THE DETERMINANTS OF FIRM PERFORMANCE: UNIONS, WORKS COUNCILS, AND EMPLOYEE INVOLVEMENT/HIGH-PERFORMANCE WORK PRACTICES

Drawing on evidence from the United States and Germany, this paper offers a survey of the effects of worker representation (in unions and works councils) and innovative work practices on firm performance. The focus is on the growing links between these two historically separate literatures. The interaction between worker representation and high‐performance work practices provides a practical means of peering inside the black box of collective voice, even if there is as yet no well‐determined hierarchy for productivity performance and certainly no blueprint for the future of unions.     

Do good workers hurt bad workers—or is it the other way around?*

I study the effect of worker heterogeneities on wages and unemployment in a directed search model. A worker's productivity in a given firm depends both on his type and on a worker–firm specific component. Firms advertise unconditional wage offers only. The resulting equilibrium is inefficient, with a too high wage premium for high‐type workers, and too few high‐type jobs. This reduces the welfare of high‐type workers. My findings contrast with the findings in the literature on labor market segmentation, where it is argued that the existence of high‐type workers forces down wages and reduces welfare for low‐type workers.     

Unemployment insurance,recalls, and experience rating

In the United States, almost half of the workers who separated from their jobs ended their unemployment spell by returning to work for their last employer. In this study, we explore the impact of the experience rating (ER) system on recalls. In states using reserve ratio ER, and for a firm that is not at the minimum or the maximum tax rate, each layoff of a worker receiving unemployment benefits increases the future tax rate while each recall reduces it. This provides a natural incentive for firms to recall former workers receiving unemployment benefits. We use the Quarterly Workforce Indicators dataset, which provides information on recalls at the county level, and exploit the differences in tax schedule across states to estimate the impact of ER on recalls. We show that the recall share from hires increases with the degree of ER. We then develop a search and matching model with different unemployment insurance (UI) status, endogenous UI take-up, endogenous separations, recalls, and new hires. We illustrate that this model reproduces the effects of ER on recalls admirably. We show that an increase in the intensity of ER translates into a higher recall share at the steady state, especially for unemployed workers collecting unemployment benefits. We then use this model to analyze the labor market dynamics under alternative financing schemes. We show that ER has stabilization virtues—the higher the degree of ER, the less volatile the unemployment rate.     

Auctions With A Minimum Requirement Of Bids

We show that in a procurement auction with independent and private costs of production and a positive cost of preparing a bid, the requirement of a minimum number of offers for the good to be bought always yields a unique (perfect) Bayesian equilibrium where no firm enters a bid, whatever its cost of production, the number of potential bidders and the size of the bidding cost.
To avoid the no-bid result, the buyer can commit to subsidise the losing bidders in certain circumstances. Alternatively, it can use a stochastic auction, where the provider of the good is not always the firm that bids the lowest price.     

EMPLOYMENT STABILIZATION INSIDE FIRMS: AN EMPIRICAL INVESTIGATION OF WORKER COOPERATIVES

There is evidence that worker cooperatives provide a greater stabilization of employment compared to capital‐managed firms. While the reasons of this behaviour can be ascribed to their property and governance structure, less is known of the tools to put it into practice. I discuss two possible ways to guarantee employment insurance: by letting wages fluctuate, or by accumulating reinvested profits into an income stabilizing fund that copes with downturns without firing and without reducing wages. In this second case, I find out that asset locks play a wage smoothing role. This may explain the large share of profits that are reinvested in this indivisible and not appropriable fund. I provide evidence for this mechanism by means of original data at the firm level and of first‐hand collected survey data at the individual level on risk perception in a sample of Italian cooperatives.     

TRAINING, JOB SECURITY AND INCENTIVE WAGES

This paper considers the optimal level of firm‐specific training by taking into account the positive effect of training on the expected duration of workers' current employment. In the framework of an efficiency wage model, a short expected job tenure represents a disamenity that reduces the penalty from shirking. As this disamenity increases, workers have an incentive to continue providing a positive level of effort only if they are compensated by a higher wage. We endogenize the employment separation rate by introducing firm‐specific training. Firm‐specific training creates a rent that is lost if the worker is separated from the firm. As a result, the firm will be more reluctant to fire its trained workforce in a recession. This implies that firm‐specific training can decrease current wages because it represents a commitment to lower future labour turnover.     

Bidding for Firms with Unknown Characteristics

When a region successfully attracts a firm by offering subsidies, the firm often commits itself to performance targets in terms of employment. In this paper, we interpret these firm‐specific targets as a consequence of incomplete information. We analyze a model of two regions that compete for a firm, assuming that the firm's productivity is ex ante unknown. We show that performance targets often induce overemployment in high‐productivity firms, and that tax credits are often superior to lump‐sum payments. Moreover, when regions differ in wage rates, the low‐wage region wins the bid and has a higher surplus than under complete information. Finally, we show that, under incomplete information, bidding might not lead to efficient firm location.     

WAGE‐RISE CONTRACT AND QUANTITY COMPETITION WITH PROFIT‐MAXIMIZING AND LABOUR‐MANAGED FIRMS

This paper examines the behaviours of a profit‐maximizing firm and a labour‐managed profit‐per‐worker‐maximizing firm in a two‐stage quantity‐setting model with a wage‐rise contract as a strategic commitment. The paper then shows that there exists a unique equilibrium that coincides with the Stackelberg solution where the profit‐maximizing firm is the leader and the labour‐managed firm is the follower.     

Short or long-term contract? Firm’s optimal choice

This article studies the behaviour of a firm searching to fill a vacancy. The main assumption is that the firm can offer two different kinds of contracts to the workers, either a short-term contract or a long-term one. The short-term contract acts as a probationary stage in which the firm can learn about the worker. After this stage, the firm can propose a long-term contract to the worker or it can decide to look for another worker. We show that, if the short-term wage is fixed endogenously, it can be optimal for firms to start a working relationship with a short-term contract, but that this policy decreases unemployment and welfare. On the contrary, if the wage is fixed exogenously, this policy could be optimal also from a welfare point of view.     

Learning under supervision: an experimental study

In many market environments, for example in investment banking, salesforce management and others, workers and supervisors work closely as a team. Workers are paid a fixed salary and supervisors determine any raises, which are typically dependent on how well the organization does. In such scenarios, a supervisor who constantly offers suggestions can create a problem—typically a worker cannot ignore his supervisor’s advice, yet if such advice is wrong and is followed, it will only decrease firm profits. We conduct a laboratory experiment to address a question critical for such settings—does the relationship between advisor and worker interfere with the learning abilities of the worker? The answer is a resounding no. In fact, subjects who have a supervisor advising them and whose advice is costly to ignore actually learn better than those with an advisor whose advice can be ignored. An even more striking result is that advisees as well as advisors in both these conditions learn better than subjects with no advisors. Our result can be attributed to the presence of advice and has direct relevance to learning in many environments.     

Firm ownership and internal labour practices in a transition economy

One feature common to many post‐socialist transition economies is a relatively compressed wage structure in the state‐owned sector. We conjecture that this compressed wage structure creates weak incentives for work effort and worker skill acquisition and thus presents adverse consequences for the entire transition economy if a substantial portion of the labour force works in the state sector. We explore firm wage incentives and worker training, as well as other labour practices and outcomes, in a transition setting with matched firm and worker data collected in one of the largest provinces of Vietnam – Ho Chi Minh City. The Vietnamese state sector exhibits a compressed wage distribution in relation to privately owned firms with foreign ownership. State wage practices stress tenure over worker productivity and their wage policies result in flatter wage–experience profiles and lower returns to education. The state work force is in greater need of formal training, a need that is in part met through direct government financing. In spite of the opportunities for government financed training and at least partly due to inefficient worker incentives, state firms, by certain measures, exhibit lower levels of labour productivity. The private sector comparison group to state firms for all of these findings is foreign owned firms. The internal labour practices of foreign firms are more consistent with a view of profit‐maximizing firms operating with no political constraints. This is not the case for Vietnamese de novo private firms that exhibit much more idiosyncratic behaviour and whose labour practices are often indistinguishable from state firms. The exact reasons for this remain a topic of on‐going research yet we conjecture that various private sector constraints, including limited access to formal capital, play an important role.     

SUNK COSTS OF CAPITAL AND THE FORM OF ENTERPRISE: INVESTOR‐OWNED FIRMS AND WORKER‐OWNED FIRMS*

ABSTRACT ** : This paper examines implications of sunk costs of capital for efficient forms of enterprise. It is assumed that firm owners and outside traders are asymmetrically informed of venture risks, and that there are sunk costs associated with investment in physical and human capital. We then make an efficiency comparison between investor‐owned and worker‐owned firms. We find that the firm is efficient when it is owned by the input supplier (the investor or worker) who incurs large sunk costs. This is because such an input supplier can credibly signal to the other input supplier that he in fact has a safe project. An empirical study based on the Japanese manufacturing industry seems to support the theoretical result.     

IMMEDIATE SETTLEMENT OR ENDURING A STRIKE: THE CHOICE OF SIGNALS

Some labour contract negotiations involve strikes while most conclude with immediate settlement. This article offers a model of union‐firm negotiation with private information to show that either strikes or immediate settlement will take place in the equilibrium. Different from most signalling literature where the signals are exogenously given, this article endogenizes the choice of signals. We compare two signals, the employment level and the strategic delay. We show that the low‐revenue firm will choose the signal which gives it higher payoff while separating itself from the high‐revenue firm.     

Information asymmetry,attitudes toward risk,and macroeconomic performance

Every firm in differentiated oligopoly offers a product that is different from that of rival firms. Similarly, in general, a firm interfaces with consumers and interacts with rival firms on the market. As a result, both the firm and consumers experience information asymmetry. In practice, a firm is a risk taker in its dealings with rival firms and is a risk averter in its interface with consumers. However, firms utilize intangible investments (non-price strategies) to convey the value of their product to consumers and stabilize their market share. Note that consumers are risk averse and ignore such attempts by a firm once they recognize the intrinsic value of the product. These two features explain the frequency and depth of the supply fluctuations that have not been acknowledged so far. This study offers a fundamental explanation of this phenomenon along with the steady state behavior in a synthetic manner.“With uncertainty entirely absent, every individual being in possession of perfect knowledge of the situation, there would be no occasion for anything of the nature of responsible management or control of production activity.”- Knight (1957, p.267)     

The responsiveness of industry wages to low‐frequency shocks in Canada

Abstract The first objective of this paper is to examine the empirical relationship between low‐frequency shocks to labour demand and average wages on an industrial basis using a Canadian longitudinal data set. We estimate a fixed‐effects model that controls for workers’ unobservable attributes. The second major objective is to extend the existing industry‐based literature by estimating a specification allowing for a comparison between the degree of wage responsiveness of within‐firm stayers and between‐firm movers. The findings indicate that average wages by industry tend to respond positively to low frequency changes in employment, and that there is some degree of wage flexibility within firm‐worker matches.     

DEMAND REDUCTION IN MULTI‐UNIT AUCTIONS WITH VARYING NUMBERS OF BIDDERS: THEORY AND EVIDENCE FROM A FIELD EXPERIMENT*

Recent auction theory and experimental results document strategic demand reduction by bidders in uniform‐price auctions. The present article extends this area of research to consider the effects of varying the number of bidders. Our theoretical model predicts that demand reduction should decrease with an increase in the number of bidders. Considerable demand reduction remains even in the asymptotic limit, although truthful bidding yields profits very close to those of equilibrium play. We experimentally confirm several of our predictions by examining bidding behavior of subjects in an actual marketplace, auctioning dozens of sportscards using both uniform‐price and Vickrey auction formats.     

Corporate Social Responsibility in the work place

We analyze the effect of investments in corporate social responsibility (CSR) on workers’ motivation. In our experiment, a gift exchange game variant, CSR is captured by donating a certain share of a firm’s profit to charity. We are testing for CSR effects by varying the possible share of profits given to charity. Additionally, we investigate the effect of matching mission preferences, i.e., a worker preferring the same charity the firm donates to. Our results show that, on average, workers reciprocate investments in CSR with increased effort. Matching mission preferences also result in higher effort, independently of the extent of the CSR investment.     

Rent sharing before and after the wage bill

Many biases plague the analysis of whether employers share rents with their employees, unlike what is predicted by the competitive labour market model. Using a Portuguese matched employer-employee panel, this article is one of the first to address these biases in three complementary ways: (1) Controlling directly for the fact that firms that share more rents will, ceteris paribus, have lower net-of-wages profits. (2) Instrumenting profits via interactions between the exchange rate and the share of exports in firm's total sales. (3) Considering firm or firm/worker spell fixed effects and highlighting the role of downward wage rigidity. These approaches clarify conflicting findings in the literature and result, in our preferred specifications, in significant evidence of rent sharing (a Lester range of pay dispersion of 56%), also shown to be robust to a number of competitive interpretations.     

PRECAUTIONARY DEMAND FOR LABOUR AND FIRM SIZE

This paper studies firms' job creation decisions in a labour market with search frictions. A simple labour market search model is developed in which a firm can search for a second employee while producing with a first worker, and this creates the equilibrium size distribution of firms. A firm expands employment even if the instantaneous payoff to a large firm is less than that of staying small – a firm has a precautionary motive to expand its size. In addition, this motive is enhanced by a greater market tightness. Because of this effect, firms’ decisions become interdependent – a firm creates a vacancy if it expects other firms to do the same, creating strategic complementarity among firms and thereby self‐fulfilling multiple equilibria. An increase in productivity can cause a qualitative change in labour market tightness and the rate of unemployment.     

Intermediate good sourcing,wages and inequality: From theory to evidence

This paper examines the consequences of offshoring and outsourcing on domestic wages and wage inequality. I highlight the role of labor market frictions in impacting firms’ outsourcing and offshoring decisions; specifically, how differential costs of matching with workers affect the location of production (onshore or offshore) and how differential costs of assessing worker quality affect the ownership of intermediate production (intra‐firm or inter‐firm). I demonstrate how firm sourcing decisions can depend crucially on the industry skill intensity, which reflects the importance of worker–firm match quality, and as a result, the effect of offshoring on domestic labor depends on occupation and industry characteristics, as well as the ownership regime of trade. Bringing the theory to the data I rely on plausibly exogenous variation in the cost of inter‐ and intra‐firm offshoring to identify the effects of a change in each type of offshoring on domestic wages. I find strong evidence that the effect of offshoring on domestic wages—both on the average and on the wage distribution—is governed by the type of offshoring (inter‐ vs. intra‐firm), the skill intensity of the industry, and the offshorability of the occupation.