Monday, May 12, 2014

Microfoundations of Inequality and Sabotage

"In sum, these models [efficiency wage] provide a new, consistent, and plausible microfoundation for a Keynesian model of the cycle." -- Janet Yellen (1984).
Inequality and Sabotage, explored the relationship between Thomas Piketty's "r > g" inequality and speculated, based on Veblen (1921) and Kalecki (1943), that businesses would pursue r > g efficiencies but oppose r < g efficiencies. Canny Ca'Canny, presented a hypothetical case study examining the relationship between wages, output and hours of work under imperfect competition for  a firm with some degree of monopsony power to dictate wages and hours. Scoundrel Time, documented the pejorative one-sidedness, noted earlier by Warren Samuels, of the propositions about "shirking" in the efficiency wage literature and, most recently, The Sticky Wages of Sin reviewed criticisms of the efficiency wage hypothesis that make explicit its peculiarly inverted relationship to Marx's theory of the industrial reserve army. In common with the efficiency wage hypothesis, Kalecki saw unemployment as playing a key role in maintaining "discipline in the factories." Unlike the efficiency wage theorists, though, Kalecki underscored the political dimension of this discipline.

Conspicuously missing from the mainstream discussion of efficiency wages and shirking is the fact that work effort is composed of both intensive and extensive dimensions. That is to say, a worker might work twice as hard for half as long and produce the same amount of output. Or half as hard for twice as long. Labor productivity is calculated by dividing total output by the number of hours worked. Edmund Phelps (1992) gives a slight nod in this direction when he offers "on-the-job leisure" as a less pejorative substitute for "shirking."

If higher wages can act as a deterrent to "on-the-job leisure" why wouldn't the provision of greater off-the-job leisure perform the same feat? Robert LaJeunesse (1999) proposed just such an "efficiency week" hypothesis but there appear to have been few takers among the mainstream. The only source that cites him in connection with the Shapiro/Stiglitz hypothesis (Ferguson, 2004) curtly turns to other issues with the disclaimer that LaJeunesse's argument about reducing the hours of work increasing effort and output, "will not be pursued here."

Perhaps the lack of enthusiasm for an efficiency workweek model reflects mainstream adherence to the "canonical" labor-leisure choice model of labor supply in which the hours worked are the choice of the individual worker? Paradoxically, in such a model, the wage would have a considerable effect on workers' preferences, depending on the relative strengths of income and substitution effects. Furthermore, in the labor-leisure choice model, unemployment is treated as a voluntary preference for more leisure.

Efficiency wage theory clearly is incompatible with a labor-leisure choice model of labor supply, as noted by Sawyer and Spencer (2010) in their critique of the mainstream model's failure to make a clear distinction between the number of workers employed and aggregate demand for labour hours:
The approach of Shapiro & Stiglitz (1984) is formulated around a ‘no shirking’ condition, with dismissal from current employment being the consequence of being caught ‘shirking’: it is the threat of dismissal and the loss of employment, not the ‘threat’ of working fewer hours, in this instance, which deters shirking. In a similar vein, the ‘cost of job loss’ approach (Bowles, 1985), as its title indicates, is based on job loss, and not on fewer hours worked.
It appears as though the efficiency wage theorists are content to leave the duration aspect of work effort unexamined. Too much cognitive dissonance. Nevertheless, Phelps's less pejorative framing of shirking as "on-the-job leisure" provides an opportunity to inquire further into the effects on output of variations in the hours of work as analyzed by Lionel Robbins (1929). The starting point of Robbins's analysis is that a reduction of hours doesn't necessarily result in a corresponding reduction in output:
Here fortunately it is possible to be brief. The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it. Systematic study of the conditions of efficiency has abundantly vindicated the view, which after all is not very sophisticated, that, if we wish to maximise daily output, just as it is possible to work too little, so it is also possible to work too much.
In "The Economic Effects of Variations of Hours of Labour" Robbins investigated the consequences, not the causes, of a change in the length of the working day, assuming such a change occurs. One scenario that Robbins discussed is of particular interest. It is the case of wages and hours fixed by collective bargaining, which in effect, Robbins maintains, "is only a simple application of the general theory of monopoly."
Instead of the price accommodating itself to the given supply so that the actual quantity demanded clears the market, the amount demanded accommodates itself to the price that is fixed.
For our purpose here, we can ignore the stipulation that the wages and hours be fixed by "collective bargaining" and extrapolate Robbins's conclusions equally to the consequences of wages and hours unilaterally fixed by an employer with some monopoly power. Except, of course, the outcome for the firm will be the inverse of the outcome for the union members.

Robbins assumes first an agreement by workers to lengthen their working day and accept a reduction of hourly wages that keeps the daily wage constant. He argues that the resulting level of employment would vary according to the elasticity of demand for labor. At elasticity equal to unity, employment would remain constant. If elasticity is greater than one then "employment will be increased (or profits will rise); if it is less, it will be diminished."

The second case Robbins considers also involves a lengthening of the working day but stipulates maintaining constant employment, rather than constant daily wages. Under this scenario,
…it is not difficult to show that in certain cases a lengthening of the working day with increasing output must result in lower wages per head than would have prevailed if the day had not been lengthened… The popular belief that, if hours are lengthened, a fall in wages can always be averted or at least diminished, is only true when certain conditions are satisfied. 
Clearly we are a long way here from the harmony we found existing between individual income and output. A group which puts more into the common pool may be compelled to take out less, and a group which diminishes the size of the pool may receive an enhanced share.
Conveniently, Robbins didn't happen to notice that there is an intermediary -- the employer -- between the group and the "common pool." The extent to which an employer can arbitrage the discrepancy between the more the group puts in and the less it takes out is indeterminate but clearly depends on the employer's monopoly (monopsony) power. This, remember, is for the case in which an increase in working time results in an increase in output, although not necessarily proportionate.

At the beginning of his article, Robbins cited S.J. Chapman's "Hours of Labour" as authoritative on the technical, legal, economic and subjective factors that determine the hours of work. But there is another aspect of Chapman's article that bears directly on Robbins's point that a lengthening of the working day doesn't necessarily increase output, nor does a curtailment necessarily diminish it. Chapman's analysis goes further than that to conclude that, under competition, the hours of labour will tend to be set in excess of those that maximize output.

That "under competition" is an important disclaimer. Whether the hours set under imperfect competition will be too long, too short or just right is indeterminate. If not compelled by competition, state regulation, collective bargaining or ignorance, why would an employer set hours of work that were longer than optimal for output? I am arguing that maintaining overly long hours is a strategy to maintain both an artificial scarcity of product and an artificial surplus of labor inputs. On one side, by limiting output, the seller with some monopoly power can keep prices high and thus maximize marginal revenue. On the other side, by setting longer hours, the employer can, under certain conditions, enforce lower wages and thus minimize costs. Those certain conditions are that the employer exercises some monopsony power in the labor market and that the elasticity of demand for labor is less than one. Robbins might have had something like this possibility in mind when he cautioned, "Deliberately to recommend an increase of hours when the conditions of demand are not elastic is either very ignorant or very Machiavellian."

Robbins did not elaborate on his "Machiavellian" inference. Instead, he launched into a soliloquy aimed at the folly of arguing "from the possible success for a group of a policy of restriction to the probable success for society as a whole of a similar policy." As usual, it is labor, not business, that Robbins assumes to be the culprit in such policies of restriction.

With all due respect to Machiavelli, "Machiavellian" has come to be almost as pejorative a term as shirker. To ease up on the casting of aspersions, I propose to designate the necessity for slack a matter of "design tolerance." The variability of markets requires a flexible response. Since the source of the difficulty is external to the firm, naturally the entrepreneur would prefer to also externalize the cost of responding to it.

How might "on-the-job leisure" (to use Phelps's euphemism for idleness) be strategically imposed by management, at the expense of workers, with the objective of a “conscientious withdrawal of efficiency”? See Canny Ca'Canny for an illustration.

Note: the link above to S.J. Chapman's "Hours of Labour" takes you to a thirteen-part series posted to EconoSpeak in November of 2008. The full article is also available as a pdf file, Missing: The strange disappearance of S. J. Chapman's theory of the hours of labour. See also The Hours of Labour and the Problem of Social Cost.

Samuel Bowles (1985) "The production process in a competitive economy: Walrasian, neo-Hobbesian, and Marxian Models," American Economic Review, 75, pp. 16-36.

Sydney J. Chapman (1909) "Hours of Labour." The Economic Journal, 19: 75 , pp. 353-373.

William D. Ferguson (2004) "Worker Motivation, Wages, and Bilateral Market Power in Nonunion Labor Markets." Eastern Economic Journal, 30: 4, pp. 527-547.

Michal Kalecki (1943) "Political Aspects of Full Employment."

Robert M. LaJeunesse (1999) "Toward an Efficiency Week." Challenge, 42: 1, pp. 92-109.

Edmund S. Phelps (1992) "Consumer Demand and Equilibrium Unemployment in a Working Model of the Customer-Market Incentive-Wage Economy." The Quarterly Journal of Economics, 107: 3, pp. 1003-1032.

Malcolm Sawyer and David Spencer (2010) "Labour Supply, Employment and Unemployment in Macroeconomics." Review of Political Economy, 22: 2, pp. 263-279.

Carl Shapiro and Joseph E. Stiglitz (1984) "Equilibrium Unemployment as a Worker Discipline Device." The American Economic Review, 74: 3, pp. 433-444.

Lionel Robbins (1929) "The Economic Effects of Variations of Hours of Labour."  The Economic Journal, 39: 153, pp. 25-40.

Janet L. Yellen (1984) "Efficiency Wage Models of Unemployment." The American Economic Review, 74: 2, Papers and Proceedings of the Ninety-Sixth Annual Meeting of the American Economic Association, pp. 200-205.

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