The Pluralist Industrial Relations Paradigm of Balancing Competing Interests, Study Guides, Projects, Research of Political Theory

Download The Pluralist Industrial Relations Paradigm of Balancing Competing Interests and more Study Guides, Projects, Research Political Theory in PDF only on Docsity! Prepared for: Theoretical Perspectives on Work and the Employment Relationship Industrial Relations Research Association, 2004 Research Volume Bruce E. Kaufman (editor) WHY A BALANCE IS BEST: THE PLURALIST INDUSTRIAL RELATIONS PARADIGM OF BALANCING COMPETING INTERESTS John W. Budd University of Minnesota Rafael Gomez London School of Economics Noah M. Meltz University of Toronto Version Date: February 20, 2004 1 The pluralist industrial relations paradigm analyzes work and the employment relationship from a theoretical perspective rooted in an inherent conflict of interest between employers and employees interacting in imperfect labor markets. The employment relationship is viewed as a bargaining problem between stakeholders with competing interests; employment outcomes depend on the varied elements of the environment that determine each stakeholder’s bargaining power.1 Modeling the employment relationship as a bargaining problem raises central questions about the distribution of resources and the rules governing interactions between employers and employees. As a result, corporations, labor unions, public policies, and dispute resolution procedures are important institutions (broadly-defined) and research subjects in pluralist industrial relations. Moreover, individual employees, managers, owners, and union leaders are viewed as human agents rather than purely economic, rational agents. Behavioral elements of individual decision-making are therefore important—cognitive limitations, emotions, social or cultural norms and values, habits, intrinsic as well as extrinsic motivators, and concern for others, fairness, and justice. The pluralist industrial relations school of thought traces back to Sidney and Beatrice Webb in England, John R. Commons (the father of U.S. industrial relations), and members of the Wisconsin school of institutional labor economists in the early twentieth century. Its views were enshrined in the New Deal U.S. labor policies of the 1930s Great Depression era and cemented in practice by a generation of postwar scholar-arbitrators. This school of thought continues today as the mainstream industrial relations paradigm in North America.2 With the postwar rise to dominance of the neoclassical paradigm in economics, however, industrial relations has been frequently criticized for allegedly being limited to atheoretical fact-gathering, and therefore not a 4 prices (including wages) fully reflect social value. Workers participate in the determination of their working conditions through entry into desirable jobs and out of undesirable ones (Troy 1999); outcomes are viewed as equitable or fair because each commodity—labor included—is rewarded with its value (McClelland 1990). In contrast, a hallmark of the industrial relations perspective is that workers are not simply commodities (Kaufman 1993; Webb and Webb 1897). Workers are human beings with aspirations, feelings, emotions, needs, and rights; work provides more than extrinsic, monetary rewards by fulfilling important psychological and social needs. Moreover, if markets are not competitive, then prices do not accurately reflect social value (Slichter 1924). As such, a realistic analysis of welfare requires explicit consideration of the nature of work and workers’ lives. The industrial relations paradigm therefore explicitly considers interests of the employment relationship that are not limited to (but include) efficiency. The nature of work and workers’ lives were graphically apparent to Commons and other early institutionalists through the labor problem of the early twentieth century—excessive working hours, low wages, dangerous working conditions, and widespread worker insecurity from business cycles, seasonal labor demand, accidents or disease, old age, and discriminatory or arbitrary firings (Kaufman 1993, 1997). According to government surveys around 1910, 85 percent of wage-earners had a standard workweek of more than 54 hours, and among iron and steel industry workers, over 40 percent worked more than 72 hours per week and about 20 percent worked more than 84 hours per week (Lauck and Sydenstricker 1917). The long hours were often for low pay in dangerous and unhealthy conditions. A March 1911 fire at the Triangle Shirtwaist Company in New York City killed 146 workers because of inadequate and locked fire exits. According to one estimate, industrial accidents resulted in 25,000 deaths, 25,000 5 permanent disability cases, and 2,000,000 temporary disability cases per year which implies that during World War I, U.S. causalities were greater in the workplace than on the battlefield (Downey 1924). The long hours at low pay in dangerous and unhealthy conditions were also marked by great insecurity. Many lived with a constant fear of unemployment. A government investigation of nearly 30,000 male workers in 1909 found that only 37 percent did not have any time lost from work over the course of a full year; half of the workers lost four or more months (Lauck and Sydenstricker 1917). Labor was frequently viewed as just another input in the production process no different from machines or raw materials. In the drive system of the foreman’s empire, workers were arbitrarily dismissed for any reason, no matter how abusive (Jacoby 1985; Lichtenstein 1989). With mass manufacturing methods emphasizing repetitive, narrowly-defined tasks by individual workers to achieve high output, workers had no contact with the final product and had minimal control over the content of their job. Even Adam Smith (1776, 734) recognized that while this division of labor has efficiency advantages, there were other concerns since specialization renders workers “stupid and ignorant.” Because of these conditions, the early institutionalists identified not only efficiency, but also equity and self-actualization as the key objectives of the employment relationship: “greater efficiency in production; greater equity in the distribution of economic rewards, the utilization of labor, and the administration of employment policies in the workplace; and greater individual happiness and opportunities for personal growth and development” (Kaufman 1993, 13). These basic objectives continue to be important in the contemporary industrial relations paradigm. Jack Barbash (1987, 1989) and Noah Meltz (1989) both rooted the field of industrial relations in the study of efficiency and equity. According to Barbash (1987, 172), equity consists 6 of “(1) having a say in the work, (2), due process in the handling of complaints, (3) fair treatment at work, (4) meaningful work, (5) fair compensation and secure employment.” Both Barbash and Meltz further emphasize the multifaceted relationship between efficiency and equity—the need for equity stems from the need to protect human labor from the abuses of a pure efficiency regime as well as from the need to treat human labor fairly in order to achieve superior efficiency. In other words, sometimes efficiency and equity clash; at other times they are complements. As such, the central feature of the industrial relations paradigm is balancing the distinct, yet mutually-dependent, interests of employers and employees: efficiency and equity (Meltz 1989). Budd (2004) extends this thinking by distinguishing between equity and voice. Equity is fair employment standards for both material outcomes (such as wages and safety) and personal treatment (especially nondiscrimination). Voice is the ability to have meaningful input into decisions, including both industrial democracy and autonomy or control. The basis for the equity-voice distinction is the view that equity is instrumental and can be provided unilaterally by employers or government regulations while voice is intrinsic and can only be achieved by worker participation. As such, while equity and voice might often be mutually supporting, they can also be competing objectives of the employment relationship—industrywide collective bargaining, for example, might be very effective at establishing equitable minimum wage standards, but at the expense of rank and file participation in decision-making. In Budd’s (2004) analysis, therefore, the central interests of the employment relationship are efficiency, equity, and voice.4 9 employers and employees thereby promoting the optimal operation of markets rather than interfering with it (as predicted by theories rooted in competitive markets). Common research questions in pluralist industrial relations therefore include how labor markets work (Kaufman 1988) and the effects of unions and laws on workers, firms, and the economy (Belman and Belzer 1997; Freeman and Medoff 1984; Slichter, Healy, and Livernash 1960). In fact, the pluralist view that imperfect labor market structures should be the benchmark upon which to judge policy interventions continues to have currency (Manning 2003). Card and Krueger’s (1995) findings that the effects of minimum wage laws are not consistent with models of perfect competition reinforce the importance of modeling the labor market as a zone where a combination of costly job search, mobility restrictions, and informational asymmetries give employers monopsony power. That is, labor markets can be imperfect even in situations where there is apparent labor market competition amongst employers to attract workers. And even in human capital theory—one of the bedrock theories of neoclassical labor economics—the employment relationship becomes a bargaining problem if there are informational asymmetries such as employers not being able to observe workers’ investments in human capital and outsiders not knowing a workers’ current productivity (Chang and Wang 1996). Moreover, in these situations, private actions produce suboptimal training investments so, consistent with the pluralist tradition, there is a need for institutional intervention. The final theoretical element of the pluralist industrial relations paradigm is modeling individuals as human or behavioral agents rather than purely economic agents (Budd 2004; Kaufman 1988, 1999). In contrast to neoclassical economics, work is not viewed solely as a source of income. The interests of workers can therefore be complex: avoid ing drudgery and other affronts to personal dignity (Barbash 1984; Hodson 2001), participating in decision-making 10 (Freeman and Rogers 1999), or fulfillment of self-actualization (Kaufman 1993; Webb and Webb 1897). Decisions by workers and managers are not always made on a purely rational basis. Aggression and frustration might lead to strikes (Wheeler 1985), coercive comparisons might affect wage outcomes (Ross 1948), and complexity might create internal labor markets at odds with competitive forces (Doeringer and Piore 1971; Lester 1988). The recent growth in quasi- rational and experimental economics offers mainstream economic theory a way of modeling human actions that brings economic thought closer to the longstanding pluralist paradigm, but such modeling continues to be a hallmark of pluralist rather than neoclassical research on the employment research. 7 In sum, the building blocks of the pluralist industrial relations paradigm yield a theory of competing interests: the employment relationship is modeled as a bargaining problem between stakeholders with competing and shared interests, such as cost discipline and PEEP (Barbash 1984), efficiency and equity (Meltz 1989) or efficiency, equity, and voice (Budd 2004). The competing interests are not reconciled solely by market forces—which are often imperfect and often favor employers—but also by complex individual and collective interactions shaped by institutions, behavioral decision-making factors, customs, and values.8 At the same time, the shared interests bind the stakeholders together and the focal point of the pluralist industrial relations paradigm is resolving conflicts of interest to produce mutual gain (Barbash 1984; Budd 2004; Commons 1934; Kochan 1998; Meltz 1989).9 This theoretical perspective of the employment relationship provides testable hypotheses regarding the determinants of employment outcomes. The pluralist industrial relations conception of the employment relationship as a mixed- motive interaction between human agents in imperfect labor markets is a legitimate theory of the 11 employment relationship. One can challenge the accuracy of the assumptions that underlie this theory, but the industrial relations paradigm cannot be dismissed as either atheoretical or entirely normative. Even among leading industrial relations scholars, however, these assumptions are typically labeled the normative foundations of industrial relations (e.g., Kochan 1998). The singular emphasis on a normative label should be amended—these assumptions reflect beliefs about how the employment relationship works as much as how it should work; they are no more normative than the neoclassical economics assumptions of rational economic agents and competitive markets. The pluralist industrial relations model is as much of a theory of the employment relationship as is the neoclassical economics model; it is not as easily reduced to mathematical modeling through tractable maximization problems, but it generates testable hypotheses about behavior, outcomes, and relationships between various quantities. The Importance of Balancing Competing Interests A central feature of this pluralist industrial relations paradigm is balancing competing interests in the employment relationship: If the democratic state is to attain its fullest and finest development, it is essential that the actual needs and desires of the human agents concerned should be the main considerations in determining the conditions of employment….We see, therefore, that industrial administration is, in the democratic state, a more complicated matter than is naively imagined by the old-fashioned capitalist, demanding the “right to manage his own business in his own way.”…In the interests of the community as a whole, no one of the interminable series of decisions can be allowed to run counter to the consensus of expert opinion representing the consumers on the one hand, the producers on the other, and the nation that is paramount over both (Webb and Webb 1897, 821-23). The emphasis on balance is rooted in the theoretical assumptions of pluralist industrial relations, but there are also important normative implications associated with these theoretical assumptions. We first consider these normative implications and then describe the importance of the balancing paradigm for positive research on the employment relationship. By viewing 14 relations framework: equality between employers and employees promotes healthy rather than destructive competition and supports both freedom and optimal economic and social outcomes. A critical building block is not competitive markets, but a balance between competing interests. As revealed by the differences in the direction of causality in Figure 1, the neoclassical economics and industrial relations schools of thought favor different policy interventions: neoclassical economics—with causality running from competition to optimality—favors policies (typically the lack thereof) that promote competitive markets and unregulated economic exchange; industrial relations—with causality running from balance to optimality—favors policies to promote equity and balance in the system. Given these different world views, it is not surprising that the old institutionalists sought to not only reduce market imperfections (such as unemployment and its negative effects though public works and unemployment insurance programs), but to equalize bargaining power between employers and employees through unionization (Kaufman 1997). At the workplace, shop committees and other systems of checks and balances were advocated to develop industrial goodwill and productivity (Commons 1919). Modern scholarship on high performance work practices further emphasizes the importance of equitable treatment for maintaining efficiency in the workplace.12 Barbash (1989, 116-17) asserts that “Human as distinguished from inanimate commodities require fairness, voice, security and work of consequence to make their maximum contributions to real efficiency” and Meltz (1989, 110) argues that “An employer dedicated to the purest form of short-run profit maximization without any reference to the human element in the factors of production is likely to create a negative reaction that in the long run will impede the achievement of the desired efficiency.” 15 In other words, apart from being good in a moral sense, equity and voice are also instrumentally important because their absence are primary sources of industrial tension. In pluralist industrial relations, the presence of imperfect markets and human (not purely economic) agents means that equity and voice are needed to generate perceptions of fairness amongst workers, which is required if workers are to voluntarily accept the conditions of the modern employment relationship. This occurs at every level of the employment relationship and also extends to the economy as a whole.13 Individuals born without initial endowments of wealth and lacking access to the decision-making process involved in generating these outcomes, are more likely to perceive the system as unfair. If there is no serious effort on the part of government, management, or labor to address these imbalances, then why should the disenfranchised respect the system in the first place? These questions are not new; indeed the role of voice and fairness expectations in justifying wealth distribution has some interesting historical and biblical antecedents.14 Pluralist industrial relations applies these analytical propositions to the micro and macro dimensions of the employment relationship (see below) and hypothesizes that the employment system is most effective when competing interests are balanced. Finally, consider the philosophical underpinning of the balancing paradigm, which literally extends back to the very foundations of Western thought. Here we see how both normative and positive implications of the balancing paradigm are int ertwined. The “Golden Mean”—originally a mathematical relation—was argued by Aristotle to extend to the proper governance and conduct of societal and individual action. According to Aristotle, moderation between two extremes is the key to acting virtuously, and to fulfilling the needs of a community. Aristotelian justice therefore includes a central industrial relations belief: might does not make right (Solomon 1992). Note carefully that these views include both the normative and positive 16 implications of balance discussed above. Normatively, it is argued that individuals should act virtuously and should not favor might over right. Positively, it is argued that communities operate most effectively when individuals are virtuous and when might does not make right. As in the balancing of competing interests between human agents interacting in imperfect markets, the true virtue is a “golden mean” between extremes—normatively and analytically. Balancing Competing Interests: The Micro Level Many of the early institutionalists disputed not the analytical value of the neoclassical economics paradigm, but rather its incomplete treatment of the employment relationship and the economy, and its narrowness when applied to public policy (Yonay 1998). We share a similar perspective on other schools of thought on the employment relationship—Marxist analyses reveal the importance of embedded power relations and the human resource management school contributes to our understanding of the determinants of organizational performance. By including aspects of markets, conflict, and human agents from the other schools, the pluralist industrial relations paradigm provides a unique theoretical framework for understanding the employment relationship through the linkages between efficiency, equity, and voice which are absent in competing paradigms. This section describes two important examples at the micro level where the balancing paradigm adds analytical value—collective bargaining and high performance work practices.15 Collective Bargaining: Market Impediment or Mediating Institution? In the standard neoclassical economics model, competition among firms, workers, consumers, investors, and suppliers under ideal conditions yields optimal prices, output, wages, and consumption. The interests of the employment relationship are fulfilled by competition— allocative efficiency is achieved, equity is fulfilled because all factors of production are rewarded 19 different set of analytical predictions about labor unions and collective bargaining than other paradigms. Similar differences are apparent in the research on high-performance work practices. High-Performance Work Practices: Win-Win or Work-Work? By many accounts, the employment relationship, especially in North America, has been transformed since the 1970s (Appelbaum and Batt 1994; Cappelli 1999; Heckscher 1988; Kochan, Katz, and McKersie 1986; Osterman et al. 2001; Piore and Sabel 1984). Competitive pressures have caused a breakdown in traditional forms of collective bargaining, a decline in union power, and the adoption of new practices and polices to manage labor. Some of these policies focus on slashing labor costs through concessions, decertifying unions, and adding more contingent workers; other practices attempt to enhance organizational performance through high- performance work practices such as flexible work arrangements, performance-based pay, employee participation, work teams, and job security. Arguably the most important research stream that has resulted from this sharp increase in the interest in high-performance work practices is analyzing the effects of these practices. By implication, this line of inquiry also addresses the more fundamental question of why these practices exist. The uniqueness and significance of the industrial relations paradigm is illustrated by the increased understanding of these questions that can result from an integration of the analytical tenets of the balancing paradigm. 16 In the neoclassical economics and human resource management paradigms, questions of the effects of high-performance work practices largely reduce to efficiency: Are firms that adopt such practices more profitable than those that do not? Do work teams produce higher quality output than individuals in narrowly-defined jobs? Are workers who are involved in production decisions more loyal and productive than those who are not? The literature often concludes that 20 companies do well by doing good (Baker 1999): high performance polices (if implemented jointly and not piecemeal) increase organizational performance (Batt 1999; Huselid 1995; Ichniowski, Shaw, and Prennushi 1997).17 The effects on workers beyond efficiency-related issues are frequently ignored because in neoclassical economics, dissatisfied workers are free to quit and in the human resource management paradigm, a unitarist employment relationship means that what’s good for employers is good for employees. The pluralist industrial relations paradigm reveals the narrowness of this research. By modeling the employment relationship as a set of competing interests, the effects of human resource policies on workers is of equal importance to the effects on organizational performance. It is employees who are directly affected by any modification in human resource practices, and so produc tivity and profitability cannot be the only benchmarks upon which to judge the success of these practices. High-performance work practices that appear to be a win-win situation for workers and employers in a unitarist framework can be seen as “management by stress” in a pluralist framework: new tools for increasing the pace and effort of work while increasing the uncertainty of rewards and security (Parker and Slaughter 1995). Moreover, the competing interests framework posits that there is not always a unity of interests between employees and employers, and this yields a critical prediction for the research on high-performance work practices: high-performance work practices that balance employer and employee interests will be more successful, while those that do not will be more likely to fail (Delaney and Godard 2001). The pluralist industrial relations paradigm can also make a valuable contribution towards a more general understanding of how individual and organizational performance can be improved by such practices, since this paradigm incorporates what is of value to labor as well as management. If high-performance work practices enhance productivity and profits, it is 21 ultimately because they are attuned to what is of value to labor as well as management (Osterman 2000). In fact, pluralist industrial relations scholars frequently distinguish between two types of efficiency: allocative (or formal) and real (Barbash 1989; Meltz 1989). Allocative efficiency encompasses the technical procedures needed to maximize output given certain constraints. This view of efficiency treats labor simply as a commodity no different from other factors of production. The analytical treatment of labor in industrial relations, however, includes human elements of labor with interests distinct from their employers and therefore the rationalization of the workforce along formally efficient criteria can create problems of alienation, shirking, and low morale. Moreover, allocative efficiency can create a distributive tension between wages and profits (Barbash 1989). Therefore, in order to enhance real efficiency, the industrial relations paradigm predicts that allocative efficiency needs to be tempered by workers’ interests such as equity and voice. In other words, workers are distinct from other organizational inputs because of their human requirements for fairness, voice, and job security as preconditions for making maximal contributions to real efficiency. In fact, while economists recognize that cooperative behavior among economic agents is needed when markets are incomplete or imperfectly competitive (Olson 1982, 2000), it is less well-recognized that non-market institutions such as unions and works councils can foster long-term relationships between employers and employees. Once in place, these relationships place limits on the extent of pecuniary gains that one party can extract from the other. Ongoing relationships also produce repeated interactions among actors, which are conducive to the sharing of information and the development of trust. Trust in the employment relationship is not determined exogenously; it is formed and reinforced by being responsive to the other side’s interests. 24 workers and citizens, desperate families turned to crime, and labor disputes disrupted production. It was additionally believed that this inequality between labor and management depressed consumer purchasing power and prevented macroeconomic stabilization (Kaufman 1996). In short, these are analytical propositions that the economy would work better if there was greater balance between employers and employees. The macro- level New Deal policies of the 1930s sought to create a balance through public works programs to provide jobs, the encouragement of unionization, minimum wage and maximum hours legislation to prevent cutthroat competition, and social safety nets to cushion the economic and social harms of adverse events (Bernstein 1985; Kaufman 1996). The National Labor Relations Act (1935), therefore, protects workers’ efforts at forming unions and engaging in collective bargaining to increase workers’ purchasing power. The Fair Labor Standards Act (1938) created a federal, national minimum wage, a mandatory overtime premium for covered workers for hours worked in excess of a weekly standard (now 40 hours), and restrictions on child labor. A social safety net was established by the Social Security Act (1935) through insurance for the unemployed, disabled, and elderly. These public policies reflect the intellectual (not just normative) tenets of pluralist industrial relations (Budd 2004): labor is more than a commodity; labor and management are not economic or legal equals (in other words, there is an imbalance of bargaining power); there is at least some conflict of interest that cannot be resolved by unitarist management policies, but this is pluralist employment relationship conflict, not class- based or societal conflict; and employee voice is important. As summarized by panel B of Figure 1, these intellectual tenets imply that if these policies can create a greater balance between employers and employees, then healthy rather than destructive competition will result and outcomes will improve. 25 Balanced Distributions of Income and the Promotion of Stability and Growth The New Deal policies of the 1930s were set against a backdrop of economic and social instability—strikes, bread lines, Hoovervilles of homeless squatters, hunger marches, mass migration out of the Dust Bowl, and the like. As such, the New Deal policies were not only intended to improve the workings of the labor market, but also to promote social and political stability. This logic mirrors the International Labour Organization’s (ILO) philosophy of global stability as enshrined in its preamble from 1919: “Universal and lasting peace can be established only if it is based upon social justice” and “conditions of labor exist involving such injustice hardship and privation to large numbers of people as to produce unrest so great that the peace and harmony of the world are imperilled.” This logic continues to be important in the 21st century, especially in light of the well- publicized globalization backlash. The widespread protests in Seattle against the World Trade Organization (WTO) in the fall of 1999 stemmed from perceived imbalances between corporations and other interests in the WTO’s system of free trade. Creating a greater balance in the global trading system appears critical to the future of this system (Business Week, September 8, 2003, p. 56) and underlies the United Nation’s Global Compact initiative. In fact, the evidence is not just anecdotal in this regard; across a broad spectrum of countries, there appears to be a positive long-run association between balanced (equitable) distributions of income and economic performance (Alesina and Rodrik 1994; Persson and Tabellini 1994).20 Two major political-economic models have been advanced to explain the observed positive relation between income equality and economic growth: fiscal policy models based on public choice theory and models of political instability (see Figure 2).21 The argument of the fiscal policy theories is that income inequality induces large segments of the population to 26 support redistributive policies (such as high taxes) that dampen growth-promoting activities, such as incentives for investments in physical and human capital (Alesina and Rodrik 1994; Persson and Tabellini 1994). The higher the inequality of wealth and income, the higher the rate of taxation and consequently the lower the growth rate. Countries that have low initial disparities in income inequality are hypothesized to face fewer political pressures to redistribute, while in more unequal societies it is publicly induced distortionary taxation and redistribution that ultimately lowers growth. The second class of models are based on social and political discontent. In terms that are strikingly similar to longstanding pluralist industrial relations beliefs and to the ILO’s preamble, inequality in these models is hypothesized to fuel socio-political instability—which can take on varied forms such as crime, riots and coups, strikes and other forms of industrial conflict –which in turn reduces investment and therefore economic growth (Alesina and Perotti 1996). But does a balancing paradigm have empirical support? Empirical evidence in favor of the second class of models would support the balancing paradigm because inequality likely reflects a lack of balance and hence instability in the employment relations system, which reduces macroeconomic performance. The evidence, as it happens, is more strongly in favor of the instability model than the high-tax fiscal policy model (Perotti 1994). Countries with more egalitarian pre-tax distributions of income tend to support higher levels of transfers—not lower as predicted by the fiscal policy model—and higher growth rates (Benabou 2000). To wit, Figure 3 presents a comparison of Gini ratios to tax revenue as a percentage of GDP among the 29 member states of the Organization for Economic Cooperation and Development (OECD). The slope of the regression line and associated correlation coefficient is negative (-0.68) indicating 29 Analytical research on, and normative support for, labor unions is another dominant part of industrial relations scholarship, but the viability of the pluralist industrial relations paradigm is not entirely dependent on the fortunes of organized labor. The fundamental precept of balancing competing interests in imperfect markets is embraced, for example, in other academic disciplines (such as business ethics), theories (such as stakeholder theory), and popular institutions (such as the Catholic Church and the United Nations). In the wake of the corporate and foreign exchange scandals of the early twenty-first century, a number of commentators advocate adding checks and balances to markets, corporations, and global economic institutions—this is a pluralist principle.24 The push for fair trade and other initiatives to make sure that the benefits of economic markets are widely shared are intellectually consistent with the predictions of the pluralist industrial relations paradigm.25 Most importantly, perhaps, the pluralist industrial relations paradigm recognizes that the employment relationship is complex. In contrast to the models of the other major schools of thought—neoclassical economics, human resource management, or critical (Marxist) industrial relations—this relationship cannot be reduced to a single overriding principle. In short, the balancing paradigm tells us to be humbler than we normally prefer to be—the pursuit of a singular objective (only efficiency, or equity, or voice) and the reliance on sole mechanisms (only markets or internal management) can be socially harmful. Workers, after all, are complex human agents with extrinsic and intrinsic expectations and rights. To understand the workings of the employment relationship and to create policies and practices that will promote broadly-shared prosperity and long- lasting democratic freedoms, the pluralist paradigm argues that the employment relationship should be modeled as a complex bargaining problem between human agents operating in imperfect markets—one where 30 competing interests need to be balanced in order to ensure not only efficiency, but also fulfillment of workers’ rights. While rooted in the scholarship of Commons and the Webbs of 100 years ago, for which we are grateful, this pluralist industrial relations paradigm continues to be theoretically and normatively rich in the 21st century. Dedication and Acknowledgments This chapter is dedicated to the memory Noah M. Meltz. Noah submitted the original proposal for this chapter and significantly shaped its structure and content. We are honored to have had the opportunity to complete his project. We are grateful to Bruce Kaufman for his thoughtful comments and to all those who participated in the IR theory workshop, held in the IIRA meetings in Berlin, 2003 . 31 References Adams, Roy J. 1995. Industrial Relations Under Liberal Democracy: North America in Comparative Perspective. Columbia: University of South Carolina Press. Akerlof, George A., and Janet L. Yellen. 1986. Efficiency Wage Models of the Labor Market. Cambridge: Cambridge University Press. 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Industrial Conflict: An Integrative Theory. Columbia: University of South Carolina Press. Yonay, Yuval P. 1998. The Struggle Over the Soul of Economics: Institutionalist and Neoclassical Economists in America Between the Wars. Princeton: Princeton University Press. 40 Figure 1. The Role of Balance in the Neoclassical Economics and Industrial Relations Paradigms Healthy Competition / Individual Freedom Balance of Power Between Employers and Employees Optimal Outcomes Healthy Competition / Individual Freedom Balance of Power Between Employers and Employees Optimal Outcomes A. Neoclassical Economics B. Industrial Relations 41 Figure 2 Political-Economic Channels Linking Inequality to Lower Growth Higher Inequality Mechanism 1: Fiscal Policy Mechanism 2: Social Instability Poorer Median Voter Higher Tax Rates Greater Social Unrest More Instability / Uncertainty Fewer Incentives Lower Economic Growth Lower Investment 44 pluralist industrial relations and modern institutional economics share John R. Commons as a critical founding figure, there is unfortunately a lack of interaction between the two schools. This is not to be confused with the “new institutional economics” in which market imperfections such as transactions costs and asymmetric information give rise to the importance of institutions (webs of rules) while maintaining the neoclassical economics emphasis on individual utility- maximization and efficiency, and therefore a general skepticism of the benefits of government regulation (Dow 1997). 9 Compare this to Kelly’s (1998, 132) critical perspective in which the focal point of industrial relations is viewed as “injustice and the ways in which workers define and respond to it.” 10 In this respect, the pluralist view of competing interests shares much more in common with the forefathers of economic thought in the classical economics school, than in their neoclassical progeny. Adam Smith—all too often viewed as the father of free-market conservatism—was quite skeptical of the alleged benefits accruing from the pure application of efficiency (higher profits) at the expense of greater equity (higher wages). Indeed, in The Wealth of Nations not only did Smith view merchants and manufacturers with deep suspicion, he also qualified his praise of the self-equilibrating economy with a darker vision of the dehumanizing potential of a profit-orientated society. Until recently, Smith’s views would have run counter to the approach taken by many mainstream economists, but for over a century his views have run parallel to the approach of the pluralist school of thought and the theory that a balance of competing interests is the optimal outcome for a society over the long run. 11 The difference between the pluralist industrial relations conception of earning profits and the neoclassical economics emphasis on maximizing profits is therefore much more than semantics. Earning rather than maximizing profits is also consistent with business ethics in the Aristotelian and Kantian traditions (Bowie 1999; Solomon 1992). In fact, the pluralist industrial relations balancing paradigm in general is consistent with these ethical perspectives (Budd 2004). 12 Note that these new forms of workplace design were prefigured by more than half a century by the pluralist tradition (Kaufman 2001). 13 In human resource management, see the large literature on distributive and procedural justice (Folger and Cropanzano 1998). For discussions of fairness in labor market outcomes, see Rees (1993) and Solow (1990). 14 In an agricultural society land is the primary source of wealth. The Bible mandates that, after the land of Israel was divided among the 12 tribes, in every Jubilee (fiftieth) year land was be restored to the families within their tribes (Leviticus, 25, 8-55). Even if a person was forced by economic circumstances to sell his land and become a servant, the sale was only until the next Jubilee. Hertz (1978, 533) observes that “In this way the original equal division of the land was restored. The permanent accumulation of land in the hands of a few was prevented, and those whom fault or misfortune had thrown into poverty were given a ‘second chance.’” 15 Kaufman (2004a) argues that the early institutionalists sought a balance on three levels: in internal firm governance, external labor markets, and national policy-making. In this section we consider institutional arrangements within these first two levels. In the following section we consider national policy-making and social stability issues. Note carefully that our examples are intended to be illustrative of the continued relevance of the balancing paradigm, not comprehensive. 16 Another important research stream tries to explain the uneven diffusion of these practices across firms given the alleged benefits trumpeted by supporters. By focusing on market 45 imperfections, unequal distributions of resources, and the importance of non-market institutions and behavior, the pluralist industrial relations paradigm can also help explain why not all firms adopt high-performance work practices 17 Findings on the productivity effects of these practices are not universal and also do not necessarily translate into improved corporate profitability (Cappelli and Neumark 2001). 18 Roach (1996) argues that U.S. business leaders during the early and mid-1990s made profitability improvements through the unsustainable low-road approach of cost cutting. 19 Okun (1975, 1) is perhaps the classic discussion of the perceived fundamental trade-off between efficiency and equity, including the remark that “tradeoffs are the central study of the economist. ‘You can’t have your cake and eat it too’ is a good candidate for the central theorem of economic analysis.” Similar sentiments are echoed in economics textbooks: “policies designed to divide the proverbial economic pie more equally, inadvertently cause the size of the pie to shrink” (Baumol et al. 1991, 124). 20 For a discussion of micro- level problems of too much income inequality, see Krueger (2002). 21 A third class of models to explain a negative relationship between income inequality and economic growth relies on imperfect credit markets (low-income individuals face borrowing constraints and are therefore limited in the investments in human and physical capital that they can make) (Benabou 1994, 2000). In principle, this focus on imperfect markets is consistent with the pluralist industrial relations paradigm, though an industrial relations theory would focus on labor market imperfections. 22 The failure of the fiscal policy model to account for the persistence of high inequality and low taxation regimes can be explained by the industrial relations paradigm: the absence of voice institutions that translate public demands into policy. 23 Mobilization theory, in turn, provides a framework for analyzing when perceived imbalance or injustice translates into collective action to redress this imbalance (Kelly 1998). 24 See Kelly (2001), Korten (1999), Phillips (2002), Soros (2000), and Stiglitz (2002). 25 There is a large literature on international trade with imperfect product markets (Grossman 1992), but industrial relations scholars should inject this research with analyses of globalization characterized by imperfect labor markets that favor employers.