 4,8 4,3 4,9 6,1

-1,0 + 1,4 1,7 0,5 5,0 0,7 -5,2 -0,8 -2,1 +0,6 +3,1

Source: Bretschneider J./Husmann J./Schnabel F. (1984).

The lack of adequate differentiation is not only a problem between sectors of the economy but even between the branches or the regions of one sector. The metal industry is a particular case in point. While the settlements are hardly different (regions) or identical (branches), it is obvious even to a casual observer, that the relative position of regions and branches within the metal industry of West Germany is different. This sector encompasses office machines, aircraft, and computers on the one side and watch-making and shipbuilding on the other side. The divergence of tariff wages has been reduced since the 1960s. While in 1968 the average deviation of a certain wage group in the various branches with respect to the average, was some 13.5 p.c., it was only some 7.5 p.c. in 1982. The ritual of wage bargaining in West Germany has changed over the last 30 years (Markovits/Allen 1984). Throughout the 1950s and into the 1960s tariff wages were settled as a minimum wage, as a floor wage. Due to very cautious bargaining certainly only in very few cases tariff wages were above equilibrium levels. While microeconomic orientation prevailed during that period, macro-considerations and an orientation at the expected growth and inflation performance were used as a guide for wage bargaining in the 1970s and 1980s. Such an orientation is helpful in a situation of full employment (or even overemployment) and when there is a great reservoir of regional and

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vocational mobility of labour (even in the case of imported mobility via the influx of refugees or guest workers); but in a period of high unemployment such a policy leads to undersired lay-offs in weak branches or structurally disadvantaged firms and to the dismissal of workers with lower than average productivity. The latter phenomenon, namely the above average unemployment of certain groups, especially the low qualified, has been intensified by the unions' strategy to eliminate low wage groups and to increase salaries across wage groups by the same fixed amount instead of the same percentage (Sockelei). With this strategy the unions intended to help the low income groups, but achieved the opposite: they discriminated against those groups. Firms more and more used robots and machines for this type of work, while less qualified workers remained or became unemployed. Fringe benefits were changed even more in a way to increase labour costs of less qualified persons, since they advanced more than proportionately. An extreme case in point is the development of vacation in recent years (Table 2). Table 2: Days of Vacation in the Metal Industry

1978 1979 1980 1981 1982 1983

18 to 24 years

25 to 30 years

30 years and older

21 24 26 28 30 30

24 26 28 30 30 30

27 28 29 30 30 30

Source: Weisser, 1984: 33.

It is surprising that such a policy, which above all increases labour costs of the young at such high rates, is pursued in a period when there is a strong influx of young people into the labour force. This very fact is a good indication of how strongly the microeconomic adjustment mechanisms are prevented from working in a corporativist society; cartels dominate the market mechanism. Such an outcome in wage and tariff policy is, however, only possible when the general economic policy establishes an environment of moral hazard, because it neglects the fact that an incentive system is crucial for the well-functioning of a society. While the full employment guarantee prepared ground for unions and employers' associations alike to rely upon government action to "solve" overall employment problems, while a comfortable social legislation made unions inclined not to consider dismissed workers a problem that should be avoided at almost every price, while a permissive policy of subsidization of weak branches and firms made employers prepared not to fight hard against high wage demands, the international competition became stronger, the number of external shocks bigger, and the financial capabilities of the government declined.

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During an interim period, however, tariff wages and fringe benefits departed more and more from market equilibrium levels. This very fact was demonstrated the more brutal the quicker the government medicine - employment programmes and overexpansionary policy - was withdrawn. However, the continuation of government intervention was not a help either, since nobody believed that such a policy could be pursued indefinitely. Because of these circumstances and because of the fact, that at the same time marginal tax and social contribution rates were high, more and more citizens - especially those with involuntary free time - intensified their activity in the (non-taxed) shadow economy. But not only high transfers, subsidies, taxes, and contributions distorted the incentive system, but also a lot of legal regulations. One instrument that fossilizes the results of tariff wage settlements is the declaration of the ministry of labour (central or Länder government) that certain settlements are binding to everybody employing or being employed in a certain branch or region (Allgemeinverbindlicherklärung). Despite the fact that only a relatively small number of settlements have been treated in such a way, it is obvious that already the existence of such a possibility (and the awareness that the instrument is used in critical cases) changes the behaviour of unions and employers associations: they can be sure to be bailed out, if outsiders create a problem for the viability of those institutions. This result did not occur by accident. In 1983 the ministry of labour declared: "Since its introduction on December 23, 1918, the declaration of tariff wages to be binding for everybody is viewed unanimously as an instrument to help organized employers in a situation of a weakening cycle and increasing unemployment avoiding the erosion of the importance of tariff wage settlements. In periods of decline non-union workers could effectively outcompete union members by accepting wages below tariff wages. Unorganized firms could achieve unjustified competitive advantages by non-unionized workers at wages below tariff wages" (Bundesministerium für Arbeit und Sozialordnung 1983).

Labour law developed into a prominent factor for increasing overall labour costs (Tables 3 and 4). Labour more and more became a fixed factor. The almost perfect protection of the job meant that the risk of employment fell almost totally on the firm. It is overlooked by the proponents of job protection that this in turn is a means to prevent job creation. The rules for dismissal are complicated and uneconomical. There Table 3: Sues for Protection of Job Year

Cases

Cases in % of dismissals

1967 1970 1975 1978 1981

57 44 123 111 145

0,9 0,7 2,0 1,8 2,3

443 718 620 043 972

Source: Bundesministerium für Arbeit und Sozialordnung (1983).

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Table 4: Payments in Case of Dismissal in Industry Total

Per employee

1969 = 100

1969 = 100

Per employee relative to overall income 1969 = 100

100 232 802 967 1732

100 227 842 998 1716

100 163 450 444 648

Year 1969 1972 1975 1978 1981

Source: Statistisches Bundesamt.

is a formula of a "socially unacceptable dismissal". This formula is arbitrary, it leaves the firm with a difficult burden, that should be covered (if at all) by the taxpayer. This limitation of a firm's flexibility leads to discrimination against those who do not rule out from the beginning that they might become a "problem case". This consequence is more and more understood. Since 1985 the "Beschäftigungsförderungsgesetz" allows for contracts for up to two years. Tables 3 and 4 demonstrate that indirect costs of labour as a consequence of labour law and its jurisdiction must have a strong impact on the decision of a firm to hire. If costs of dismissal increase more than 6-fold compared to overall wage costs, it is perfectly rational that firms hesitate to hire new workers in the case of uncertain economic conditions. The mismanagement of an economy becomes obvious, when the bankruptcy is the only true instrument of flexibility. Two last topics have to be mentioned when institutional inflexibilities concerning the labour market are described: the attempt to control the process of technical innovation and the regulation of opening hours. The opinion that technical progress reduces the number of jobs available is widespread: thus, it is often tried to at least delay the implementation of new techniques. This is done by tariff arrangement but also via codetermination. This approach seems to be backward oriented and is bound to fail in all respects: it seems obvious that only those who accept technical progress are in a position to become richer and are in a position to offer more attractive jobs. A very special problem for the persons looking for a part-time job is the rigidity of opening hours for shops in Germany enforced by law. A liberalization would greatly help to increase the number of part-time jobs that fit into the private time schedule of people. The relatively strict legal regulation of the working time (in general, and especially for certain groups like women and the young) limits the job opportunities as well. A more liberal stance would help to improve the labour market situation.

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References Boss, A. (1982): Das Arbeitskräfteangebot in der Bundesrepublik Deutschland in den 80er Jahren, Kieler Arbeitspapier Nr. 158, Kiel: Institut für Weltwirtschaft. Bretschneider J., Husmann J., Schnabel, F. (Juni 1984): Handbuch einkommens-, Vermögens- und sozialpolitischer Daten, Bachem: Wirtschaftsverlag. Bundesministerium für Arbeit und Sozialordnung (Oktober 1983): Sozialpolitische Informationen, Bundesarbeitsblatt and unpublished material of Bundesanstalt für Arbeit, Bonn: Bundesministerium für Arbeit und Sozialordnung. Markovits, A., Allen, C. (1984): Trade Unions and Crisis: The West German Case. Unions and Economic Crisis: Britain, West Germany and Sweden, Gourevitch, P. et al. (Eds.), London: George Allen and Unwin. Minford, P. (1983): Unemployment, Cause and Cure, Oxford: Martin Robertson and Company Ltd. Roth, J. (1982): Mehr Beschäftigung durch Reallohnzurückhaltung, Kieler Diskussionsbeiträge Nr. 85, Kiel: Soltwedel, R. (1984): Staatliche Interventionen am Arbeitsmarkt - Eine Kritik, Kiel: Statistisches Bundesamt. Personalkosten und Personalnebenkostenerhebungen, Wiesbaden: Statistisches Bundesamt. Thurow, L. (1985): A Time to Dismantle the World Economy, The Economist, London: Weisser, W. (1984): Der Kampf um die Arbeitszeit in der Metallindustrie, Köln: Deutscher Institutsverlag.

Social Boundaries of Labor Markets Günter

Endruweit

Abstract The concept of labor market refers to the traditional idea of the market. Employment statistics, though, are correlated to the jurisdiction area of employment agencies. This contribution tries to describe labor markets in a functional way, i.e. as that area in which labor relations can be established. Local labor markets are thus distinguished from interlocal labor markets which can be subdivided according to the kind of mobility which they require, i.e. migration or commuting. Some criteria are mentioned which may induce an employee to determine his subjective labor market. Finally, we discuss how management can find a company's correlate to the many individual labor markets of the necessary employees. We are used to speak of labor markets, and we are used to regard them as problemburdened. This contribution 1 will ask whether it is possible that definition and analysis of labor markets have closer relations than expected.

1. Markets and Labor Markets Traditionally, markets are conceived of as places in which supplies and demands are directly opposed to each other and, at least in a middle-range perspective, balanced. If there are continuously only demands or overdemands or only supplies or oversupplies, the market will slowly cease to function and, finally, to exist; rather it will turn into a problem-area. As soon as the immediate exchange in a market is regarded as insufficient, supplies and/or demands will seek other places. Labor markets as institutions of which we speak only in recent times provoke, by their etymological analogy, not only connotations of the traditional concept of markets for goods and livestock; in addition to this they create individual and social hopes that they may function in the same manner. That is why the description of the state of affairs in labor markets uses the same terminology as the market-reports in medieval times. The question is still whether this analogy may be misleading in many cases.

Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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2. The Stuttgart Labor Market as an Example The city of Stuttgart may serve as an example by which we can discuss in a more detailed way what our sometimes subconscious ideas of labor markets look like. We obtain our information on labor markets from the figures on unemployed persons and openings published monthly by the employment agencies. These figures are aggregated for the areas of Arbeitsämter (Labor Offices), Landesarbeitsämter (State Labor Offices) and Bundesanstalt für Arbeit (Federal Labor Agency), i.e. the whole Federal Republic of Germany. These are, in a way, the data on supply and demand on the labor markets. Thus, there seems to exist the idea that a labor market is identical with the jurisdiction of an office of the Labor Agency. That might be the reason why one speaks of a "labor market of Stuttgart" 2 or a "labor market of the state of Baden-Württemberg" 3 when one compares the unemployment rate on the state level (5.7 percent) with the rate in the capital (4.7 per cent) 4 . Finally, there is even a concept of a labor market with a nation-wide extension5. This shows that labor markets are differentiated according to geographical levels. All this seems to point at unanimity concerning the concept of labor market. In addition to this there is no doubt that the figures on unemployment show clearly that there is more demand for than supply of employment. This unanimity is superficial, though. While the state labor office counted a little less than 25,000 openings in Baden-Württemberg in 1985, the Chambers of Industry and Commerce interviewed their member enterprises and found more than 57,000 vacancies which had unsuccessfully been offered; would they have been manned, the state-wide unemployment rate would go down to only 3.6 per cent6. In a similar way the Chamber of Handicrafts at Stuttgart discovered that in this city 1,618 skilled and more than 400 unskilled workers were wanted in spite of the officially statistical lack of places to work. For the whole state of Baden-Württemberg the Chamber of Handicrafts stated 3,648 vacant places for skilled and 890 for unskilled workers in the crafts 7 . In contrast to this, the President of the Federal Labor Agency declared that, according to his figures, there is, except for a few occupations, no lack of skilled manpower 8 , i.e. no oversupply of places of work. The President of the Baden-Württemberg State Labor Office had previously admitted, though, that at least in the Stuttgart region skilled workers in the metal industry and unskilled workers in the automobile and machine building industry are lacking9.

3. Inadequacies of the Traditional Labor Market Concept Which consequences have to be drawn from the dissenting opinions among labor market experts described under 2? It seems to be clear that these disagreements are due to discrepancies between the usual idea of labor market and reality. Some of the many reasons may be:

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a) The concentration on the statistics of the public labor administration allow an insight into but a part of the labor market. This is, most probably, the broad center-field. Especially attractive places of work and especially courted employees, though, find their chances prevalently via private agencies, professional or daily journals and newspapers, and even direct initiatives of employer and/or employee. Bad jobs and bad jobbers, on the other hand, are traded in the partly inofficial channels of chore and odd jobs, or long-time unemployed persons are transferred to social welfare and are thus officially "eliminated" from the labor market which can not prevent them from reentering it privately if they find a job after all on their own initiative. This is wellknown, and it can not be changed by reasonable means. Enterprises can live with these shortcomings much better than social politicians. b) Labor administration has realized that labor markets may be different for different professions. An electronics engineer at Bremen may certainly be considered for a vacancy at Stuttgart. Nation-wide activities of the Fachvermittlungsdienste (special negotiation services) of the Federal Labor Agency take account of this. The statistics, though, buoy us up with labor markets which do not really exist. It does not make sense to oppose statistically an unemployed prawn fisherman at Biisum to a vacant milker's job at Garmisch-Partenkirchen. c) On a local level the labor market is conceived as coinciding with the jurisdiction of an Arbeitsamt. This area is normally determined by the jurisdiction of the general public administration which has hardly ever been designed according to aspects of labor markets or even of regional economy. Rather it is a result of historical facts from former power relations. There is no reason to force labor administration into new structures. It will know why it has paralleled its radii of activity to the jurisdiction of states and communities, although the Bavarians can prove that more than one state labor office does not mean much more than that the responsible minister has to invite more than one president to his receptions. One should also not take away the labor offices' statistics as a proof of their work-load. They may also serve for a crude estimate of future costs of unemployment benefits. For labor market planning, for science, and for the daily practice of employers, though, a social concept of labor market will be much more useful than an administrative one.

4. A Social Science Concept of Labor Market If we want to formulate a functional concept of labor market, we have to proceed on the assumption that a labor market is a place for social relations. Labor relations, i.e. relations which are founded in a labor market, belong to the most important social relations of an individual in an industrial society (Endruweit et al. 1985: 4). Only family relations are of a comparable importance. Therefore, it is quite reasonable and obvious that a large part of man's planning of life is determined in the tension field between labor relations and family relations.

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4.1. Local Labor Markets This tension field is still relatively simple, at least if regarded under the aspects of labor market, if place of work and place of residence are the same, i.e. if the distance between them could be bridged by walking or by bicycle. Before we continue we have to consider that a labor market can be defined from an employee's perspective as well as from an employer's perspective. An employer might regard as a labor market that area in which he has the chance to find sufficiently qualified labor force for the jobs offered by him. An employee may see as a labor market that area in which he would be ready to accept a job at the conditions offered by an employer. The core of labor market policy is to make both areas as congruent as possible. In the eyes of an employee and in a situation with congruence of place of work and place of residence, i.e. a local labor market, the concrete labor market will be defined, among others, by: a) familial socialization which develops inclinations to or against certain groups of jobs, fields of activity, ways of work etc.; b) school socialization which determines the level of general education; c) professional socialization which may steer the chances of groups of activities by its supply of apprenticeships, image of the profession etc.; d) societal order of values influencing via level of aspiration the expectations concerning standard of living, quality of life etc. in an prospective employee's family situation; e) employee's situation of life (number and age of children, number of gainfully employed members of the household, other incomes, property of real estate etc.) which codetermines his concrete motivation to accept a job; f) individual ethos of work which directs his motivation to work not only via assiduity or laziness, but also via readiness to change the job or the employer or to take part in activities of continued education etc.

4.2. Interlocal Labor Markets What has been said under 4.1 is also valid if place of work and place of residence are not congruent. In this case it is an additional criterion of the labor market that it is limited by the possibility of mobility. This social mobility is essentially a horizontal one, and that is in most cases geographical mobility. We have to differentiate between two kinds again, between migration and commutation mobility. 4.2.1. Labor Markets with Migration Mobility In a labor market with migration mobility it is either the place of work or the place of residence which has to be relocated in order to make labor relations possible. The first

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case was typical for the sixties in Germany when "extended work-benches" were established in remote villages to seize the last hidden reserves of the labor force. The present economic conditions afford such a practice only in a few cases, e.g. in the hunt for hightech specialists in the environment of technical universities. The second form is much more frequent now. This form of a labor market with migration mobility requires that an employee moves before he can resume a (new) job. Such a decision may depend on: a) the difference in the costs of living at the present and the future place of residence. The level of rents and the cost for real estate, both extremly high in booming regions like Miinchen and Stuttgart, play a key role. The person who can sell a house in the Emsland at 300,000 DM will need twice as much to buy a similar building in the region of the Mittlerer Neckar. It is not enough, therefore, to offer a monthly increase in salary of 1,000 DM to a 40-year old engineer in order to make up for his loss before the end of working life; b) the income situation of the household before and after a move. The person who is married to a teacher can extend his labor market beyond state borders presently but under the condition that the teacher stops working; c) the children's school situation: differences in the states' educational policies cause in many cases hard sacrifices if the parents move into another state; d) social ties of the family or single members of it to the present place of residence. Studies on "mental maps" show clearly (Flemming 1985) hat the "region perceived" has little relation to the administrative units. That means that labor markets which are defined as administrative units may deviate extremely from what a prospective employee may have in mind as labor market in a sense of range of social activity; e) regional prejudices against the new place of residence or other subcultural problems, like differences in dialect; f) leisure time activities bound to certain regions. The more postindustrial a person's system of value is (or can be because of affluence), the more can such circumstances be decisive for a move. A state- or nation-wide labor market can, almost without exception, be only a labor market with migration mobility. As soon as a migration has happened, though, the partners of the new labor relation find themselves back either on a local labor market (4.1) or an interlocal labor market with commutation mobility (4.2.2). 4.2.2. Labor Markets with Commutation Mobility If interlocality of place of work and place of residence is not so distant that the problem has to be solved by moving, i.e. by one act of radical mobility, it can be bridged by regular mobility, i.e. by commuting. Commutation exists in many forms (Endruweit 1975: 51-54). All of them serve, as long as it means commuting for occupational purposes, the maintenance of a labor market. An interlocal labor market is therefore, the relatively rare cases of a migration labor market put aside, normally identical with an area of commutation relations.

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The deliberations to extend one's local labor market into an interlocal one by taking commuting into consideration could be influenced, among others, by the following points of view: a) financial costs of commuting in comparison to a possible additional income. These calculations can be codetermined by state (tax deductibility of travel expenses) or company interventions (fringe benefits for car use, employer's contribution to railroad tickets, employer-provided transportation etc.); b) individual costs of commutation. At the beginning many commuters underestimate their regular expenditure of time and its consequences for their personal well-being; c) social costs of commutation. These costs are especially frequently undervalued, and they lead very often to a revision of the previous decision (Endruweit 1975: 63-68). Above all, it is the restriction in family relations and the social isolation caused by the exclusion from social activities at the place of residence which are recognized in their full importance only after some time. Some of my ongoing studies in Baden-Württemberg have yielded the surprising (at least for me) result that commuters in totally urbanized areas are ready to put up with longer commuting times than commuters in rural areas.

5. Management's Chances in the Definition of Labor Markets Until now we have seen labor markets only from the perspective of potential employees. Their view is one of the data which management has to take into account. The question is now what management could do in order to define the labor market relevant to the enterprise and in order to find an optimal coincidence between employers' and employees' definition of labor market. First we have to take into account that the labor market is, like almost any market in modern societies, not a place in which but buyers and sellers meet; there is always a third party, the state. The state is functioning in many ways as an intervening variable there. Direct interventions are more and more eufunctional. An example is the labor administration's differentiation in the handling of unemployed persons and job-seekers. Those who ask solely or primarily for unemployment benefits have to register with their local labor office. On the other hand, a person who is looking for a new or a first job may apply at any office, regardless of his place of residence. Labor offices with an oversupply of vacancies look for workers in other districts, and one office at Waiblingen in Baden-Württemberg employs even an "adviser for North-Germans" who tries to make the transfer of unemployed labor force from the Northern areas with unemployment rates of more than 12 per cent into the South Western boom areas socio-psychologically successful.

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Indirect state intervention in the labor market, presently being the majority of political activity, is more dubious and often dysfunctional. This applies, for instance, to the tax privileges for regular commuting of employees. They were introduced by reason of an alleged justice in taxation; the longer the regular travel, the higher the professional outlay, the higher the possibility to minimize the taxable income. Aside from the questionable practice of subsidizing those who already profit from lower housing costs in the outskirts, these regulations are a main reason for the incredible increase of land (ab-)use in many parts of the country. Therefore, it can not be excluded that the privileges are cancelled or even reversed as soon as a sufficient number of voters realizes that these rules further the "sealing of landscape" while by no means contributing to the creation of jobs. Only when regarded at the individual level of an employer or employee, they widen the horizon for recruiting labor force or for choosing a work-place. Already at the lowest social level, i.e. the local labor market, this advantage is extended to all competitors of an employer or an employee, thus equalling the sum of social privileges to zero. The definite advantage is with him who has to make the best offer, and he could make it without these tax regulations in exactly the same way. Management should be cautious in relying too much on these partial plannings which just hide the incapability or unwillingness of politicians to formulate, decide, and execute comprehensive plannings for social structure. Partial plannings are easy to change. Only in a short-time perspective a useful lobbying of employers' federations could consist in stimulating legislation which is merely employer-oriented. Long-term regulations will only be valid if they are advantageous for more than just one element of the social structure. What can management in a single company do now under these circumstances on the labor market? The most important factor has already been mentioned by the president of the Baden-Württemberg labor office: "The pros in the competition between different employers play an important role in the search for skilled labor", and he made expressively reference to the disparities between costs of living and amount of salaries and wages in the comparison of different labor markets 11 . Immaterial values are certainly effective, too. It was the construction industry of Stuttgart which recently found an explanation for its difficulty in manning apprenticeships: the bad image of this whole branch of industry12. However, the management of a single company can increase its own success in a labor market but by offering better conditions of work than its competitors. One of the main problems will be to keep its extraordinary efforts out of collective bargaining as voluntary fringe benefits. It is quite intelligible that unions and work councils will try to make company contributions to travel costs, company-provided bussing, or housing etc. generally obligatory by cementing them through industrial agreements or by stipulations on shop level. These practices, though, having a tendency to universality re-establish equality on a higher level and destroy all competition effects. Even where there is no danger on a collective level, an individual suit before a labor court may have the same effect. Labor courts in Germany have until now not been a motor for managerial wealth of invention.

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Management, unions, and politicians, however, will have to develop some imagination in order to minimize the disparities between labor markets in a different way than by the mechanisms effective until today. They function like this: booming branches lead to an outstandingly well-earning proportion of the over-all population of a region; costs of living increase because landlords, real estate sellers, retail trade, services etc. smell an opportunity to cream more than their colleagues in other regions; as wages and salaries are fixed on a higher than regional level, the recruitment of additional manpower becomes difficult; a way out of this squeeze is sought in more rationalization which is normally a replacement of many cheap workers by a few expensive ones; this means on a national level the destructions of jobs, and on the regional level it is another push to reinforce the effects described above. It is quite clear that this exponential development must come to an end. Otherwise regional descrepancies might reach an extension which can become politically disastrous. Such a development would, after all, be unconstitional (Bielenberg et al. 1979: 14). It would be a task for general politics, however, not to admit such a state of affairs. It has correctly been stated that "each Land in principle has autonomy in its industrial policy" (Gerhard Brand in Tokunaga and Bergmann 1984: 21, 22). This follows already from art. 72 of the constitution. An economic and labor market policy, which is, in comparison to other Länder, extremely successful is impeded, though, by art. 11 which grants the right of freedom of movement. As labor market policy is so essential to life in an industrial society, we need more research on labor markets in order to make rational politics feasible. That is why the Baden-Württemberg minister of economics was right when he was discontented with global figures and wished information which gave data on the job situation in narrower areas, i.e. labor markets according to our definition (Herzog 1985: 16). This should be, however, data on labor markets defined in a social sense.

Notes 1 This is a contribution prepared for the discussion in the seminar. For publication it has been a little enlarged and updated in some figures. 2 Amtsblatt der Landeshauptstadt Stuttgart February 6, 1986: 4. 3 Stuttgarter Zeitung July 10, 1986: 6. 4 Figures refer to the end of March, 1985, according to Statistisches Landesamt Baden-Württemberg (Hrsg.): Statistisches Taschenbuch 1984/85, Stuttgart 1985: 77. 5 Brockhaus Enzyklopädie, 17. Auflage, l . B a n d , Wiesbaden: Brockhaus 1966: 671. 6 7 8 9

IHK-Nachrichten 67/85 October 8, 1985. Stuttgarter Zeitung July 1, 1986: 14. Mannheimer Morgen November 14, 1985. Stuttgarter Nachrichten August 3, 1985.

10 Der Spiegel 50/1985: 90-93. Even the German Armed Forces have, in cooperation with the Labor Office of Stuttgart, a program in which they invite soldiers from North Germany to the south in order to make them aquainted with the circumstances of living, hoping that might encourage

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them to look there for a job after the end of their military service (Stuttgarter Zeitung August 3, 1986: 15). 11 Stuttgarter Nachrichten August 3, 1985. 12 Stuttgarter Zeitung May 15, 1986; 23.

References Bielenberg, W., Erbguth W., and Sölker, W. (1979): Raumordnungs- und Landesplanungsrecht des Bundes und der Länder, Band 2, Bielefeld: Schmidt. Endruweit, G. (1975): Berufspendler als Problem der Raumordnungspolitik. Beiträge zur Raumplanung in Hessen!Rheinland-Pfalz/Saarland, Akademie für Raumordnung und Landesplanung (Ed.), Hannover: Schroedel: 49-88. Endruweit, G., Gaugier, E., Staehle, W.H., and Wilpert, B. (1985): Handbuch der Arbeitsbeziehungen, Berlin: de Gruyter. Flemming, M. (1985): Regionales Bewußtsein und neue Regionalpolitik, untersucht am Beispiel der Gemeinde Neuensteini Region Franken, Diplomarbeit Universität Bayreuth. Herzog, M. (1985): Baden-württembergische Wirtschaftspolitik im Spannungsfeld von Strukturwandel und Umwelt, Stuttgart: Verband der Metallindustrie Baden-Württembergs. Tokunaga, S., and Bergmann, J. (Eds.) (1984): Industrial Relations in Transition, Tokyo/Frankfurt: Tokyo University Press/Campus.

Labour Market Rigidities: Economic Analysis of Alternative Work Schedules Including Overtime Restrictions Morley Gunderson and Klaus Weiermair

Abstract Policy concerns over issues such as unemployment, productivity, and international competitiveness have led to increasing interest in labour market rigidities as impediments to optimal labour market adjustments. In many circumstances, however, such labour market rigidities may have an efficiency rationale in markets subject to imperfect and asymmetric information, transactions costs, equity concerns, and other noneconomic constraints. In such circumstances the policy challenge is one of balancing the legitimate needs of the private labour market actors against the equally compelling concerns of society over the aggregate state of the economy. This paper examines these tradeoffs with respect to the issue of alternative work schedules including overtime restrictions, retirement policies, flextime, worksharing, paid vacations, paid educational leave, and part-time work. Special attention is paid to the pros and cons of restricting overtime so as to share the available work and reduce unemployment. This issue illustrates employer concerns for flexibility of work scheduling and the need to amortize their quasi-fixed non wage labour costs, employee concerns for income and leisure, and the concerns of the unemployed and underemployed for jobs.

1. Introduction As part of the overall thrust to reduce labour market rigidités, increased attention has been paid to the role of alternative work schedules. Alternatives that are currently being examined or put into practice in some jurisdictions include flexible working hours, worksharing, paid educational leave, early retirement options, and reductions in the use of overtime. Many of these options have been advocated as means to reduce or at least share - the unemployment that has been growing, especially amongst youths. Others have been advocated as options that meet the divergent preferences of an increasingly heterogeneous workforce, especially given the rapid growth in the labour force participation of married women and of two-earner families. Whatever their rationale, these policies often have given rise to tensions between workers who often prefer the flexibility of a variety of optional alternative work schedules, and employers who want certain elements of predictability and who want their own Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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flexibility to schedule their work. The concerns of employers are heightened by the needs to be competitive, both domestically and internationally. Tensions may also be created between governments that are concerned with the consequences of massive unemployment, especially amongst youths, and employers and workers who already hold jobs and who may be reluctant to accept alternative work schedules simply to reduce unemloyment. The public policy dilemma is compounded by the fact that many of the policies to encourage alternative work schedules may conflict with other elements of social policy. Conversely, other policies that have been instituted for legitimate social purposes may inhibit the use of more flexible work schedules. The challenge for public policy is to minimize the adverse side effects of public policies designed to alter work schedules, and to minimize any adverse side effects on work schedules that other elements of social policy may engender. The purpose of this paper is to provide an analysis of what economics has to say about alternative work schedules, with an emphasis on the dimensions pertaining to hours of work. The economic determinants of hours of work schedules are first discussed, emphasizing the interaction of the demands of the workforce and the ability of organizations to provide such alternative work schedules. Non wage quasisfixed labour costs for employers and fixed time and money costs for workers are then discussed, along with their implication for alternative work schedules. The overtime issue is singled out for special consideration and the option of restricting overtime to create employment analysed. The paper concludes with a discussion of the efficiency rationale for some elements of labour market regidities, emphasizing the role they play in markets subject to adjustment and monitoring costs, imperfect and asymmetric information, and equity and other non-economic concerns.

2. Economic Determinants of Hours of Work Schedules Basic economic theory emphasizes that alternative work schedules - as with other institutional arrangements that emerge in our labour market and industrial relations system - change in response to the interaction of the demands of the workforce and the ability of organizations to provide or supply such alternative work schedules. Economics emphasizes that the demands of workers for alternative work schedules depends upon the basic economic determinants of income or wealth, relative prices, and preferences. Other things equal, an increase in our wealth should induce workers to demand more leisure time. The form in which that leisure time will be taken, however, may depend upon the relative cost of different alternatives. In addition, as the composition of the workforce changes (e.g. proportionately more younger workers, married women, and two-earner families) the preferences of these workers will become more important. Thus, economics emphasizes that the historical decline in the workweek reflects a positive income elasticity of demand for leisure (as with all "normal" goods). However,

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in more recent years there has been a substitution towards more leisure in the form of delayed entry into the workforce, earlier retirement, and longer vacation periods (Gunderson 1980 discusses the Canadian evidence). These are simply relatively cheaper ways of taking increased leisure time, given the fixed costs of going to work, the lower wages one is forgoing when young or older, and the high cost (i.e. depreciation of skills and contacts) of taking intermittent spells out of the labour force. That is, economics emphasizes that income and relative prices affect not only quantities of things we consume, such as leisure, but also they affect the timing and spacing of such purchases. Different individuals may also have different preferences, especially over their life cycle and as they form alternative family arrangements. For example, the increased labour force participation of married women and of two-earner families means an increased demand for flexible working hours, job sharing, and part-time work. This may occur not so much because individual preferences have changed towards such arrangements, but rather because those groups with preferences for such arrangement have become more important in numbers. Thus, the demographic composition of the workforce becomes an important determinant of the demand for alternative work schedules. The demands of the workers and their willingness to work alternative work schedules must also confront the ability of employers to provide such alternative arrangements. This in turn depends upon their technological cost considerations as well as their own needs for such arrangements, as they are derived from their production considerations. These in turn are affected by technological substitution possibilities (e.g. between fulland part-time workers, or between overtime hours and new workers) as well as by relative prices (e.g. the cost of hiring a new worker versus the cost of working on existing worker longer hours). The demands and the willingness of workers and employers to engage in alternative work scheduling are equilibrated in the market through the price mechanism of compensating wages. That is, if workers exhibit a growing preference for more flexible hours, then they will be willing to accept a lower wage in return for the flexible hours. Conversely, if wages are held constant, then presumably there would be lower turnover or improved morale, given the favourable working conditions. Similarly, if it is more costly for employers to provide flexible working hours, then presumably they could do so (and maintain their profit levels) only if they could pay a lower compensating wage, or experience other cost reductions from lower turnover and improved morale. Conversely, if the work scheduling is undesirable (e.g. split shifts, shiftwork, overtime), then a compensating wage premium must be paid to induce workers into accepting the undesirable working condition. This necessity of paying a higher price for such undesirable work scheduling induces firms to economize on the use of such scheduling and to reorganize their production process to minimize the need for such scheduling. This illustrates the basic economic proposition that employers who provide flexible work arrangements to meet the divergent preferences of their workforce should be able to pay lower compensating wages (or experience other cost reductions) in return for providing that desirable work characteristic. This in turn has to be weighed against the

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cost consequences of providing such desirable work schedules. The market price that equilibrates these competing considerations is the compensating wage rate for the job characteristic pertaining to hours of work. (This is a direct application of the hedonic wage principle whereby the variation in job characteristics gives rise to compensating wages that reflect the shadow or implicit price for those characteristics.) This also illustrates that interfering with the compensating wage mechanism can impose a rigidity that discourages the emergence of flexible work scheduling. It is worth mentioning that economics tends to downplay the independent, exogenous influence of institutional forces as ultimate determinants of hours of work arrangements. For example, union and legislative influences for a reduced work week are regarded by many economists as collective manifestations of the way in which basic economic forces pertaining to income, relative prices, and preferences manifest themselves. Such collective responses, exhibited through union and legislative pressures, are regarded as the endogenous manifestation of the basic economic forces. They may be crucial mechanisms through which collective demands are manifest, but they do not exhibit an independent, exogenous influence as much as being the vehicle through which the economic forces are manifest. This is important, because it tells us that if we want to understand why alternative work schedules emerge, we can not stop at the explanation that they are the result of union or legislative pressures. We must ask why unions and legislatures exhibited the pressures they did. To understand this, economics emphasizes the role of income, relative prices, liefe cycle preferences, and production technology.

3. Non Wage Quasi-Fixed Labour Costs Economists have also emphasized the importance of non wage quasi-fixed labour costs in inhibiting flexible adjustments in labour markets (Hart 1984, Oi 1962). Such costs have a fixed element per employee and, hence, they do not rise in the same proportion as the earnings (i.e. wages times hours worked) of employees. In the case of a pure quasi-fixed cost, once the cost is incurred for the employee, there is no increased non wage cost associated with higher wages or longer hours worked by the employee. Examples of quasi-fixed costs include the costs of recruiting, hiring, and training new employees. They also include the expected costs associated with possibly terminating employees; such costs can include advance notice, severance pay, and the possibility of being subject to wrongful dismissal proceedings through the courts or unjust dismissal proceedings through statutory employment standards provisions. Unemployment insurance premiums that are experience rated may also increase for employers with a disproportionately high number of employee layoffs or terminations. Such expected termination costs become quasi-fixed at the hiring decision; that is, they are fixed once the worker has been hired, but they can be avoided by not hiring new workers. Empirical evidence indicates that while such employment protection legislation reduces the

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termination of redundant employees, it also reduces the demand for new workers, and the net effect is in fact an increase in unemployment (Andrews and Nickell 1982 for the United Kingdom and Malinvaud 1984 for France). Quasi-fixed non wage labour costs are also associated with employer contributions to fringe benefits that are fixed per employee or that have a fixed component per employee so that the fringe benefits do not rise in the same proportion as the employees hours or wages. Examples of fringe benefit cost that have a fixed element per employee include statutory payments for worker's compensation, unemployment insurance, or public pensions. In Canada these programs have elements of a variable cost, since employer contributions are a certain percentage of earnings. However, there is also a fixed cost per employee, since there is often a ceiling on the employee's earnings beyond which contributions are not made; employers' contributions increase when new employees are hired but not if existing employees, who are beyond the earnings ceiling, work longer hours. (Meltz, Reid, and Swartz 1981 discuses such costs in the Canadian context and indicate their effect as an impediment to worksharing. Reid 1985 discusses the legislative barriers in Canada which create an unintended bias against worksharing, and he makes specific recommendations on how to remove those biases.) Quasi-fixed non wage labour costs are also associated with company contributions to health-care or life insurance costs to the extent that these premiums are based on a per employee basis and are independent of earnings. There may also be quasi-fixed administrative, regulatory, and supervisory costs associated with expanding the number of new employees. Also, elements like office spaces and parking spaces may be indivisible, as may be certain elements of the production process that require fixed amounts of capital or other inputs per worker. As a result of such quasi-fixed non wage labour costs, employers may be reluctant to hire new workers for whom such costs will be incurred. Rather, employers have an incentive to try to amortize the quasi-fixed costs over their existing workforce, perhaps by having them work longer hours. Firms may also try to amortize the quasi-fixed hiring and training costs by reducing turnover and retaining the workers for as long as possible, even if they are redundant in the downphase of the business cycle. From the perspective of alternative work schedules, such quasi-fixed labour costs may explain a variety of phenomena that otherwise appear paradoxical. They may explain employers' reluctance to provide part-time jobs or to engage in worksharing or to hire new recruits or even recall their existing workers from layoff, at the same time as they work their existing workforce long hours including overtime hours at premium rates. Expanding employment entails new quasi-fixed costs; having existing workers work longer hours amortizes those fixed costs. Similarly, employers may contract-out some of their work and rely on temporary help agencies so as to avoid the quasi-fixed costs of expanding employment, especially if the demand is likely to be temporary. To the extent that these quasi-fixed non wage labour costs have grown over time, this would also explain the increased usage of such phenomena as overtime, contracting out, and temporary help agencies. Also, the quasi-fixed non wage labour costs can give

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rise to increased labour market segmentation, as employers try to amortize the quasifixed costs over longer hours and a longer worklife of a privileged set of workers in the core internal labour market of the firm, rather than incurring such quasi-fixed costs by hiring additional workers including minorities and youths.

4. Fixed Time and Money Costs for Workers The previous discussion focussed on the effect of quasi-fixed non wage labour costs on the firm's demand for labour. Fexed costs can also affect the willingness of workers to supply labour services to the market. In particular, there may be some work related expenses that are incurred by workers and that are somewhat independent of the hours a person works. They may be direct, like daycare expenses for children or the purchase of a uniform or a car to drive to work, or they may be indirect, like renting or purchasing accommodation close to work. Commute costs are also fixed, irrespective of the hours one works. As illustrated in Cogen (1981), such fixed, start-up costs increase people's reservation wage (the minimum wage required to enter the market), and this in turn reduces their probability of participating in labour market activities. Somewhat paradoxically, an increase in fixed money costs associated with participating in the labour force does increase the expected hours one will work, conditional upon participating. This occurs because the higher fixed costs are like a loss of non wage income, and this income effect reduces the demand for leisure, thereby increasing hours of work. Such fixed costs will also give rise to discontinuities in labour supply. That is, there will be a range of hours over which some individuals will not work until their wage is sufficiently high to compensate them for their fixed costs associated with entering the labour force. It only becomes worthwhile to incur the fixed costs, if they can be amortized over a sufficiently long work day. Hence, many individual workers, like employers, will have an aversion to part-time work, because it may entail similar fixed time and money costs as full-time work. Obviously, other factors like household responsibilities may make part-time work attractive. Nevertheless, fixed time and money costs do create an element of inflexibility that inhibit the development of flexible work scheduling from the perspective of the employee as well as employer.

5. Voluntary Overtime The previous discussion illustrated that fixed costs may induce both employers to demand more overtime hours from their existing workforce, and employees to willingly supply the additional hours, once they have entered the labour market. Longer hours enable both parties to amortize their fixed costs of employment. Especially when an

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overtime premium is paid for additional hours worked beyond the standard work week, employees may willingly accept the additional hours. Since they do not get the extra pay unless they work the extra hours, they can not use the additional income to buy more leisure by working fewer hours (at least hours per day). More formally stated, the overtime premium has virtually a pure substitution effect, inducing a voluntary substitution away from leisure (given its much higher price under the overtime premium). There is no income effect, since the additional income is not earned unless one works the overtime hours. Thus, employers would be reluctant to have their wage scheme involving overtime premiums replaced by a straight-time hourly equivalent of a weighted average of regular and overtime pay, since the straighttime equivalent would involve a leisure inducing income effect and, hence, reduce the number of hours a worker would voluntarily want to work (illustrated in Gunderson 1980: 90). Hence, the persistence of overtime pay premiums even for situations where overtime becomes a regular feature of the employment relationship.

6. Restrictions on Overtime to Create Employment The paradox of large amounts of overtime simultaneously existing with massive unemployment and layoffs (often in the same establishment where the overtime exists) has led to recent pressure to institute policies in order to reduce the use of overtime in the hope of creating new jobs and, hence, reducing unemployment. The policy issue is especially controversial, because employers are concerned that interference with their work scheduling will lead to inefficiencies. Union leaders are also torn between the pressure of some of their workers who rely on overtime income, and others who are on layoff or involuntarily working part time. Governments hope that reductions of overtime could create new jobs that would reduce aggregate unemployment and create oppurtunities especially for youths and minorities. There is also public concern over the effects of overtime on industrial accidents and on the time spent with families. Unfortunately, we know very little about the extent to which reductions in overtime hours could translate into new job opportunities. That is, we do not have much information on the elasticity of substitution between overtime hours and new employment. The economics literature on aggregate production functions generally does not disaggregate the labour input in the production function into various types of labour, let alone disaggregate the various types of labour inputs into separate components pertaining to hours and numbers of employees. Presumably, those working overtime are the skilled and more senior employees and those on layoff or who do not have a job are the less skilled and less senior employees (Ehrenberg and Schumann 1982). The empirical literature on production functions does not tell us the extent to which reducing the hours of the more skilled senior employees would lead to more job opportunities for the less skilled; that is, we do not know the elasticity of substitution between skilled hours and unskilled employees.

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Presumably, there is not a one-to-one relationship, but it is also unlikely to be zero. Even if they are not good substitutes, jobs can be redesigned and other elements of work schedules rearranged to accommodate the new workers. For example, second shifts can be introduced whereby the more senior skilled workers (who otherwise would be working overtime) can work alongside and complement the additional employees (who otherwise would be unemployed or on layoff). The complications imposed by shift work as an alternative work schedule were emphasized in Bosworth and Dawkins (1984). Not only do we not know the extent to which reductions in overtime would lead to new jobs, but we also do not know if reduction in the use of overtime is the best way of restricting hours of work to create jobs. Other forms of hours restrictions over a worker's expected lifetime are possible, such as delayed entry into the labour force, earlier retirement, worksharing, educational or training leaves, longer vacations or a shorter work week. (Cuvillier (1984) gives an international comparison of these options; Reid 1982 and 1985 discusses the potential effect of Canada's unemployment insurance assisted worksharing scheme in reducing unemployment.) As indicated previously, given certain fixed costs, workers may prefer to work long daily hours and take longer vacations or a shorter work week, and they may prefer to concentrate their working hours into the peak earnings years of their careers rather than when they are young or old. Also, it is important to avoid the lump-of-labour fallacy that there is a fixed number of jobs and that a job taken by one person means that another person does not have a job. In the short run, and in particular situations where a fixed budget is allocated to the labour input, this may indeed be the case. In periods of high sustained unemployment it also appears that there is a fixed number of jobs to go around. Nevertheless, the number of jobs in the overall economy is not generally fixed, and the hours that people work can affect demands in other jobs. Just as we generally dismiss the proposition that a job held by a woman means one job less for a man, so we should not be sanguine that a job vacated by an older or younger worker, or by reductions in overtime, would lead to a job opening for some other worker. Even if it were deemed desirable to restrict the use of overtime in the hope of sharing the work, we have little information on how such a restriction should occur, either through collective bargaining or through legislation. There are a number of options. The standard workweek beyond which an overtime premium must be paid could be lowered. The overtime premium itself could be raised (Ehrenberg and Schumann 1982 concentrate on the effect that raising the overtime premiums has on reducing overtime hours and the subsequent effect of this on increasing new employment). The statutory maximum number of hours beyond which it is forbidden to work, at least without special permission, could be lowered. Exemptions to exceed the statutory maximum (often termed the permit system when permits are granted for exemptions) could be made more difficult to obtain. The number of workers excluded from overtime regulations could be reduced and the right-to-refuse overtime could be strengthened. Any or all of these design features of overtime regulations could be altered to restrict the use of

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overtime. Yet we know very little about the pros and cons of each mechanism, including the extent to which overtime hours would be sensitive to changes in each mechanism. Basic principles of economics provide some - but very little - assistance. It is generally agreed that outright prohibitions on activities are costly and often not effective, because they ignore different legitimate needs. If an activity is undesirable, then it is better to tax the activity in order to reduce its usage and to set the tax according to the degree of undesirability of the activity. A prohibitive tax, of course, would prohibit the activity, but reasonable taxes would discourage it and yet enable people to carry out the activity, if it were important for them to do so. In the overtime area this suggests that increases in the overtime premium (tax) are a more desirable instrument than statutory maxima beyond which people can not work (prohibitions). It is generally better to use the price system through overtime premiums to discourage activities than blunt instruments like prohibitions which do not take account of legitimately different needs and circumstances. If statutory prohibitions are utilized, then some flexibility should be attained through allowable exemptions to exceed the limit, although this creates administrative problems in determining when the exemptions are legitimately needed and therefore should be granted. Counterintuitively, basic principles of economics also tell us that if we tax an activity to discourage its use, where the tax revenue goes is irrelevant (except for certain second order effects) from the perspective of encouraging the optimal amount of the activity. That is, if society wanted to discourage employers' use of overtime, it could tax overtime hours by requiring an overtime premium. Under conventional arrangements that tax goes to the workers who work the overtime hours in the form of an overtime premium. The legislation mandates that the tax goes to those who work the overtime hours, and there is a sense of fairness about that procedure, since overtime work is generally considered undesirable. Nevertheless, assuming that the legislative premiutn is not redundant (i.e. assuming that employers would not have had to pay the full premium to get workers to work the overtime), then the decision to give the "tax revenues" to those who do the overtime work can largely be made on grounds of distributional or equity considerations. Taxing the activity by itself is sufficient to deter its usage. The revenues (i.e. overtime premiums) could have gone to general tax revenues or perhaps reduce some of the fixed costs that inhibit firms from hiring new workers. In fact, giving the tax revenues to those who do the overtime hours obviously encourages them to partake in the activity and hence encourage its use. Basic principles of economics also suggest that if the purpose of restricting hours of work is to encourage worksharing, then the policy of requiring compensating time off is particularly appealing. This means that a worker who works overtime would be able to take the corresponding time off (or perhaps time-and-one-half or double-time) in a future time period that is mutually acceptable. Wehn the time off is taken, then presumably job opportunities open up for other workers, hence facilitating the workshar-

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ing goal. This procedure enables employers to utilize overtime when necessary and to plan for the period when the compensating time off is taken, just as when vacation time is taken. Clearly the overtime issue illustrates the myriad of problems involved in the area of alternative work schedules. Delicate trade-offs are involved amongst a variety of legitimate competing objectives: the concerns of employers for flexible work scheduling and the need to amortize their quasi-fixed non wage labour costs; the concerns of employees for family time, safety, and income that may depend upon overtime pay; and the concerns of the unemployed and underemployed for jobs.

7. Efficiency Rationale for Some Labour Market Rigidities The overtime issue also illustrates how care must be taken in regarding all peculiar institutional features of labour markets as rigidities that prevent efficient adjustments in labour markets. Many of the so-called rigidities may have an efficiency rationale in markets, subject to adjustment and transactions costs, imperfect and asymmetric information, equity concerns, and other non-economic constraints. This was illustrated with respect to the issue of alternative work scheduling, where quasi-fixed non wage labour costs on the part of employers and fixed money and time costs on the part of workers inhibited the emergence of flexible work schedules, in spite of their obvious advantages given the heterogeneous preferences of workers. Gunderson and Meltz (forthcoming) also illustrate how such factors as adjustment, monitoring, and transactions costs and imperfect and asymmetric information can give rise to other rigidities and peculiar institutional arrangements in labour markets, such as wage rigidity, seniority systems, deferred compensation systems, and mandatory retirement. Under such circumstances care must be taken in encouraging policies to whole-heartedly remove such rigidities, since they may exist to serve important functions for both employers and employees. The policy challenge is to remove the impediments and rigidities that prevent employers and employees from working out their own mutually agreed upon arrangements, even if such arrangements themselves appear as rigidities that inhibit labour market adjustments. At the same time, it is important to remove rigidities that reflect pure rent-seeking activities, garnered through state intervention or non-competitive markets. The policy challenge is one of differentiating between labour market rigidities that serve a useful social function (including equity and fairness) and those that protect privileged positions at the expense of others.

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References Andrews, M. and Nickeil, S. (1982): Unemployment in the U.K. Since the War, Review of Economic Studies, 49: 731-759. Bosworth, D. and Dawkins, P. (1981): Work Patterns: An Economic Analysis, Aldershot: Gower Publishing. Cogen, J. (1981): Fixed Costs and Labor Supply, Econometrica, 49, 4: 945-963. Cuvillier, R. (1984): The Reduction of Working Time, Geneva: International Labour Organization. Ehrenberg, R. and Schumann, P. (1982): Longer Hours or More Jobs? Cornell: New York State School of Industrial and Labor Relations. Gunderson, M. (1980): Labour Market Economics: Theory, Evidence and Policy in Canada, Toronto: McGraw-Hill. Gunderson, M. and Meltz, N. (forthcoming): Labour Market Rigidities as Causes of Unemployment, in: Unemployment: International Perspectives, Gunderson, M., Meltz, N., and Ostry, S., (Eds.), Toronto: University of Toronto Press. Hart, R. (1984): The Economics of Non-Wage Labour Costs, London: George Allen and Unwin. Malinvaud, E. (1984): Mass Unemployment, Oxford: Blackwell. Meltz, N., Reid, F., and Swartz, G. (1981): Sharing the Work, Toronto: University of Toronto Press. Oi, W. (1962): Labor as a Quasi-Fixed Factor of Production, Journal of Political Economy, 70, 6: 538-555. Reid, F. (1982): UI-Assisted Worksharing as an Alternative to Layoffs: The Canadian Experience, Industrial and Labor Relations Review, 35, (April): 319-329. Reid, F. (1985): Reductions in Work Time: An Assessment of Employment Sharing to Reduce Unemployment, in: Work and Pay, Riddell, C., (Ed.), Toronto: University of Toronto Press.

The Impact of Environmental Trends on the Legitimacy of Trade Unions in Canada Daniel Ondrack

Abstract A series of changes are described in this paper which pose a threat to the legitimacy of unions by reducing the level of need for some union services or by satisfying some of these needs by means which are independent of unions: a) growth of employment legislation which provides improving conditions of work to union and non-union employees alike; b) growing sophistication of personnel management which reduces many of the sources of friction between employers and employees; c) growing use of quality of work life (QWL) which reduces dissatisfaction and increases motivation among workers; d) increasing use of technology which changes the composition of the work force towards more highly educated, semi-professional employees and allows traditional types of work to be performed by technology ; e) increasing international competitiveness which causes domestic organizations to have to obtain concessions from unions on wages and work rules in order to meet competition. The paper will conclude with a discussion of strategies by unions to try to counter the impact of the trends or to improve legitimacy by modifying the services offered by unions.

Introduction In the systems model of organizations (Child 1984) the effectiveness of an organization is assessed by the efficiency with which an organization transforms resources from the environment (inputs) into outputs for some market. If the outputs of the organization are considered to have a value greater than the costs of the inputs and the costs of transformation, then the organization is considered to have added value to the system, and the organization is judged to be effective. Organizations which fail to add sufficient value to environmental inputs are judged to be less effective and, in the long run, less effective organizations will receive fewer resources, as environmental resources are shifted to more efficient organizations. Thus, organizations that wish to survive in the Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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long run have to appear to be effective users of environmental resources or have to be adaptive to shifting concepts of value added in order to maintain a continuing supply of resources from the environment (Pfeffer and Salancik 1978). Secondly, some types of organizations are under greater pressure to be sensitive to environmental expectations than others (Aldrich 1979, Child 1984, Pfeffer and Salancik 1978). Organizations with a less secure source of resources from the environment would have a greater need to be sensitive to the demands of the environment and have to strive harder to appear to add value to resources than would organizations with more secure access to resources (Betton and Dess 1985). Examples are monopolies and organizations with highly predictable sources of income, such as the automatic checkoff of union dues for unions. These conditions of resource security may arise from very long feedback loops between market or client judgements about the value added provided by an organization and environmental reactions to an organization's performance. A situation of comparative resource security may actually be potentially harmful to an organization by inducing structural inertia which limits the ability of an organization to adapt (Betton and Dess 1985) and which might leave an organization unprepared to respond to a long feedback loop environmental reaction. The perceived value added by an organization is determined by a collective series of judgements by members of the environment, and diverse judgements may exist within the same environment. These perceptions or judgements of the value of organization outputs can be described as an assessment of the legitimacy of the organization (Aldrich 1979; Pfeffer and Salancik 1978). Organizations with high legitimacy are perceived as being more valuable to the relevant environment and would have a more favorable resource situation than an organization with low legitimacy. Consequently, an important factor in organization survival is perceived legitimacy of the organization, and an important strategy for survival is to improve the value added of outputs or alternatively, to improve the perceptions of existing outputs (Meyer and Rowan 1977). Service organizations have special problems of legitimacy in that the outputs of such organizations are often intangible, while the organization processes may appear to be costly. Some services may be essentially preventative in nature so that an effective organization may not have much visibility, or the services may only be revealed in times of crisis. Intangibles are often difficult to measure or evaluate, and therefore the legitimacy of service organizations has to be estimated on the basis of impressionistic evidence of outputs or inferred from indirect indicators. Having to rely on such estimates and inferences greatly adds to the difficulty of making judgements about the value added or legitimacy of service organizations. Unions are essentially service organizations which continue in existence on two foundations of legitimacy. One foundation is ideological, which means that a certain proportion of the population believes that unions are a necessary part of the North American industrial system. The population with an ideological commitment to unions simply has faith in the basic legitimacy of unions and does not subject unions to value added tests of legitimacy. By the admission of many union officials in Canada, the ideologically committed proportion of the population is not very large. If the size of this population

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were to substantially decline for some reason, a considerable threat would develop to fundamental union legitimacy. The second foundation of legitimacy for unions rests with the proportion of the population which examines unions in terms of value added to society or to the unionized work force. This population is considered to be much larger than the ideologically committed population. The strength of this second foundation depends upon the evolving judgements of the value of the intangibles of union services or the instrumentality of unions (Schuler and MacMillan 1984, Schuler and Youngblood 1986), and if these judgements should turn against unions, then a more serious threat to union legitimacy would occur. This paper will now turn to an examination of a number of emerging trends in the Canadian (and North American) industrial environment, which appear to be imposing a threat to some of the foundations of union legitimacy. The principal environmental trends that will be discussed are the following: a) growth in legislation on employment standards, health and safety, and human rights which duplicate much of the content of collective agreements; b) growth in sophistication of personnel management which reduces much of the sources of friction between labor and management; c) growth in quality of work life programs which create greater opportunities for satisfaction with work; d) growth in substitution of new technology for labor which reduces bargaining power of unions and changes the composition of the work force; e) growth in international competitiveness of industry which pressures employers to seek lower manufacturing costs.

1. Legislative Trends Recent reviews of the roles of unions in North American society (Brett 1980, Freeman and Medoff 1979, Kochan and Barocci 1985, Spector 1985) have concluded that unions provide: a) regulation and standardization of basic conditions and payments for work; b) collective bargaining power which is superior to individual bargaining power; c) enhancement of the "psychological contract" (Brett 1980) of the workplace (modification of superior-subordinate relations, opportunities for due process, increased freedom of communication, etc. (Freeman and Medoff 1979). Brett has shown that employees' initial interests in unionization are based on dissatisfaction with working conditions and, secondly, on a perception of lack of individual power to change the working conditions. Individuals who are unhappy with working conditions may seek to redress the situation by protest or voice (Hirschman 1972); resistance in the form of absenteeism, lateness, vandalism, etc.; or turnover (exit).

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None of these alternatives are very satisfactory to employees and have little chance of achieving change with a resistant employer. If the psychological contract is violated first by unsatisfactory conditions of work and secondly by the employer's denial of the employee's attempt to change the situation, then employees will be forced to turn toward collective action in order to obtain some balance of power with the employer. If the employees believe that a union will be effective in providing collective action and achieving meaningful change in reducing the sources of dissatisfaction with conditions of work, then employees will seek union representation. Thus, in Bretts' theory of unions, legitimacy of unions is strongly based on a concept of instrumentality of unions as providers of essential services rather than on an ideological commitment to unions. In North America this instrumental attitude toward unions has resulted in the development of an industrial relations system where management is free to make basic entrepreneurial decisions and unions have a responsibility to negotiate basic conditions of work. This form of "job control unionism" (Kochan, McKersie, and Katz 1985) is characterized by highly formalized specifications of conditions of work, pay, safety, and grievance procedures. In this system it is also expected that unions will not try to participate in the basic business decisions of the firm and would defend the principles of the free enterprise system in North America. Thus, an unspoken understanding was reached between industry and unions that unions would satisfy workers' needs for basic conditions of work, collective bargaining power, and enhancement of the work environment, while management focussed on strategic decisions for the business. This professionalization of union-management relations-produced relative stability in labor relations, but the system over time also became less responsive to growth in environmental forces of inflation, international competition, and deterioration of productivity (Kochan et al. 1985). If the industrial relations system has become less responsive or fails to be effective in confronting important new problems for the work force, then the instrumental legitimacy of unions could seriously decline. A second threat to the instrumental legitimacy of unions could occur from the emergence of an alternative source of supply of services to union members that provides essentially the same protection and regulation of conditions of work without the necessity and costs of collective bargaining. With little ideological commitment to unions among workers, the presence of an effective alternative source of basic services to workers would cause the legitimacy of unions to decline, and workers would shift their resources to other uses. A major alternative to the union function of the regulation of basic conditions of work, which appears to be rapidly emerging, is the recent development of new legislation on the employment relationship. Traditionally, labor relations law has been concerned with regulating the relationship between management and labor on such issues as union certification, collective bargaining, rights to strike, and dispute settlement. Parallel to labor law has been the development of a diverse body of legislation which regulates conditions of work for the labor force as a whole, both for unionized and non-unionized workers. This other body of law can be grouped into four categories, (1) employment standards that specify minimum conditions of work that apply to all workers; (2) human

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rights legislation that prohibits discrimination and other forms of unfair treatment; (3) health and safety laws that improve work safety standards for all employees; and (4) benefits laws that provide various forms of income security to all workers (Srinivas 1984). These other laws affect the employment relationship for all workers and provide the same level of minimum standards protection to union and non-union workers alike. Historically, the various laws affecting the employment relationship were very narrow in focus and provided only very low level minimum standards of working conditions. Consequently, there was a significant difference in the level of minimum standards of conditions of work available to union members compared to the legal minimum standards available to non-union workers. However, the nature of the laws affecting the employment relationship has changed substantially in recent years in Canada, both in providing higher levels of minimum standards and in scope of regulation of conditions of work. While there is still normally a difference in level of minimum standards of working conditions between that provided in a collective agreement and that provided by legislation, the difference in many important areas is narrowing. If the level of difference falls below some threshold of perceived significance to workers, then union legitimacy in terms of providing acceptable standards of conditions of work will decline. Secondly, some of the legislation (health and safety, human rights) has actually gone beyond the level of standards or scope of protection normally provided to employees in collective agreements. Once again, if a substantial proportion of workers find that this legislation provides higher levels or a broader scope of protection in conditions of work than that provided by unions, then union legitimacy will decline. At present, it is too early to judge whether these critical assessments of union legitimacy due to evolving employment standards legislation will actually occur. Worker judgements about legitimacy will probably be due to a weighing of a combination of factors, and it is not possible to assess the weight of employment standards compared to, for example, level of wages. However, it does seem reasonable to surmise that if the level of employment standards available to all workers through legislation rises to a level which is not significantly different from union levels, then unions will no longer be able to offer one of Bretts' (1980) major foundations for union legitimacy.

2. Sophistication of Personnel Management Kochan et al. (1985) have stated that the majority of managers have never abandoned their philosophical opposition to unions despite the general accommodation reached with unions. The accommodation was possible in managements' mind during conditions of economic expansion where the presumed costs and inconveniences of dealing with unions could be passed along to customers. However, with the recent development of lower cost international competition, this strategy became no longer feasible. Consequently, many businesses have begun to seek a means of operations that would be nonunion and presumably either more competitive or consistent with managements' re-

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sidual non-union philosophy. The principal means selected for the "non-union model" of operations is to either match or improve union levels of wages and benefits in union communities or establish operations in less unionized communities and pay wages superior to local wages (but lower than wages in union communities). Secondly, employers might also try to develop new personnel systems which emphasize greater flexibility or humanization of the work environment. With a combination of competitive wages and appropriate personnel policies, it is expected that the need for unions would be obviated and workers would see little point in paying union dues for services that were not required. An alternative perspective on non-union businesses has been offered by Goodman and Sandberg (1981). They argue that employers should have a contingency approach to labor relations strategy, based on the premise that a unionized work force is a more expensive means of doing business than an non-unionized work force. If an employer is resource rich, then the employer can tolerate a unionized work force, but if the employer is resource poor (or suffering from increased competition), then the employer has to choose eithere a strategy of becoming non-union or seeking concessions from the union. This contingency approach is not based on a fundamental anti-union ideology, but rather is based on beliefs about relative costs of different methods of operating a business. It is not necessary in this paper to examine the debate about whether a unionized business is actually more costly to run (see Freeman and Medoff 1979, Kochan, McKersie, and Katz 1985 for a discussion of this issue), the main point is that many managers believe that unionized work forces cause a more expensive means of doing business. The strategy for becoming non-union in Goodman and Sandberg (1981) is essentially the same as described by Kochan et al. (1985), i.e. provide personnel policies to obviate the need for unions. A third perspective on personnel management is provided by the very recent development of the concept of "human resource management" and the integration of human resource management with corporate strategy (Ondrack and Nininger 1985). Numerous textbooks have recently appeared on this concept (for some examples, see Beer et al. 1985, Kochan and Barocci 1985, Odiorne 1984, Schuster 1985). A major premise of human resource management is that greater sophistication of personnel and employee relations practices in the organization will result in the dual payoff of more effective utilization of personnel and more satisfaction with work among employees. The effect of typically advocated human resource management policies and programs (competitive compensation, humanization of the work environment, job enrichment, life time careers, etc.) is to reduce possible sources of friction between employees and the employer and also to create a much more satisfying work environment. With the growing popularization of success stories about human resource management (Innes, Perry, and Lyon 1986, Peters and Waterman 1982), it is quite likely that the philosophies and principles of human resource management will become more and more widespread in North America. Foulkes (1981) has summarized some patterns of how "top non-union companies" manage their employees as follows: a) egalitarian views about treatment of employees ("a sense of caring");

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b) selection and design of work sites to minimize dissatisfaction ("carefully considered surroundings"); c) minimize worker uncertainty about employment security; d) promotion from within accompanied by career counselling and development; e) competitive pay and benefits; f) management that listens to and is responsive to employees; g) highly influential personnel departments; h) managers accountable for quality of employee relations; i) careful selection and training of managers for effectiveness in employee relations; j) organization culture of pride and identification with organization performance. (Those familiar with general characteristics of human resource management in large Japanese multinational organizations will recognize the similarity of many of these patterns described by Foulkes.) Regardless of which perspective on increased sophistication of personnel management is followed, the outcome is still essentially the same. Greater sophistication of personnel management should reduce the necessity for workers to join unions and thus should contribute to a deterioration of union legitimacy. Research evidence on the impact of new personnel policies is not yet conclusive, but there is considerable support from individual case studies that more sophistication in personnel management has had an impact of reducing legitimacy of unions in at least some situations (for example, see Angle and Perry 1986, Boisseau and Caras 1985, Buss 1985, Ondrack and Evans 1984). A review by Freedman (1985) for the Conference Board showed that a significant decline in union membership occurred between 1977 to 1983 in firms that (1) assigned a high priority to union avoidance as a labor relations strategy, (2) opened new plants, (3) introduced workplace innovations in non-union facilities, and (4) lacked the presence of a dominant union anywhere in the firm (Kochan et al. 1985: 278).

3. Quality of Work Life In the North American context, quality of work life programs are based on the premises of increased democratization of the work place plus the restructuring of work to provide greater levels of intrinsic satisfaction with work (Trist 1981). Other common features are semi-autonomous work groups, pay for levels of knowledge, pay by salary rather than hourly pay, and minimization of status differences between management and workers. Some debate exists about whether union representation of workers is a necessary precondition to a "true" QWL program, but obviously, many examples of QWL programs exist in Canada and the United States with both union and non-union employees (Gilbert 1986). In general, QWL programs are introduced by two kinds of

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employers: those who are unionized and wish to develop a better relationship with the work force (as well as to maintain competitive levels of productivity), and those who are non-union (and who wish to remain non-union). Both types of employers are generally among the more progressive employers in a community and often seek ways to improve employment conditions and relationships. If the work force is unionized or if the employer is already progressive, then workers' basic needs for acceptable conditions of work and levels of compensation are generally already satisfied. The main contribution of a QWL program is to enhance satisfaction with the content of work or to satisfy intrinsic needs for growth, challenge, responsibility, and participation in decision making. If these needs are satisfied by a QWL program, then overall worker satisfaction with the job and the employer will greatly increase. The problem for unions with QWL is that the loyalty of workers may shift to the employer as a result of the increased level of work satisfaction obtained from participation in QWL programs. Unions must also view QWL programs with suspicion when they see QWL programs as major components of some employer strategies for remaining non-union. Certainly, if workers come to identify strongly with employers and have greatly improved levels of work satisfaction from participation in QWL programs (and already have high wages, etc. from being employed by a progressive employer), it is quite possible that little need will be seen for a union. The evidence on the impact of QWL programs is mixed in many ways. Those with a strong belief in the virtues of QWL programs feel that QWL and the parallel concept of socio-technical systems have a self-evident beneficial impact on the quality of life of workers, but there has been little examination of the impact of QWL programs on unions. Occasional case studies appear, which support the effectiveness of QWL as a means of maintaining a non-union work force (Ondrack and Evans 1984), but there do not appear to be any examples of a union becoming decertified as a bargaining agent as a result of the introduction of a QWL program. Instead, most of the impact of QWL programs on the legitimacy of unions appears to have occurred in "greenfield" nonunion work sites. Unions have had little success in organizing drives in new plants with well-managed QWL programs, and the lack of union organization success in such situations is probably attributable to low perceived legitimacy of unions. However, Kochan et al. (1985) also have observed that many QWL programs have difficulty becoming institutionalized beyond the introductory stage, and it is too soon to tell if they will become a lasting feature of the industrial relations system.

4. Substitution of Technology for Labour New technology which is based on silicon chip micro computers is rapidly changing the nature of socio-technical systems in the work place (Child 1984, Trist 1981). Two of the most important changes are increasing technical capabilities to substitute capital for labor and increasing financial feasibility of making the substitutions. The cost of micro

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chip technology is constantly declining with the effect that it is becoming more and more possible to have machines take over many aspects of skilled work that historically could only have been done by workers (for example, computer assisted design [CAD] and computer assisted machining [CAM], robotics, and expert systems). Companies which fail to keep up with the new technology may find themselves at a significant cost disadvantage. For unions, the prospect of new technology has three major implications: (1) declining population of traditional membership, as technology takes over traditional jobs, (2) declining bargaining power of threats to strike, as plants require fewer and fewer operators, (3) new highly skilled, semi-professional entrants to the labor force with no tradition of union membership. Many instances exist of unions in effect going bankrupt due to the membership base shrinking below some minimal size to sustain the operationns of a union (Freeman 1986) or of marginal unions having to merge with other unions in order to maintain some sort of existence (AFL-CI01985). If technological substitution of jobs occurs on a large scale for some unions, their operational viability and bargaining power becomes seriously threatened and, of course, their legitimacy is diminished (witness the situation of newspaper printers' unions in England in their dispute with Rupert Murdoch). In the United States the AFL-CIO has become seriously concerned about recent declines in union membership and has advocated mergers of marginal unions and a series of programs to increase the variety of services offered to workers to arrest the decline and attract some non-traditional members. (The AFL-CIO strategy will be discussed later in this paper.)

5. International Competition Increasing international competition in North America has hit especially hard in unionized manufacturing industries. Foreign imports of either cheaper cost or superior quality (or both) have caused extreme pressure on many manufacturers to seek substantial reductions in domestic manufacturing costs. Alternatively, many manufacturers have created or sought offshore sources of supply and have cut back significantly on domestic manufacturing. In either case, the impact on many unions has been the same pressure to make concessions on wage demands and restrictive work practices or see jobs disappear to offshore lower wage locations. The AFL-CIO considers international competition to be the single largest current threat to unions and feels that the union movement has to develop innovative responses to counter the threat. Concession bargaining has been very difficult for unions and union members to accept, because the need for concessions has forced many radical changes to traditional (and presumably costly and inefficient) work practices. The previously mentioned inertia and lack of environmental responsiveness in the labor relations system (Kochan et al. 1985) has been severely jolted, and there have been many difficulties of adjustment. One result has been that some employers and unions have actually developed a new, more mature relationship based on a serious commitment to developing a joint compet-

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itive response to international competition. Others have failed to establish a new relationship and have suffered from an increasingly desperate situation. In cases where the employer and the union fail to reach an accord on concessions, the union membership faces a choice between continued support of the union and almost certain loss of employment, or breaking ranks with the union and acceptance of lower wage employment. In having to make this choice, the union member will likely perceive a loss in union legitimacy. Unfortunately in cases where an accord is reached on concession bargaining, the union members will still probably have to forego traditional levels of wages and work rules if the employer is to remain in business or if the plant is to continue manufacturing in the local area. Under these circumstances, it may be very difficult for the union membership to continue to accept the instrumental legitimacy of the union. The business press has extensive reports of current dissatisfaction and dissension within unions, as union officials and members try to grapple with the difficult consequences of international competition.

6. The Outlook for Union Legitimacy The individual impact of the environmental trends discussed in this paper is difficult to assess, although scattered evidence is available about some declines to union legitimacy actually having occurred. However, it is also important to note that all of these trends are occurring simultaneously, so that the impact of any one trend may be obscured or amplified by other trends. Certainly, there would appear to be a close relationship between increased international competition and substitution of technology for labor, for example, and between quality of work life and sophistication of personnel management. Some authors (Kochan for example) have suggested that concession bargaining may actually be encouraging to greater cooperation between management and labor, if both parties approach the task with a long range view to working on the development of a jointly satisfactory relationship. Both parties would have to adopt the point of view of being investors in the enterprise and work to ensure the continuing viability of the enterprise to provide employment for union members and earnings for capital. It remains to be seen whether or not such a sense of union-management partnership can be developed and sustained. An alternative approach is suggested by a recent policy paper developed by the AFLCIO in the United States which recommends a series of new activities for unions to sustain or reestablish union legitimacy (AFL-CIO 1985). Very briefly, the policy paper recommends exploration of the following types of new activities: a) unions must develop flexible models for representing workers, tailored to the needs of different kinds of workers and different work situations, instead of the traditional goal of uniform conditions of work; b) unions must continually seek out and address new issues of concern to different groups of workers and try to satisfy their concerns through collective bargaining rather than relying on legislative initiatives;

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c) unions should encourage programs affording greater worker participation in workplace decisions, providing that such quality of work life programs are grounded in collective bargaining; d) consideration should be given to establishing new categories of membership for workers not employed in bargaining units, and the AFL-CIO should undertake a study of possible services, benefits, costs, and fees to workers outside of bargaining units; e) unions should undertake a communications campaign to make the public at large aware of the contributions of unions to the work place and to society; f) unions need to provide additional opportunities for members to participate in union affairs in ways other than traditional attendance at union meetings; g) unions with serious membership declines have to contemplate mergers in order to maintain a viable scale of membership. It seems quite clear from an examination of those proposals and their underlying assumptions, that a serious concern exists in this union federation about legitimacy of unions. Many of the recommendations are directly intended to bolster declining legitimacy or to provide new means for sustaining legitimacy. Business organizations have considerable experience in attempting to adapt to significant environmental changes, and many businesses have had great difficulty in achieving necessary adaptation. It will be very interesting to observe how union organizations manage to respond to these same challenges.

References AFL-CIO (1985): The Changing Situation of Workers and Their Unions, Washington, D.C.: AFL-CIO Committee On The Evolution of Work. Angle, H. and Perry, J. (1986): Dual Committment and Labor-Management Relationship Climates, Academy of Management Journal, 29, 1, 31-50. Beer, M., Spector, B., Lawrence, P., Mills, D., and Walton, R. (1984): Managing Human Assets, New York: The FreePress. Betton, J. and Dess, G. (1985): The Application of Population Ecology Models to the Study of Organizations, Academy of Management Review, 10, 4, 750-757. Boisseau, R. and Caras, H. (1985): A Radical Experiment Cuts Deep Into The Attractiveness of Unions. Human Resource Management, Schuster, F. (Ed.) Reston, Va.: Reston Publishing Company, 392-395. Brett, J. (1980): Why Employees Want Unions, Organizational Dynamics, Spring, 47-59. Buss, D. (1985): Japanese-owned Auto Plants in the U.S. Present a Tough Challenge to the UAW. Human Resource Management, Schuster, F. (Ed.) Reston, Va.: Reston Publishing Company, 390-392. Child, J. (1984): Organizations: Problems and Practice, New York: Harper and Row. Foulkes, F. (1981): How Top Nonunion Companies Manage Employees, Harvard Business Review, September-October, 59, 90-96. Freedman, A. (1985): Changes in Managing Employee Relations, New York: The Conference Board.

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Freeman, R. and Medoff, J. (1979): What Do Unions Do? New York: Basic Books. Gilbert, E. (1986): The Impact of Union Involvement on the Design and Introduction of Quality of Work Life Programs, University of Toronto, unpublished PhD thesis. Goodman, J. and Sandberg, W. (1981): A Contingency Approach to Labor Relations Strategies, Academy of Management Review, 6, 1, 145-154. Hirschman, A. O. (1970): Exit, Voice and Loyalty, Cambridge, Mass.: Harvard University Press. Innes, E., Perry, R., and Lyon, J. (1986): The 100 Best Companies in Canada to Work For, Toronto: Collins Publishers. Kochan, T. and Barocci, T. (1985): Human Resource Management and Industrial Relations, Boston: Little, Brown and Company. Kochan, T., McKersie, R., and Katz, H. (1985): US Industrial Relations in Transition: A Summary Report. Perspectives on Personnel!Human Resource Management, 3rd Ed., Heneman, H. and Schwab, D. (Eds.) Homewood, 111.: Irwin Press. Meyer, J. and Rowan, B. (1977): Institutionalized Organizations: Formal Structure as Myth and Ceremony, American Journal of Sociology, 83, 2, 340-363. Odióme, G. (1984): Strategic Management of Human Resources, San Francisco: Jossey-Bass. Ondrack, D. and Evans, M. (1984): QWL at Petrosar: A Case Study of a Green-Field Site. Quality of Working Life: Contemporary Cases, Cunningham, B. and Whyte, T. (Eds.) Ottawa: Labour Canada. Ondrack, D. and Nininger, J. (1985): Human Resource Strategies - The Corporate Perspective, The Business Quarterly, 49, 4, Winter, 101-108. Pfeffer, J. and Salancik, G. (1978): The External Control of Organizations, New York: Harper and Row. Schuler, R. and MacMillan, I. (1984): Gaining Competitive Advantage Through Human Resource Management Practices, Human Resource Management, 23. Schuler, R. and Youngblood, S. (1986): Effective Personnel Management, New York: West Publishing. Schuster, F. (1985): Human Resource Management, Reston, Virg.: Reston Publishing Company. Spector, B. (1985): Notes on Why Employees Join Unions. Readings in Human Resource Management, Beer, M. and Spector, B. (Eds.), New York: The Free Press. Srinivas, K. (1984): The Labour Force and the Experience of Work. Human Resource Management: Contemporary Perspectives in Canada, Srinivas, K. (Ed.) Toronto: McGraw-Hill Ryerson. Trist, E. (1981): The Evolution of Socio-Technical Systems, Toronto: Ontario Quality of Work Life Centre.

The Role of Management in a Political Conception of Industrial Relation Level of the Enterprise Roy J. Adams

Abstract From a political perspective business managers may be thought of as governors of an enterprise. In this paper their political behaviour is compared to that of rulers of nation states. It is argued that just like national rulers of an earlier time, business rulers oppose democratization which implies new restrictions on their capacity to decide. They have, however, been more successful than national rulers in containing the advance of democracy. It is suggested that one important reason for this outcome is that business enterprises are generally considered to be fundamentally economic rather than political in nature. Thus political problems associated with business are not given the same attention by society as are economic problems.

1. Introduction It has often been remarked that the employment relationship may be regarded not only as an economic phenomenon but also as a political system (Chamberlain and Kuhn 1965, Commons 1921, Leiserson 1922, Mason 1959). However, despite many decades of discussion about issues such as industrial democracy, political analysis of employment relations has been slow to develop. Few political scientists have focussed their attention on the enterprise. They have instead been almost exclusively concerned with the problems of the state (see Dyson 1976). Indeed, most students of industrial relations who have employed political imagery have been economists (e.g. Chamberlain and Kuhn 1965, Commons 1921, Derber 1970), sociologists (e.g. Blumberg 1968), or industrial relations pluralists (e.g. Clegg 1960). In this paper I look at the enterprise as political scientists look at the state. The working proposition is that the state and the enterprise may be regarded as two manifestations of a single class of phenomena. Both are political systems which may be analyzed and compared utilizing a single set of concepts. In recent years there has been a large increase in the literature on the role of management in industrial relations (Godard and Kochan 1982, Gospel 1983, Gospel and Littler 1983, McKersie and Capelli 1984, MacDonald 1985, Poole and Mansfield 1980, Purcell 1983, Purcell and Sisson 1983, Sisson 1983, Storey 1983, Thurley and Wood 1983, Windmuller and Gladstone 1984). One of my objectives in this paper is to add to that Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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literature by developing the concept of managers as governors of enterprise. I will attempt to demonstrate that managers as rulers of enterprise have behaved in a manner almost identical to that of rulers of nation states. Both have vigorously sought to defend their unilateral right to rule. Managers have, however, been more successful. The result is that there is a discontinuity between state and enterprise governance forms. Contemporary Western states are democracies, but enterprises are not. From a legal-economic perspective, the discontinuity may seem to be natural. From a political perspective, however, it is very troublesome.

2. The Enterprise as Polity There are many ways to classify forms of governance, but one common typology has three variants: 1) autocracy in which the governors make and administer all of the rules unilaterally; 2) constitutionalism in which the governors rule within an institutional framework which constrains the decisions that they may take; and 3) democracy in which the governors are elected by and responsible to the governed. In their classic work on Management in the Industrial World (1959) Harbison and Myers proposed that this framework, which is commonly applied to nation-states, could also be usefully applied in industry. However, Harbison and Myers who were trained as economists were not entirely comfortable with political imagery. Instead of referring to the typology as one of governance forms, they spoke of it as a categorization of management strategies. In short, they applied political concepts metaphorically. The discussion that follows proceeds from the assumption that state governance is not merely a metaphor for enterprise governance but rather that the two levels are part of a single class of phenomena.

2.1 Autocracy Under this form governors rule dictatorially. They make administer, and interpret all of the rules regarding the conduct of the governed. They specify unilaterally, what is expected, permitted, and forbidden. The governed under autocratic rule have no right of participation in rule making. Usually, they may choose to leave the polity, but if they stay they must accept the dictates of the ruler. This description, it seems to me, is accurate when applied at either the nation or enterprise level. Under laissez-faire, free enterprise systems management typically makes all decisions regarding employees: who and how many to hire; what to pay; what hours employees should work; the pace of work; whether or not to train and if so who, how many, and in what depth; who to promote; who to fire; who and how many to lay off or dismiss; retirement age and conditions of retirement; and, of course, what to produce; where to produce it; the production technology; and the price of the product.

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There are, of course, constraints on management. Without labour there can be no production, and since firms under laissez-faire capitalism compete with each other to attract labour, conditions need to be competitive. Competition, however, has never reached the level of perfection that exists in abstract models, with the result that management, especially management of firms of any size, has a great deal of discretion to formulate internal rules and policies (see Lindblom 1977). Individual employees may, of course, negotiate the terms of their association with the enterprise, since within liberal democracy they can not usually be compelled to work for any one firm. However, in such negotiations, the bargaining power of management is far superior to that of the individual employee in most cases. As a result, potential employees are unable to insist upon the inclusion of participation rights as part of their contract. If such a clause is absent, Western legal tradition assumes that the contract contains "a set of implied terms reserving full authority of direction and control to the employer" (Selznik 1969: 136, see also Atiyah 1979, Ramm 1982). Even if individual employee bargaining power was somehow enhanced enormously, management would still control policy regarding issues such as job and pay structures, pensions, health and safety, training, and technological change. A separate deal with each employee would simply be impractical. Employees may participate in policy issues only through collective means, and since collective decision-making does not exist within classic laissez-faire free enterprise, the power to decide stays with management. Competition for participants does not differentiate state and enterprise governments. States often compete for labour. During their formative years, for example, Canada, the U.S., and Australia competed vigorously for skilled workers from Europe. More recently, Northern European countries sought to attract guest workers from southern Europe during the 1960's and 1970's. In both cases the bargaining power of the individual compared to that of the state was closely equivalent to that of the potential employee in comparison with the enterprise. Just as dictatorial kings could be benevolent or tyrannical, so may be enterprise autocrats. One common form of benevolent enterprise autocracy is paternalism (see Bendix 1963, Fox 1985, Harbison and Myers 1959). Under this governance strategy loyalty, appreciation, and deference is expected of employees in return for employment security, decent conditions of work, and reasonable pay. Paternalism in its extreme form (under which management specifies proper employee conduct over a broad range of personal issues) is no longer considered acceptable in much of the liberal democratic world, but milder versions are common. Paternalism is, of course, a fundamental aspect of the state governance form known as feudalism. Indeed, under feudalism relations between the state and its subjects and between employer and employee were closely integrated. For example, relations between peasants and the lord of the manor were a seamless web of political and economic obligations and institutions. Benevolent autocrats may unilaterally implement various schemes designed to permit employee (subject) input into decisions. For example, in the late 19th and early 20th century "employee representation plans" (often referred to disparagingly as company

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or yellow unions) were widely introduced throughout Europe and North America (see Douglas 1921). Their purpose was to allow employees, through representatives, to express their desires regarding many of the issues noted above. Management, however, always maintained final decision-making authority as well as authority to end the participation scheme. These schemes have their counterpart at the national level. For example, in countries which are nominally democracies or republics but are actually dictatorships (e.g. Haiti under the Duvaliers or the Philippines under Marcos) there is always a representative assembly. Its capacity to decide is always determined by the dictator. During the 1970's, in an era of labour shortage, inflation, and labour militancy many managements introduced schemes, such as autonomous work groups, which gave employees at the shop floor considerable control over their daily tasks. Such schemes were sometimes heralded as "workplace democracy" (see Nightengale 1982). But again, these schemes were (and are) more anologous to the freedom permitted by state dictators to their subjects to conduct their own affairs as long as the results were consistent with the objectives of the ruler. When subjects and ruler had different interests, the will of the ruler prevailed. For example, under feudalism, villagers were often permitted by the lord of the manor to manage their own affairs as long as the decisions which they reached did not go against his interests. Much the same can be said about the more recent relationship between colonial rulers and their colonial subjects. When autocratic rulers change their mind for whatever reason, they may alter participation schemes, regardless of the wishes of those affected. Examples at both state and enterprise level are innumerable (see e.g. Flaherty 1985).1 At either the state or enterprise level schemes in which the "rights" of the governed are entirely contingent upon the goodwill of an autocratic governor can not be legitimately referred to as democracy. (For a similar comment see Chell 1983).

2.2

Constitutionalism

A government rules constitutionally, when it is constrained by a body of rules which restrict the decisions it may take. Within the confines of those rules it may still decide unilaterally. Management rules constitutionally, when it is constrained by some combination of legal requirements (e.g. minimum wages and maximum hours) and agreements arrived at through negotiations with representatives freely chosen by the employees. During the past several decades legal rights granted to employees, and therefore restrictions placed on employers, have expanded considerably. Moran, noting this development, has argued that it represents a new step in the evolution of citizenship (Moran 1979). In the 18th century civil rights, such as the freedom from arbitrary arrest, came into existence. Political rights, such as the right to vote, began to be extended in the 19th century. The first half of the 20th century saw the advent of widespread social rights, such as the right to a free education. Finally, since World War II industrial citizenship rights - the right not to be discriminated against for irrelevant

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reasons, the right to a safe workplace, the right not to be dismissed arbitrarily - have become firmly embedded. Within constitutional systems mechanisms typically exist which permit subjects to influence the decisions of the government. Constitutional monarchs rule (or nowadays only reign), for example, within a framework of decisions and procedures negotiated with a representative body such as a parliament. In industry today employees may participate in the making of enterprise policy via some combination of representation by trade unions, statutory works councils, and delegates on corporate boards of directors. As a result of these institutions, most enterprises in the liberal democratic world must be classified today as being governed constitutionally. However, constitutional governance varies considerably. Britain, for example, has had a constitutional monarchy for several hundred years, but the power of the monarch, the mechanisms of decision making, the number of subjects (citizens) able to participate, and the range of issues open to joint discussion and decision have changed greatly over the years. There is also a great deal of variability when one looks at enterprise governance today. For example, the U.S. depends almost entirely on union-management collective bargaining, whereas West Germany employs a combination of collective bargaining, works councils, and worker participation on boards of directors. In the U.S. collective agreements apply to only about 20% of the labour force, whereas in Scandinavia, West Germany, Austria, and the Low Countries (as examples) collective agreements apply to most employed people (see Wood 1985). West Germany specifies issues subject to works council-management co-decision at the enterprise level, whereas in Canada, Britain, and Japan the range of issues to be decided under collective bargaining is largely left to the parties to decide. Those countries do not utilize statutory works councils or employee board representation as a general rule. Impasses on joint labourmanagement bodies may be settled by resort to strikes, lockouts, arbitration, or by unilateral decision.2 Variation within the category of constitutional governance occurs on three major dimensions of subject participation: the range of issues on which they may participate; the degree of participation (e.g. information, consultation, co-determination); and the level at which participation takes place (see Poole 1978). When applied to the state, the appropriate general levels are local, provincial, and national. When applied to the enterprise, they are shop floor, establishment, and company. Today most management spokesmen accept in principle the idea of constitutional governance in some form or degree (see Windmuller and Gladstone 1984). The general propensity, however, is to avoid the addition of new constraints to those which already exist, regardless of the likely impact. The governments of American companies such as IBM, Tandy Corporation, Texas Instruments, and Proctor and Gamble are examples of very weak constitutionalism bordering on dictatorship. They vigorously oppose collective bargaining, despite the widespread acceptance of collective bargaining in principle,

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and despite the existence of a national policy designed to encourage collective bargaining. The only formal constraints on their unilateral power to rule are government imposed standards regarding issues such as maximum hours, health and safety, and human rights. In North America and Britain management generally opposes participation by workers on boards of directors despite implementation of such schemes in several European countries. In West Germany management opposes attempts by unions to strengthen shop floor union committees, even though North American employers have dealt with strong shop floor unions for many decades. Japanese employers operate successfully with enterprise unions in Japan, but when they open branches in North America many pursue union-avoidance as vigorously as their native counterparts. This universal opposition to forces in the direction of more democracy is strongly reminiscent of the behavior of state governments over the past several centuries (Therborn 1977). Indeed, the analogy is almost exact (see Leiserson 1922). Western rulers fought each step of the way against attempts to limit their powers to decide. Managers do precisely the same thing. A general principle appears to be at work: once possessed, power is given up only reluctantly and only under duress. However, once a new step is taken down the road away from dictatorship towards democracy and the new form of governance becomes institutionalized, it is common for both state and industrial governors to embrace it. Most participants in state governance today are avid supporters of democracy, although their predecessors vigorously opposed it. Employers tried to destroy early trade unions, but today unions are accepted as important institutions in liberal democratic society. German management protested strenuously against the extension and strengthening of the co-determination system, but now that it is in place widespread opposition has ceased (Streeck 1985). British management generally has not attempted to abrogate its relations with trade unions in the 1980's despite the existence in power of a government opposed to unions and collective bargaining (Brown 1985). Employers in the U.S. are an exception. Under the Reagan administration many have attempted to throw off the constitutional constraints of collective bargaining and return to quasi-dictatorial forms of government (see e.g. Kochan et al. 1984).

2.3 Democracy The third form of governance in Harbison and Myers' typology is democracy. The term "democratic" has positive connotations in the contemporary world, and it is therefore used without much discrimination. Many dictatorships in the less developed world refer to themselves as democracies in order to present a positive and modern image. Students of industrial relations, as noted above, sometimes use it to refer to management initiated and controlled schemes. It has also been used to refer to labour-management decision-making via co-determination procedures in West Germany and collective bargaining in the U.S. (see Windmuller 1977).

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Democracy, however, is customarily defined as a political system in which the governors are elected by and are responsible to the governed. We follow that custom here. German co-determination and American collective bargaining should be thought of as forms of constitutional governance. Management initiated participation schemes are examples of autocratic benevolence. Democracy, as defined above, is universally practiced in the economically advanced, market oriented nations at the level of the state. It is practically absent at the enterprise level. The only exceptions are the small number of employee owned and controlled companies. 3 Even though all of the nations of the industrialized, market oriented world are governed by democratic procedures, the modalform of governance in industry is weak to moderate constitutionalism. Everywhere in the West managers have been able to reserve to themselves discretion in regard to a wide range of issues which in the national sphere would be open for debate and liable to decision by representatives of the citizenry. From economic and legal perspectives this discontinuity between national and enterprise governance may seem to be natural. The starting point implicitly accepted in economic analysis is absolute managerial power to decide. In economic theory labour is simply a commodity to be purchased at market prices and thereafter to be manipulated freely without constraint just as other commodities. In legal theory the individual is formally considered to be able to negotiate any arrangement, and therefore, the arrangements which exist must be mutually satisfactory to both labour and management. They should, as a consequence, be approved by society as a whole. In practice, as discussed above, management's bargaining power is usually vastly superior to that of potential employees. As a result, the practical starting point is, as in economic theory, absolute management power to decide. Disciples of economic and legal theory generally agree that such absolute power is somewhat problematic in democratic society, and they, therefore, are often willing to accept that some constitutional checks on that power are justified. They are, however, likely to emphasize the probable negative consequences of moving too far away from pure markets (e.g. possible loss of economic efficiency) or pure contracts (e.g. loss of freedom). In short, economic and legal theory are conservative with regard to possible change from the status quo. From the political perspective, on the other hand, the discontinuity between governance forms at the state and enterprise levels is a matter of deep concern. In any nation which adheres to and cherishes democratic decision-making one would expect that all institutions in that society would adhere to democratic procedures, unless very good reasons for deviating from the ideal could be produced. For example, democracy is not practiced in the military services of democratic nations, because there is general agreement that the practice of democracy would severely obstruct the military from achieving its objectives. Democracy is, however, practiced in most clubs, associations, trade unions, municipalities, etc. Indeed, whenever new organizations are created, democratic pro-

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cedures usually emerge without effort or discussion. Why then is democracy not practiced in industry? Several arguments have been put forth to justify its absence. One argument is that public corporations already are democracies of another sort shareholder democracies (Eisenberg 1976). Shareholders (citizens?) elect the board of directors (parliament?) who appoint the management (bureaucracy?). Management is legitimized by and responsible to the shareholders. This conception has two major flaws as a defense against criticism that the corporation is not democratic. First, as many observers have noted, a large gap has opened during the twentieth century between ownership and the control of the corporation (see Berle and Means 1932, Herman 1981). In most large corporations top management selects the board of directors. Shareholderes generally make little effort to involve themselves in the day-to-day operations of the firm. They are, for the most part, interested in return on investment not enterprise governance. Second, as noted by Chayes, management does not "govern" the shareholders, it governs the employees (Chayes 1959). Thus, under shareholder democracy the governed have no say in choosing their governors nor are the governors responsible to the governed. In short, shareholder democracy is not democracy at all. A second (and related) argument against enterprise democracy is, that if it were established by law the shareholders would be disenfranchised and would, as a result, lose some of their property rights. In essence, so the argument goes, taking away the shareholders' right of ultimate control is tantamount to the expropriation of property without compensation. Because property rights are held to be a fundamental pillar of liberal democratic society, the establishment of democracy in industry is argued to be destructive of basic institutions. This argument, as Ellerman has recently demonstrated, is unsound (Ellerman 1983). When capital and labour meet, the party which will assume the role of hirer or hiree is indeterminate. In practice capital almost always hires labour, but labour may - without upsetting the premises of property rights theory - hire capital. To achieve that end Ellerman proposes "reversal contracts" under which employees of a corporation could "form another properly structured self-managed firm which could then borrow the money to purchase or lease the requisite capital goods from the remaining shell of the old capitalist corporation" (p. 275). The reason why capital usually hires labour is because "the holders of capital have traditionally held the power to make the hiring contract in their favor" (p. 270). More fundamentally than Ellerman's argument (which is constrained by legal-economic thought), the idea that the right to control human organization should be vested in the owners of capital is a vestige of 19th century social relationships. For much of the period between the 18th and mid-20th century, western nations were "landowners' democracies" and the state was considered to be the agent of landowners' interests (see Atiyah 1979, Therborn 1977). But the right to rule nations no longer adheres to landownership. The only justification for property owners continuing to enjoy the right to rule organizational polities would seem to be that it has always been that way. The

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custom is entirely inconsistent with the contemporary principle that governors should be responsible to the governed. A third argument is that self-governed enterprises might be substantially less efficient and effective than the weakly constitutional autocracies which now exist. In the best interests of society as a whole it is just as necessary to have an autocratic business sector as it is to have an autocratic military. A version of this argument is commonly made by business managers each time a new constraint on their power to decide is contemplated. For a short period after the collapse of feudal institutions, such as urban guilds and rural custom and practice, managers and entrepreneurs had almost complete freedom from regulation and control. Since then they have vigorously opposed in turn the emergence of unions, factory laws, various social insurance schemes, and most recently proposals in Britain, Sweden, and West Germany to increase employee participation in enterprise decision-making.4 A major reason, which they typically have put forth in opposition to movement away from autocracy towards democracy, is that the new constraints will make it increasingly difficult for them to carry out their primary societal function of organizing and directing production in an efficient and effective manner. However, research on the impact of increased employee rights and participation does not generally support their allegations. Instead, increased participation, according to one recent review, "rarely leads to a decline in productivity" far more often it either has no effect or results in an increase in productivity" (Dahl 1984: 60). The one major experiment in employee democracy on a national basis - Yugoslavia - is generally considered to be an economic success: After reviewing the impact of legal constraints on management, Lindblom concluded that, "businessmen have commonly demanded of government more indulgences than are actually necessary to motivate their required perfomances. As some of these indulgences have been taken away, their performance has not faltered" (Lindblom 1977: 177).

The negative productivity arguments made by management against democracy are very reminiscent of the arguments offered against political democracy. Anti-democrats argued that democracy would produce chaos and a deterioration in the quality of life for the society as a whole. In practice prosperity and democracy have advanced together. At the level of the state today there is no discussion of tradeoffs between democracy and economic efficiency. The very idea that one might give away democracy in exchange for greater economic performance is repugnant. The objective is the achievement of the highest economic performance within the context of democracy. There is no obvious or convincing reason why a similar objective could not be set at the enterprise level. Among management theorists there is widespread agreement that managers of large, modern corporations should take into consideration the interests of all constituents of the enterprise. For the most part, however, the theorists do not propose that formal procedures be implemented in order to ensure that end. Proposals that representatives of various constituency groups be awarded seats on corporate boards of directors have generally been rejected both by supporters of enterprise autocracy and by supporters of enterprise democracy (see e.g. Baldwin 1984, Ellerman 1983). The former argue that

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special interest groups will not be able to take a broad view of the interests of the enterprise as a whole, and the latter argue that it would be difficult to identify clearly some of the constituencies and that, at any rate, none of them have a stake in the enterprise so fundamental as that of the employees. Despite such allegations, in some countries quasi-public institutions such as hospitals and universities seem to operate effectively with multi-constituency governing boards (see e.g. Weiler 1980). A fifth and widely held basis for opposing enterprise democracy is that no convincing case for reform has been made (see Eisenberg 1976, Simon 1983). Proponents of this view argue that contemporary schemes do permit multiple stakeholders to influence managerial decisions. Shareholders may make use of their property rights if they see fit to do so. Employees may form unions or participate in relevant decisions through works councils or board representation where such schemes are in effect; consumers and environmentalists may form associations and cajole the government to intervene. Moreover, the operation of product, capital, and labour markets place constraints upon management to behave in a manner consistent with the interests of consumers, shareholders, and workers respectively. There are at least two problems with this defence. First, there is a considerable amount of evidence which suggests that current institutions do not provide entirely satisfactory checks on managerial decision-making. During the past decade or so, many well publicized incidents of consumer, shareholder, and employee complaints against unilateral management decisions have come to light (see Baldwin 1984, Nader 1984). The most extensive study of employee participation in the liberal democratic world concluded that employees have little influence on most managerial decisions. Even in countries such as Sweden and West Germany, which are considered to have advanced employee participation schemes, employees have only a modest capacity to influence the making of enterprise policy (IDE 1981). A second problem with the defence is that it proceeds from the legal-economic status quo and in doing so undervalues democratic decision-making. It looks at the issue from the perspective of the autocrat and says: "Why change?" instead of looking at it from the democratic point of view and saying: "Why not democracy?"

3. Why the Discontinuity? My conclusion from this brief review is that the justifications for the virtual absence of democracy in industry are - from the perspective of the democrat at least - unconvincing. Why then is the present situation accepted by societies which highly value democracy in the abstract? A major reason, it seems to me, is because of the key role played by business managers in market societies. A great deal of reliance is placed upon the professional skills of management to effectively organize and direct production and distribution. Managerial and entrepreneurial ability is a resource which is scarce in the world (Harbison and

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Myers 1959). The high standard of living in the advanced, market countries is largely dependent upon the willingness of business managers to effectively use their skills. As a result, government (responsible to the public for economic performance) tends to coddle management - to give businessmen a great deal of what they want (Lindblom 1977). One thing which managers apparently want is power. The evidence seems to suggest that they do not need as much power as they claim to need in order to produce effectively - but they want it nonetheless. Power, it seems, has high intrinsic value. The contemporary disparity between state and enterprise governance can be interpreted to be the result of a deal between management and the state acquiesced in by society as a whole. Society accepts quasi-dictatorial management as a price it must pay in order to have management exercise its valuable talents on behalf of society as a whole. This deal, although real enough, is not widely understood, in large part because of the nonavailability of political imagery with which to assess it. A combination of legal and economic concepts dominate public discussion of employment relations. Terminology such as "industrial democracy" is often considered to the hyperbolic. Democracy is considered to be no more than a romantic metaphor applied to an essentially economic phenomenon. National governments which practice dictatorship and cling to dictation despite formal adherence to democratic values are regularly reviled in the press. However, when corporations move towards dictatorship (such as those in the U.S. which are now in the process of throwing off even the mild form of constitutionalism embodied in collective bargaining) protest is muted. Such developments are commonly assessed against economic instead of political criteria. Management is not considered to be fleeing from its political responsibilities. It is simply making strategic economic decisions (see Kochan et al. 1984).

4. Conclusion Because legal-economic imagery dominates both research and public discussion of employment relations, it is difficult to think seriously of the enterprise as a political system subject to evaluation against political criteria. A careful reading of the literature on industrial democracy indicates that political imagery is often applied to industry metaphorically rather than in earnest. Rarely is the enterprise seriously held up against the political standards normally applied to the state. I have tried to demonstrate here, however, that state and enterprise may be credibly and usefully analyzed using similar analytic tools. The equation is not, of course, perfect, but the governance of enterprise is at least as like state governance as are labour markets like money markets or as are employment contracts like commercial contracts.

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It is an accident of intellectual history that legal scholars and economists instead of political theorists effectively staked their claim to primacy in the analysis of employment relations. It is happenstance, not immutable reality, that has given us a legaleconomic vocabulary instead of a political lexicon with which to describe and evaluate employment relations. Had a major political theory of employment relations been published early in the 19th century, market terminology might today appear to us to be contrived, exaggerated, metaphorical at best when applied to labour-management relations. From a political perspective, the role of management in liberal democratic society is twofold. First it has the professional, technical task of organizing and operating the economic machinery of society. For taking on that task competent business managers are accorded status, wealth, and power. As a necessary consequence of taking on those duties, management must also take on the role of governor of an enterprise polity. It can not escape from the necessity to make and administer rules with respect to members of that polity. Because it assumes a political character, it may be and should be assessed against political criteria. Governments under liberal democracy are evaluated against democratic principles. When managements are so evaluated, one finds that in general they are anti-democratic. Since power has intrinsic value, that opposition should not be surprising. The fault with the contemporary disparity between enterprise and state governance does not lie, it seems to me, entirely on the shoulders of management. Part of the blame must be attributed to society as a whole and to the intellectual community. Society has not vigorously demanded that managers live up to democratic principles, and intellectuals have not properly equipped society with the wherewithal to see the necessity of doing so.

Notes 1 A recent example is the case of People Express Airlines in the U.S. Begun as a model of employee participation, each employee was referred to as a manager and was provided with shares and therefore a right to participate in profits. In recent years, however, performance of the firm has been slipping and therefore (according to the New York Times, March 7,1986) its president and initiator of the participation scheme has been behaving increasingly "autocratic". 2 For a more extensive discussion of the differences between countries, see Bean 1985. 3 The large corporations in Japan may be another partial exception. The governors are not elected by the governed, but to a much greater degree than in the West the governors behave as if they are responsible to the governed. Decisions are commonly taken which are designed to maximize the welfare of the entire corps of regular employees rather than the welfare of top management or of the shareholders. Nor is this decision pattern entirely benevolent as it is sometimes characterized as being. Instead, the pattern is one result of extensive labour-management conflicts which took place in the 1940's and again in the 1960's. It would be very difficult for management to withdraw unilaterally from it (see Weiler 1986). 4 On recent employer policy in Britain, Sweden, and Germany see Windmuller and Gladstone 1984

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and Juris et al. 1985. For a discussion of employer reaction and strategy regarding trade unions see Adams 1981. It is not entirely true, as some observers have suggested, that progression has been from total employer freedom to decide to increasing constraint (see Stewart 1963). Medieval industrial relations in Europe are probably best characterized as constitutional. Urban masters were constrained by guild rules, and rural lords were held back by the strength of custom and practice. Unconstrained industrial autocracy developed as a result of the industrial revolution which destroyed previously existing customs and institutions (see Bendix 1963).

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Fox, A. (1985): History and Heritage: The Social Origins of the British Industrial Relations System, London: Allen and Un win. Godard, J. H. and Kochan, T. A. (1982): Canadian Management Under Collective Bargaining: Policies, Processes, Structure, and Effectiveness, Union Management Relations in Canada, Anderson/Gurderson (Eds.), Don Mills: Addison-Wesley. Gospel, H . R . (1983): New Managerial Approaches to Industrial Relations: Major Paradigms and Historical Perspective, The Journal of Industrial Relations, 25, June: 162-176. Gospel, H. R. and Littler, C. R. (Eds.) (1983): Managerial Strategies and Industrial Relations, London: Heineman Educational Books. Harbison, F. and Myers, C. (1959): Management in the Industrial World, New York: McGraw-Hill. Herman, E. S. (1981): Corporate Control, Corporate Power, Cambridge: University Press. IDE International Research Group (1981): Industrial Democracy in Europe, Oxford: Clarendon Press. Kochan, T. A. McKensie, R. B. and Capelli, P. (1984): Strategic Choice and Industrial Relations Theory, Industrial Relations, 23, 1, Winter: 16-39. Kuhn, J. W. (1978): To Whom and For What Are Business Managers Responsible? Columbia Journal of World Business, 13, Winter: 52-61. Leiserson, W. M. (1922): Constitutional Government in American Industries, American Economic Review, 12, 1, March: 56-96. Lindblom, C. E. (1977): Politics and Markets, New York: Basic Books. MacDonald, D. (1985): The Role of Management in Industrial Relations and Some Views on its Conceptualization and Analysis, Journal of Management Studies, 22, 5. 152. Moran, M. (1979): Citizens and Workers, Political Quarterly, 50: 59-70. Nightingale, D. V. (1982): Workplace Democracy, Toronto: University of Toronto Press. Palmer, G. (1983): British Industrial Relations, London: George Allen and Unwin. Poole, M. (1978): Workers' Participation in Industry, London: Routledge and Kegan Paul. Poole, M. and Mansfield, R. (1980): Management Roles in Industrial Relations, Farnborough: Gower. Purcell, J. (1983): The Management of Industrial Relations in the Modern Corporation: Agenda for Research, British Journal of Industrial Relations, XXI, 1, March: 1-16. Purcell, J. and Sisson, K. (1983): Strategies and Practice in the Management of Industrial Relations, Industrial Relations in Britain, Bain, G.S. (Ed.), Oxford: Basil Blackwell. Ramm, T. (1982): Model of a European Individual Employment Contract, Comparative Labour Law and Industrial Relations, Blanpain/Millard (Eds.), Deventer, Netherlands: Kluwer. Selznick, P. (1969): Law, Society and Industrial Justice, New York: Rüssel Sage Foundation. Simon, H. A. (1983): What is Industrial Democracy? Economic Impact, 43: 76-83. Sisson, K. (1983): The Management of Collective Bargaining: An International Comparison, Oxford: Blackwell. Stewart, R. (1963): The Reality of Management, London: Heineman. Storey, J. (1983): Managerial Prerogative and the Question of Control, London: Routledge and Kegan Paul. Streeck, W. (1985): German Industrial Relations, Paper presented to the Annual Meeting of the Industrial Relations Research Association, New York. Therborn, G. (1977): The Rule of Capital and the Rise of Democracy, New Left Review, 103: 3-41. Thurley, K. and Wood, S. (Eds.) (1983): Industrial Relations and Management Strategy, Cambridge: Cambridge University Press. Weiler, J. M. (1986): The Japanese Labour Relations System: Lessons for Canada, Labour-Management Co-operation in Canada, Riddell (Ed.), Toronto: University of Toronto Press. Weiler, P. (1980): Reconcilable Differences, Toronto: Carswell.

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Windmuller, J. P. (Ed.) (1977): Industrial Democracy in Comparative Perspective, Annals of the American Academy of Political and Social Science, 431, May 1977. Windmuller, J. P. and Gladstone, A. (Eds.) (1984): Employer Associations and Industrial Relations, Oxford: Clarendon Press. Wood, S. (1982): The Study of Management in British Industrial Relations, Industrial Relations lournal, 13, Summer: 51-61.

Management Between "Old" and "New" Production Concepts and Its Dependence on Factors in the System of Vocational Training and Employment Margit

Osterloh

Abstract Recently, publications in very different disciplines which foresee "the end of the division of labor" and "the end of mass production" have created a furor. In these publications a return to skilled industrial work based on integrated tasks is characterized as a new alternative for management decisions. The authors state that, due to two factors - the impact of microelectronics and altered market requirements - , new discretion is available to managers which makes it possible to choose between the "old" production concepts based on Taylor and "new" concepts of flexible specialization. However, various factors in the system for vocational training and employment in the individual industrial countries greatly limit discretion with regard to the "old" and "new" production concepts. Some of the most important factors are: - the qualification potential represented by skilled workers; - a system for vocational training and employment which aims at developing socialization in the company and providing long-term employment; - a cooperative system of industrial relations. These factors are discussed in detail.

1. Introduction Recently, a number of new publications written largely independent of each other in different disciplines have created a furor by presenting a return to skilled industrial work based on integrated tasks as a new alternative for management decisions. The publications in question are a book by the German industrial sociologists Kern and Schumann published in 1984 (2nd ed. 1985) with the programmatic title Das Ende der Arbeitsteilung? (Is the Division of Labor Coming to an End?) and a volume by the American economist Piore and political scientist Sabel at the Massachusetts Institute of Technology (MIT). The German translation of this book (1985) also has a programmatic title: Das Ende der Massenproduktion (The End of Mass Production). The arguments of other authors, such as Sorge (1985) and Dohse/Jürgens/Malsch (1985) of Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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Berlin's Wissenschaftszentrum, also run along the same lines. In their successful book In Search of Excellence the organizational practitioners Peters and Waterman (1984) even state that, in order to counter the "Japanese challenge," it is urgently necessary to break with Taylor's organizational concepts and return to organizational forms based on people as the most important source of production potential. These publications have met with widespread interest and approval by highly diverse schools of thought, primarily because they confirm the possibility or necessity of reducing the division of labor based on the Taylor method and increasing the discretion available to production workers (Kador 1984, Posth 1985, Steinkuhler 1985. See also the journals Die Wirtschaftswoche, No. 35/1985 and Die Mitbestimmung No. 10/11 1985). However, another observation is equally interesting: in contrast to the economic-technological or situational determinism that once prevailed in industrial sociology and in the contingency approach of organization theory, these publications conclude that the manager's discretion is also expanded. This "return of the actor" to organization theory is suggested by still another programmatic book title, Le retour de I'acteur (Touraine 1984). It is associated with a newly awakened interest in individual "micropolitical" action strategies (Kiipper-Ortmann 1986), as well as a new interest in the social construction of (Berger/Luckmann 1980) and cultural limitations on organizational reality (Ebers 1985). But it is precisely the now highly fashionable culture debate that points out the limitations on managers' newly discovered discretion. Such observations make it possible to find a middle course between the excessive phenomenological emphasis placed on the strategies of individual actors sometimes found in the corporate culture debate (critically Ebers 1985) and simple situational determinism, whose contingency approach has been criticized repeatedly for some time now (for example, see Kieser/Kubicek 1978: 132ff., Schreyogg 1978: 230ff., Staehle 1987: 82ff.). In this respect a discussion of the factors influencing the choice between "old" and "new" production concepts provides an exemplary model for such a middle course at the same time. In order to explain which culturally created restrictions limit choices however, first it is necessary to explain the reasons such options are available.

2. Technological and Market-Related Prerequisites for New Production Concepts The idea that division of labor based on the Taylor method wastes important productivity potential is by no means new. The factory community movement (Werksgemeinschaftsbewegung) in Germany during the 1920s and the human ressources movement of the 1970s were characterized by calls for expanding discretion in production (see, for

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example, Argyris 1957, Herzberg et al. 1959, Likert 1961, McGregor 1969, Thorsrud/ Emery 1982).1 Nevertheless, he undeniable success of Taylor's organizational principles prevented these calls for change from leading to more than experiments and demonstration projects (Kern/Schumann 1984: 48, 98). During the past years, however, a striking change has occurred, due to the coincidence of two new factors. These are: a) altered market requirements and b) the impact of microelectronics. About a): The altered market requirements are being created by increasingly saturated demand for mass-produced goods (Piore/Sabel 1985) as well as a pronounced shortening of product life-cycles in the case of high-technology products. In both cases changes in corporate strategies are required: here economic advantages can be gained primarily by means of diversification strategies which make "economies of scope" possible instead of "economies of scale". This means that less effort is devoted to achieving cost advantages through mass production than to achieving synergetic effects by offering a wide variety of products (Buhner 1985: 27, 261 f., Goldhar/Jelinek 1983), for example by means of: - customer-oriented production; - reduced preproduction and inventory costs; - short throughput times. About b): The required variety of products is only made possible in the first place through intensified application of microelectronics. This is encouraged by miniaturization and cost reductions. Even in the case of small batch production it is now possible to reduce unit costs through microelectronics, because automation no longer leads to reduced flexibility, as it used to, but instead has precisely the opposite effect because the new technologies are programmable for differing applications (Kern/Schumann 1985: 170ff., Piore/Sabel 1985: 286ff., Staudt 1978: 374). Taken together, both factors have led to a considerable reduction of repetitive tasks in production and increased qualification requirements. For the first time since industrialization began, dismantling the Taylor system is no longer only a moral appeal, but also makes sense economically. However, such a move away from the Taylor system does not occur inevitably; among other things, it is dependent on managers' patterns of interpretation. In this connection Kern and Schumann (1985) distinguish between two managerial types: - The technocratic, narrow-minded manager tries to achieve success through a hierarchically centralized organization, minimizing scope for decision making during the execution phase, and using automation to eliminate most possibilities for human intervention in production (see ibid.: 155ff.). - On the other hand, the empirically oriented, non-ideological manager works to achieve success by decentralization of responsibility and relying on the production

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worker's independence and competence. He assumes that it will not be possible to dispense with skilled workers in the future either and that, therefore, it is essential to ensure that their entire productive capacity remains available to the firm (see ibid.: 164 ff.). Both approaches can make sense economically. To this extent it is necessary to agree with the authors that the conditions imposed by technology and by the market do not dictate one solution or the other. However, the analysis by Kern and Schumann (1985) disregards historical and cultural factors for the most part, and, furthermore, it is confined to developments in the Federal Republic of Germany. By contrast, the studies by Piore and Sabel (1985) and by Sorge (1985) make it clear that various national cultures present different conditions for the realization of the "old" and "new" production concepts and that in particular the structure of the vocational training system and employment system, and also the system of industrial relations, are of decisive importance in this connection. 2 Their effects are twofold: - On the one hand, they influence management patterns of interpretation, i.e. managment's subjective estimate of possibilities for discretion. - On the other hand, they constitute social and socioeconomic conditions that must be fulfilled and thereby set objective limits on management choices. In accordance with the overall theme of this conference, the present discussion will deal only with the imitations placed on objective discretion, even though it can be assumed that close correlations exist between subjective and objective discretion (Osterloh 1985).

3. Qualification-Related Prerequisites for the Introduction of New Production Concepts In order to determine which objective limitations are imposed by the system of vocational training and the system of employment in connection with the introduction of new production concepts, it is first necessary to clarify how qualification requirements change when such new concepts are introduced. The new technologies shaped by the influence of microelectronics not only eliminate repetitive elements from operative performance to a considerable extent, but they also fundamentally transform the relationship between man and machine: the worker is no longer an extension of the machine; instead, his tasks are now largely disconnected from it. The product is no longer the real object of work, but rather disruptions in production processes. This means, worker productivity can no longer be monitored by the number of units produced. Instead, the functioning of the entire installation is the criterion for assessing his work. Most work consists of error detection and preventive inspections. The supervisor, however, is hardly in a position to monitor the effective-

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ness of such work; at the most it can be judged within the working team (Kern/ Schumann 1984: 87). In addition to this, a new system of production control has gained acceptance, especially in the auto industry (Dohse/Jiirgens/Malsch 1985: 57 f.): the programmability of microelectronic equipment makes it possible to reduce inventory costs considerably by means of a just-in-time system, characterized by demand-synchronized production on the one hand and, on the other hand, by supplies of pre-fabricated components which arrive just before they are needed. 3 As a result of these two measures, it is possible to minimize buffer and intermediate storage. At the same time, however, the production process becomes more susceptible to breakdown, so that the firm must depend more heavily on its suppliers and employees to eliminate bottlenecks quickly. Because of these features characterizing the new technologies, different employee qualifications are necessary: on the one hand, these new requirements are related to the so-called functional qualifications, i.e. the extent and type of specifically technical and specialized abilities, skills, and knowledge. On the other hand, they are related to the so-called extrafunctional qualifications, which include normative orientations such as willingness to accept responsibility, work discipline, willingness to adapt, and willingness to identify with the goals of the respective organization. 4 With regard to functional qualifications, it is true that the new production concepts clearly lead to requirements for higher qualifications. However, not so much specialized professionals are in demand as employees with mid-level qualifications and practice-oriented vocational training who are capable of grasping the production process as a whole (Fürstenberg 1985: 63, Kern/Schumann 1985: 77,86). In this connection experience gained within the firm is particularly significant compared to knowledge acquired in educational institutions outside the company. Such in-firm experience not only makes it possible to be comprehensively informed about company production processes but is also significant as far as extrafunctional qualifications are concerned, since greater loyalty can be expected from someone who has worked for company over a long period of time. In view of the production process's susceptibility to breakdown described earlier, this is important in order to compensate for the lack of external monitoring possibilities through the internalization of norms and standards. The finding by Kern and Schumann (1985:104,285) that, especially in the auto industry and large chemical firms, the employees who work with new technologies have completed professional or vocational training but are assigned to tasks below their educational level, points out the special role played by extrafunctional qualifications when new production concepts are introduced. This makes it seem likely that specialized knowledge on a certain subject is of secondary importance to companies and that skilled workers' qualifications are valued more because of the normative orientation and general competence indicated by the fact that they have completed their training (Windolf/Hohn 1984: 98ff.). 5

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4. Factors in the Vocational Training System and Employment System Which Influence Decisions in Favor of Old or New Production Concepts By examining the altered qualification requirements described above, it is possible to determine which conditions the vocational training and employment systems must provide to make the introduction of new production concepts more probable. These are: a) an adequate pool of skilled workers; b) a vocational training and an employment system which aim at developing socialization in the company and providing long-term employment; c) cooperative industrial relations. About a). A study by Sorge comparing the machine-tool industry in the Federal Republic of Germany and Great Britain clearly substantiates the significance of the role played by the potential of the vocational training system for providing skilled workers when decisions are made in favor of old or new production concepts. He shows that, where computerized numerically controlled machines are employed in the Federal Republic of Germany, shop-floor programming is much more common, i.e. programming by the operator, machine setter, assistant foreman, or foreman. 6 In Great Britain, on the other hand, responsibility for programming as well as other forms of work scheduling is much more frequently shifted out of production or the workshop and assigned to those responsible for production technology. For this reason, "empirical-non-ideological" or "new" production concepts, which are equated with shop-floor programming in the machine-tool industry (Kern/Schumann 1985: 168), are more common in the Federal Republic of Germany than in England. Sorge (1985: 163 ff.) describes in detail how the different vocational training systems traditional to these two countries are responsible for such developments: compared to the Federal Republic of Germany, in England the number of skilled workers is considerably smaller, due in part to higher wage costs for apprentices. 7 In addition to this, in England the vertical division of labor as well as the difference in status between technicians and skilled workers are greater, and on the whole the apprenticeship is valued much less as a vocational training instrument than it is in Germany. 8 These factors make it more difficult to reintegrate tasks at the skilled worker level, even though such reintegration seems to be technically possible and to make sense economically, as numerically controlled machines without microcomputer equipment are replaced by CNC machines. Kern and Schumann (1985: 109) point out that the introduction of new production concepts in the German auto industry is facilitated because of the increase in workers who have had vocational training relevant to automobile manufacture. According to their data (ibid.: 89), between 1960 and 1981 for an average transfer line the share of repetitive tasks dropped from 90% to 15%, while the share of equipment monitoring increased from 10% to 85%. 9 This corresponds to the structural change that has taken place in the labor market, where it is becoming less and less necessary to hire unskilled

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workers and/or foreigners: of the younger qualified semi-skilled workers, who began to work in vehicle construction after 1975, 45% have had vocational training relevant to their work, compared to only 25% of the older workers (see ibid.: 341). The influence of labor supply on forms of work organization can also be illustrated by the following: during the 1960s in the Federal Republic of Germany, it was possible to take advantage of foreign labor to compensate for the labor shortage at that time, but this could not be done in Japan. As a consequence, the division of labor according to the Taylor concept was intensified in Germany, while the Japanese invested in technology and thereby kept the division of labor within limits (Die Mitbestimmung 7/8 1984: 310, Weltz/Schmidt/Sass 1974). About b): There are two reasons which help explain why it is easiest to implement the new production concepts where both socialization in the company and long-term employment are ensured by means of the vocational training system and the employment system. On the one hand, this is because the control tasks associated with the production process require greater understanding of the context or basics of production. As a result, broadly skilled workers who can envision product and production together and have considerable in-firm experience are needed (Dohse/Jiirgens/Malsch 1985: 58, Piore/Sabel 1985: 303, Wildemann 1983). On the other hand, this is true because greater employee loyalty and willingness to identify with the company are now needed to help compensate for the lack of structural control described earlier - and one of the best ways to promote employee loyalty and identification with the firm is by means of socialization in the company and long-term employment. From this point of view as well, Staudt's call for increased in-firm training (1982) is meaningful. Piore and Sabel (1984: 302 ff.) recognize the necessity of integrating occupational qualification and socialization in order to develop the types of relations and loyalties usually associated with the preindustrial past (ibid.: 305). They consider the educational systems in the Federal Republic of Germany and Japan with their emphasis on in-firm training better suited than the U.S. educational system for creating what they call flexible specialization. In connection with the application of new technologies, Drucker (1986) also praises the dual system of vocational training in West Germany. In his opinion, it is at least as well suited as the Japanese "quality circle" system, if no better, to help shape the "right attitude" in addition to providing good theoretical foundations (ibid.: 31).10 However, job identification and loyalty can not be achieved in the long run if workplaces are in danger (Ouchi 1981: 100). A recent study by the Social Science Research Institute in Gottingen (Baethge et al. 1985) about the occupational and life prospects of employed young people between 20 and 25 years of age also substantiates this. Those young people who can look back on a history of continuous employment have a workcentered concept of life. On the other hand, young people whose employment history is marked by crises, in particular by longer periods of unemployment, have an exclusively

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materialistic relationship to work and a life concept oriented toward leisure and the family. Even though the Federal Repulic of Germany is still far from the Japanese system of lifelong employment with the strong functional (Schulze 1984: 396), social (Ouchi 1981: 17), and emotional dependence (Pascale/Athos 1981: 178f.) it generates, a study by Windolf and Hohn (1984: 108 ff.) shows that in some branches of West German business as well it is possible to identify essentially closed systems where apprenticeships represent almost the only entry-level positions.11 The fact that the children of employees are often given preference under such a system is not only a concession made to longtime employees, but is also intended to further strengthen ties to the 'company family' (ibid.: 110). This is in agreement with the views of Piore and Sabel (1985: 252f., 302ff.), who attribute a prominent role to the family (in both the biological and the figurative sense) as a promoter of vocational qualification and socialization in connection with the new production concepts, although at times their description verges on the idealization of a craft production idyll (ibid.: 304 f.). About c): New production concepts, which tend to increase the skill level required of workers and to promote self-regulation of work at the execution level, are implemented primarily where cooperative industrial relations prevail or companies are even union-free. Examples of the above include not only the company unions of Japan with their close links between management and union functions at the shop-floor level (for example, Dohse/Jiirgens/Malsch 1984, Tokunaga 1984), but also industrial relations in the Federal Republic of Germany. Here established forms for recognizing common management/employee interests have existed ever since the factory community movement (Werksgemeinschaftsbewegung) of the prewar period, and in general industrial relations are considered a good basis for the successful introduction of new production concepts12 (Dohse/Jiirgens/Malsch 1985: 73, Piore/Sabel 1985: 160ff.). According to Piore and Sabel (1985: 250 ff.), the conditions for introducing new production concepts are also good in Italy, where entrepreneurs reacted to the strikes of the 1960s by radically decentralizing production. At first this was only intended as a temporary measure to undermine the power of militant workers in the large enterprises. However, since then such decentralization has proved to be an optimal prerequisite for introducing innovative change. In the United States, at first efforts were directed towards introducing new teamwork strategies and flexible work organization, primarily in nonunionized companies. In some cases, however, these attempts failed due to resistance from the unions: The United Auto Workers succeeded in undermining General Motors' union-free strategie in the southern part of the United States by managing to form unions in plants in the South as well. As a result the new forms of work organization were introduced in all new companies, including those with unions; the UAW had to make considerable concessions to management, however, with regard to cost-cutting changes in work rules (Dohse/Jiirgens/Malsch 1985: 68 f., Katz 1985, Piore/Sabel 1985: 271 f., 359).

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In British firms on the other hand, where social relations are much more strongly classoriented, thus far the new production concepts can be found only in exceptional cases (Dohse/Jürgens/Malsch 1985: 72, Willman/Winch 1984). Why are there such great difficulties in reconciling new production concepts with conflict-oriented union policy? One decisive factor already mentioned is that internal structures and processes are now more susceptible to disruption. On the one hand, this is due to dependence on individual workers, on their practical experience and willingness to act when breakdowns occur, or when control tasks must be carried out without delay. On the other hand, this susceptibility to breakdown is due to close informational, technological, and logistical ties to upstream stages of production or suppliers, which are created by the just-in-time production system. On an average employing such a system reduces the stock of materials needed for production by as much as 50% (Die Wirtschaftswoche No. 15/86: 92). The price for such savings is dependence on suppliers. The political aspect of this dependence became particularly clear in connection with the dispute about section 116 of West Germany's Labor Promotion Law (Arbeitsförderungsgesetz): the 'minimax' strategy of the West German metalworkers' union IG Metall, i.e. its strategy of achieving maximum impact on auto manufacturers with a minimal amount of expenditure and strike pay, was effective primarily because the auto industry has already adopted the just-in-time system to a large extent (ibid.). Thus it is clear that the new production concepts also grant a new type of "bonus" for cooperative industrial relations at the same time (Dohse/Jürgens/Malsch 1985: 58). The second reason conflict-oriented labor unions can have an aversion to new production concepts is due more to historical factors and above all is seen in connection with the specific shop-floor control approach of American labor unions (Piore/Sabel 1985: 126 ff., 147 ff.): in the United States labor unions gained power in conjunction with the spread of assembly line work and the Taylor method. Their efforts were concentrated on establishing fixed definitions of already existing workplace structures based on Taylor's division of labor concept. Thus the unions used the rules originally established for the purpose of controlling worker performance to create a system of rules based on procedural rights which was then used to ensure certain pay-performance relationships, vested rights, and occupational status (Dohse/Jürgens/Malsch 1985: 67f., Helfert 1983: 757, Piore/Sabel 1985: 127). Under these circumstances if workplace definitions based on a strict division of labor are broadened, the power of the labor unions, which depends heavily on maintaining current regulations, could be weakened. In addition to these more historically based reasons for union resistance to new production concepts, however, there are other reasons directly associated with the opportunities for greater workplace autonomy offered by these new concepts: Such opportunities can lead an employee to decide that now the individual can represent his own interests and that collective representation of interests is no longer necessary (Helfert 1983: 757, Müller-Jentsch 1986: 266ff.). This results in job-related communication systems alongside, and sometimes in place of, the traditional management-works council relationship. Thus, bit by bit, "industrial relations" are replaced by "employee

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relations" (Dohse/Jürgens/Malsch 1985: 68). This must meet with resistance by conflictoriented unions - unless the unions themselves succeed in developing their own new and flexible forms of shop-floor control (Piore/Sabel 1985: 307). Finally, there is a fourth reason why conflict-oriented unions may be expected to show distaste for new production concepts, at least under current labor market conditions: at present the policy of job security for regular employees associated with the new concepts is only attainable if barriers are erected between such privileged workplaces and everyday jobs, jobs in the crisis sectors, and the unemployed. Otherwise the great mass of non-permanent workers with their fluctuating employment would represent a constant threat to loyalty. According to Kern and Schumann (1985: 300ff.), this tendency toward erecting barriers, or segmentation, has replaced the polarization of qualifications which the same authors still considered the most important consequence of automation in 1970 (Kern/Schumann 1970). Japan again provides examples of such tendencies: as is generally known, the system of lifelong empolyment practiced there only applies to the regular employees of the large companies. In 1975 this group was estimated to constitute 30% of all employees at the most (Ernst 1980: 21). Since there is little mobility between large companies, it is possible to speak of an almost hermetically sealed labor market for the regular employees (Bergmann 1983: 100). The tendency of these developments to weaken solidarity can also be observed in the Federal Republic of Germany in a more moderate form (Piore/Sabel 1985: 260): Here tradeoffs occur between the works council and management, with job guarantees being approved by management in exchange for agreement by regular employees to work overtime and permit greater flexibility with regard to other aspects of their work. In the long run such company-centered egoism will lead to a weakening of the industrial trade unions (Lecher 1985) and of the labor movement (Piore/Sabel 1985: 307), which conflict-oriented unions are not likely to accept without resistance. In closing, it should be pointed out that, despite the limiting factors described in the systems for vocational training and employment which influence management's choice between old and new production concepts, at the same time management is in a position to make all these limiting factors the subject of its long-term labor policy strategy. This indicates that technological development is less likely to be the central challenge of the 1980s and 1990s than are the diverse problems associated with social forms of regulating work processes (Naschold 1985).

Notes 1 To this extent the "new" production concepts can only be considered genuinely new if past traditions in organizational theory are largely disregarded, as is the case in Kern and Schumann's 1985 publication (for a critique see Osterloh 1986a). 2 In the prevailing contingency approach of organization theory such factors have been neglected for

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the most part or, at best, viewed as stopgap explanations for the otherwise inexplicable range of organizational differences (see Sorge 1985: 157). The cultural approach, on the other hand, stresses that these factors cannot be registered in a particularistic manner. Instead, they include aspects that are taken as a matter of course in the respective societies and are firmly established in the less articulated background of the action (see ibid.: 161). In addition to this, the contingency approach is based on a narrow concept of rationality which views actual work and the possible influences of values and norms on such work more as interference than as productivity potential (Peters/Waterman 1984: 56ff., Ebers 1985: 78ff.). The so-called 'kanban system' is being referred to here. For a description see, for example, Wildemann 1982. E.g. see Dahrendorf 1956, Offe 1970 for discussions of this distinction. On the other hand, in the machine-tool industry the CNC machine operator and the assembly machinist clearly enjoy expert status. In these cases, however, in Germany it has never been possible to establish a division of labor based on the Taylor concept to any appreciable extent (Kern/ Schumann 1985: 176 ff.). The numerically controlled machine without microcomputer equipment (drilling machine, lathe, or milling machine) is controlled by punched paper tape or magnetic tape and is permanently wired. Thus a program, once created, is fixed in its form. It usually is written in a programming department separate from the workshop and cannot be changed by the machine operator. As a consequence, dispositional elements of work are moved off the shop floor, and the machine operator performs less qualified work. By contrast, the CNC machine is equipped with its own microcomputer. Therefore its control is freely programmable, the program is stored in the memory of the machine's own microcomputer, and corrections can be made on the spot. This makes it possible to assign programming tasks to the machine operator, which compensates for the tendency of strict NC programming to make work less qualified. In addition, production flexibility is increased considerably (see, for example Kreikebaum 1985, Kern/Schumann 1985: 137ff., Piore/Sabel 1985: 286ff.).

7 In 1978 British apprenctices received 61% of the wages paid to fully trained workers in the respective occupation, while in Germany they received only 20-30% (Wagner 1983: 38f.). 8 In England the apprenticeship serves above all to provide social protection for trade union members because they insist that jobs, once they have been occupied by 'skilled workers', be permanently classified as skilled work (Sorge 1985: 170f.). 9 In addition to this, equipment controllers perform a greater variety of tasks than was the case in 1960 (ibid.: 89). 10 One can suspect that the appeals to common values and myths in the American organizational culture debate - which occasionally display the characteristics of real 'value drills' (Peters/Watermanl984: 104, 132, 364, for criticism see also Heinen 1985: 984) - are intended to help compensate for the lack of loyalty that occurs under the American vocational training system in comparison with the West German and Japanese systems. 11 In the United States also an increasing number of firms are pursuing a policy of 'employment security' (Foulkes/Whitman 1985). 12 This does not rule out the existence of considerable differences within Germany (for a typology of codetermination forms see Osterloh 1986b). Because of these differences, sensitive pilot projects involving new technologies are first implemented where works councils are weak in conflict situations (Kern/Schumann 1985: 127).

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Lecher, W. (1985): Überleben in einer veränderten Welt: Ein Konzept für die zukünftige Arbeit der Gewerkschaften, Die Zeit, 18, dtd. 26. April 1985: 44-45. Likert, R. (1961): New Patterns of Management, New York: McGraw-Hill. McGregor, D. (1960): The Human Side of Enterprise, New York: McGraw-Hill. „Die Mitbestimmung",Nr. 7/8 1984: „Wenn wir jetzt nicht in dieser Frage den Fuß in die Tür bekommen, ist der Zug abgefahren." Gespräch mit Andreas Schleef, Leiter des Zentralen Personalwesens und Knut Henneke, zuständig für Personalpolitik und Grundsatzfragen bei der AUDI-NSU/ AUTO UNION AG über Perspektiven der Beschäftigungspolitik, p. 308-311. „Die Mitbestimmung",Nr. 10/11 1985. Müller-Jentsch, W. (1986): Soziologie der industriellen Beziehungen, Frankfurt/M.: Campus. Naschold, F. (1985): Vorwort des Herausgebers, Arbeit und Politik: Gesellschaftliche Regulierung der Arbeit und der sozialen Sicherung, Naschold, F. (Ed.), Frankfurt/M. - New York: Campus, p. 7-8. Offe, C. (1970): Leistungsprinzip und industrielle Arbeit: Mechanismen der Statusverteilung in Arbeitsorganisationen der industriellen „Leistungsgesellschaft", Frankfurt/M.: Europäische Verlagsanstalt. Osterloh, M. (1985): Zum Begriff des Handlungsspielraums in der Organisations- und Führungstheorie, Zeitschrift für betriebswirtschaftliche Forschung, 37, 4: 291-310. Osterloh, M. (1986a): Industriesoziologische Vision ohne Bezug zur Managementlehre? Die Betriebswirtschaft 46, 5: 610-624. Osterloh, M. (1986b): Über die Unwirksamkeit von Informationsrechten. Ein Beitrag zur Rechtstatsachenforschung im Bereich der Mitbestimmung in Betrieb und Unternehmung. Mitbestimmung in Betrieb und Verwaltung. Konzepte und Formen der Arbeitnehmerpartizipation. Diefenbacher, H./ Nutzinger, H. G. (Eds.), Heidelberg: Texte und Materialien der Forschungsstätte der Evangelischen Studiengemeinschaft, S. 151-176. Ouchi, W. G. (1981): Theory Z, Reading, Mass.: Addison-Wesley. Pascale, R. T./Athos, A. G. (1981): The Art of Japanese Management, New York: Simon and Schuster. Peters, Th. J./Waterman jun., R. H. (1982): In Search of Excellence: Lessons from America's best run Companies, New York: Harper and Row; German translation (1986): Auf der Suche nach Spitzenleistungen: Was man von den bestgeführten US-Unternehmen lernen kann, 10. Auflage. Landsberg/Lech: Moderne Industrie. Piore, M. J./Säbel, C. F. (1984): The Second Industrial Divide: Possibilities for Prosperty, New York Basic Books; German translation (1985): Das Ende der Massenproduktion: Studie über die Requalifizierung der Arbeit und die Rückkehr der Ökonomie in die Gesellschaft, Berlin: Wagenbach. Posth, M. (1985): Bildungsoffensive im Unternehmen, Die Zeit, 18, 26. April 1985: 46. Schreyögg, G. (1978): Umwelt, Technologie und Organisationsstruktur, Bern, Stuttgart: Haupt. Schulze, G. C. (1984): Der japanische Erfolg, Fortschrittliche Betriebsführung und Industrial Engineering, 33: 308-318. Sorge, A. (1985): Informationstechnik und Arbeit im sozialen Prozeß: Arbeitsorganisation, Qualifikation und Produktivkraftentwicklung, Frankfurt/M. - New York: Campus. Staehle, W. H. (1987): Management: Eine verhaltenswissenschaftliche Einführung, 3. Aufl., München: Vahlen. Staudt, E. (1978): Rationalisierung der betrieblichen Elastizität, Fortschrittliche Betriebsführung und Industrial Engineering, 27: 373-379. Staudt, E. (1982): Entkoppelung in Mensch-Maschine-Systemen, Zeitschrift Führung und Organisation, 4: 181-189. Steinkühler, F. (1985): Produktionsressourcen sind nicht Maschinen, sondern Menschen, Frankfurter Rundschau, 156, 10 July 1985: 14. Tokunaga, S. (1984): Die Beziehungen zwischen Lohnarbeit und Kapital in japanischen Großunternehmen, Leviathan Zeitschrift für Sozialwissenschaft, 1, 12: 79-97.

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Touraine, A. (1984): Le retour de l'acteur, Paris: Fayard. Wagner, K. (1983): Relation between Education, Employment and Productivity and their Impact on Education and Labor Market Policies. A British-German Comparison, Berlin: Europäisches Zentrum für die Förderung der Berufsbildung. Weltz, F./Schmidt, G./Sass, J. (1974): Facharbeiter im Industriebetrieb, Frankfurt/M.: Athenaeum. Wildemann, H. (1982): Qualität - Das Ergebnis einer detaillierten Planung: Das japanische KanbanSystem, Der Betrieb im Qualitätswettbewerb. Von der Qualitätssicherung zur offiziellen Qualitätspolitik, Biethahn, J. et al. (Eds.), Münster: E.Schmidt, p.87-99. Wildemann, H. (1983): Produktion auf Abruf, Zeitschrift des Vereins deutscher Ingenieure für Maschinenbau und Metallverarbeitung, 3. Willman, P./Winsch, G. (1984): Innovation and Management Control: Labor Relations at BL Cars, Cambridge/New York: Cambridge Univ. Press. Windolf, P./Hohm, H.W. (1984): Arbeitsmarktchancen in der Krise: Betriebliche Rekrutierung und soziale Schließung, Frankfurt/M. - New York: Campus. „Die Wirtschaftswoche", Nr. 35, 1985. „Die Wirtschaftswoche", Nr. 15, 1986.

The Changing Nature of Industrial Relations in the UK and Its Impact on Management Behaviour Mick

Marchington

Abstract Over the last few years, a number of well-publicised events in the UK have indicated that some employers are adopting a much tougher line in industrial relations management, often described as 'macho' by commentators. The context within which industrial relations takes place has certainly changed over the last decade and, on a simplistic level, would seem to offer a convincing rationale for re-establishing the right to manage. However, in line with more recent analyses in the UK, the view taken here is that such events represent the abnormal rather than the typical, although it is probable that there have been more significant and effective changes in manpower utilisation than there have in the processes for regulating relations. In order to illustrate the diversity of developments in industrial relations processes, three ideal-typical case studies will be described. Particular attention will be paid to the context within which employee relations takes place, especially the product market situation. This analysis, therefore, reflects the growing trend in industrial relations research of going beyond the conventional boundaries of the subject, and accepting that the management of people is not usually an end in itself, but is (or should be) directed towards the achievement of broader corporate goals.

1. Introduction Any casual observer of the UK industrial relations scene could be forgiven for assuming that the last decade has seen a total shift from the consensus-style, pluralist policies of the 1970's to unitarist, confrontational, and union-busting behaviour in the 1980's. The best publicised events in recent years have indicated examples of such activity, and there is support for this view of 'macho' management from a recent survey of personnel practitioners undertaken by Mackay (1986: 25-27). Moreover, the context within which employee relations takes place has altered significantly to the extent that more aggressive behaviour on the part of management would appear to be easier to sustain. However, there is a growing body of evidence which disputes both the extensiveness of this 'new' approach, and also the simple correlation between macro indicators of a contextual nature and the actuality of managerial behaviour. Surveys by Batstone Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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(1984) and Edwards (1985), as well as case study work by Marchington and Armstrong (1985), Spencer (1985), and Rose and Jones (1985), all suggest that a considerable number of employers have not taken advantage of 'favourable' environmental factors in order to effect changes unilaterally. Rather, they have sought to persuade or convince employees and/or their representatives of the need for change, and in some cases involve them in this process. The purpose behind this paper is therefore three-fold; first of all, to describe the recent (post 1979) changes in the employee relations context at macro-level in the UK, and the evidence for and against the existence of so-called 'macho' management. Secondly, to assess the validity of this concept in the light of its current usage, and to examine the links between context and behaviour at the level of the employing organisation. Thirdly, an attempt will be made to construct a more comprehensive framework which makes allowances for variation at enterprise-level, and places managerial behaviour within its specific contextual circumstances.

2. The National Context The context within which industrial relations takes place could hardly have changed more dramatically in the UK since the 1970's. On a political level, the government is committed to a policy consistent with a unitary frame of reference, and a notable feature of the current situation is that it is the government which has been the major protagonist for change, both on a philosophical and a practical level. Not only has it reduced the size of the public sector by a continuing policy of privatisation (for example, in Telecommunications and Gas), it has also encouraged a greater commercialisation and subcontracting of activity in the National Health Service and local authorities. Since the government is without means to directly intervene in the private sector, Soskice identifies two major means of putting pressure on such employers; firstly, the use of publicly owned companies in the competitive sector as an example of how to achieve unilateral management control, and secondly, the use of macro-economic policy to force business to change in order to survive (1984: 312-13). In economic terms, the effect of this policy - and changes in the competitive international context - has been to significantly increase the level of unemployment in the UK. In comparison with the weighted average of all OECD countries, unemployment here has been persistently high and has risen at a fast rate, such that it now stands at around 14% of the labour fource, compared with just over 8% overall. In addition, over 40% of the UK unemployed have now been out of work for more than one year (Manpower Policy and Practice, Spring, 1986). Most reports about the UK commercial scene demonstrate the degree to which there has been overcapacity in the supply of products, and this has put increasing pressure on companies to cut costs across the board, particularly in their use of labour. The bargaining power of employees is reduced to the extent that, when employers insist upon reductions in manpower, they are in little position to resist

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given over-supply in the labour market as well. Thus, employers currently hold considerable potential power. This power is also facilitated by shifts within the labour market generally, especially those which tend to weaken the position of unions. Thus, the shift in employment from the manufacturing to the service sector has been well documented, and now the former only accounts for approximately 25% of the employed labour force; in September 1985, this was 5.49 million. Amongst those who are still in employment, there is now a greater proportion who are employed on a part-time basis (over 20%) compared with the situation in 1980. And, yet further, there has also been an increase in the number of people employed on a temporary basis, according to a recent issue of Employment Gazette (Meager 1986). All of these changes can be directly translated into a drop in trade union membership since 1980 of 2.2 million, such that the number of workers in TUC-affiliated unions actually dropped below 10 million for the first time in a decade. The density of unionisation has also dropped from its peak of 54% in 1979 to a little under half of all potential members by the end of 1984. The impact of technological change has also had a significant effect on UK industrial relations, partly in terms of increasing unemployment, but also in terms of changes in the structure of industry and the character of individual aspects of employment. As Jenkins and Sherman prophesy in the preface to their book, The Collapse of Work (1979), new technology "will have the most profound effect on jobs and employment prospects since the introduction of the electric motor and before that of the steam engine [ . . . ] no production process will be immune from its impact [ . . . ] it will affect not only processes and components but also commercial activities, and office, clerical and information methods in both the public and private sectors of the economy."

Indeed, the subject of information technology has attracted such a high profile in the UK that there is now a Government Minister with specific responsibility for it, and institutions of higher education are expected to rapidly incorporate it into conventional syllabuses. Finally, there have been some significant changes in the law relating to industrial relations, as the government has proceeded with its piecemeal approach to reform via the Employment Acts of 1980 and 1982, and the Trade Union Act of 1984. These have been designed in order to provide employers with the ability to combat secondary or otherwise unlawful industrial action, secondary picketing, the closed shop, and unionlabour only contracts for certain services. At the same time, although the legislation to protect individual employees has not been dismantled, there have been changes which have removed the rights of certain categories of employee, notably those with short periods of service. There is also a growing awareness of the contractual right of an employer to dismiss employees because of strike action, strengthened by recent legal amendments to allow selective rather than merely blanket dismissals. Put together, therefore, these changes in the national context provide a range of tools via which managements might seek to re-establish their prerogatives and produce a shift from the pluralist policies many sought to develop and employ throughout the 1970's.

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3. Macho Management Evidence to support the view that employers have become more aggressive in their dealings with employees is not hard to find. As Soskice (1984: 312) notes about the style of management at British Leyland, "management's method was to communicate demands directly to shopfloor workers, threatening dismissal to those who favoured a strike and closures in the event of the withdrawal of government subsidy, and balloting the workforce when the unions did call strikes". Willman and Winch, in their review of the changing nature of management control at the same company, refer to the latest phase as "one of increasing confrontation and direct control. Beginning with the dismissal of the Longbridge convenor in November 1979, BL displayed an explicit concern with managerial authority and the removal of steward influence over the crucial areas of manning and work standards [ . . . ] the emergence of a new regime of lessened facilities, tighter discipline and reduced trade union influence" (1985: 173-174).

The ex-chairman himself also writes of the changes at BL in a similar vein, although a different purpose is put forward as to the reasons why. "We needed to re-establish management authority (and) counteract shop steward power which had got out of hand [ . . . ] we needed to take on the militants [ . . . ] the objective was not to destroy or weaken the unions" (Edwardes 1983: 78-79).

Changes have taken place in the utilisation of manpower and the numbers employed in both the British Steel Corporation and the National Coal Board over the last few years - for example, a reduction in numbers employed in BSC from 190,000 in 1979 to a 54,000 in 1986 - and there has also been a widely acknowledged change of style in both of these organisations. At the NCB (now renamed British Coal), the period leading up to the national strike of 1984/85 appears to have been one of preparing for the industrial action, and in choosing a time to confront or withstand the tacticts of the National Union of Mineworkers. Following the end of the strike, substantial numbers of people have left the industry, pits have been closed down, and there is now interunion rivalry (and considerable hostility) which does not seem to displease senior management in the company. The previous examples relate to industry over which the government can exert some direct and coercive influence in order to bring about change, but a more recent example can be drawn from the printing industry. The style of management at News International could certainly be characterised as confrontational, and this involved the relocation of printing away from Fleet Street, and the dismissal of all staff who went on strike against this action. In subsequent interviews the proprietor has not exactly modified his stance, and the traditional print unions now face an uncertain future if more newspaper publishers decide to adopt a similar line. In order to demonstrate that these are not just isolated cases, Mackay (1986: 25-27) concludes her survey of personnel respondents in 56 establishments with the assertion that "the macho manager is alive and kicking in a surprisingly large number of organisations", and she produces quotations from these managers to illustrate her findings, which refer to a much tougher, more resolute

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approach, especially in the nationalised industries but also in firms within the private sector. Her respondents also felt that the changes in working practices which had been achieved in recent years would be permanent and not subject to re-negotation by employees were times to alter. Against this view of 'macho' management comes the contrary perspective as re-produced in the work of Batstone (1984), Edwards (1985), and Marchington and Armstrong (1985) amongst others. Batstone (1984: 2) is especially critical of statements of the current state of industrial relations which "appear to be largely based of the experience of companies which are likely to be exceptional in some sense or an 'intuition' and a priori theorising which pay scant attention to the realities of industrial relations".

His research on 133 personnel managers in manufacturing establishments, conducted during the summer of 1983, found that in general there had been little change in the way in which industrial relations is conducted, at least in procedural terms. Thus, in his companies, union membership was still at a high level, and there had actually been a slight increase in the number of closed shops and check off arrangements since 1979. There had been little change in the number of plants with senior or full-time stewards, although there had been a reduction in the overall number of stewards - but nothing like the reduction in numbers employed. There does appear to have been some tightening-up of facilities for stewards, especially on time connected solely with union business (for example, multi-union joint shop steward committees). He concludes (1984: 234) that "only in a few cases have managements attempted to remove the institutional bases of union organisation in the plant. It would seem that the kinds of strategy that have been widely adopted in the USA have not been employed by management in Britain on any significant scale".

Whilst changes in the processes of managing industrial relations may not have been publicly widespread, the practices of manpower utilisation had undergone some significant and major changes between 1978 and 1983. Batstone summarises his argument against 'macho' management in the following way (1984: 311); "if they adopt 'macho' tactics, they may well encounter concerted worker and union opposition which further weakens the firms position in a competitive product market. They therefore have an incentive to win the co-operation of the unions and the workforce in making possibly somewhat marginal changes rather than adopting a high-risk strategy. On this argument, the pragmatic [my emphasis] employer will only seek to fully exploit the state of the labour market when he was nothing to lose".

Perhaps one could add to this that it is management's perception of gain or loss which is crucial.

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4. The Corporate Context Shifting the level of analysis from national to that of establishment or corporate level, the context outlined in Section 2 begins to look rather different. Since the government has been unwilling (and would probably not be able) to force employers to impose change, it is reliant upon exhortation and example to bring about shifts in the style of managing labour. Given that the Confederation of British Industry did not pronounce itself as a firm supporter of the current government's policies until 1982, such an influence was unlikely to have much effect. Given also that the CBI itself is not able to control member firms, the likelihood of change is only feasible when it suits individual companies to do so. Nowhere is this more marked than in relation to the link between levels of unemployment and company industrial relations practice. Whatever the macro situation, certain workers retain considerable power to thwart managerial intentions through a variety of factors: their ability to disrupt production; their ownership of 'tacit' skills needed by employers (Manwaring and Wood 1985: 191); the fact that it may not be practicable to sack all employees and employ new recruits; and above else for the need to seek cooperation in the labour process in excess of that achievable by mere compliance. That is, factors in the external labour market may lead to sizeable differences in income and other benefits as well as methods of working between firms which draw upon the same pool of labour (Nolan 1983: 298), and those in the internal labour market may cause firms not to respond to potentially favourable contexts. As Nolan and Brown (1983: 284) indicate, even when a particular occupation is in a state of relative excess supply, the employer's response is far from obvious, since the decision to revise wages downwards will have implications for internal pay relativities and co-operation. The simple read-off from the macro-situation also fails to take into account recent work which differentiates within firms between primary and secondary, or core and peripheral forms of labour, and which is characterised by certain groups of employees becoming relatively insulated from the vagaries of the market place (see, for example, Atkinson 1984: 28-31, Loveridge and Mok 1979: 123-129, Nolan 1983: 304-307). Whilst, on one level, it is true to say that product market competition has intensified in most, if not all, sectors, the degree to which this has developed is also subject to some variation. Problems will have been greater for companies with smaller market shares, or those in a declining market, than they will for those whose market is expanding or stable, or which possess some control over the market. Again, there are differences between companies which supply fashion conscious or unpredictable markets compared with those with greater lead times or those subject to a slower process of change. Previous studies in the UK by Goodman et al. (1977), Marchington (1980), and Purcell (1981) have demonstrated the influence of the market on particular industrial relations situations. However, it should also be remembered that market pressures do not necessarily predetermine the type of change, nor the way in which it may be introduced. As Purcell stresses (1981: 87),

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"to suggest that product market pressures forced a change in management's handling of industrial relations is too simple. It implies that there was no choice when in fact a lengthy and often bitter debate took place between senior managers".

Indeed, even within the same industry, the response of companies can often be different, as Kochan et al. (1984) illustrate for the tyre industry, and Cappelli (1985) does for airlines. In each case strategic decisions were taken about whether or not to remain in the market, whether to go for high volume production or to go for a specialised market niche, whether to invest at the same location or go for a greenfield (non-union?) site, and whether to make or buy components (Kochan et al. 1984: 24-26). These have clear consequences for the management of employee relations. In their examination of the UK car industry, Marsden et al. (1986) also point to the importance of increased competitive pressures to explain labour relations reforms between 1979 and 1984, and the view that this was most fundamental at British Leyland (p. 179). They feel, however, that the parameters of shop floor reform were similiar in kind if not in degree, and point to a convergence of management strategy in this particular industry. As there are differences in product market pressures, so too there are variations in the impact of technological change. For some occupations - for example, printing or office services - the potential disruption to traditional methods of working is immense, and the way in which work is organised may require totally different skills and/or people. In other sectors the likelihood of significant change is less apparent because automation is either not appropriate or not cost-effective, whilst in yet others - such as chemical processes - change has always taken place on a gradual basis rather than on the basis of abrupt shifts in technology. Once again, though, it is important to make allowance for the role of strategic choice in any change process, as Wilkinson (1983) so clearly demonstrates in his case studies on new technology. Finally, despite the new legal regulations providing the opportunity for employers to take out injunctions against unions or sue them for damages, it is not at all automatic that an employer will pursue such a course of action. Some have, of course, and have won their legal battles, but apart from changes which appear to be taking place in relation to the use of ballots prior to industrial action, other areas seem to have undergone little amendment. Perhaps, the pragmatic approach of employers (and unions for that matter) is best illustrated by the relative lack of use of the balloting provisions contained in the 1982 Employment Act regarding the closed shop. Despite the fact that an employee who is dismissed for non-membership of a union will win a case for unfair dismissal if no ballot has been held in the preceeding five years, or if a requisite majority have not voted in favour of the closed shop, few employers have chosen to hold ballots, preferring to let the situation continue and deal with any case should a problem arise. In other words, what is remarkable is that there should be a debate about the absence or presence of so-called macho management. To argue that British employers are or are not macho managers is to miss the point on at least three counts. First of all, most of the survey evidence points to the existence of macho and non-macho managers, however broadly defined - Batstone estimated 20% to be macho, Mackay reckons at least 29%,

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and perhaps considerably more are non-macho. Either way, there are differences within each of the samples, despite the general or even majority view. Secondly, there appears to be considerable confusion as to what exactly is meant by the term, and it seems to encompass both substantive and procedural factors; that is, those relating not only to aspects of manpower utilisation, flexibility, and reductions in employment levels, but also those relating to the processes of managing change, and whether this is achieved with or without the co-operation of employees and their trade unions. Batstone's categorisation of labour relations policies contains both substantive and procedural aspects, for example. It is probably fair to say that, over the last few years, regardless of the way in which they have introduced change, it is becoming increasingly common for employes to have achieved changes in work organisation especially in relation to flexibility of work practices and reductions in numbers employed. Thirdly, all the reports concentrate on describing the activity which takes place, and therefore fail to take into account the specific context within which industrial relations is played out. To discover that x% of employers are taking a certain line in managing labour is interesting, but does not tell us why they are taking this line, and why (100x)% are not. There is a lack of explanatory power in such descriptions of industrial relations management. What is required therefore is an analysis which relates changes in the management of industrial relations to the contextual factors surrounding the establishment or company in question.

5. Variations in Management Style Recently, there have been a number of attempts to describe and categorise management styles in its handling of industrial relations. Following on from the original Fox (1966) distinction between unitarism and pluralism, there have been other attempts to extend upon this simple two-fold differentiation. Fox himself in 1974, and, more recently, Purcell and Sisson (1983) have proposed a five-fold categorisation which broadly distinguishes between pro- and anti-union policies on the part of management, proactivity and reactivity in dealings with industrial relations, and a commitment to either, neither, or both individualist and collectivist philosophies (for the latter, see Purcell 1986). Friedman (1977), drawing upon research conducted in the car industry, proposed a simple distinction between carrot (responsible autonomy) and stick (direct control) approaches on the part of employers in order to maintain control over labour relations. Thurley and Wood (1983) outline seven different approaches to the management of people, based upon the link between business strategy and industrial relations strategy. Whilst all of these categoriations of management style are extremely helpful, they do little more than describe or analyse differences between companies, and it is usually only by inference that any attempt is made to explain why a particular approach may be

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adopted, and little is done to identify the key contextual or political factors which are asociated with specific styles. Thus, Purcell and Sisson (1983: 116-117) point to the importance of key personalities in the early stages of a company's development, and intensified product market competition, for the determination of management styles. Friedman (1977: 105) distinguishes between large enterprises - which are central to a particular industry - and small firms which are their suppliers or subcontractors, and thus also points to the importance of market position. Finally, Thurley and Wood (1983) examine business strategy in coming to their typology of management styles, but not in any great depth. There are a number of shortcomings with this literature. First of all, it is difficult to determine whether they cover the whole range of styles operating in the UK, and it is difficult to locate - in any of the models - the current usage of direct employee involvement by an increasing number of organisations (Batstone 1984, Edwards 1985 for example). Secondly, aside from Friedman, there is a concern with the structures of industrial relations to a much greater extent than there is the processes; that is, an emphasis upon collective bargaining arrangements, union recognition, and procedures, rather than upon the practice of these institutions and considerations of trust and relationships. Thirdly, there is a danger of assuming that styles are static and all-enduring, and are determined by previous circumstances or particular sets of environmental contingencies - of course, what is needed is an analysis which incorporates contingent factors and notions of managerial choice. And, finally, in all cases the link between the various factors is not particularly explicit; that is, the degree to which specific product market conditions may be associated with certain styles of managing industrial relations is not explored via the mechanism of detailed case studies, nor is that between the dominance of particular coalitions within senior management and employee relations style. In order to illustrate this link more explicitly, as well as describe both the contextual features and the styles, the remainder of the paper will analyse three specific examples; those of confrontation, competition, and co-operation. In terms of publicised events, confrontation would probably be the best example with which to commence. In this case there have been direct attempts not only to modify working practices, but also to amend union organisation and activity. There have been big reductions in the number of people employed in these corporations, and this has coincided with a concerted effort to increase task flexibility, make for better use of working time, increase the amount of work which is bought-in or subcontracted, and relate pay more closely to effort and performance, especially at local level, instead of paying on the basis of attendance (Brewster and Connock 1985). The processes of change will, in all probability, have involved compulsory redundancies, the weakening of union organisation at whatever level it caused managements most problems, and perhaps even the sacking of senior shop stewards. It will almost certainly have involved a much tighter definition of union activities, a closer control on the amount of time spent on union business, and a sizeable reduction in the number of shop stewards operating within the company. These more aggressive tactics on the part of senior management in relation to unions will also have drifted over into dealing with individual employees, who will have been more likely to receive personal letters from their

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employer in the event of their contemplating action, and the threat (or actuality) of dismissal in the event of going on strike. The context within which this set of events takes place is of course highly specific; a declining industry, one with little prospect for the future or one which is suffering from considerable excess overcapacity that shows no sign of receeding; a feeling on the part of senior management that they have no option but to change if they are to survive even on a severely slimmed-down capacity, and perhaps even direct coercive pressure from government or a holding company which makes reductions and reform a prerequisite for further funding; a new senior management philosophy which is not particularly sympathetic to unionism or participative techniques, and which has probably gone alongside a downgrading of the personnel function, or the appointment of a new director with a brief to force through change if he or she is to survive personally; an assessment that previous management-employee relations have to change, since the unions (if they are present) can not be 'trusted' to 'deliver the goods' in terms of cooperating with the process of adjustment, and one in which previous relations can not be characterised as especially good. Now is the one chance we have, it could be argued, to create a permanent change in relations; indeed, Batstone's most 'macho' plants were those which had confronted particularly acute problems in the depression and where steward organisation had previously been strong (1984: 260). Secondly, a somewhat quieter, and alternative, approach to change has been adopted in many other organisations. In these there has been no head-on attack on unionism and, indeed, efforts have been made to ensure that stewards are involved in the company, and have their links with the workforce maintained. Whilst there may well be less option to bargain about changes, employee representatives find that they are now in receipt of a considerable amount of information - perhaps for the first time a few years ago. Considerable effort is put into building up consultative machinery which operates at all levels within the plant, and there is the possibility of an annual or bi-annual presentation at company level in the multi-establishment corporation. The logic behind the move to greater employee involvement is two-fold; firstly, to 'educate' senior union representatives about the environment within which the company operates, and to make them fully aware of product market conditions, future business prospects, international competition, and effective use of manpower. Hopefully, this will reduce their potential opposition to managerial plans and enlist their support for future action. Secondly, management aim at all levels to communicate rather more effectively with individual workers in order to persuade them to go along with changes in general and in their own work areas in particular. Thus, the hope is that individual workers - qua union members - will exert pressure upon their representatives to accept changes put forward by management, and will identify rather more closely with the goals of the enterprise. The current interest in newsletters, videos, presentations, visits to suppliers and customers, briefing groups, and of course increasing share ownership, bears witness to activity in this area. They are all geared up to making employees closer to and more aware of the demands of customers via the market place. At the same time, significant substantive changes in work organisation, and in numbers employed, will

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probably have been achieved within these companies, though with nothing like the conflict seen in certain examples in the previous category. Whether senior management intended it or not, the unions may see this as an assault on their activity by the employer, and an attempt to weaken them by the back door, rather than head-on. Senior management would argue, conversely, that in a time of increasing need for the acceptance of change, it is no more than common sense on their part to explain things directly to their own staff in order that they might appreciate the current business situation. Consequently, previous relationships based upon a high degree of informal contact between senior stewards and managements may be broken. Once again, though, it is important to be clear about the context within which this activity takes place; there is in all likelihood an increase in competition which implies a tightening up on arrangements in the workplace, but it is a situation in which the prospects of survival are reasonable; management may be able to offer potential security conditional upon changes in working practices and employee relations; previous relationships have been based upon a degree of antagonism, but not open hostility, and management are confident that, with the right information and pressure from the rank and file, unions ought to be 'reasonable' - as things previously stood, this could not be expected; there might also be a new personnel manager but if not, then unlike the previous case, this person retains influence at senior management level. In all, therefore, the aim behind this approach is to make employees and their representatives more aware of the vagaries of the environment, 'closer' to the product itself, and willing to unite against the common enemy of the competitor. As seen on one company video recently, the Managing Director related an incident of industrial action at the plant directly to his having to write a cheque for a specified amount to the Chairman of the major competitor. Both of the previous examples - of confrontation and competition with the union - are tied together by the common result, intentional or not, of reducing union influence in the workplace. That third example is to maintain the status quo, and co-operate with employees or unions in managing the process of change. There may well have been major changes in working practices, although it is likely that these have been progressively introduced over a number of years. This is the kind of environment in which the notion of the 'core' employee, party to priviledged conditions and relative security of employment, operates with a fair degree of control, responsibility, and autonomy. Senior management are strongly committed to these employees, who are being trained to be flexible, and aim to insulate them, as far as possible, from having to compete in the labour market or suffer from short-run fluctuations in demand. Indeed, numerical or headcount flexibility is achieved by the use of temporary or subcontracted labour, and this group may never come to share in the success of the enterprise, because they do not build up sufficient service to qualify for higher benefits or protection. There is a firm and articulated support for a trade union if there is one, but then the union itself, especially at local level, finds the senior management of the company honest and straightforward in return. There may well be closed shop in existence, but there will certainly be a range of mechanisms to assist the union in undertaking its job; time for

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joint shop stewards committees, pre-meetings, feedback meetings, facilities, check-off, the opportunity to meet new recruits as soon as they join the company, time-off for training and so on. Management do not rely solely on the collective machinery, but do all they can to stimulate direct employee involvement in and commitment to the company. This is not used to undermine the role of the union because the senior management is equally concerned about the maintenance of good relationships on both an individual and collective level. In some way this reads like a description of the pluralist institution á la Donovan, and indeed it is, but it should be recognised that there are also specific contextual conditions which apply to this model as well. Whilst competition in the market place may well have been intensified, the company is still able to retain a significant share of this market, being assisted by the high entry costs required in order for new firms to compete effectively; the market is relatively predictable, at least months and in some cases years in advance, and this means that any run-down in numbers, should this be required, can be achieved voluntarily; the cost of labour itself is not particularly significant in comparison to the cost of financing new capital, and the cdsts of mistakes by employees can be sizeable - thus the emphasis on retraining and co-operative relations; previous relationships between unions and management will have been good, and both regard the other as reasonable and having a legitimate role to play in the governance of the enterprise; previous changes will have been negotiated, and because of this the personnel function retains a strong influence at senior levels within the company, there probably being a director responsible for this activity at establishment and/or corporate levels; preplanning and proactivity in all aspects of the business, including research and development, will be the order of the day. In other words, management by consent is viewed as a desirable and achievable objective by both parties to the employment relationship, and, of course, this is assisted admirably by the relatively stable market conditions within which the company operates.

6. Conclusions Despite the publicised examples, and the superficial attraction of a straightforward link between various national contextual factors and adjustments in management style, the argument of this paper is that the confrontation (or macho) approach is not as widespread as commonly believed. For the most part, employers tend to be governed rather more by pragmatism than they do by political philosophy, and approaches to the management of labour will be heavily influenced by their own short- or long-term objectives. Thus, if the conditions within which the company operates are such that senior management perceive that a confrontational style stands the best chance of success, then this will be chosen; and a similar assessment may lead to the adoption of competitive or co-operative strategies in employee relations. Understandably, this analysis is at an early stage in its development, and considerably more work needs to be undertaken in order to test and refine the model. In particular,

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there needs to be a more systematic consideration of external influences - and particularly product markets - and a closer analysis of differences in style which may operate within as well as between sectors. Nonetheless, an attempt has been made to at least identify the links between product markets, employer activity, and the style of industrial relations management.

References Atkinson, J. (1984): Manpower Strategies for the Flexible Organisation, Personnel Management, 16, 8: 28-31. Bain, G. S. (ed.), (1983): Industrial Relations in Britain, Oxford: Blackwell. Batstone, E. (1984): Working Order, Oxford: Blackwell. Brewster, C. and Connock, S. (1985): Industrial Relations; Cost Effective Strategies, London: Hutchinson. Cappelli, P. (1985): Competitive Resources and Labour Relations in the Airline Industry, Industrial Relations, 24, 3: 316-38. Edwardes, M. (1984): Back from the Brink, London: Pan. Edwards, P. (1985): The Myth of the Macho Manager, Personnel Management, 18, 4: 32-35. Fox, A. (1966): Industrial Sociology and Industrial Relations, Royal Commission Research Paper Number 3, London, HMSO. Fox, A. (1974): Beyond Contract; Work, Trust and Power Relations, London: Faber. Friedman, A. (1977): Industry and Labour, London: Macmillan. Goodman, J., Armstrong, E., Davis, J., and Wayner, A. (1977): Rule-Making and Industrial Peace, London: Croom-Helm. Jenkins, C. and Sherman, B. (1979): The Collapse of Work, London: Eyre Methuen. Katz, H and Sabel, C. (1985): Industrial Relations and Industrial Adjustment in the Car Industry, Industrial Relations, 24, 3: 295-315. Knights, D., Willmott, H., and Collinson, D. (Eds.) (1985): Job Redesign, Farnborough: Gower. Kochan, T., McKersie, R., and Cappelli, P. (1984): Strategic Choice and Industrial Relations Theory, Industrial Relations, 23, 1: 16-39. Loveridge, R. and Mok, A. (1979): Theories of Labour Market Segmentation, London: Martinus Nijhoff. Mackay, L. (1986): The Macho Manager; it's no Myth, Personnel Management, 19, 1: 25-27. Manwaring, T. and Wood, S. (1985): The Ghost in the Labour Process. Job Redesign, Knights, D. et al. (Eds.), Farnborough: Gower. Marchington, M. (1980): Responses to Participation at Work, Farnborough: Gower. Marchington, M. and Armstrong, R. (1985): Involving Employees through the Recession, Employee Relations, 7, 5: 17-21. Marsden, D., Morris, T., William, P., and Wood, S. (1986): The Car Industry, London: Tavistock. Meager, N. (1986): Temporary Work in Britain, Employment Gazette,94: 7-15. Nolan, P. (1983): The Firm and Labour Market Behaviour. Industrial Relations in Britain, Bain, G. S. (Ed.) Oxford: Blackwell. Nolan, P. and Brown, W. (1983): Competition and Workplace Wage Determination, Oxford Bulletin of Economics and Statistics, 45, August: 269-287. Purcell, J. (1981): Good Industrial Relations; Theory and Practice, London: Macmillan.

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Purcell, J. (1986): Employee Relations Autonomy within a Corporate Culture, Personnel Mangement, 19, 2: 38-41. Purcell, J. and Sisson, K. (1983): Strategies and Practice in the Management of Industrial Relations. Industrial Relations in Britain, Bain, G. S. (Ed.) Oxford: Blackwell. Rose, M. and Jones, B. (1985): Managerial Strategy and Trade Union Responses in Work Reorganisation Schemes at Enterprise Level. Job Redesign, Knights, D. et al. (Eds.) Farnborough: Gower. Soskice, D. (1984): Industrial Relations and the British Economy, Industrial Relations, 23, 3: 306-22. Spencer, B. (1985): Shop Steward Resistance in the Recession, Employee Relations, 7, 5: 22-28. Thurley, K. and Wood, S. (1983): Industrial Relations Strategy and Management Strategy, Cambridge: University Press. Wilkinson, B. (1983): The Shopfloor Politics of New Technology, London: Heinemann. Willman, P. and Winch, G. (1985): Innovation and Management Control, Cambridge: University Press.

Trends in the Development of Industrial Democracy in Greece and Their Impact on Management Discretion Andreas

Nikolopoulos

Abstract Important developments have appeared in the relations between employees and employers in Greece in the course of the last four years. These developments are to be found in the creation of institutional presuppositions for the resolution of conflicts in the labour field. The institutional presuppositions mainly regard the formation of a representative organ of employees in companies, which employ more than 40 people. The following important features in these relations should be mentioned: the independent right each union of a company has of deciding on a strike; the existence of a status which almost prohibits dismissal of trade-unionists; and the prohibition of lock-out. Briefly, it is estimated that the existing system of industrial relations in Greece faces great problems regarding its function, i.e.: the determining role of the governing parties both for the formation of working terms and for the relations in trade unions, the insufficiency of organizational presuppositions in Greek companies for the promotion of cooperative labour relations. The developmental trend of the above features shows that the existing problems are likely to become even greater. In order that these problems be solved, politics for the settlement of conflicts are developed.

1. Introduction The multitude of stimuli in the relations between employees and employers in the last four years create entirely new trends in the development of industrial democracy in Greece. 1 In this paper I shall discuss the results such actions have and the related developmental trends, taking into consideration both the existing conditions in Greek industrial relations and the factors which have determined the structure and course of these relations in the last ten years. Finally, I shall discuss politics for the settlement of conflicts in the industrial field.

2. Typical Features The most important feature of Greek industrial relations is that they are controlled by political parties, particularly by the party that is in power at the time. This political Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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control is effected in a variety of ways. All parties represented in parliament have corresponding syndical parties which take part in the elections for administrative councils of trade unions of all kinds, with separate ballot-papers. Representatives of all unions form the administrative council of the highest syndical organ of employees, i.e. the Greek General Confederation of Labour (GSEE). In the last 40 years the governing parties have succeeded in controlling the administration of the GSEE by having trade-unionists who agree politically with those elected. Thus, governments have safeguarded themselves against political pressure from the opposition; this pressure could otherwise take the form of widespread (i.e. panhellenic) strikes. These relations have given rise to many doubts about the representativeness of the GSEE in the last decades. Governmental action upon the content of collective agreements should also be noted: this action has been made possible by means of a properly formed arbitration system, which has been implemented since 1955. Under the circumstances mentioned two more recent government actions have to be taken into account; the one is the implementation of an automatic readjustment of wages to the price index during the last four years; the percentage of this readjustment is determined by a unilateral government decision and not by negotiations and is imposed directly in the public sector and optionally in the private one. The second action concerns legal settlements in 1983 and in the period between October 10, 1985 and December 31, 1987, which state that any rises given in wages and salaries should comply with what the governing party has decided of its own accord, i.e. without former bargaining with the interested parties, in order that the economic problems of the country be successfully handled. All those actions have been considered essential because of the fact that the parties of the Opposition (i.e. their syndical parties) do all they can in order to cause malfunctioning and political phenomena that could possibly lead to an increase in the number of their voters. The governing parties, on the other hand, because of their wish to avoid such developments, choose to avoid manifest widespread conflicts. Another typical feature of Greek industrial relations is that the syndical organizations are fragmented, so that they can only be compared to those of Great Britain. In Greece there are about 2,000 occupational, industrial, local, and branch trade unions, to which about 30% of the employees belong. Each of these trade unions is entitled both to accomplish collective bargaining with the respective employers' union and to decide on strikes independently. In this field of relations the role of management is characterized by a lack of concern for the effective settlement of labour conflicts. This unwillingness is made obvious by the lack of related initiatives, i.e.: the underdevelopment of politics for the successful settlement of conflicts in companies, even in periods when the correlation of powers is positive. The following should also be mentioned as additional manifestations of this unwillingness: - the underrated, merely executive role of staff managers, which can be seen even in the case of large industrial units; - the fact that the setting up of an appropriate substructure for the development of bargaining on an objective basis has been avoided. This substructure had already been suggested at the Industrial Conference of 1975 in the form of a proposal for the estab-

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lishment of a "Labour Institute" which would undertake the training on managerial and trade-unionists. Neither this proposal nor anything like it has materialized yet; - the unsystematic investigation of the possibility of research centers to settle labour conflicts. Briefly, the traditional policy of the employers is to seek firm government action to achieve the most favourable arrangements possible for labour relations, in association with more general demands that the conditions for investment be improved; this reinforces a policy of state intervention in this field.

3. Relations in the Field of Companies My discussion of relations in the field of companies will focus upon the presentation of the relevant settlements and upon the investigation of factors that determine the bargaining behaviour of the interested parties. On the basis of these remarks I shall discuss some attitudes towards their relations.

3.1 Legal Settlements The relations between employers and collectively bargaining employees are based on two acts: No. 1264 of July 1, 1982 "On the democratization of syndicalism and the protection of the syndical liberties of employees" and No. 1568 of October 18, 1985 "Health and insurance of employees". According to the former act, employees in companies with a staff of over 40 people are entitled to found a union which can negotiate on its own all details of the working conditions. This act is very general; from this point of view it is comparable to Italian act No. 300 of 1970, Statuto dei diritti dei lavoratori. With act No. 1264 dismissal of trade-unionists is made almost impossible, provision is made for the development of syndical sectors in each company, the application of the right to strike is made easier (since the only restriction is to notify the employer 24 hours before the strike is due to begin), lock-out is prohibited and, finally, penalties are imposed upon the employers who intervene in the syndical activities of employees in any way. In general, this act could cause the development of more detailed agreements between the interested parties, which would be adapted to the particular demands and necessities of each company. This has not materialized yet. The second act makes provision for the formation of mixed committees (i.e. committees in which both employees and employers participate), which aim at improving working conditions by taking measures against accident and disease caused by the type of employment. Moreover, under this law, which in the first place applies to industries which employ more than 150 people, provision is made for the employment of "Safety Technicians" and "Labour Physicians", who would have to cope with working conditions from the respective viewpoints. Taking into consideration the lack of substructure

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in this field as well as the set presuppositions, it could be argued that at least five years are necessary for the implementation of this act. Apart from the above forms of representation, in companies belonging to certain industrial branches "factory committees" have been formed. These have a very limited development, because they are unofficial and also because of the comparative advantages of factory unions.

3.2 Factors Which Determine Bargaining Behaviour A distinction can be made between the objective and the subjective factors. Objective factors include the framework of conditions, under which industrial relations develop, such as: - the size of the company; - the staff structure (in relation to sex and to the characterization "workers" and "clercs"); - the location of the premises; - the branch of economic activity; - the differentiation of legal status; and finally - the differentiation of the political status. The subjective factors are related to the ways (style) in which the bargaining is conducted. Some empirical research was carried out in order to investigate the influence of the objective factors in particular (Nikolopoulos 1986b). The number of companies in which there could exist some kind of representation of the employees is 2033. Questionnaires were sent to all of these, and about 27% of them responded. Elaboration of the responses showed the importance of a relationship between the development of representative organs of the employees and the factors already mentioned. On the basis of this consideration an important correlation between the establishment of representative organs and the differentiation of political status, the size of the company, and the branch of economic activity to which the company belongs was noted. In these relations one should also note the impact of the political status. By the time political relations were modified towards the end of 1981, when the Socialists took office, 52% of the employees' representative organs in companies had already been established. The remaining 48% were established within a period of three years and three months only (December 1981-March 1985). It should also be taken into account that the very drastic modification of the legal status in July 1982, as a result of which the establishment of the representation of employees in companies was made a lot easier, did not greatly affect its development. Thus, it is obvious that industrial relations in Greece are mainly affected by unofficial, rather than by official developments. This conclusion can lose some of its value if we consider the following two arguments:

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a) shortly after the Socialist government was formed, the Minister of Labour clearly stated the government's intention to completely revise the then existing legal status of industrial relations; he also mentioned where those revisions would apply; b) the intention of the governing party to have trade unions established in companies and to gain control of GSEE in its forthcoming congress led trade-unionists who support this party to establish unions in companies. Finally, the impact of subjective factors on the development of representative bodies can be considered unimportant. This results from the investigation of the relationship between the diachronic development of representative bodies.

3.3 Criticism In recent years Greek industrial relations have been oriented particularly towards the development of syndicalism in companies. This is an important source of conflicts, because the representative organs of employees in Greece are entitled to bargain all the matters that directly or indirectly concern labour relations, even in small companies (over 40 employees). These conflicts are particularly reinforced by the previously mentioned typical features of the relations. On the basis of these data the negotiations between employees and the employers can not be regarded as substantial or objective. The ability of each contracting party to create adverse consequences for the other is the most serious form of power that can be exercised in this system of relations. Nevertheless, there seems to have been quite a reduction in the number of strikes in private companies in the last four years. 2 This reduction is due to two main reasons: a) it is due to the very high index of unemployment (ca. 12% in urban areas), which has a suspensory effect on the manifestation of conflicts; b) since manifest conflicts aggravate the social climate and are considered to express opposition to government policy, trade-unionists who support the governing party and whose influence on representative bodies in companies is great, avoid supporting strikes. These trade-unionists also appear to be more "conciliatory" in bargaining. These positive aspects of the correlation of powers which favour management have not yet led to its activation towards a more beneficial delimination of bargaining limits. Thus, the relations between the two parts still remain very unsettled and could, in future, greatly aggravate labour conflicts.

4. Limitations in the Management's Bargaining Ability The employers consider that existing limitations in the management's bargaining ability can be summed up in the following four main points3:

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a) legal settlements which restrict the flexibility of the system of employment; b) control exercised by the governing parties on the collective treaties of employment; c) the fact that collective bargains are ideologically overburdened; d) the fact that employees' rights in companies are bound to be extended owing to the intended recognition of International Convention No. 135. The first point above includes: (a) possibilities for mass dismissals, (b) the institution of hourly-paid and part-time employment, and (c) the protection of members of the administrative councils of trade unions. The possibility of mass dismissals is confined to a monthly 2% of the personnel. This percentage can only be raised under exceptional circumstances, provided the Higher Council of Employment has agreed. Until now, though, acceptance of such petitions has very rarely been granted. However, following the intended reorganization of this council, which in its new form will allow representatives of banks to participate, this percentage is expected to be made more flexible. The petition for the introduction of hourly-paid and part-time employment has repeatedly been supported by the employers. It is noteworthy that neither hourly-paid nor parttime employment offends the existing labour legislation; but a special agreement of the concerned parts is demanded prior to the application of these forms of employment which means that all is undoubtedly negotiable. Because such agreements are considered unfavourable by the employers, though, they seek, to be granted the right of introducing part-time and hourly-paid employment schedules at their own discretion. Finally, as regards protection of trade-unionists, employers ask for facilitations to be provided for the dismissal of members of the administrative councils of trade unions. The control over collective treaties of employment exercised by the governing parties can only be considered restrictive under the conditions, that rises in salaries are considerably higher than rises in the price index and that the treaties also state the highest possible rises, which is true for the period from October 18, 1985 until December 31, 1987. In other words, the state's interference in collective bargains can not be considered in itself a limitation for management, while the result of this interference, which is often determined by political expediencies of the governing parties, can under certain circumstances be restrictive. The lack of essential presuppositions for serving this policy of state interference leads to the conclusion that no mid-term important revision can be expected, since the formation of such presuppositions would demand a drastic modification of the typical features of the Greek Labour Relations system. However, it must be noted here that with the latest suggestions (of July 30, 1986) which the Ministry of National Economy submitted to the "National Council for Development and Programming"4, it is pursued that, from January 1,1988, collective treaties be developed in each company; these treaties will tackle the theme of payment policy on the basis of the development of the productivity index of each separate company. The ideological burden which is carried by collective bargains creates problems regarding impartiality; therefore, ideological attitudes form important limitations for management. For the development of these limitation the observations made in the previous paragraph remain valid.

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Finally, since mid-1985, a bill concerning the recognition of International Convention No. 135 has been submitted to Parliament. This is expected to be voted on until December 1987. Thus, provision is made for the formation of company councils which will have the right to be informed and to participate in decision making. The right to be informed concerns: change in legal status of the company, change in whole or in part in the location of the company, introduction of new technology or new programmes of production, changes in the structure of the staff, economic development of the company, the balance sheet, and the annual report. The right to participate in decision making concerns: arrangements for the staffs leaves of absence; the mode of employing technical means for checking the staffs presence, behaviour, and productivity; internal regulations; prevention of accidents; programmes for cultural/syndical education and for leasure activities. In the case of disagreements about the way in which the rights of the two parties are applied, the inspector of the arbitration (i.e. a collaborator in the Ministry of Labour) is asked to intervene; his decision is compulsory for the employer, but not for the employees. Thus, the employees have the opportunity to impose their wishes by means of strikes on which the union of the company can decide, functioning together with the council of employees mentioned above. The voting for this bill is likely to be accompanied by an agreement between the higher organizations of employers and the GSEE about the development of a more general framework for internal regulations. This framework will make special provisions for each branch and for each company belonging to the respective branch. Thus, it is hoped, the problem of the very low level of standardization of the relations between the two parties, a problem which can easily be discerned through the provision of act 1264 of 1982, can be solved. As has already been made obvious, any modifications of the political status in Greece have a considerable impact on the relations of employees and employers. Thus, a discussion of such modifications is essential. In the event of the formation of a liberal/ conservative government a considerable removal of the limitations formed by legal settlements and a modification of act 1264, especially as to the prohibition of lock-out and the extended right of strike, must be expected. Representatives of employers' organizations have realized, on the other hand, that the event of the liberals/conservatives taking office would lead to an important intensification of labour conflicts, as a powerful cooperation of socialists and communist trade-unionists would then have to be confronted with. A development like this would considerably worsen the relations between employees and employers and would consequently lead to a series of limitations of a new (more informed) type for management. Leading members of the liberal/conservative party are oriented towards adopting the Swedish system of industrial relations, i.e. towards a thorough liberalization of bargains between the interested parts in all themes of labour life. Undoubtedly, these attitudes are questionable as to the possibilities there are of realizing them, because of the absence of those fundamental principles upon which the Swedish system of industrial relations has been constructed. Briefly, one can remark that Greek industrial relations are oriented towards bargains in the field of companies. This development can help to reasonably remove state interfer-

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ence in collective bargains. The lack of initiatives leading to this end on the part of management can be considered an important suspensory factor for this development. This lack of initiative gives rise to problems in tackling a large part of both existing and developing confinements of the management's bargaining extent.

5. Politics for the Settlement of Conflicts For the scientist carrying out research in the field of Greek industrial relations there remains no doubt that only the employer can implement politics for the settlement of labour conflicts. Although Greek employers have repeatedly expressed interest in this direction, the way in which they have handled these matters in the last decade gives rise to certain questions. These questions can be summed up in two alternative cases: a) the problem of labour conflicts is not so serious for employers as they themselves have sometimes claimed. Thus, their inadequate activities and initiatives in this field are justified, even when circumstances guarantee the success of their actions; b) the problem of labour conflicts is actually very important. Their inadequate politics for the resolution of labour conflicts is due to the view that their aims can be achieved more satisfactorily be means of direct state intervention. In relation to the first point above it should be noted, that labour conflicts in Greece have shown unexpected developments which have, as a rule, negative consequences both in the company and the political fields. Since the politics of employers do not seem to lead to a control of these developments, it is quite possible that even worse consequences for the function of companies will emerge, especially in the case of modifications of the given political status. On the contrary, if the second point above is accepted, then the traditional policy of employers undoubtedly is not in accordance with the system of parliamentary democracy. The activation of the state for the determination of working terms promotes political instability, and this has been clearly manifested in Greece in the last ten years and aggravates the terms of labour relations and more generally the climate of investment. After these remarks and the one referring to developmental trends, it must be clear that aims of Greek companies can only be thought of as realistic, if they are related to the acceptance of the competence of the negotiators by the respective representative organs of employees. Once this competence is acquired, it can truly help to settle labour conflicts if certain presuppositions materialise. The first presupposition concerns the standardization of relations, i.e. the delimitation of negotiative limits, of the two parties. In order that this standardization be achieved, the ratification of international convention No. 135 and the development of a status of internal regulations aiming at promoting dialogue between the two parties would be of great help. This dialogue must be accompanied by an improvement in the quality of communication, which would constructively affect the correlation of powers. Thus, it is

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advisable that additional rights of joint decision be given in the field of labour relations in general, together with the right to receive information about the economic development and status of the company. Under these conditions a system of optional arbitration will essentially have to be agreed upon, so that peace may be ensured in the labour field, and the independent right to decide on strikes may be limited. The existing system of arbitration in companies in W. Germany can be considered a satisfactory model. The second presupposition concerns the development of training programmes both for employers and for trade-unionists. In order that government and party interventions in the orientation and mode of application of programmes be minimized, organizations in which capital and labour would participate equally should be responsible for organizing those programmes. It is advisable that the latter be implemented in the first place in each company and in the second place, in branches of companies of the same kind. The medium - term correlation of powers can not cause many problems in the materialization of the above presupposition. The cost of these politics can not be considered high. The positive consequences can be discerned in the field of the improvement of the climate for investments, the increase in productivity, and the liberalization of bargaining which will result in direct economic advantages. Among the negative consequences I should mention the reactions of trade unions that aim at malfunctions, the possible extent of which, though, is considered to be limited. The quantitative modification of negotiative limits is considered to be very satisfactory, since under the conditions explained above the emergence of labour conflicts in a properly functioning system of parliamentary democracy can satisfactorily be controlled. The adoption of an alternative solution opposite to the above has been rejected, since the achievement of basis long-term aims in companies would be placed in danger.

Notes 1 Industrial Democracy is defined as: "the fields of relations between employees and employers, in which there are possibilities for substantial interactions, with guaranteed legal protection, between the - formally or informally - institutionalized actors, whose interests are economic and/or political", Nicolopoulos (1980: 15). 2 This view results from more general estimates. We have no evidence, as the Greek Minister of Labour has forbidden his collaborators of the Ministry to give analytical data on strikes. 3 These are made obvious in the attitudes expressed by employers' organizations in the daily press and also in the latest general assembly of the Federation of Greek Industries (Federation Greek Industries, Bulletin, Mai 1986: 8). 4 Participants in this council include outstanding members of the governing party and of organizations of employers and of employees.

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References Abell, P. (Ed.) (1975): Organizations as Bargaining and Influence Systems, London: Heinemann Educational Books. Bernard, T. (1983): The consensus-conflict debate, New York: Columbia University Press. Dlugos, G. (1974): Unternehmungspolitik als betriebswirtschaftlich-politologische Teildisziplin, Unternehmensführung, Festschrift für E. Kosiol zu seinem 75. Geburtstag, J. Wild (Ed.), Berlin: Duncker und Humblot, 39 ff. Dlugos, G. (1977): Gesellschaftspolitische Implikationen unternehmungsinterner Konflikthandhabung, Die Betriebswirtschaft, 37, 465 ff. Dlugos, G. (Ed.) (1979): Unternehmungsbezogene Konfliktforschung, Stuttgart: Poeschel Verlag. Dlugos, G. (1981a): Die Unternehmungseffizienz im Interessenkonflikt der Unternehmungsmitglieder, Mitbestimmung und Effizienz, Säcker, F.-J./Zander, E. (Eds.), Stuttgart: Schäffer Verlag, 1 ff. Dlugos, G. (1981b): Von der Betriebswirtschaftspolitik zur betriebswirtschaftlich politologischen Unternehmungspolitik, Die Fährung des Betriebes, Geist, N./Köhler, R. (Eds.), Stuttgart: Poeschel Verlag, 55 ff. Dorow, W. (1978): Unternehmungskonflikte als Gegenstand unternehmungspolitischer Forschung. Berlin: Duncker und Humblot. Dorow, W. (1979): Konfliktforschung aus unternehmungspolitischer Sicht, Unternehmungsbezogene Konfliktforschung, Dlugos, G. (Ed.), Stuttgart: Poeschel Verlag, 353 ff. Dorow, W. (1982): Unternehmungspolitik, Stuttgart/Berlin/Köln/Mainz: Kohlhammer. Dorow, W. (Ed.) (1987): Die Unternehmung in der demokratischen Gesellschaft, Günter Dlugos zum 65. Geburtstag gewidmet. Berlin, New York: de Gruyter. Federation of Greek Industries (Ed.) (1976): The meeting of Athens, Athens: Federation of Greek Industries. Federation of Greek Industries (1986): Bulletin of Federation of Greek Industries, Athens: Federation of Greek Industries. Fürstenberg, E. (1975): Industrielle Arbeitsbeziehungen, Wien: Manzsche Verlag. Galtung, J. (1965): Institutionalized conflict resolution: A theoretical paradigm, Journal of Peace Research, 2, 348 ff. Garson, G. D. and Smith, M. P. (Eds.) (1976): Organizational Democracy, London: Sage Publications. Geist, N. and Köhler, R. (Eds.) (1981): Die Führung des Betriebes, Stuttgart: Poeschel Verlag. Hirschman, A. O. (1970): Exit, Voice and Loyalty, Harvard: University Press. Klis, M. (1970): Überzeugung und Manipulation, Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler. Krüger, W. (1980): Unternehmungsprozeß und Operationalisierung von Macht, Macht in Organisationen, Reber, G. (Ed.), Stuttgart: Poeschel Verlag, 123 ff. Lindblom, E. C. (1980): The policy-making process, Englewood Cliffs, N. J.: Prentice-Hall. Nicolopoulos, A. (1980): Chancen einer industriellen Demokratie in Griechenland, Berlin: Dissertationsdruck. Nicolopoulos, A. (1984): A model for handling industrial relations (in Greek), Athens: To Oikonomikon. Nicolopoulos, A. (1987): Die Entwicklung der Unternehmensdemokratie in Griechenland, Die Unternehmung in der demokratischen Gesellschaft, Dorow, W. (Ed.), Berlin, New York: de Gruyter, 289-305. Nicolopoulos, A. (1986b): The structure of collective representation of employees in Greek companies, Athens (to be published). Oechsler, W. A. (1979): Konfliktmanagement, Wiesbaden: Betriebswirtschaftlicher Verlag Dr. Th. Gabler.

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Petigrew, A. M. (1975): Towards a Political Theory of Organizational Intervention, Human Relations, 28, 191 ff. Pfeffer, J. (1981): Power in Organizations, Boston: Pitman Publishing. Reber, G. (Ed.) (1980): Macht in Organisationen, Stuttgart: Poeschel Verlag. Runggaldier, U., Säcker, F. J. and Wächter, G. (1978): Das italienische Arbeitnehmerstatut, Zeitschrift für Arbeitsrecht, 9, 387 ff. Sokianos, N. (1981): Die Zielanalyse als ein Instrument des Konfliktmanagements, Berlin: Duncker und Humblot. Staehle, W. H. (1969): Die Unternehmung als Koalition und die Notwendigkeit der Werbung um Koalitionsteilnehmer, Zeitschrift für Betriebswirtschaft, 39, 377 ff. Steinmann, H. (1969): Das Großunternehmen im Interessenkonflikt, Stuttgart: Poeschel Verlag. Tushman, M. L. (1977): A Political Approach to Organizations: A Review and Rationale, Academy of Management Review, 2, April, 206 ff. Waschke, H. (1978): Gewerkschaften in der Europäischen Gemeinschaft, Köln: Deutscher Institutsverlag. Wild, J. (Ed.) (1974): Unternehmensführung, Festschrift für Erich Kosiol zu seinem 75. Geburtstag, Berlin: Duncker und Humblot.

Future Trends in the Greek Labour Market Athanasios N. Stathopoulos

Abstract Various factors in the turbulent historical past of Greece have accounted for the country's demographic characteristics and the peculiarities in its labour force profile. Most important among them appear to be the high rate of emigration and the imbalances in employment distribution within the three main sectors of the economy - namely agriculture, industry and services. Greece witnessed a spectacular economic development in the post-World War II period, during which the per capita income increased from $ 300 to $ 4,800, and sectoral imbalances were largely improved with greater labour participation in industry and services. During the 80's the situation in the labour market is not satisfactory, showing a disproportionate increase in labour cost and a heavy rise in unemployment. The attitudes, policies, and measures of the state could be held responsible to a considerable extent for the decline of investment in the private sector and the low labour productivity in both the public and private sectors of the economy. There are two possible alternatives to the present situation: the first consists of continuation by the state of the same policies which so far have proven ineffective and which do not appear to offer any solution to the problems of the Greek economy. The second alternative, which is strongly supported by the author consists of first gaining awareness of the acute problem facing the Greek economy and the Greek labour situation and second adopting a series of measures which should aim mainly at: the increase of employment, the improvement of the structural imbalances of the Greek economy, the revitalisation of the private sector, the establishment of a climate of confidence for entrepreneurial activity, productivity, linked compensation of labour, and less state intervention in business activities.

1. Introduction The existing labour force situation of a country and its general behaviour is one of the basic regulatory factors for that country's economic, social, and cultural development. This effective force, when combined harmoniously and productively with the country's natural resources, available capital, existing technology, and modern private and public sector management systems, may result in favourable development prospects, Keeping a balance between the positions, demands, and requests of the labour force and those of the employers, in other words, keeping a balance between the positions, objectives, Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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and pursuits of employers and those of the labour force must be the primary goal of the above-mentioned interested parties as well as of the state agencies responsible for implementing the state's labour and employment policy. The creation of a favourable climate enhances and promotes in the best possible way the aims of all parties involved. There is evidence that countries like Greece, with a turbulent historical past, where constant changes in figures and reallocations of forces and conditions have taken place, one-sided state support of one of the parties involved in the productive mechanism, has resulted in creating a wide gap between these parties. Furthermore, this one-sided support leads to constantly increasing social distortions and dangerous situations. On the other hand, equal treatment of the opponent parties by the state would mean a general state of equilibrium and an economic, social, and cultural progress. On the basis of the above, we shall attempt to present a brief historical sketch of the profile of the Greek labour force, of the basic factors which have affected and are affecting it, and, finally, of the general environment within which the labour force has played its role in the course of history. We think that an in-depth historical account is necessary in order to gain insight into the peculiarities of the Greek labour problems and the possible ways of handling them. We shall also try, as far as possible, to face, examine, and analyze the state's recent conduct towards both the labour force and the employers and the climate of relationships which has resulted from this conduct. Next, we shall look into the emerging prospects on which we shall especially focus our attention. Finally, we shall attempt to put forward a few of our thoughts, which might assist in calming the turbulence in the existing climate of relationships between the labour force and employers and try to discover and state the underlying trends of these forces.

2. The Greek Labour Market as a Demographic Problem Before and After World War II 2.1 Historical Evolution of the Greek Labour Force Profile In order to understand the profile of the Greek labour force, we think that it is necessary to survey briefly and carefully its historical course since the country's liberation from the Turkish Empire in 1821 until the present day. One can see from this survey that during this 165-year period, many changes in territories and populations, relocations, and facts have taken place. Also qualitative, quantitative, and structural changes have occurred, sometimes at such a speed that the profile and the conditions of behaviour and evolution of the population and expecially of the labour force have been highly influenced. Thus, in 1821 the population of Greece, due to its limited occupied territory, amounted to 938.765 inhabitants to reach, after heavy struggles for annexation of new lands, a

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total number of 6.204.684 inhabitants in 1928. Here it must be pointed out that the uprooting of more than 2 million Greeks from Asia Minor in a very short time and their installation without any infrastructure in Greece gave rise to one of the most acute problems in the country's demographic and population history. A country suffering from constant wars had to absorb and give employment to a new population and labour force. The Second World War and the internal war, which followed from 1940 until 1951, meant loss of life for thousands of people and caused new massive moves among the population, especially from rural to semi-urban and urban areas. Internal war resulted in the increase of volume of the Greek capitals Athens and Salonica. Thus, the population of Athens from 500.000 persons in 1940 reached 3.027.571 in 1980, and today it has exceeded 3.500.000 persons (more than one third of the total population of Greece). One can understand the impact of the relocation of such large portions of the population mainly from rural areas to urban centers. In 1947 the annexation of the Dodecanese - until then under Italian rule - took place. Thus, during the 1951 census, the Greek population amounted to 7.632.801 persons. Facing huge obstacles and serious problems, the reconstruction of the country started in 1951. A large amount of these problems was of a demographic nature and had to do especially with employment of the labour force. These years are therefore characterized by the domestic migration of large numbers of people, by the temporary and permanent emigration to the U.S.A., Canada, Australia, and subsequently by the vast wave of labour force masses emigrating to Central Europe and mainly to West Germany. Emigration was followed by waves of Greeks returning back to their native country. However, repatriates did not settle in their home villages but, as a rule, in other urban or semi-urban areas, while also bringing along a variety of newly acquired skills. A strong characteristic of the years which followed the 50's was the strong commitment shown by both state and business circles to economic development. A series of legal decrees of a developmental nature and of policy measures assisted the country which had suffered so far and which for the first time in its modern history was able to witness an impressive economic development. As a result of this, Greece was included in the 70's in the list of the 23 richest countries in the World. At that time, and especially after 1961 and until 1981, a spectacular re-distribution of the labour force took place between the three sectors of economic activity, as can be seen in Table 1 and Figure 1. Table 1: Labor Force Participation by Sectors of Economic Activity (%) Sector

1961

1971

1981

E.E.C.

Primary Secondary Tertiary No Information

53.9 19.0 23.8 3.3

40.6 26.5 30.9 2.0

30.7 29.0 40.0 0.05

8.1 35.9 56.0 -

Source: Hadzipanagiotou 1984: Employment Organization for Manpower Employment 1984: 8.

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Industry

Agriculture

39.6Services

Figure 1: Employment - Evolution and Structure 1960-1983 Source: Bulletin of the Federation of the Greek Industries, Nr. 476-477, Dec.-Jan. 1986: 9.

2.2 2.2.1

Main Factors Contributing to the Changes in the Labour Force Profile Industrialization of Greece

During the 1953-1981 period large shipyards, refineries, and large plants of fertilizers, nitrogen, textiles, cement, chemicals, wood and paper, and many others were established. This meant a change in the employment prospects for a large portion of the country's labour force. Undoubtedly, there was a big increase in the number of newly created jobs, as a result of which serious and considerable shifts in direction and orientation of the work force took place. The first law 4458/65, according to which industrial zones and industrial areas were established, was passed and thus industrial zones and areas were established with great success in Salonica, Volos, Patras, and other urban centers. This was an additional reason for a new professional orientation. 2.2.2

Tourist Development

Tourist development of Greece was non-existent before World War II as well as during the first years which followed it, despite the various points of interest which the country offers, such as antiquities, physical beauty etc. Only 90.333 persons visited Greece in 1938. However, the organization of tourism by the State and the assistance to investments in tourist projects created the infrastructure for attracting tourists. Thus, in 1966 Greece had 1.105.293 tourist arrivals, while arrivals reached 7.039.000 in 1985. Tourism created new and large opportunities for employment both in tourist and other relevant professions, i.e. hotels, camp sites, restaurants, tour guides, transportation means, etc. New outlets for employment - as a rule of a temporary nature - new trends, new specializations etc. formed new participation patterns for the country's labour force. Similarly, in order to meet requirement imposed by tourism, new developments and organizations in the social economic and cultural sector appeared.

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Development of Merchant Marine

The geographical location and nature of Greece with its 15.021 kilometers of coastline, its large number of inhabited islands, and a marine tradition of thousands of years gave an impetus to merchant marine which witnessed an outstanding progress during the past thirty years. Thus, the Greek merchant marine claimed and continues to claim a top position internationally, despite adversities due to the unfavourable world conditions as well as difficulties particular to the Greek situation. This leading position urged a large portion of the Greek labour force to adjust and specialize to the particular requirements of merchant marine. It is worth noting that in 1984, 50.000 persons were directly employed by Greek and Greek-owned ships. 2.2.4

Emigration and Repatriation

During the last twenty years, one of the important factors in Greek employment was first the strong emigration and subsequently the strong repatriation waves which took place. We think that these waves are due to two major factors: (a) the shortage of jobs in Greece and the big employment opportunities offered at the time by certain West European countries such as West Germany, and (b) the cultural factor according to which Greeks traditionally like to travel and to move around the world. Homer's relevant saying on Greeks is well-known "many mens' towns I have seen and minds I have known". Greece has always been a source of immigrants for transoceanic countries such as U.S.A., Canada, Australia, as well as for European countries. One can observe during the beginning of our century an increase in the emigration wave with more than 100.000 persons emigrating annually during the first decades, 122.034 persons in 1910, and 128.521 persons in 1915. Following World War II, emigration to transoceanic countries was between 10.000 and 35.000 persons annually, while after 1961 and until today 20.000-120.000 persons emigrate to Europe every year. Hence, the total amount of Greek population in W. Germany reached in the near past a peak of 500.000 persons. It must be noted here that these great moves of population in general and of manpower in particular of that period had a considerable numerical influence on Greek manpower, as well as on the participation rate of the population in employment. Thus, the participation rate decreased from 43,4% in 1961 to 36,9% in 1971, reaching 37,9% in 1981. The absence of a large number of persons from the labour force has altered the distribution of the population in general and of the labour force in particular. In addition to these changes, qualitative changes have influenced the labour force profile. The close link of emigrants to their homeland, their frequent visits back home, their remittances, their purchases of property were all facts which have set the stage for the positive or negative peculiarities of the Greek population. Emigrants returning to settle in their country differed both in quality and property from those leaving their country. Emigrants with low or nonexistent income, mainly from a rural background, brought back with them some material property, professional skills, and a much higher social and cultural level. This meant for them new employment prospects, but also a new basis for the redistribution

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in the country's employment profile. Here it must be mentioned that the average number of repatriates since 1968 amounts to 30.000 persons annually. 2.2.5

Evolution of Education

In Greece, there has always been a tradition and a particular inclination of parents to offer their children not only some education, but as a rule a higher education in universities within or outside Greece. The fact that there is a large number of Greeks around the world and especially in developed countries in temporary or permanent residence has resulted in the fact that today the number of Greek students or graduates of foreign universities is very large compared to those of any other country. While there are more than 150.000 students studying annually in Greek Higher Education Institutions and Higher Technical Schools, more than 50.000 students - although the number cannot be accurately defined - are studying abroad. This means that the Greek labour market has a constant supply of new university graduates, a fact which improves the structure of the labour force, whenever this supply is met by appropriate demand. Here we must stress the fact that in terms of quality the labour force is improving constantly, since a considerable number of Greek graduates comes from universities abroad and holds, in most cases, post-graduate degrees, i.e. Masters, Ph. D.s etc. This also means that specialized knowledge in both theoretical and applied subjects, systems, and techniques is transferred to Greece from abroad.

3. The Present Situation in the Labour Market During the last few years, radical changes in the structure of the social, economic, and cultural milieu of Greece took place. These changes succeeded one another very rapidly, and in some cases new conditions appeared and old conditions disappeared, a fact which limits the possibility of those interested to understand the elements comprising this situation, due to the lack of continuity and the constantly occurring changes. These new conditions, mostly unexpected both for those who did not wish for them to happen or for those who sought them or took advantage of them, are presenting lately various ruptures, discontinuities, inconsistencies, and developments which appear to be dangerous for our economic and social situation and structure in general. We will try to mention here some of the main results of the above radical changes in governmental policy.

3.1 Problematic Redistribution of Income to the Labour Force This alleged theoretical and in many cases "verbalistic" pursuit of economic development, increase in productivity, and improvement in the standard of living in fact proved to be: a) on the one hand, a shift of wealth from those whose work was worth their

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earnings until recently to t h o s e w h o are by nature or by disposition u n a b l e t o w o r k , and b ) o n t h e o t h e r h a n d , an e x c e s s i v e b u r d e n of t h e state by external a n d internal b o r r o w ing, a fact w h i c h m e a n s that the p r e s e n t and a n u m b e r o f t h e future g e n e r a t i o n s h a v e to b e a r t h e charge a n d are b e i n g m a d e d e p e n d e n t . T h e a b o v e h a d as a direct implication t h e d e c r e a s e in i n v e s t m e n t s ( s e e Table 2 a n d Figure 2 ) , t h e s l o w i n g d o w n in t h e p r o d u c t i o n i n c r e a s e rate ( s e e T a b l e 3 and Figure 3 ) , t h e d e c r e a s e in productivityTable 2: Annual Average Change in Investments (%) (Constant Prices)

- Industry - Agriculture - Services

1960-75

1975-80

1980-84

1982/81

1983/82

1984/83

+ 10.7 + 2.9 + 6.3

+2.6 -4.6 +4.7

-4.6 +3.8 -1.3

-6.1 + 1.0 +5.6

-7.0 +3.3 -9.6

+ 1.1 +21.2 - 2.2

Source: National Accounts and the Bulletin of the Confederation of Greek Industries, No. 475, Nov. 1985: 7.

Industry

I I I I I I I I I I I I I I I I I I -6 -5 -i. -3 -2 -1 0 1 2 3 i, 5 6 7 6 9 10 11 12 Figure 2: The Investments Evolution in Greece from 1960 to 1984 Source: Bulletin of the Confederation of Greek Industries, No. 475, Nov. 1985: 9. Table 3: Annual Average Change in Production (%) (Constant Prices)

Industry Agriculture Services Gross National Product

1960-75

1975-80

1980-84

1982/81

1983/82

1984/83

+9.4 +4.4 +6.7 +6.7

+4.7 + 1.3 +4.8 +4.2

-1.2 0 +2.0 +0.7

-4.2 +2.4 + 1.5 -0.1

-1.3 -6.8 +2.3 +0.3

+ 1.9 +6.4 +2.9 +2.8

Source: National Accounts and Bulletin of the Confederation of the Greek Industries, No. 475, Nov. 1985: p. 7.

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I I I

I I I I I I I I I I I

- 3 - 2 -1 0 1 2 3 i. 5 6 7 8 9 10 11 Figure 3: The Production Evolution in Greece from 1960 to 1984 Source: Bulletin of the Federation of Greek Industries, No. 475, Nov. 1985: 7.

competitiveness of Greek goods and services both internally and abroad, the limitation in employment posts, the increase in unemployment (see Table 4 and Figure 4), and a further demand on the part of the work force for an increase in wages and salaries and more social services. Thus, we had a decrease of productivity in 1985 of —2,6% and an increase of labour cost 24,4%. The social policy allegedly exercised by the government in salaries and wages of both the employed and the pensioners, could possibly have a beneficial impact on them and the economy. However, the way in which it took place had harmful and in most cases damaging results for both underprivileged and favoured. Two routes were followed by the government during the application of its social policy: a) freeze or minimal increase in salaries of the so-called "highly-paid", who happen to be as a rule the "meritocrats" i.e. those possessing a higher education, specialization, and creativity, and b) the excessive increase in the wages and salaries of low-paid, whose payment sometimes exceeds salaries of the previous ones. Table 4: Number of Unemployed by Areas (in thousands)

Greece Total Urban Areas Athens Area Thessaloniki Area Other Areas Semi-Urban Areas Rular Areas Source: Epilogi 1986 a/b: 18.

1981

1982

1983

1984

1984%

148.5 123.1 75.6 20.2 27.3 10.7 14.7

215.3 160.1 93.3 28.5 38.3 18.8 36.4

299.0 236.2 137.0 30.1 69.1 26.2 36.6

310.3 249.3 139.6 30.5 79.2 25.7 35.3

8.1 11.5 12.1 11.3 10.6 6.0 2.9

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Figure 4: The Evolution of Unemployment in Greece Source: Epilogi 1986a/b: 18.

If one takes into consideration the fact that during the last few years in Greece we have had an increase in the percentage of those non-employed, due to early retirement on the one hand, and a reduction in worker's productivity on the other, the resources available to the economy are constantly diminishing. A direct repercussion of the above mentioned governmental policy has been the fact that young people in particular are wondering whether they should toil for their education, for the acquisition of university or other special degrees, whether they should work conscientiously and creatively, or whether their mere presence in society is enough for giving them the right to its wealth. On the other hand, most productively and conscientiously working young people wonder if it is possible to survive and to have societies which constantly offer to them, while they themselves do not offer to society. This last question is worrying some members of the younger generation, leading at least a part of it to the conclusion that only creative work and meritocratic distribution of wealth assisted by social spirit can bring economic and social progress.

3.2 The General Change of the Climate in the Private Sector An additional negative phenomenon of recent years in Greece has been the fact that a considerable share of the political forces has succeeded in influencing, frightening, and in some ways forcing the remaining political powers to keep silent or in making them act as non-participating spectators of the existing realities. These political forces are constantly condemning production, industry, commerce, services, etc. and speak of the work force as persecuted, exploited, and maltreated by entrepreneurs and employers, who are constantly being accused of the alienation of workers. To oppose these views, one could point out the fact that Greece, despite numerous post-war difficulties, presented during the last 20-30 year period a rate of growth which, according to official OECD data, classified the country among the 23 richest countries in the world. The increase during that period in productivity, in construction, in manufacturing, in industry, in mining, and in shipping and the increase in the per capita income from $ 300 to $ 4.800 (today's $ 3.600) are facts that cannot be questioned. Besides, the general

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improvement in the administration, in public utility organizations as well as the development in the network of the Public Power Corporation, the Telecommunications Organization, transportation etc., give proof of the improvement and the amelioration of the general conditions in the country.

3.3 The Increase of the Production Cost and Increase of Unemployment The adverse climate recently established and already described, assisted by the high labour cost and social surcharges, the high cost of capital (one of the highest interest rates in Europe), the high cost of services, the constantly increasing public red-tape bureaucracy, the market-control regulations, the constant changes in legislation, and the variations in policies and strategies towards everything and everyone are limiting continuously the number of jobs, are increasing the unemployment, and are thus creating major problems in the labour market. One could argue that the development of the public sector and of public corporations which is sought by the state could offer a solution to the problem. Unfortunately, as already proved, the criteria for establishing, operating, staffing, and serving people in the public sector and in public corporations are not dictated in most cases by rational economic and social motives. The public sector and especially public corporations are constantly growing without any serious reason and as a result are heavily in debt. The experience from other countries in this area is bitter, e.g. Great Britain has offered for privatization vital branches of the public sector such as telecommunications and is considering privatization of other branches such as British airports, etc.

3.4 The Promotion of Small Industry The Greek Government recently paid a lot of attention to small industry. Small industry is a wealth-generating part of the economy, particularly in Greece, due to the size and the origins of the economy. However, small industry can not survive and develop alone, without the economic integration with larger industries and their technology.

3.5 The Continuous Pressures Exercised by the Labour Force Another aspect which should be mentioned is the pressures exercised by labour's constant demands in both private and public sectors. These demands, which are partially or totally dictated by political parties, are expressed through labour unions, whose formation, structure, and leadership give reason to strong arguments and confrontation. The presence of organized labour is strong in various ways. First, through demands about possible or impossible and often unrealizable claims, such as limited working hours, limited years of work, etc. Second, through workers' participation in all organizational levels of the production process and participation in company manage-

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ment. The government in order to satisfy these claims has made certain steps towards this direction with laws 1264/82 and 1365/83. Here it should be mentioned that the way through which workers' participation in boards of Greek firms is sought and the establishment of Work Councils, differs a lot from that applied in relative bodies in Europe and internationally. For instance, participation in boards has already taken place in education under law 1268/82 with various negative consequences. With reference to this, we shall only mention here, that good management means delegation of authority, responsibility, and accountability for all those involved in administration. Yet, in Greek Institutions of Higher Education, students limit their contribution only to that of "authority". These already mentioned general and special reasons, as well as the general situation existing in the country, which is characterized by insecurity, lack of clarity, and constantly changing reality, does not allow the harmonious functioning of the productive mechanism and the smooth collaboration between employers and employees.

4. The Perspective in the Labour Market The perspectives of development in the Greek Labour Market are characterized and determined by an intense, at least at present, instability. If one takes into consideration the fact that this instability is reinforced by the generally prevailing conditions in the Southern European area of the Mediterranean, the possibilities for forecasting specific prospects are rather problematic. This reason forces us to work under certain assumptions and thus speculate about the future under two alternatives or versions. The first alternative assumes that the present situation will continue in the future, whereas the second alternative assumes that today's impasse will finally be understood and its reality will be faced by all parties involved. This reality presents possibilities but also a large number of weaknesses. It is therefore our aim to take utmost advantage of existing positive possibilities to avoid negative possibilities and to cure in every way our weaknesses. An attempt to deal specifically with these alternatives will be now made, in particular under the three aspects of the country's labour force, namely the structural, the quantitative, and the qualitative aspects.

4.1 First Alternative The first alternative includes the unquestionable continuation of the present situation or its trends. This means, that the general attitude of the state toward the country's economic problem, as well as the specific attitude in the area of labour relations (employers-employees) will remain the same, or that minor changes will occur. This means that the economic impasse, which unfortunately was admitted by the state only 4-5 months ago, whereas, as I want to believe, it was known to higher state officials

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much earlier than that, will not only continue, due to the additional weaknesses which have intervened in the meantime following the new measures and until this date, but will also bring radical changes in the character of the Greek economy with consequences still remaining unknown. This stronglyprofessed awareness of the problem and the recent measures which were taken, do not necessarily mean that the downturn will stop, since these measures do not include a clear view expressed by the state concerning the private sector. In view of the above, this alternative appears to have the following characteristics: - The continuation of limited employment in the private sector; - small increase in employment in the public sector; - stagnation in restructuring the relationship between the primary, secondary, and tertiary sector; - increase in unemployment; - inability to increase workers' and pensioners' compensation; - reluctance in pursuing right type studies, meritocracy, and specialization; - trends towards full dependence of employees on party mechanisms in order to secure an employment post; - inability of the state to support its economic issues and those of the public sector; - creation of non-productive jobs; - continuation of limited or full-scale strikes, due not only to political but also to real reasons.

4.2 Second Alternative The second alternative includes developing awareness - even at a later date - of the fact that the Greek economy and labour market have recently gotten into an alarming situation. This awareness, which has to be developed by both the state and employees, must be covered by strong and radical measures to revitalize the economy and to establish a climate of confidence for entrepreneurial initiative and to provide incentives for the rehabilitation of the harmed climate of economic development. Any other unclear or dubious policy is bound to fail - at least at present - and to damage the future of the Greek labour market. The return to a route which suits the country and the development of new enterprise initiatives today involves a cost for the state which is in fact a high cost, without which the Greek labour problem cannot be successfully met. This solution implies the following: - increase in employment in the private sector; - a rational increase in employment in the public sector; - further improvement in the re-structuring between primary,secondary, and tertiary sectors of production; - reduction in unemployment; - progressive increase in employment compensation linked to productivity;

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- decreases in strikes and awareness of the role of labour unions; - re-establishment of confidence in meritocracy; - limitation of the state to sectors where it is impossible or unprofitable for the private sector to undertake action.

5. Conclusions From the above mentioned it has been made clear that the Greek labour market, despite its difficulties and inherent weaknesses, has followed a rapid re-organization of forces and has reached in a short time the character of western advanced economies during the post-World War II period. The strong state intervention in both the economic area and the labour force situation has created serious disadvantages for the continuation of development and appropriate evolution in the labour force. The awareness of this fact gained even at this late stage by all those involved, the state in particular, and the changes in policies will perhaps bring about the economic development which is required to meet Greek reality. It is time to confine "verbalism" to its minimum and to increase productive employment of the work force, as this will give a new impetus to a better future for all of us.

References Act of Legislatory Content (1985): Measures to Protect the National Economy, Official Government Gazette, Issue A , No. 179, (October 18). Athanassiou, L. (1984): Income Distribution in Greece, Athens: Centre for Economic Planning, Scientific Studies 6. Bulletin of the Confederation of Greek Industries (1983): Industry Disagrees With Works Councils, Bulletin of the Confederation of Greek Industries, (Athens), 452 (August). Bulletin of the Confederation of Greek Industries (1985): Basic Figures of Greek Industry, Bulletin of the Confederation of Greek Industries, (Athens), 475 (November). Bulletin of the Confederation of Greek Industries (1985-1986): Basic Measures in Greek Industries (Employment), Bulletin of the Confederation of Greek Industries, (Athens), 476-477 (DecemberJanuary). Commercial Bank of Greece (1986): Economic Bulletin, Athens: Commercial Bank of Greece, January. The Economic Costs of Employment in Western Europe: Bruxelles: European Trade Union Institute, INFO 7. Economic Survey - Greece (1983): France: OECD (December). Economicos (1986): Greeks have Become the Most Well-Paid Lazy People in the World, Economicos, (Athens), January 9, (translated from Der Spiegel). Economou, G. E. (1981): Policy of Prices and Incomes in Greece, (Taking Advantage of the International Experience), Athens: Centre of Programming and Economic Research.

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Emke-Poulopoulou, H. (1986): Problems of Emigration and Return-Migration, Athens: Institute for the Study of Greek Economics and Greek Association of Demographic Studies. Epilogi (1986a): Employment and Unemployment, Epilogi Economic Review, (Athens), January, Epilogi (1986b): Emplyoment and Compensation, Epilogi Economic Review, (Athens), January (Special Annual Edition). Fakiolas, R. (1986): Attachment to Obsolete Models and Unwillingness to Face Reality Undermine Labour Unionism, Economicos, (Athens), January 23. Glytsos, N. R (1986): Labour Markets. Hadzipanagiotou, I. P. (1984): The Evolution of Greek Labour Market, Athens: Ministry of Labour, Organisation for Manpower Employment. Korres, A . E . I . (1978): Greek Merchant Marine Work-Force, Athens: Institute for Economic and Industrial Research, (four special tudies). Koskos, L.F. (1983): Employment - Labour Relations, Athens: Panhellenic Industrial Conference, March 9. Koulouris, D. (1986): The Model of the Lazy Employee is Institutionalised, Kathimerini, (Athens), February 2-3. Law 1264 (1982): For the Démocratisation of the Labour Union Liberties of Employees, Official Government Gazette (Athens), Issue 1, No. 79, July 1. Law 1365 (1983): Socialisation of Public-Character or Public Utility Enterprises, Official Governmental Gazette, (Athens), Issue 1, No. 80, (June 6). Law 1568 (1985): Health Conditions and Safety of Workers, Official Governmental Gazette (Athens), Issue 1, No. 177, October 18. Monthly Statistical Bulletin (1986): Athens: National Statistical Service of Greece,Vol. 31, Issue 1, January. Organisation for Manpower Employment (1984): Employment and Unemployment in Greece, Athens: Ministry of Labour - Organisation for Manpower Employment, (Special Publication Series). Rapport de la Commission au Conseil - Douzième Rapport d'Activité du Fonds Social Européen, Bruxelles: Commission des Communautés Eruopéennes, COM (84), 396, Final.

Employment Policy in the USSR - Limitations on Enterprises' Personnel and Wage Policies Hans-Erich

Gramatzki

Abstract Enterprise labor and wage policies in the USSR are still strongly limited by the "center", i.e. by central management and planning bodies of functional and sectoral nature. On the other hand, market forces have a great deal of influence on economic activities, either directly (through labor force allocation), or indirectly (through income relations). The center needs to permit more decentralized decision-making in the field of labor and wages in order to stimulate higher overall labor productivity. Thus far, an obsolete management and planning system, an egalitarian wage policy, an unjust linking of wages to individual efforts, and the waste of labor (labor hoarding, absenteeism, discontinuities of the production process, poor work discipline and work motivation, outdated work norms, etc.) have essentially impeded the long-demanded and stronlgy needed "intensification" of labor use. The actual economic reforms focus on better work discipline and work ethics, more entrepreneurship and participation at all enterprise levels, and organizational as well as technical improvements. But there is ample evidence of only limited reform success in socialist countries, when policy changes are not accompanied by fundamental changes of the economic "mechanism", i.e. changes of its instrumental and institutional subsystems. Too little is done to reform the mechanism and promote greater enterprise autonomy.

1. Introductory Remarks In the USSR the "center" has put strong limitations on the enterprise's personnel and wage policies. But it is more difficult for it to plan and manage labor than material resources. Even during the Stalin era, when the elements of direct allocation of labor were much stronger than they are now, a decisive difference existed between labor allocation and allocation of material resources. Thus, one basic problem in the USSR is to coordinate two essentially different subsystems of the economy, the directly allocated material resources and indirectly allocated labor. The first steps of partial economic liberalization after Stalin's death referred to the labor field. Economic reforms since the mid-1960s raised enterprise competence with regard to labor and wages to some extent. But as the "environment", i.e. the economic mechanism, has remained Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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basically unchanged, strong limitations on the enterprises' labor and wage policies have "survived". Sometimes they are felt even stronger today because of the steadily rising professional qualifications and aspirations of the work force. The existing central planning is per se a limitation on an efficiency orientation of the Soviet enterprise. Central wage policy and planning focus on stimulation and regulation (cf. Adam 1979). The stimulative function means the use of wages and premiums in order to induce higher labor productivity at the microlevel, leading to an overall productivity rise. The regulative function refers to the total and structural balance of labor supply and demand and to social goals in the field of labor. This regulative function can - and, as a rule, does - lead to disincentive consequences. The strong limits for wage rises set "from above" are in conflict with the need for improved incentives "below" for higher wages and bonuses as a precondition for higher labor productivity. Soviet evaluation of enterprise performance is guided by two main principles, by the fulfilment of central plans and the so-called khozraschet principle ("economic accountability"), i.e. enterprise policy according to microeconomic efficiency. Micro-"rationality" according to these two principles looks quite different. Production for plan-goals has been extremely wasteful. The Soviet system is an expenditure-(cost-)oriented planning and management system, with cost 4- profit pricing and not a price •/• cost profit orientation. This is shown by the current discussion about the need to find a new "antiexpenditure" economic mechanism (anti-zatratnyj mekhanizm), i.e. a cost-reducing system. Changes of the main performance indicators towards value added and/or profit on the one hand and final results (versus paying for intermediary stages of production) on the other have partly narrowed the gap between the two principles, but their basic difference has remained, because of the still dominant plan fulfilment principle. G. Kulagin, former Director General of a Leningrad association, calls for a departure from evaluating enterprise performance "according to the percentage of plan fulfilment". "As long as 100% plan fulfilment remains the fateful borderline between kicks on one side and candy on the other, we will never be able to keep the enterprises from seeking approval for 'soft' plans and hiding reserves" (Kulagin 1985b; 572).

For demographic reasons, but above all because of reduced economic growth in the immediate past, the Soviet political leadership has stressed more and more the need to raise labor productivity. The last party congress decided to raise it by 2.3-2.5 fold by the year 2000. This gigantic task - hardly achievable - requires a far better use of labor and capital, including their improved combination. This increase of capital and labor productivities is supposed so result from organizational changes (reserves "on the surface", as some Soviet economists call it) and technical-technological changes, i.e. better research and development and a more rapid transfer of inventions into production. Radical organizational and technical changes are needed both at the macro-level (meso-levels included) and at the micro-level. Enterprises must and are supposed to be granted more scope for planning and management, the incentive system included. At this moment, the Soviet Union is an experimental field for a large variety of experi-

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ments focussing on higher microeconomic efficiency. And a variety of problems results for these experiments, due to the old environment. Systemic impediments lead to only small "net" benefits from experiments. There are impediments of institutional, mental, and coordinative character. Institutions are supposed to implement or assist reforms without adequate incentives to do it or - even worse - when disincentives are given: i.e. when institutions that participate in reform implementation lose power or resources. There are many psychological barriers: for example, stronger wage differentiation seen as crucial for labor productivity growth is impeded by egalitarian thinking. Coordination problems result from the fact that the reshaping of the "economic mechanism" has not yet gone very far. This refers above all to the price system, production and material supply planning, and investment planning. There are large potentials for productivity gains by organizational and technical changes at the macro- and micro-level, but they can only be partially implemented, if there is no radical change of the coordination system. Much has been written in Soviet literature about the need for such a system, but there are only a few concrete descriptions of its structure and contents.

2. Central Planning and Enterprise Powers In this contribution only some basic remarks can be made about enterprise powers and the interactions between planning and administrative bodies on the one hand and the "producers" on the other. There is a broad consensus among Soviet economists and enterprise managers that too much "petty tutelage" still exists on the side of the economic administrations. Even when enterprises are freed from administrative orders by reform decrees, ministries often behave as if those decrees had never been issued. The USSR needs clear legal rules for enterprise activities. "Enterprises and associations [ . . . ] must receive legal guarantees of their economic independence. One can scarcely speak of broadening associations' and enterprises' rights when antiquated rules and regulations are retained that prevent efficient use of resources and are an obstacle to accelerating production. Laws must prescribe not what business managers can do, but what they cannot do. Everything else should be left to the discretion of economicaccountability organizations..." (Sadikov 1986; 14).

Enterprises are overregulated not only in the "material" sphere (production, supply, investment, etc.), but also with regard to financial planning, and, in particular, clear regulations are lacking in the field of income distribution (between the enterprise and external budgets). "The time has come for stable normatives for the distribution of revenues from the sale of output to be stipulated by law, prior to the drafting of plans and independently of t h e m . . . " (ibidem 1986; 13). An "expenditure-controlling economic mechanism is only possible if labor collectives pay all of their expenses out of their own earnings" (ibidem). Until now, possibilities for strategic planning at the enterprise level have been strongly limited because of their short time horizon of planning. Again and again, enterprises

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demand stable economic parameters, and again and again such stability is violated, even when it is "guaranteed" from above. The strong emphasis on short-term planning is not compatible with the enlargement of enterprise "initiative", "entrepreneurship", and faster technical innovation. Even the production units with the most far-reaching experiments, such as the Sumy M. V. Frunse Machinery Association, still suffer from great tutelage. "A large number of needless indices still are planned for it. Its new technology and financial plans are overloaded wit them" (ibidem 1986; 14). But even if the legal powers of the Soviet enterprise are still narrow, not at all clearly defined, and often violated, the factual situation of the enterprise can be quite different. The administration is dependent on the producer, who is the only one in possession of the information needed for central planning. The producer has large stocks of materials and capital, i.e. factual property rights, and he can arrange to "go fast" or "go slow", etc. The outcome of this situation has been that the relations between the center and the producer have been determined by a large bargaining component and by an "individualization" of planning and allocation of resources, by personal contacts, a redistribution of enterprises' incomes (poorly functioning enterprises are subsidized by the ones that function well), etc. This ist not a planning system which could legitimately be called a counter-model to the "anarchic" market economy.

3. Central Planning and Regulation of Labor and Wages Until now, the planning center of the USSR has very strongly regulated the tariff system for wages, enterprise wage bills, and average wages, thus trying to compensate for the deficits of "allocative power" over labor force. The wage system has a highly varied wage differentiation - according to regional, branch, qualification, and other criteria. But these differentiations are not sufficiently harmonized, priority rules lead to fluctuation or reduce the required mobility of labor, etc. On the other side, wage differentiation is regarded as too small. It is a pronounced goal of Soviet economic policy to achieve a more effective linkage between payment and work by larger wage differentials. "The task of making the wage system more effective is of outstanding socioeconomic importance. The elements of egalitarianism and major deficiencies in the area of labor norms and wage structure which have been observed more often recently undermine this system's stimulative role and retard productivity growth [ . . . ] Each workers' earnings must be brought into strict conformity with the results of his work."

The "most important challenge" is making "wage increases closely dependent on increases in labor productivity" (Ryschkow 1986; 360). But the use of wage differentiation as an instrument to increase productivity is impeded by several factors and/or actors. The "center" has financial-economic limits for wage differentiation as a consequence of low overall productivity growth and is concerned about violating principles of

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income distribution policy or ideology. Enterprise managers are in fear of worsening the work climate and are not sure to gain essential net benefits by paying more strongly differentiated wages. In a situation of labor shortage the losers can try to "correct" the results, for example by second economy activities and the like. And the work force itself is quite accustomed to a basically egalitarian wage structure. Rudolf Bahro says: "People do not compete with each other [ . . . ] they do not spoil each other's norms. Bonuses are divided up. When management actually is able to implement the wage differentiation that has been called for, by no means does performance improve, but this is certain to ruin the normal work atmosphere" (Bahro 1977).

In a system guided by the principle "each according to his work", one should expect well-founded determination of wages by wage norms. But reality in the USSR is just the opposite. Wage norms are manipulated by administrative bodies to arrive at a certain wage sum. "The norms are not changed as long as the wage fund allows it. However, if the fund is likely to be overspent, then such norms are rapidly corrected, even if this is not backed by corresponding organizational and technical measures [ . . . ] Norm fulfilment does not determine the wage level; instead, the wage level adopted determines the degree of 'norm fulfilment'" (Jakuschew 1983 ; 49).

There is a clear contradiction between the high degree of so-called "technically founded norms" - about four fifths of the piece-rate workers in industry (cf. ibidem 1983; 48) and the degree of greater overfulfilment of work norms. The fulfilment is 120% on average. 40% of the workers reach more than 120%, and 12% achieve 150% and even more (cf. ibidem 1983; 48). Thus, the relation between wage norms and wages - to sum it up -is an "upside-down world" in terms of khozraschet efficiency. This points out the dominance of central planning and the plan fulfilment principle, the still strong limitations on microeconomic decision-making power and microeconomic efficiency. It can be seen - and can not be any different, given the essentially unchanged system, for management and planning - that the old phenomena and practices continue to play a role. "When plans are corrected, this norm is adapted to the wage fund (both at the ministry level and also at enterprise level),and not the other way around. The tendency toward egalitarianism and toward fixing this fund at its present level becomes clear" (Aganbegjan 1983; 385).

Because space is limited, we will try - by presenting a catalogue of indicators and indications - to show the only limited success of central employment and wage policy. There are: 1) simultaneously existing abundance and shortage of labor force at the micro-level, 2) large unplanned fluctuations and migrations of labor, 3) a marketdominated placement of workers (80-85%), 4) still too much unqualified labor (manual workers), 5) overqualified labor for "bad jobs" (insufficient mechanization), 6) a suboptimal combination of capital and labor (high shift coefficients for obsolete equipment and low coefficients for modern), 7) stronger deviations between centrally planned wage relations and income relations (determined to a large extent by market forces), to quote only some of the most important. Of course, employment and wage policy bear responsibility for these phenomena only to a certain extent. This is even more true for

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the general equalization tendency (uravnilovka), the low pay for qualified workers in relation to unqualified, for engineers in relation to workers, and the low average and marginal labor productivities.

4. The Soviet Labor Market Traditional resources of additional active labor force are widely exhausted in the Soviet Union, i.e. agricultural labor, women, and pensioners. Above all, female workers mesured by international standards - are intensively used, a consequence more of low male incomes than of political-ideological considerations (right to work, duty to work). On the other side, the demographic situation of the Soviet Union has deteriorated, at least partly because of the high participation of women in work. Thus, economic growth in the USSR depends above all on labor productivity increases, i.e. on a better use of the existing labor force potential. The deteriorating demographic situation has been widely discussed in the USSR and in Western literature as a main determinant for slower future economic growth. One can hardly accept this argument, because in each economic system the time horizons for reliable demographic forecasts, and therefore for future labor force potential, are extremely long compared with other forecasts. Thus, the growth or decline of the labor force potential is known to economic policy well ahead of time. An economic system unable to cope with this prognostic and policy task would hardly merit any legitimation. A. Kotljar, one of the leading labor economists of the USSR, criticizes the "dramatization" of the demographic situation. For him, it does not make sense to declare it as "unfavorable", because meeting the labor needs of the economy "is not ensured". Here matters "are turned upside down. It is not the demographic process that must correspond to economic structure, but rather economic structure must be adjusted to the needs of society, including the need for work and for work places" (Kotljar 1986; 297).

Meanwhile economists, both in the USSR and in Western countries, either (still) think in terms of a shortage economy, or (already) in terms of possible mass unemployment. In the author's opinion, neither the shortage nor the unemployment position can be supported. At this very moment, of course, shortages prevail. But if larger labor force releases occur in the new future - and they must occur due to productivity increases - , there is sufficient demand for additional labor force, and a range of instruments exists to come to an overall balance. The problem is more one of psychological preparation for higher mobility. Given the slow pace of economic reform in the USSR and the frictions that interfere with plan implementation, it is unlikely that the enterprises will give up their hoarding behavior. The basic precondition for this would be having the enterprises guided by a hard budget constraint. But even the Hungarian "socialist market economy" has not been able to eliminate "soft" budgets and corresponding behavior thus far. Even if technical and technological advances should be in accordance with ambitious Soviet

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expectations - which is unlikely because of the existing economic mechanism - , there would not be a mass release of labor force. Second, the demographic situation does not favor this. Many Soviet regions will not gain any additional population of working age in the near future. Third, in order to arrive at better capital productivity and thus total factor productivity, additional labor force is needed for the tertiary sector, for highly qualified services in the production sector, to some extent even for agriculture, for eastern regions, and for higher shift coefficients in industry. According to A. Kotljar, the shift coefficient in Soviet industry declined from 1.5 to 1.35 between 1965 and 1981 (see Kotljar 1986; 297). Qualified workers are still extremely scarce in the Soviet Union. The Soviet employment system itself has "rationalization reserves". The institutional infrastructure of the employment service is still weak. Infrastructural improvement would bring about improved resettlement. The same is true with respect to the functions of the employment service. In the past it searched primarily for labor force reserves and tried to activate them. In the future retraining programs will gain in importance, the share of those resettled by the state will rise, etc. The use of nonstandard (flexible) work schedules could increase noticeably in the USSR in the future, but at present growth in this area is slow. Two thirds of all part-time workers are employed in the service sector, but they account for only about 1% of the total work force (see Kurskii, Telaveli, and Udovichenko 1984; 76). Demand for parttime work greatly exceeds the supply. Thus, to some extent part-time work could compensate for reduced employment in the future. Another instrument is wage policy, referring to the emplyoment of pensioners. Far more than today, the combination of pensions and wages and selected wage differentiation according to special labor force needs could indirectly influence the factual pension age and the total labor force. A certain portion of women do not want to work at all, some especially because of child care. Increased male wages and/or children's allowances could create the material basis for a reduced female participation rate. For Kotljar it is also a psychological problem "to prepare staff members psychologically for strongly increasing job mobility". The right to work "does not mean an unlimited right to hold a specific job [ . . . ] Realization of a citizen's right to work is therefore based on high mobility" (Kotljar 1986; 300). This sounds very familiar to labor economists of market economies. However, at this moment the problem is not re-employing those released, but still how to release low-productivity labor force, above all manual labor. Instruments for accomplishing this are: better work organization, more innovation, better wage norming, wage differentiation, a tax on the wage bill (as in the GDR), structural policy, etc. One basic reason for low-productivity labor is the tendency for a certain degree of selfsupply (autarchy) of the industrial ministries, resulting from material supply bottlenecks. Thus, a large part of machine-tool production is done outside the special ministry, either with insufficient labor productivity (because of a low degree of specialization and poor equipment) or with low capital productivity (because of the insufficient use of equipment).

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5. Enterprise Labor and Wage Policy The dominating principle of plan fulfilment and the risks of underfulfilment lead the enterprises to practice a reserve policy for material resources and for the labor force as well. The hoarding of labor is a widely discussed phenomenon and problem. Hoarding in one enterprise leads to shortages in other enterprises. New equipment in new plants can not be used or only used at a low shift coefficient. New technology requiring a high shift coefficient because of its costs or its large productivity potential is partly underused. Thus, the existing planning and incentive mechanism creates surpluses and shortages of labor force at the microlevel. The problem of labor hoarding is widely discussed in Soviet and Western literature. The rigid sanctions even for small plan underfulfilments, in comparison with the costs of labor hoarding, are the basic reasons for hoarding. And the principle of planning from the achieved level is a disincentive for releasing labour force, because the planners take the improved productivity level as the basis for the next planning period. Other reasons for hoarding are: "empty" labour markets and the need to have labor reserves for plan changes, production rise, for overtime work, to compensate for a high absenteism, and for work outside of the enterprise (agriculture, building activities, etc.). And in the past the size of the enterprise work force was one essential determinant for wage classification and for the salary and premia of the enterprise director. By means of wage incentives and, above all, social benefits, enterprises try to attract and retain workers. Even if wage rates are fixed from above, there are ways to decentralize wage policy, the traditional instruments being upgradings in the tariff classification, paying extra for special work conditions where these do not really exist, etc. Distribution policy and distributional justice refer to wages and goods. There is shortage of money (hard budget constraints of consumers vs. soft budget constraints of producers) but even more of goods. "Side benefits" like flats, the use of kindergardens, educational facilities are often as important or even more important than wages (money). Even the supply of consumer goods by enterprises' shops plays a growing role. With regard to the supply of consumer goods, a dilemma exists. On the one hand, the workers, after their worktime, often do not get the food wanted - and thus the management is forced to establish or widen enterprise shops - , on the other hand, a growing supply by the enterprises - and this is strongly demanded - would bring new injustice, especially for the non-working population, and would "double" the retail trade system, hardly acceptable for reasons of economic efficiency. The quality of the job is of growing distributional importance. The Soviet Union will not allow a labor market segmentation between the haves and have-nots with respect to jobs, but there is a stronger segmentation between "good jobs" and "bad jobs". And the enterprises that spent much money to modernize work places seem to have the best "pay-off" in terms of labour force stability and labour productivity. Extremely "bad jobs" exist above all in auxiliary production. Even for those who are quite familiar with the Soviet economy, it is difficult to understand why the speed of mechanization is

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much slower in the auxiliary processes than in the main processes of production, because the payoff of investments into auxiliary processes is by far greater, up to 2-3 times that of the main processes (according to Soviet economic literature). What are the reasons? The prestige of the enterprise director is above all connected with main production. He may receive money only for this purpose. It is difficult to get equipment for auxiliary processes. And when unqualified workers are released, it is far more difficult to reemploy them than qualified ones. Requalification conditions are still insufficient, etc. On the other side, an enterprise director has some room for maneuver, for "decentralized" investments where he can decide on his own, even if he often is not allowed to use "his" profit according to his intentions, or - even worse - the center siphons off this profit.

6. Reforms and Experiments In the complex area of enterprise labor and wage reforms a range of measures is intended to lead to a rationalization of work organization and more just and efficient income distribution, with both of these essentially effecting labor productivity growth. Additional wages are to be "earned" by the enterprise itself, i.e. by releasing either engineers, technicians, and workers who are redundant at the given technological level, or by raising this level. A more just income distribution is to be realized basically by "collective organization of labor and payment", by a more effective structure of work brigades ("complex brigades", consisting not only of workers, but also of engineers and technicians), by more management by delegation at the different enterprise levels, and by a new system of wage determination: not establishing wage costs or average wages for each enterprise from above, but linking wages to production results by so-called "normatives". Normatives are relations between variables or percentages of variables. Wage normatives used are: wages paid per ruble of output or per ruble of net production, and additional wages (in %), paid per 1% of additional labor productivity. First, the new measures are supposed to objectify central planning and allocation of resources and benefits (reducing the elements of "individualization", of bargaining, of personal relationships between the administrators and enterprise managements). Second, the use of collectivist forms of organization of labor and income determination is intended to increase individual effort and the possibilities for larger individual income differentials (at least between collectives). By means of the brigade system - with brigade contracts between enterprise management and brigades about the fulfilment of certain production tasks - a higher labor productivity is supposed to result from better work motivation and better pay. The labor productivity of well-designed brigades is far above average productivity. But their actual role is smaller than claimed in official propaganda. The political leadership is in favor of it; management (top, middle, and lower) in many cases assists it only half-heartedly, because brigades mean reduction of management decision-making power, more discipline on the side of the enterprise, and

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also more problems when brigade contracts cannot be fulfilled, because of disturbances for which not the enterprise but central management is responsibile. Until know, the top management of the Soviet enterprise was installed by its economic administration and through party influence. Participation rights for the rank and file existed only at the brigade level and, to some extent, up to the master level on an experimental basis. The new Soviet enterprise law - it comes into force at the beginning of 1988 - widened the participation rights, including the choices of the leading management at all. The law established an enterprise council as the central participatory body (consisting of representatives of the enterprise management, the party and the trade union committees of the enterprise, and the rank and file). In the midst of the 80s there are no Soviet plans for basic reforms, even if "radical" or "revolutionary" changes are being demanded by the political leadership. "Basic" refers to party rule, property rights, and the economic mechanism. The system of property rights is of essential importance for the increase of economic efficiency, because more private and co-operative work could improve work motivation and productivity. But the actual campaign in the USSR against "unearned" income, against second (legal) incomes, for example of workers with private plots performing labor that really is socially necessary (for extremely scare food supply) show that the Soviet Union is not willing - unlike some East-European countries - to allow a wider range of private economic activities. Even if these could essentially reduce the food and service problem, the current ideological impediments are still stronger. Thus, property rights, if changed at all, would be revised primarily in favor of co-operative organization. Gorbachev, at the 27th Party Congress, criticized the violation of co-operatives' rights, but on the other hand, there are no signs that new forms of co-operatives are being developed and/or that quasi-state co-operatives are being converted into genuine ones. The brigades of state enterprises are co-operatives by their very nature. They have partial property rights. They work closely together. Thus, they are an acknowledgement of the Party that this society and economy need more co-operative action. The property rights of the state enterprise and its leading manager are not at all clear. They have been enlarged by a union-wide experiment for more enterprise powers, the so-called "large-scale" experiment some "isles" of experiments, and the new enterprise law, which enlarged, the enterprises competences and established self-financing. But as long as there is no consensus about the kind and scope of change of the economic mechanism, there will be no clear solution of enterprises' rights and duties. The Soviet leadership tries to streamline the system of central management and planning of the economy, first by organizational changes and second by substituting normatives for directives. The second aspect may be called economic mechanism in the narrower sense. Reforms have been started by organizational change. Six agricultural and food ministries and central administrations were amalgamated, some thousand employees released. Other ministries are expected to follow, thus cutting back the extreme administrative division of labor of the past. But, generally speaking, this is the second step before the first and a typical Soviet "reform approach". What is needed first is the

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reform of the mechanism in the narrower sense, i.e. the "allocation system", the coordination mechanism, or whatever else one may call it. The extreme division of labor in the central economic administration was an outcome of this "mechanism" and not vice versa. To create a new allocation system with an anti-expenditure bias requires above all quite another price system. The actual system is a system »gearing planned prices to facts". Conservative Soviet economists still identify factual average branch costs and "socially necessary labour expenditures" (Petrakov 1986; 12). Enormous reserves for reducing the labor intensiveness of output "are buried in the price, hidden from society in the guise of expenditures justified by the plan". A "certain part of the price becomes a payment for mismanagement" (ibidem). But there is no evidence that radical price changes are planned. Minor changes will refer to a certain decentralization of pricesetting, to price differentiations (according to quality, innovation, etc.). But this is too little to eliminate the cost orientation of pricing). If there will be no market pricing at the macro-level, at the micro-level the future system will not allow the profit to be the only efficiency indicator for enterprise performance. The economic reformers are still discussing optimal synthetic indicators. However, planned prices and "syntheticized" indicators will not lead to a much-needed reduction of complexity, but will preserve (over-) complexity. The substitution of normatives for directives, the establishment of a "mixed" economy with directives and normatives, do not basically change the allocation system. It is already extremely difficult to find an optimal solution for a single normative (to be found primarily by trial and error), let alone for a system of normatives and the combination of directives and normatives. Wage policy has now moved from a phase of discussion and scattered experiments to the reform stage. The 1986-1990 five-year plan provides for a considerably more differentiated wage schedule (cf. UdSSR 1986). More highly qualified workers within individual occupations are to be better paid, and wages in more efficient enterprises are to be raised as well. In addition, bonuses will be determined more on the basis of performance. Qualified engineers are to earn significantly more, and in the future there will be four categories of qualification (compared to "engineer" and "chief engineer" thus far). Furthermore, there will be a greater contrast between the highest-paid and lowestpaid wage groups. In other words, there are supposed to be greater rewards for performance. Just how various occupational shortages will be handled remains unclear, for in the case of lower academic incomes there are two categories. In the first case the lower income category reflects market forces: workers are scarce, and engineers are plentiful. Some engineers are accepting positions as workers because these pay better. Should central planners attempt to alter the relationship between incomes in defiance of market forces (occupational shortages), the enterprises would certainly "correct" the situation again. The situation is completely different with regard to the second group of low incomes. In this case the government sets income independent of market forces, for example for qualified young physicians who have opportunities to earn a second income in the second economy. Thus far, the ideology of "unproductive" labor has certainly

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played a central role. In order to reduce the influence of the second economy, it must be assumed that the state will let market forces - and not a misunderstood Marx - play a larger role in the future.

7. Concluding Remarks Improvements of macroeconomic and microeconomic dynamic and static efficiency are needed with regard to growth and structural policy. Regulation and stimulation of labor and wages have to be improved and better harmonized with each other. At the enterprise level, work discipline and work ethics as well as better management are crucial for increasing microeconomic efficiency. More possibilities for "entrepreneurship" at all enterprise levels, more participation rights of the rank and file, and more qualified management and organization of production and labor are intended to create a new work ethic. A new classification of engineers and workers according to their professional skills and work activities and more differentiated wages are supposed to guarantee that pay will no longer be determined to such a high degree by the time spent, but rather by actual performance. The main impediments for greater microeconomic efficiency are: 1) an (over)complex system of management and organization of the national economy which will remain basically unchanged, 2) a still high degree of interference by the center with regard to all aspects of enterprise policy, and 3) the question of how to solve the equalityefficiency trade-off.

References Adam, J. (1979): Wage Control and Inflation in the Soviet Bloc Countries, London-Basingstoke: Macmillan. Adam, J. (1984): Employment and Wage Policies in Poland, Czechoslovakia and Hungary since 1950, London-Basingstoke: Macmillan. Adam, J. (1986): Similarities and Differences in the Treatment of Labour Shortages, Employment Policies in the Soviet Union and Eastern Europe, Adam J. (Ed.), 2nd ed., London-Basingstoke: Macmillan, 127-148. Aganbegjan, A. (1983): Stimuli und Reserven. Sowjetwissenschaft, 36, 4: 382-386 (Trud 12. 12 1982). Bahro, R. (1977): Die Alternative - Zur Kritik des real existierenden Sozialismus, Köln - Frankfurt a. M.: Europäische Verlagsanstalt. Bolshe prav-vyshe otvetstvennost' (1986): Socialisticheskii Trud, 5: 7-24. Fedorenko, N.P. (1985): Planung und Leitung - Wie sollten sie sein? Sowjetwissenschaft, 38, 4: 355-364, (Ekonomika i Organizaciia Promyshlennogo Proizvodstva 1984, No. 12). Granick, D. (1986): Job Rights in the USSR: Their Effect on the Organization of the Total Soviet Economy, Osteuropa-Institut München, Working Paper No. 113.

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Jakuschew, W. M. (1983): Wirtschaftsmechanismus, Leistungsprinzip und Wettbewerb, Sowjetwissenschaft, 83, 1: 47-58, (Sociologicheskie Issledovaniia 1982, No. 3). Kornai, J. (1980): Economics of Shortage, Amsterdam - New York - Oxford: North Holland. Kotljar, A. (1986): Das Arbeitskräfteproblem in der UdSSR, Sowjetwissenschaft, 39, 3: 295-300, (Ekonomicheskie Nauki 1985, No. 12). Kulagin, G. (1985a): Will the Need for Workers Stay High? The Current Digest of the Soviet Press, XXXVII, 3: 1-4, (Pravda, Jan 21, 7). Kulagin, G. (1985b): Die Rolle der Betriebe im Wirtschaftsmechanismus, Sowjetwissenschaft, 38, 6: 570-572, (Pravda, July 7). Kurskii, A., Telaveli, G., and Udovichenko, G. (1984): Novye formy organizacii rabochego vremeni, Socialisticheskii Trud, 6: 68-77. Lane, D. (Ed.) (1986): Labor and Employment in the USSR, Brigthon/Sussex: Wheatsheaf Books. Petrakov, N. (1986): Price is a Lever of Management, The Current Digest of the Soviet Press, XXXVIII, 21, 12f., (Ekonomicheskaia gazeta No. 16). Ryschkow, N. (1986): Über die Hauptrichtungen der wirtschaftlichen und sozialen Entwicklung der UdSSR für die Jahre 1986 bis 1990 und für den Zeitraum bis zum Jahr 2000,27. Parteitag der KPdSU. Sowjetunion zu neuen Ufern? Meyer, G. (Ed.), Düsseldorf: Brücken. Sadikov, A. (1986): Keeping Account of Economic Accountability, The Current Digest of the Soviet Press, XXXVIII, 21: 13f., (Izvestia, March 13). Trud (1984): Trud i zarabotnaia plata v SSSR. - Slovar spravochnik, Moscow: Ekonomika. UdSSR (1986): UdSSR/Ein Schritt zum Leistungslohn: Kostensenkung soll die Einkommen finanzieren, Handelsblatt, 11.9.1986: 12. Zaslavskaja, T. (1984): Die Studie von Nowosibirsk, Osteuropa, 34, 1: A1-A25, (translation from Russian).

The Development of the Labour Market in Poland Restrictions for Management Jerzy Kortan

Abstract Since the mid-seventies, the labour market in Poland has been characterized by a constant growth in the rate of professional activity among the population. The process of rapid industrialization and urbanization of the country led to absorption of previously unutilized labour resources (mainly a massive flow of the rural population towards towns and work in industry, and the desire of a large number of women to work). Highly extensive economic growth, competitive wages, and social-welfare benefits offered by capital goods industries etc. caused major labour fluctuations and a constant mobility among enterprises. Administrative attempts to check this process did not produce the desired results. The situation began to change in the second half of the Seventies, and professional activity rates began to decline. Hopes raised by the implemented economic reform were not fulfilled, and inconsistent employment and wage policies further aggravated the unfavourable phenomenon. This paper discusses the main trends in employment policy with particular regard to enterprises: -

improvement of intraplant employment structures necessity of professional activation and reactivation of marginal labour resources intensification of labour management in industrial plants strengthening of motivation through wages necessity of active shaping of desirable labour mobility.

Over a period of 25 years, i.e. between 1950 and 1975, the labour market in Poland expanded rapidly, due to an extensive and strenuously promoted industrialization process. This industrialization process in Poland, as in all other socialist countries, led to the development of a doctrine of the objective necessity of pursuing a policy of full employment excluding any possibility of unemployment. Some time later this doctrine proved to be irreconcilable with the principle of rational employment. The full-employment-policy accounted also for the application of extensive methods aimed at the promotion of very rapid increase of professional activity rates among the population. These methods included the attraction of huge masses of the rural population to industries in towns, mass involvement of women in the production process, and rapid and marked development of co-operative units employing disabled persons. Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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The year 1975 witnessed a substantial drop in the coefficient of professional activity of the population in almost all age groups for the first time in the history of the socialist economy in Poland. Until then the increment in labour resources had always been higher than natural increase rates of the population, due to the above-mentioned factors. In the years 1976-1982 natural increase rates declined significantly, which led to a further shrinkage of real labour resources. This situation is shown in Table 1. Table 1 : Average Annual Increments of Labour Resources Period

Total labour resources

Demographic increment

1951-1960 1961-1970 1970-1975 1976-1980 1981-1982

222,000 277,000 279,000 150,000 164,000

125,000 156,000 272,000 207,000 137,000

Source: Kabaj (1984).

Thus, it was not until 1975 that the necessity of changes in the utilization of labour resources began to be realized in practical implementation of the employment policy as a result of gradually declining rates of natural increase. The situation was suddenly aggravated in the years 1981-1982, when labour resources were reduced by ca. 600,000 persons. This caused a major shock in the economy which had been developing extensively over a period of thirty years in conditions of constant and abundant growth of labour resources. Adjustment to the altered situation within a short period of time proved impossible. This process of decreasing labour resources in the second half of the Seventies was further aggravated between 1980 and 1983 mainly by: 1. the creation of wide possibilities for earlier retirement than had been legally envisaged; 2. the introduction of grants for women benefitting from child-care leave; 3. the liberalization of regulations concerning disability of employees, which substantially increased the number of persons retiring earlier from work. The new situation is illustrated in Table 2. At present, Poland enters a period characterized by the lowest rate of increase in labour resources in working age groves (for women between 18 and 59 years and for men between 18 and 64 years) and by a parallel decline in coefficients of professional activity: the previously mentioned lowering of retirement age, the growing number of persons benefitting from child-care leave, the growth in the number of persons considered to be disabled, intensified by a reduction in the number of weekly working hours, and a common drop in labour productivity in the Eigthies. The shrinkage of labour resources was accompanied by the freeing of enterprises from directives and administrative restrictions with regard to employment. This was a result

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Table 2: Old Age, Disability Pensions and Child-Care Leaves Year

Old age and disability pensions between 1970 and 1983: average data excluding private farmers

Women benefitting from child-care leaves (data for 31st December each year)

1970 1978 1980 1983 1984

2,321,000 3,646,000 4,094,000 4,994,000 5,114,000

50,400 403,200 487,200 877,700 873,300

Source: Roczink Statystyczny GUS 1985 (Statistical Yearbook 1985): 71, table 20 (107); 168, table 3 (229).

of the introduction of the economic reform on January 1,1982, according to which the volume and structure of employment should be determined by calculus of effectiveness conducted by the enterprise. Consequently, the so-called employment quotas were removed (and replaced by an indirect method in the form of progressive taxation of the wage fund growth), expanded possibilities of employing pensioners and women on child-care leave, as well as part-time work, etc. Table 3: Real (till 1980) or Estimated Increase in Labour Resources Period

Number of persons in thousands

1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000

1,249 1,138 614 375 733 1,014

Source: Rajkiewicz (1985).

The new situation and implementation of the economic reform resulted in a change of the employment doctrine. The policy of full employment realized by means of planned distribution and allocation of labour resources, commands, prohibitions, restrictions, and sometimes incentives was replaced by demand-based employment satisfying the real needs of enterprises. The assumption that this would involve rational employment was also accepted. However, rationalization of employment is hindered in practice by a number of processes and phenomena and primarily by wage fluctuations prompted by inflationary processes, by dislocations in the economic life, and by social tensions - hence, attempts to employ methods of administrative regulation as a remedy for the labour deficit. In most cases these methods fail to produce positive results. The economic reform introduced as of January 1, 1982 also encompassed the transmission by labour management of tasks connected with rationalization of employment from administrative organs to enterprises themselves. This was based on the assump-

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tion that better utilization of these resources would enable enterprises to lower their prime costs and to increase their profits. Such an assumption is obvious, however, only in the case of the buyer's market. Due to a situation where the seller's market largely predominates in Poland at present, enterprises fix their prices on the basis of cost formula. This enables them to considerably increase their profits and to shift the burden of their ineffective performance on to the buyer. As a result, they can maintain excessive employment and can increase (within certain limits) their wage fund, even if this involves higher taxation of the fund. Practical implementation of the economic reform did not fulfil expectations that it would promote intensive rationalization of employment or confirm apprehensions that autonomy of enterprises in determining their volume and structure of employment could lead to mass dismissals, even on a scale which might cause unemployment. Even before the reform was introduced, a common phenomenon of surplus labour volume was observed in most enterprises. Meanwhile, the huge labour deficit in the second half of the Seventies was further deepened between 1981 and 1983. As a result, the number of vacant jobs went up from 40,000 in 1970 and 92,000 in 1978 to 262,000 at the end of 1984 (Rocznik Statystyczny GUS 1985: 71, table 21 (108)). Growth of this deficit was not only (or not so much) a result of the operation of the reform mechanisms, although they did fail to provide strong enough stimulus for rationalization of employment. It was due rather to the appearance of new factors overlapping certain habits in labour management which had been consolidated in the past. Excessive employment even before 1980 had been caused, primarily, by irregular and uncertain deliveries of industrial supplies. In this situation labour reserves possessed by enterprises permitted them to accelerate production when supplies were available and in this way to make up for lost time. This phenomen is often termed the "procurement" factor of excessive employment. The second major factor resulting in irrational employment were the defective principles according to which the wage fund was formed. It was calculated as an arithmetic product of employment volume and average wage. This led to bargaining between enterprises and their superior units aimed at the maximization of employment, which was one of the factors on which a higher level of wages depended. In 1982 there appeared a new factor motivating enterprises in their drive for excessive employment. This was the system of eductions for taxation, calculated according to mean wage increase. At this time enterprises began to give preference to employment of a large, even unnecessary number of employees with low qualifications and, consequently, lower wages. This permitted the increase of employment volume without exceeding the mean wage. Until its modification (i.e. for over two years) this taxation system realize increases of mean wages but did not realize unjustified employment increase. The shrinkage of labour resources at the beginning of the Eigthies was, however, mainly caused by the very significant impact of the above-mentioned government decisions affecting the labour market (earlier retirement and child-care leave), as well as by

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the shortening of weakly working hours from 46 to 42 or 40. These decisions were taken in July 1981 in an atmosphere of pressures and emotions and without any in-depth analysis of the eventual volume and possibility of unemployment. The postulate concerning the lowering of retirement age was penned in the so-called Gdansk agreement of August 31, 1980, concluded between the government and the trade unions, who flatly refused any selection of employee groups in this issue. Moreover, concerning stoppage or postponement of investments, the government decisions made in 1981 under the influence of the economic crisis implied a smaller number of jobs for young graduates of vocational and secondary schools entering the labour market. In order to avoid the anticipated shortage of jobs, liberalized principles qualifying employees for disability pensions were also put into effect. As a result of all these decisions ca. 430,000 persons between 1981 and 1983 (i.e. on average about 143,000 persons each year) benefitted from earlier retirement, as compared with the anticipated earlier retirement of 150,000-200,000 persons (Sekula 1983). Simultaneously, new principles, according to which child-care leaves and grants connected with them were allocated, led to the withdrawal of ca. 375,000 persons from the work-force (ca. 125,000 on the annual average). The number of employees availing themselves of these opportunities rapidly decreased since the end of 1983, and in February 1985 it was already lower than it had been in 1977. Although these decisions produced significant social effects, it should be noted that they caused numerous and serious difficulties for the economy. Accordingly, they are treated as anachronistic in most cases today. The mass phenomena of earlier retirement from work and utilization of child-care leave were accompanied by liberalization of the laws enabling employees to qualify for disability pensions. This resulted in a large-scale professional disactivation process, which involved a total of over 1 million persons (Rajkiewicz 1985). These were, as a rule, persons with long professional experience and developed work habits, greater sense of responsibility for quality, and greater discipline. Consequently, their productivity rates were generally above the average. A number of the jobs vacated by these persons were taken over by young school graduates (between 1981 and 1983 about 1.2 million people entered the labour market for the first time), but many remained vacant. Simultaneously, labour productivity deteriorated considerably. Even in 1982 the average employee was producing 77% of the national income he had produced in 1977, and labour productivity rates from 1977 had still not been attained in 1985. It also soon appeared that the number of employees dismissed from work as a result of liquidation of jobs was much smaller that had been feared earlier and, therefore, the socalled steered labour transfers did not play a major role (Padowicz 1984). They encompassed only about 100,000 persons in the most important years of labour deficit (only ca. 55,000 persons in 1982). The greatest number of dismissals was recorded in 1982 and was mainly a result of liquidation of the intermediate level of management, i.e. amalgamations of enterprises and parallel units. This could slightly alleviate the labour shortage only in big towns, in which such amalgamations had their seats (Warsaw, Lodz,

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Katowice, Gdansk). Manpower agencies usually did not have difficulties in finding jobs for persons remaining jobless through liquidation of amalgamations, as the number of vacant jobs was far greater. Some structural problems appeared here, mainly due to the fact that ca. 70 per cent of all those dismissed from amalgamations were persons with secondary school or academic backgrounds. Some difficulties were also encountered as ensuring work in accordance with qualifications at the place of residence. On the other hand, difficult housing situations posed a barrier to spatial mobility of these employees and their families. Taking into account the fact that clerical workers prevailed among those dismissed from amalgamations, enterprises generally tried to motivate them to undertake production work. However, despite wage preferences, considerable barriers appeared here, while their productivity was often much lower than average, as they treated their new work only as a temporary solution. This did not pose a great problem on the labour market. According to estimates, of the total number of dismissed employees subject to transfer regulations in the years 1982-1983 about 80 per cent found work in other enterprises in the socialized sector and 12 per cent in the private sector. The remaining persons collected six-monthly compensations, and some began to conduct service-type activities on their own as craftsmen or traders, while the remainder returned to work in the socialized sector after some time. These processes brought about significant changes and initiated new trends in the employment structure according to sectors. Table 4 depicts these trends. Table 4: Employment Structure in Poland in 1978 and 1983 (%)

Sector I (agriculture and forestry) Sector II (industry and construction) Sector III (services) Sphere of material production Nonproductive sphere

1978

1983

31.6 39.5 28.9 84.1 15.9

31.9 37.2 30.9 81.3 18.7

Source: Rocznik Statystyczny GUS 1983 (Statistical Yearbook of Central Statistical Bureau 1983), quoted after Padowicz (1984: 1-13).

A characteristic trend of employment decline in the material sphere is worth noting here and its increase in the non-productive sphere. This means that the trend observed in earlier years, in which the highest employment growth was recorded in the sphere of material production, has been reversed. Moreover, within the sphere of material production, the share of labour in industry and construction decreased in favour of services, agriculture, and forestry. Generally speaking, these are desirable trends. The most favourable trend is growth of employment in services, mainly in health care, socio-welfare services, and education. Another significant trend is a simultaneous transfer of labour from the socialized sector to the non-socialized sector. Over the years 1978-1984 the number of people employed in the non-socialized sector outside agriculture went up from 532,600 to 857,400 (Rocz-

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nik Statystyczny GUS 1985: 55, table 2 (89)). From the viewpoint of the state policy, this phenomenon can not be treated as very desirable. Furthermore, socialized enterprises should constitute the main source of employment, although development of the non-socialized sector is necessary at the present time, since it supplies the market with numerous commodities, mitigating acute market shortages and creating additional jobs according to the state employment policy. These enterprises, however, should offer competitive wages in relation to non-socialized enterprises, and the former can no longer expect that any central restrictions will be adopted with regard to the nonsocialized sector. The data on changes in employment structure presented above point to considerable intensification of labour fluctuations. They were most marked between 1981 and 1983. This phenomenon can be seen most clearly if we take into account the number of employees who found jobs through State Employment Agencies. It amounted to 1,449,000 persons in 1981, 1,726,000 in 1982, 1,803,000 in 1983, and 1,909,000 in 1984 (Rocznik Statystyczny GUS 1985: 71, table 21 (108)). The above figures point to very considerable labour mobility, which is only partially the result of planned restructuralization. It is due, primarily, to the unfavourable situation in the labour market and, in particular, to a common deficit of labour. The deficit is accompanied by the existance of surplus labour in many enterprises, which are not interested, however, in rationalization of their employment. This situation was felt most acutely in the years 1982-1984. Meanwhile, enterprises suffering from real labour deficits found it difficult to find the required number of employees. Consequently, they were unable to fully utilize their production capacities and increase their output. On the other hand, enterprises possessing surplus labour in relation do their needs do their best not to decrease their labour volume, in the hope that, owing to their labour reserves, they will be able to make up the arrears which appear at times of insuffient supplies. Moreover, enterprises try to secure their future by creating labour reserves. A major consideration here is the fact that labour supply falls below its demand. This results in peculiar feedbacks - a limited labour supply induces enterprises to accumulate surplus labour and simultaneously generates a greater deficit in the labour market. The present labour deficit causes constant competition between enterprises to win employees. In this competition, despite compulsory placement of all employees through State Employment Agencies, the victors are not those enterprises whose needs are most economically and socially justified, but simply the strongest, who offer the most attractive wages, social-welfare infrastructure, etc. The considerable shortages in the labour market accompanied by a market differentiation of wages among enterprises cause, to a large extent, pronounced labour fluctuations. This constant labour deficit and competition among enterprises to win the necessary labour supply are significant factors demoralizing the entire economy. They exert a negative influence on employee attitudes, induce (and sometimes even force) enterprises to violate wage principles, intensify labour fluctuations, weaken discipline and

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work culture, and lower the level of productivity and work quality attained in the late Seventies. It is quite a common phenomenon for newly recruited employees to be charged with fewer tasks, and this results in a situation where the most effective way of securing higher wages is not through improved qualifications and promotion but simply through a change of job. The factors hampering rationalization of employment can be divided into the following groups: 1. Factors reducing labour supply and labour potential; and in the Eighties, primarily decisions regarding earlier retirement, child-care leave, and grants, followed by the shortening of obligatory work time not compensated by higher labour productivity. 2. Factors connected with prolonged lack of stabilizations and economic equilibrium, intensified in the Eighties by the economic crisis. Foremost among these are shortages and irregularity of industrial supplies (raw materials, materials, semi-finished goods, spare parts, tools, and electrical power), causing frequent and often long shutdowns of machinery and equipment and, consequently, under-utilization of production capacities. Although these difficulties are of a long-term character, they were considerably intensified at the time of the economic crisis in the Eighties. Under these conditions maintenance of surplus labour provides enterprises with the previously mentioned labour reserve necessary to intensify production and engage more workers when, for example, the enterprise receives its overdue supplies at the end of a month. Very often enterprises treat this as an indispensable condition, permitting them to "catch up" with implementation of threatened plans, which in turn entitles personnel to premiums. Thus, from the enterprise's viewpoint, it is a form of strategic reserve, allowing to execute planned tasks under conditions when production is carried out "in jumps". Of essential significance among these factors is also the rapidly growing labourintensity of production, resulting from consumption of "second-best" materials on a larger scale and substitute technologies connected with it, as well as limited possibilities of promoting technical progress. Another major factor is the frequent need to employ the additional direct labour necessitated by progressive decapitalization of fixed assets. In the case of powerful impediments to reinvestment processes (even simple replacement) and modernization of fixed assets, there arises a necessity to expand the enterprise's own production of spare parts and elements of machines, as well as the scope of repair and maintenance works, often involving large numbers of workers. The negative impact of these factors will be most probably intensified in the coming years. 3. Factors connected with the socio-political crisis and unfavourable public attitudes. 4. Factors connected with inertia of enterprises, not only with regard to the retention of the existing production structure, but also in the field of employment policy. These result in unwillingness or inability to adjust this policy to changed conditions in labour supply. Hence the inclination of enterprises to create and maintain labour

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reserves as a means of ensuring future production growth and overestimated demand for new workers. 5. Factors of structural character and, primarily, the continued low share of labour costs in total production costs. As yet, there are missing mechanisms, which could alter the unfavourable relation between labour costs and costs of exploitation of means of labour, aggravated by lack of foreign exchange for the purchasing of modern machinery and equipment. Low costs of human labour and the fact that it is relatively easier to secure this than the other factors of production means that neither fixed assets nor technical progress are competitive for human labour. 6. Factors connected with certain shortcomings in solutions adopted by the economic reform, e.g. too frequent changes in instruments of the reform, resulting in undermining of confidence in its stability, inadequate effectiveness of the motivation system in promoting labour productivity growth, and even preservation within it of stimuli maintenance of labour reserves. Of particular importance among these factors is excessive freedom of enterprises in fixing prices and calculating their prime costs. The commonly applied "costs formula of prices" allows enterprises to shift onto consumers the burden of excessively high costs resulting from irrational policy (e.g. costs of labour and costs of materials). The determinants described above lead to the statement that, from the microeconomic point of view, the behaviour of enterprises striving to preserve high levels of employment is most often justified by benefits which a given enterprise wishes to obtain and which are, all too often, incompatible with the general economic interest. This problem of synchronization of the enterprise's interests with the general economic interest requires an optimal solution.

On the basis of the analysis performed here an attempt can be made to formulate the main guide-lines of the employment policy which would aim at its rationalization. They appear to be as follows: 1. Systematic efforts aimed at improving employment structures through creation of conditions paving the way for rational employment: i.e. changes in sectoral structures of employment and those structures in individual enterprises, as well as the optimization of these structures from the point of view of qualifications and professions adjusted to changing requirements of the national economy. This is also necessary in order to eliminate certain deficiencies, manifested in the parallel existence of numerous professions and specializations both in deficit and in surplus. It calls for major changes, both in the system of synchronization of education and training programmes with demand for qualified labour and in the wage and welfare policy in relation to deficit professions, especially those which are characterized by a large degree of heavy physical work. 2. Search for further possibilities of professional activation (and perhaps more often reactivation) of marginal labour resources: the solutions which could be adopted in

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this field include the introduction and popularization of new and elastic forms of employment in part-time jobs and flexible working time or in putting-out systems of work. Another solution could be the raising of the wage ceiling which retired people, ready to take on work, are permitted to attain or by making it possible for women benefitting from child-care leave to work in putting-out systems without imposing any restrictions on their wages. 3. Irrespective of the extensive factors listed in points 1 and 2, it is necessary to intensify rationalization of the labour management. This is a difficult task, because in the Sixties and Seventies this sphere deteriorated, with most efforts of the enterprise being directed at promoting employment growth. First of all, it is necessary to focus efforts on stimulating labour productivity growth. This will necessitate the elaboration of appropriate work norms and performance appraisal systems. Errors made in the wage policy in the Seventies led, among other factors, to the situation where the role of employees charged with elaboration and supervision of execution of prodution quotas was considerably weakened, while changes in technique and technology did not produce desirable effects in the sphere of labour productivity. 4. Strengthening of the motivational function of wages, through consistent assurance of conditions permitting the direct linkage of quantity and quality of work, and development of rational wage relations: a solution of this problem calls for a far-reaching reform of wages in the Polish industry (more specifically, for settlement of new and adequate collective agreements with trade unions) and appropriate weighing of production quotas. An equally important problem is the effecting of transformations in social awareness of employment issues, which has been deformed within the last 15 years, with this deformation being further deepened over the last six years as a result of increasing new demands posed by labour and egalitarian trends. 5. Rationalization of employment in the Polish economy requires, on the one hand, the prevention of undesirable labour fluctuations and, on the other hand, an increase of desirable labour mobility in the sphere of different professions, between enterprises and between different parts of the country. This will be necessitated by transformations which will have to be made in the national economy. Realization of the right to choose freely the place of work and, in this way, to obtain higher wages should be compatible with the principle of closely relating wages to performance at work. Needs connected with restructuralization of the economy will call for planned translocation of a part of the work force to services, mining industries, etc. in the next few years. This will include departure from activities aimed at ineffective administrative restriction of socially and economically undesirable labour fluctuations and adoption of a policy oriented towards promotion of desirable labour mobility. Apart from the previously mentioned factors, it will call for changes in the attitude towards the labour mobility phenomenon and its treatment not only as a negative phenomenon, but also as an indispensable one in the structurally changing economy. Within the enterprises important factors promoting stabilization of employees, apart from proper wages, are: proper working conditions (first and foremost, work safety and hygiene), conditions in

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the work environment and culture of this environment, as well as social welfare and living conditions of e m p l o y e e s . Finally, an extremely important problem is also posed by the appropriate adaptation of n e w and, especially, young e m p l o y e e s undertaking their first work.

References Kabaj, M. (1984): Zmiany w zasobach w Polsce (Changes in Labour Resources in Poland), Polityka Spoleczna, 7. Koziel, B. (1985): Warunki stalej racjonalizacji zatrudnienia (Conditions of Constant Rationalization of Employment), Ekonomika i Organizacja Pracy, 12. Padowicz, W. (1984): Zmiany strukturalne w zatrudnieniu i przemieszczenia pracowniköw (Structural Transformations in Employment and Labour Shifts), Praca i Zabezpieczenia Spoleczne, 12. Rajkiewicz, A. (1985): Zatrudnienie w latach osiemdziesi^tych a reforma gospodarcza (Employment in the Eighties and the Economic Reform), Polityka Spoleczna, 5-6. Rocznik Statystyczny GUS (1985): Rocznik Statystyczny GUS (Statistical Yearbook 1985), Warszawa: Central Statistical Bureau. Sekula, I. (1983): Rynek pracy: swobodny, nakazowy, sterowany (Labour Market: Free, Commanded, Controlled), Zycie Gospodarcze, 22.

The Changing Industrial Relations Scene in Japan and Its Impact on Managerial Behavior1 Robert M. Marsh and Hiroshi

Mannari

Abstract The challenges of the oil shocks of the 1970s called for a more drastic restructuring of Japanese industry than would have been required had only general modernization processes been operating. To what extent was the "lifetime employment system" in the larger Japanese firms a constraint on managers who, faced with the severe economic recession, had to reduce their work force? In some ways and to some extent, the adjustments made were influenced by the distinctive features of the Japanese employment system. Although the lifetime employment system's norms do impose real constraints on managers, there is also flexibility in the system even when a particular firm's work force maximally enjoys the advantages of lifetime employment (because it is mainly male, more educated, etc.). To explore this empirically, we studied a sample of 48 heterogenous Japanese manufacturing firms in 1976 and again in 1983. Even during the recession, some of these firms expanded their number of employees while others were able to retrench. Regression analysis reveals that the main cause of how much the number of employees declined or expanded was not the "Japanese employment system" variables, but rather the degree of organizational slack. We also show that, contrary to the technological unemployment thesis, Japanese firms whose automation increased were in fact more likely than those whose technology either did not change or became less automated to increase their number of employees. The "lifetime employment" system can not explain this, since under no interpretation does it require a firm to increase its work force. Finally, we suggest that it was therefore rational for Japanese enterprise labor unions not to resist technological advance. Enterprise unions are a part of the "Japanese employment system", but are not generally a significant constraint on firms that want to substitute capital (technology) for labor.

1. The Japanese Economy in the 1970s and Early 1980s In viewing the changes that affected industries and the strategies of particular firms in those industries in the 1970s and early 1980s, it is important to distinguish two kinds of adjustments. One consists of adjustments that are part of the general process of structural modernization in industry from pre-World War II days to the present. The other Management under Differing Labour Market and Employment Systems © 1988 Walter de Gruyter & Co. • Berlin • New York

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set of changes are responses to external shocks, most especially the oil shocks of 1973 and 1979. The first, or modernization-related, adjustments include such trends as labor-saving, computerization, increased attention to marketing, and the competition from new industrial exporting countries like Taiwan and South Korea that could increasingly undersell Japan's textile industry products. Resources were shifted away from textiles and other labor-intensive consumer goods industries and toward capital-intensive and high technology industries. Japan's overall increasingly favorable international trade balance caused its exports to face greater friction with other advanced countries, and this negatively affected such Japanese industries as steel and autos. These trends reflect changing market demand profiles and technological modernization and would have occurred even without the oil shocks of the 1970s. Moreover, the steep rise in energy prices affected some industries less than others. Electronics, fine chemicals, and machinery and equipment that utilize numerical control (NC) machine tools actually expanded during the 1970s. Nevertheless, the 1973 oil shock is widely believed to have signalled an end to Japan's period of high real growth of 10-12 per cent a year. Prior to 1973 the oil Japan had to import was relatively cheap. After 1973 rising prices for energy and other goods combined with a falling growth rate. Japan experienced its worst recession of the post-War period (Sato 1980: 9). Steel and other basic industries' demand declined as a result of the falling growth rate. Industries found themselves variously in situations described as structural recession or depression. Industrial production fell and only slowly recovered. These challenges called for a more drastic restructuring of industry after 1973 than would have been required had only general modernization been operating. How did Japanese managers respond?

2. Managerial Response In part, Japanese managers have the deterministic viewpoint found in the theory of industrial organization (Bain 1968, Mason 1957). They analyze the industry in which their firms operates - the barriers to entry, the number and size distribution of firms, product differentiation, and overall elasticity of demand. These factors are seen by managers as constraining the strategies their firm can adopt. Industry structure sharply delimits the economic feasibility and appropriateness of different strategic alternatives. But a manager stops short of the determination found in industrial organization theory in economics and in population-ecology theory in organizational sociology. Managers believe they have strategic decision options concerning price, volume and quality of product, organizational design, and sales and advertising efforts. In this respect they speak in the terms of strategic management theory (Porter 1981), whether or not they know this as a theory. They emphasize the insight, creativity, and even vision some firms display in finding unique ways to alter the rules of the game in their industry.

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The causal model that guides our analysis assumes that managers choose particular production functions-combinations of production technology and labor inputs. These are strategy variables that managers can manipulate. But their choices are constrained by the context in which they are made. To paraphrase Marx, owners and managers can design the mix of technology and labor force size and the internal structure of their organization. But they can not design these things out of whole cloth. Their decisions grow out of and must take into account certain givens, conditions over which they have relatively little control. In this paper we ask: to what extent is the Japanese employment system a constraint on managers when a recessionary period calls for a reduction in their number of employees? How important are these employment system constraints on managers relative to other constraints deriving from organizational performance, slack resources, and technology?

3. Data and Methods In this paper we draw on the results of our survey of medium- and large-scale Japanese firms. The universe was defined as all industrial manufacturing establishments employing 100 or more persons on a site in one city of 400 000 people in Okayama Prefecture in southwestern Japan. In our initial field work during the summer of 1976 there were 84 such establishments. When a company had two factories in the city, one was randomly eliminated from the sample; seven were thus dropped. Of the remaining 77 factories, 50 were studied. Twenty-six were one-factory companies, the other 24 each a branch plant of a different multi-plant company. The city had manufacturing firms with 100 or more employees in 16 of the 21 two-digit industries classified in Japan's 1972 Establishment Census of Manufacturing. Our sample has one or more firms in 14 of these 16 industries, including clothing, textiles, food, chemical, petroleum, motor vehicles and transportation equipment, rubber, iron and steel, ordinary machinery, non-ferrous metals, and electric power utilities. The sampled factories varied in size from 100 to 11,815 employees and in technology from a handicraft firm producing traditional Japanese ningyd dolls to modern, automated petrochemical firms. In the summer of 1983 we conducted a second-wave follow-up study of the same factories to collect longitudinal data. Of the 50 original units, one had merged with another firm and one refused to be re-studied; our N in this paper is the 48 units which have data from both 1976 and 1983. Data collection in each factory in both 1976 and 1983 consisted of a tour of the production plant, an interview with one or more key informants (senior officials, whom Pennings [1973] calls "institutional spokesmen") and a questionnaire left to be filled out by a key informant, requesting mostly objective information on the organization. All interviews were conducted in Japanese.

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4. Management Discretion Concerning the Size of the Work Force The major distinction among Japanese employees is that between (1) regular employees (joyd jugydin),

who benefit from the "lifetime employment" (shushin koyo) sys-

tem, and (2) temporary employees (rinji jugydin), hired for a fixed-contract period, and part-time employees. Some employees, such as women, may be employed for years by a firm as "temporary", without ever attaining the coveted status of regular employees. Japan's lifetime employment system applies mainly to male employees in larger-scale firms, and therefore only about one-third of the labor force receives its advantages of more secure employment, seniority wage increases, bonuses, social insurance premiums, other employee benefit expenses, retirement allowance, etc. When demand for a firm's products declines, managers may face an objective situation in which the firm has excess personnel. Managerial discretion in adjusting the size of the work force is constrained by the employment system's cultural-institutional norms which govern the order in which a variety of employment adjustments can be made. These can be classified on a scale of increasing severity. First, the initial adjustment managers make is to reduce the number of overtime hours. Since overtime work causes fatigue which lowers Japanese workers' marginal efficiency, a decline in overtime hours actually raises productivity (Tsujimura 1980). It also reduces labor costs. If lowering overtime hours is an insufficient response, the second response is to reduce non-overtime hours. Firms with a five-and-a-half day week, for example, may change to a five-day week. Tsujimura (1980) found that for every one per cent reduction in non-overtime work hours there is a two per cent increase in labor productivity. The third response is to reduce and then stop the hiring of new school graduates in the annual spring recruitment. Like the employment adjustments that reduce overtime and non-overtime hours workes, this response still avoids lowering the number of employees in the firm. The first cut in the size of the work force is accomplished by a fourth response: ceasing to fill vacancies caused by employees who reach the mandatory retirement age (formerly 55 years old, now 58 or 60) or who voluntarily quit. The fifth response is to suspend the renewal of employment contracts of temporary and part-time personnel. The use of this mechanism can be seen if we compare the factories in our study that increased and those that reduced their number of employees between 1976 and 1983. Among those that grew in size, the mean per cent of personnel who were temporary employees rose from 4.8 to 5.9, while in declining size firms this percentage dropped from 5.1 to 4.1. In others words, where total size was reduced, it was done in part by lowering the proportion of temporary employees. But even in those factories that grew in size, the tactic was to increase the ratio of temporary to regular employees, thereby enlarging the pool of personnel that can be let go if future exigencies demand. The key point is that as long as employment adjustments can be made by not filling vacancies of those who retire or quit, or by dropping temporary employees, managers

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have protected the jobs of the regular employees, and the lifetime employment system enjoyed by them remains intact. The sixth type of employment adjustment is to transfer regular employees to another branch of the same firm. Though this often causes hardship for the employee, who decides not to bring his wife and children with him, the firm has not violated the norms of the lifetime employment system. A dramatic example of this type of adjustment, aimed at staving off layoffs or outright discharge, occured in some of the firms we studied. One clothing firm responded to the oil shock by selling some of its inventory and investing the increased capital in its sales offices rather than in production machinery. Managers then reassigned regular production workers to sales and marketing jobs. The cultural basis on which this works is that Japanese employees are less likely than their counterparts in the West to become specialists in a single job task. They are rotated through a variety of production tasks in normal times so that the firm can develop them into multi-skilled generalists. Thus, it is within managers' discretion to ask production workers to go out to sales offices and sell the products in abnormal times. If these first six adjustments in the work force are still deemed insufficient, there is a seventh, which became more common during the 1970s. This involves detaching regular employees - especially those nearing retirement age - to jobs in related subsidiary, subcontracting firms. If a "parent" firm regularly purchases the output of one or more subcontracting "child" firms, the child firms' non-encumbrance by any lifetime employment guarantees enables them to absorb some of the excess regular employees of the parent firm. For these employees, the new job may well offer lower pay and be generally less satisfactory, but the alternative is outright unemployment and seeking a job on their own. For the company's part, the number of regular employees has been reduced with only a "grey area" borderline challenge to the lifetime employment system. An eighth adjustments is more drastic: regular workers are laid off for a certain period of time, for purposes of inventory control. Thus, a ferro-alloy firm we studied was closed throughout July and August, 1983. However, they avoided violating the lifetime employment system - for the time being at least - by paying workers 90 per cent of their basic wages (honkyii) during this layoff. This cut into profit, but had been planned for in their 1983 budget. A still more severe, ninth, managerial response is to invite regular employees over age 45 to take voluntary early retirement. The incentives offered include a premium severance payment in addition to the regular retirement allowance. The iron and steel industry in Japan faced plunging domestic demand and depressed exports in the recent period. A large steel firm we studied made headlines in 1983 by announcing that it would cut 4,000 of its 29,000 employees (13.6%) over the following three yeard, through encouraging older workers to accept voluntary early retirement and other means. Given the long life expectancy in Japan and the meager public retirement benefits, it is to be wondered how much voluntarism there is in these "voluntary early retirements".

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Only when these nine means of employment adjustment have been exhausted is it within managers' discretion to take the tenth, the adjustment of last resort, and discharge regular employees. With regard to the more severe adjustment mechanisms Inagami (1984: 7) notes: "Even in the recession after the first oil crisis [1973], there were only a few cases in which the employer resorted to the means of layoff or invitation to voluntary retirement, but quite exceptional were the cases in which the employer resorted to the last means of discharge by nomination". Thus, during the 1970s recession, Japan's unemployment rate was lower than in Western nations. In 1975-1977 this rate averaged 2.0% in Japan, 7.7% in the U.S., 5,0% in the U.K., and 4.6% in West Germany. Japanese employment practices are partly responsible for averting larger-scale employment adjustments through American-style layoffs (Sato 1980: 13). Even though Japanese workers' wage demands were very much moderated during the 1970s, employers had to bear the cost of between five and fifteen per cent surplus labor (Shimada 1977: 9). A result was the emergence of considerable excess capacity (inventory), especially in manufacturing. Another result was that during the recession, Japanese manufacturing firms, like West German firms, accepted lower rates of return on total assets than did U.S. firms.

1973 1975 1977

Japan

West Germany

U.S.

3.5% -0.02% 1.3%

2.7% 0.5% 1.8%

6.5% 6.0% 7.3%

Source: Bank of Japan, quoted in Sato 1980: 15, table III—6.

The American firms maintained acceptable profit rates by quick employment adjustment that were much less within the discretion of Japanese firms.

5. Causes of Changes in Factory Size Between 1976 and 1983 Between 1976 and 1983 the mean number of personnel in our 48 factories declined from 710 to 644. This average decrease of 9.1 per cent in size followed a period in which there had been an average increase of 12.6 per cent in the number of employees between 1971 and 1975. The variation among factories between 1976 and 1983 went from a 75 per cent decline to a 61 per cent increase in the number of personnel. Even during the recessionary period from 1976 to 1983, however, although 30 factories declined in size, 16 grew (two did not change in size). What explains the fact that some increased while others decreased their work force? Let us consider a number of variables that might cause this.

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We group these independent variables under two general headings: the employment system and other structural and performance characteristics of firms. The employment system variables include labor intensity and the proportion of factory costs that are labor costs, the per cent of employees who are university graduates, the per cent women employees, and the voluntary quit rate. The structural and performance variables include the per cent of the company's capital that is borrowed rather than equity capital, the per cent change in factory output from 1971 to 1975, the per cent change in the value of factory production from 1975 to 1982, and labor productivity (value added per employee). To simplify the causal inferences, all independent variables are measured either temporally prior to, or concurrent with, the 1976-1983 period during which the dependent variable, change in factory size, is measured. To prevent attributing causal effects to the above variables that are in fact due to the prior size of the factory, we use panel regression, in which factory size in 1976 is held constant. We can thus examine the effects of the prior or concurrent employment system, structural and performance variables on the per cent change in factory size between 1976 and 1983, net of size in 1976. Given a recessionary period and the other conditions noted, we hypothesized that these variables have the following effects on changes in the number of factory employees. 1. Since factories whose labor costs are high (relative to the cost of materials and administrative overhead) tend to be labour-intensive, with lower mean wages, the higher the per cent labor costs, the more likely that the factory will reduce the size of the work force. 2. University educated employees are usually given the status of regular employees. Hence, the higher the per cent of employees who are university graduates, the less size can be reduced. 3. Women rarely become regular employees, and also have higher voluntary turnover rates (Shimada 1985: 48). Therefore, the higher the per cent women employees, the more likely that factory size will decline. 4. Since one method of reducing size is to not replace those who voluntarily quit, we expect that the higher the voluntary quit rate, the greater the decline in the number of employees will be. 5. Firms with a higher per cent of borrowed (rather than equity) capital are in a weaker position in a recessionary period, and this forces them to make more drastic cuts in the work force. 6. Better performing factories have more organizational slack - more unused resources (Cyert and March 1963) - at their disposal and are therefore not under as much pressure to reduce the number of employees in a recessionary period. Therefore, we hypothesize that the greater the increase in factory output and the value of production and the higher the labor productivity, the less likely that the factory size will decline. In summary, these variables are conceptualized as constraints flowing from the Japanese employment system and the structural and performance characteristics of particular

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factories that affect the degree of discretion that managers have when there are "objective" reasons to reduce the size of the work force. These hypotheses are tested in Table 1. In column 1, which shows the zero-order correlations, only one of the employment system variables has a significant relationship to change in size: the higher the per cent labor costs, the more likely it is that the factory size declined. The structural and performance variables are significantly related to change in size in the expected direction. Table 1: Panel Regression of Per Cent Change in Number of Factory Employees 1976-1983

Independent Variables 1. Employment system variables Ln factory size '76 % Labor costs '75 % Univ. grads '76 % Women '76 Quit rate 2. Other variables % A Factory output '71-'75 % A Prod, value '75-'82 % Borr. capital '76 Value added/Emp. '76 R R2 N

r

beta

.06 .26*

.21 .05 .01

.01 .32 .20 .23 .03

Multiple Regression beta beta

-.12

.14 .13 .02 .00 .14

beta

-.12

.53*

.41*

.36*

.41*

.28*

.57** .28*

.64** .22 .02 .826 .539 30

.59** .26*

.27* .37*

.06

.363 .018 44

.813 .592 31

.810

.604 31

* p.