Share Systems and Unemployment: A Theoretical Analysis

145 Pages·1991·12.014 MB·English

by  Franco Cugno, Mario Ferrero (auth.)

SHARE SYSTEMS AND UNEMPLOYMENT
Share Systems and
Unemployment
A Theoretical Analysis
Franeo Cugno
Associate Professor of Economics
University of Torino, ftaly
and
Mario Ferrero
Associate Professor of Economics
University of Trieste, ftaly
Palgrave Macmillan
ISBN 978-1-349-11532-7 ISBN 978-1-349-11530-3 (eBook)
DOI 10.1007/978-1-349-11530-3
© Franeo Cugno and Mario Ferrero 1991
Softeover reprint ofthe hardcover 1st edition 1991
All rights reserved. For information, write:
Seholarly and Referenee Division,
St. Martin's Press, Ine., 175 Fifth Avenue,
New York, N.Y. 10010
First published in the United States of Ameriea in 1991
ISBN 978-0-312-05015-3
Library of Congress Cataloging-in-Publieation Data
Cugno, Franeo.
Share systems and unemployment: a theoretieal analysis / Franeo
Cugno and Mario Ferrero.
p. em.
Includes bibliographical references and index.
ISBN 978-0-312-05015-3
1. Employment (Economic theory) 2. Unemployment. I. Ferrero,
Mario. 11. Title.
HD5701.5.C85 1991
331.13-dc20 90-43871
CIP
Contents
Acknowledgements vii
1 Introduction 1
2 A Historical Precedent: Sharecropping 6
3 Basic Models 11
3.1 Alternative Sharing Schemes 11
3.2 Revenue Sharing 13
3.3 Team Piece Rate 19
3.3.1 The Increasing Returns Case 19
3.3.2 The Decreasing Returns Case 24
3.4 Sliding Scale 26
3.5 A Wage-Fund System 26
Appendix to Chapter 3: A Note on Macroeconomics 32
4 The Free Access System 34
5 The Demand for Capital in the Share Economy 43
5.1 Excess Demands for Factors in Long-Run
Equilibrium 43
5.2 The Demand for Capital with Fixed Compensation
Parameters 51
6 Wage Bargaining in the Share Economy 53
6.1 Introduction 53
6.2 Employment-Restraining Agreements Under
Revenue Sharing 54
6.3 Revenue Sharing in an Insider-Outsider Model 58
6.3.1 Weitzman's Model 58
6.3.2 Profits and Wages in Weitzman's Model 61
6.4 Revenue Sharing in a Monopoly Union Model 66
Appendix to Chapter 6 (A) 71
Appendix to Chapter 6 (B) 72
7 Efficiency Wages in the Share Economy 74
7.1 Introduction 74
7.2 The Supply of Effort in a Share System 76
7.3 Profit Maximisation, Efficiency Wage, and the
Demand for Labour 80
v
vi Contents
7.4 Market Equilibrium and Comparative Statics 83
7.5 Gains and Losses from Revenue Sharing 85
8 Risk Sharing in the Share Economy 89
8.1 Privately Superior Wage Contracts 89
8.2 Privately Superior Share Contracts 93
9 A Discriminating Share System 97
9.1 Meade's Blueprint 97
9.2 The DLCP at Work: Problems and Complications 101
9.3 System Stability and Property Rights 105
Appendix to Chapter 9: Restrictive Tendencies in the
Discriminating Partnership 108
10 Conclusions 111
Appendix to Chapter 10: A Recession-Resistant
Employment Subsidy 116
Notes 121
Bibliography 130
Index 135
Acknowledgements
Substantial portions of Chapter 3, Section 2, of Chapter 4, and of
Chapter 6, Section 2, were previously published as Franeo Cugno and
Mario Ferrero, 'Free Access vs. Revenue Sharing as Alternative
Systems for Managing Employment Externalities', in D.C. Jones and
J. Svejnar (eds) , Advances in the Economic Analysis of Participatory
and Labor-Managed Firms, Vol. 3, Greenwich (Conn.): JAI Press,
1988, pp. 217-33. The authors are grateful to JAI Press for giving
permission to reproduce that material in this book.
Vll
1 Introduction
This book is about macroeconomics, as it centres on the key macro
economic problem of involuntary unemployment, yet nowhere in it
do we make use of the macroeconomist's textbook tools, such as the
IS-LM model and developments thereof. The reason for such a
choice is that the aggregate nature of that model is necessarily bound
to overshadow the relevant agents' decision processes, so that the
only policy suggestion that can possibly be drawn from it is aggregate
demand management: now the latter has come under increasing
critical fire over the last two decades for its ineffectiveness in coping
with the problem of stagflation, which in varying degrees besets all
industrialised economies of the Western world. We do accept, how
ever, the basic logic of the 'neoclassical synthesis' , summarised by the
twin pro positions that, first, global demand is not independent of the
overall price level, and that, second, goods prices are not indepen
dent of production costs, from which it follows that aggregate de
mand, as such, sets no absolute limit on the levels of output and
employment. This entails recognising, with Clower (1965), that invol
untary unemployment is due to a failure of coordination among
decisions at the micro level, in the sense that transactions can indeed
take place at disequilibrium prices, but also that a positive price
vector exists that would clear all markets if only it could establish
itself.
If this conceptual framework is accepted, then the focus of analysis
can legitimately shift from demand-side to supply-side policies, and
here two roads are open. The first leads to the setting up of an
'auctioneer', that is, of a central agency charged with the task of
correcting the 'wrong' prices by means of taxes and subsidies. The
second is the one taken in this book: the basic idea is to effect such a
fundamental change in the existing regime of labour compensation
contracts as to build in price and wage flexibility, that is, to bring
about such an automatic coordination of micro decisions as to ensure
full employment. Casual anticipations aside, this approach can be
dated back to Martin L. Weitzman's seminal article in the Economic
Journal (1983), which initiated a by now sizeable stream of literature
focusing on the macroeconomic properties of alternative labour
compensation systems. The first aim of this book is to survey and
appraise that body of work in a systematic fashion.
1
2 Introduction
We will follow throughout Weitzman's micro approach to macro
economics, wh ich focuses on the behaviour of the firm under alterna
tive schemes of labour compensation. To this effect we agree with
Weitzman that the Chamberlinian framework of monopolistic com
petition is the most useful way of modelling the modern industrial
firm for macroeconomic purposes; this involves assuming profit
maximising behaviour by the firm under the constraint of continu
ously differentiable, fully known demand curves, disregarding all
hypotheses of satisficing behaviour, kinked demand curves, and the
like. Whether or not this is indeed the best picture of the real world,
the reason why we keep within Weitzman's framework is twofold: on
the one hand, if we did not do so we would find it difficult to evaluate
a literature which in the main has grown up within that framework;
on the other hand, and more importantly perhaps, placing ourselves
in the same position as Weitzman's will help to highlight 'from
within', as it were, a fundamental ftaw of share systems that could not
be seen if one were to quest ion the starting hypotheses to begin with.
It follows as a consequence of this vantage point that the macroecon
omic link wh ich doses the model will never be brought into the
foreground; however, if a price level is assumed to exist that ensures
full employment (or, depending on hypotheses, the 'natural' rate of
employment), this is no real omission, as the introduction of an
aggregate demand function would only help determine that price
level and not the real variables.
Before proceeding, it is important to be dear from the start about
what we will henceforth understand by a share system or contract, as
opposed to the traditiona wage contract. Whereas the latter is a
1
contract by which a worker's compensation is unrelated to the level
of employment in the firm, a share contract is one by which compen
sation is tied up inversely with the employment level. As we will see,
there are several ways of writing up a share contract; typically,
though not necessarily, the linkage between compensation and em
ployment level may operate via some index of the firm's perform
ance, such as profit per worker or revenue per worker. In any case,
this is Weitzman's (1983) very general definition, where the underly
ing insight is that a contract that makes compensation fall as employ
ment rises has better macroeconomic properties than a fixed-wage
contracL
To keep our field of inquiry within manageable limits, several
implications of this definition must be noted. First, it still formally
holds but becomes uninteresting if the number of workers is exogen-
Introduction 3
ously fixed at one: in such a case, if decreasing returns prevail, hourly
compensation will vary inversely with worked hours, but this leaves
unaffected all the macroeconomic features which we are concerned
with here. Thus the share systems we are going to study do not
include individual piece-rate systems (as opposed to collective or
team piece rates, wh ich are an interesting subject for our purposes),
nor sharecropping (wh ich we will only encounter as a historical
precedent to our problem).
Second, our definition of a share scheme appears to be a subset of
the broader and somewhat ill-defined category of 'worker partici
pation in the firm': it focuses on sharing in the current income of the
firm, to the exclusion of sharing in decision-making or in property
ownership. Sharing in decision-making, or codetermination, may or
may not in fact coexist with income sharing, but, except for particular
cases, it will be ruled out of our consideration, and for good reasons.
If the share contract explicitly provides for incumbent workers to
have a say in employment decisions, then there is a presumption that
they will resist any new hirings to prevent dilution of their own
compensation; as we will see, even if codetermination is not formally
provided for in the contracts, the danger of restrictive practices will
be an impending one unless the contract is designed in such a way as
to discriminate the remuneration - which points to Meade's system,
which will form the subject of Chapter 9. On the other hand,
codetermination of investments or so me other variables crucial to the
development of the firm seems basically inconsistent with workers'
financiallack of responsibility. If, however, workers are brought to
participate, whether individually or as a group, both in decisions and
in capital ownership, then two possibilities present themselves: either
this participation is kept within such narrow limits that the linkage
between worker compensation and employment level is at most a
tenuous and indirect one (as in the various Employee Share Owner
ship Schemes), and then the macroeconomic implications are irrel
evant; or this participation is carried out on a substantial scale, up to
becoming even a majority or, at the limit, obtaining complete control
(as, for instance, with the wage-earners' investment funds envisaged
by the Meidner Plan in Sweden), and then we have a fundamental
change in the bundle of property rights typical of free-enterprise
capitalism. Even though a clear-cut dividing line will not always be
easy to draw, we propose as a rule, with Weitzman and the relevant
literature, to keep within the bounds of voluntary contracts that are
consistent with the existing structure of property rights, rather than