Chapter 14 Trust Abd Control; Labour Use In The Firm

Front 1

Distinctive Charcteristics of Labour

Back 1

1. LAbour productivity depends greatly on workers motivation.

2. The skills of workers cannot be seperated from the owners of those skills.

3. The workers has discretion over how his or her work is done

Consequences : The relation between labour input and firm performance (output) depends heavily on organisational strugtures

Front 2

Economic Theories of the Employement Relation

Back 2

1. Principal - Agent model

2. The theory of idiosyncratic exchange

3. The efficiency wage model

a. The worker discipline model

b. The high commitment model

4. The theory of hierarchical control systems

Front 3

The (Neoclassical ) principal - agent model // assumptions

Back 3

Assumptions :

1. The worker is self-interested and gets disutility from work.

2. The employer can measure workers' output not effort

Front 4

The (Neoclassical) principal-agent model \\ description

Back 4

If the employer pays the employee a fixed wage (whatever the effort) the employee (given the model assumptions) would have no incentice to high effort and would shirk.

Solution -> incentive contracts

W = a + b(Z + j X)

Front 5

Principal - agent model // problems

Back 5

1. It requires constant supervision and monitoring --> costly, demotivate workers, minimize the contribution of workers.

2. Actual employement contracts rarely specify the job in great detail -> it is dificult to measure Z

3. Emperical evidence shows that workers (on average) work more than min work rate --> conflicts with assumption 1

Front 6

The theory of idiosyncratic exchange // assumptions

Back 6

The employement relation is characterised by:

1. job idiosyncratic; specific skills learned on the job

2. bounded rationality

3. small numbers exchange

4. assymetric information between employee and employer

Front 7

The theory of idiosyncratic exchange // theory

Back 7

The assumptions lead to huge transaction costs. Therefor employers set employement in structure to contain such costs.

options are:

1. Attaching wages to jobs rather than to workers

2. Restricting recruitement to lower - level positions

3. Develop screening procedures for the filling up of higher-level positions.

Results in :

Employement contracts are seen as an efficient response to market failure

Front 8

The efficiency wage model

Back 8

There exists a positive relationship between wages and worker productivity.

Labour productivity = f ( wage / hour worked)

f' > 0

Because:

1. High wage means high cost of jjob loss

2. It leads to a decline in labour turnover and hence to lower hiring and selection costs.

3. It may lead to an improved morale within the work force

Front 9

The effiiciency wage model // most important outcome

Back 9

The positive relationship between wage and productivity is such that a cut in wages could result in an increase in unit labour costs, because of the consequent decline in labour productivity

Front 10

Unit Labour Costs

Back 10

ULC = (wage / hour) (labour productivit)^-1

growth rate (ULC) = growth rate ( wage / hour ) - growth rate ( labour productivity)

Front 11

The worker discipine model // assumptions

Back 11

1. Work intensity is not contractually specified and needs supervision

2. Worker opportunism is exogenous to the organisation

3. Labour productivity = f (wage / hour worked ) , f' (0)> 0

4. The higher the wage, the higher is the costs of dimissal to the employee, and the more effective is the threat of dimissal.

Front 12

The worker discpline model // result

Back 12

Wages and supervision can be seen as substitutes;

Employers can 'optimally' determine how much of their given resources to allocate to wages and how much to supervision. (To attain a given level of effort) on the basis of wage costs, productivity and supervision costs

Front 13

The high commitment model // assumptions

Back 13

1. Work intensity is nog contractually specified and needs supervision

2. Labour productivity = f( wage/ hour worked), f'>0

3. Worker opportunism is no longer exogenous to the organisation but actually depends on organisation.

The more the firm is willing to accomodate workers (by paying higher 'fair' wages and keeping supervision light), the more workers are willing to work above the minimum stipulated because they are treated fairly.

Front 14

The high commitment model // results

Back 14

A partial gift exchange between firm and workers in whhich workers give more than the minimum output to the firm in exchange

Front 15

The theory of hierarchical control systems // assumptions

Back 15

1. Employees (labour) and employers (capital) have a fundamental conflict. The owners of capital desire high profits, i.e. low wages and high worker effort.

2. Power is assymetric; employers are powerfull, individuals workers have no power.

Employers seek to keep wages low, while maintaining or raising work efforts (bureaucratic hierachical control systems)

Front 16

The theory of hierarchical control systems // distinct types of jobs

Back 16

1. Rules orientation --> ' unskilled' assembly line work

2. Habits of predictability and dependability --> technical jobs

3. The internalisation the goals and values of the firm --> professional and management jobs