How labor institutions influence firms and labor markets.

• Author: Kleiner, Morris M.
• Position: Research Summaries

During the past year, perceived market failures have resulted in financial and product markets being encouraged to increase their level of government regulation. The labor market, however, continues to be one segment of the economy with the most extensive and deeply ingrained role for institutions and regulations, including employers, unions, and government oversight. How do these institutions influence labor markets, as well as the traditional economic factors of supply and demand?

To understand what happens within firms' labor markets we need to know how organizations set policies and how those policies affect the performance of the organization. The most basic job attribute that firms determine for their employees is compensation--its level and method of pay. (1) When we examine how methods of pay may influence the firm, we find that moving from piece rates to time rates or gain-sharing reduces individual productivity but allows firms to move workers among different tasks without their becoming demoralized. (2) When the piece rate is changed often, consequently shifting rates of pay and making it more difficult to adjust work effort, employees can become demoralized. Even when the piece rate remains constant, workers can become demoralized if meeting targets for their desired level of pay becomes difficult or out of reach.

Other firm policies, such as employee involvement (EI), can directly influence employee and firm behavior. (3) A great many American firms have organized workplace decision-making so as to allow employees to get more involved in their jobs--using policies like self-directed work teams, total quality management, quality circles, profit sharing, and other diverse human resource programs. Using information from employees and from firms, we can ask not only what EI does for firms--the principal question in the literature on the subject--but also what El does for workers, and can examine El from the bottom-up perspective of participants rather than managers. We find that EI practices are linked in a hierarchical structure that provides a natural scaling of El activities and the intensity of the EI effort. Firms take a fairly long time--up to 20 years--to achieve an equilibrium level of employee involvement. (4) Firms with EI are also more likely to have profit sharing and other forms of shared compensation, as well as other high-performance workplace practices. EI has a weaker influence on output per worker, but a strong and positive influence on overall employee well-being.

In spite of declines in membership, the most important labor market institution influencing both firms and the labor market itself is still the labor union. Unions provide a voice to workers and the mechanisms for raising wages. One additional function of unions is to reallocate resources away from owners of capital to workers without putting the firm out of business.

Nevertheless, firms may oppose unionization, because it might...