Much has been made in recent years of former U.S. Department of Labor official David Weil's concept of "The Fissured Workplace," and while he raises many valid issues, Professor Weil uses flawed logic to unfairly lump franchising into the anti-worker mix.
Weil's central thesis is that in contrast to past decades when large, vertically integrated employers dominated the American economy, today's labor markets are characterized by a fissured workplace in which employers have shed all non-core employees to reduce wages.
Professor Weil acknowledges that the result is also likely a more efficient allocation of resources that has had benefits for both investors and consumers. "By shifting employment to smaller organizations external to the enterprise that operate in efficient markets, the lead firm creates a mechanism whereby workers will receive a wage close to the additional value they create," he wrote.
All of this is a reasonable argument, but the problem is that Weil conflates franchising with other practices. The purpose of the franchise model is not to lower labor costs; the purpose of the franchise model is to solve what economists call the principal-agent problem.
Any time the ownership of a business is separated from its management, or any time the work of an employee is difficult for a supervisor to observe, the principal-agent problem arises. Entire fields of economics and management theory have been devoted to studying ways to align the incentives of owners, managers and workers to produce efficient outcomes.
Weil himself notes that the franchise model, "creates a mutually advantageous means of sharing the gains of a brand, as well as an ingenious mechanism to push out the difficult task of providing the good or service to other entities with greater incentive to control costs while still selling the product of the lead company."
OWNERS VS. MANAGERS
By collaborating with their entrepreneur franchisees, franchisors are able to ensure that the manager of the local establishment has a strong incentive to make that establishment profitable, because he or...