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The Theoretical Foundation of Industrial Relations and Its Implications
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THE THEORETICAL FOUNDATION OF INDUSTRIAL RELATIONS AND ITS IMPLICATIONS FOR
LABOR ECONOMICS AND HUMAN RESOURCE MANAGEMENT
Author(s): BRUCE E. KAUFMAN
Source: ILR Review, Vol. 64, No. 1 (October 2010), pp. 74-108
Published by: Sage Publications, Inc.
Stable URL: http://www.jstor.org/stable/20789056
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THE THEORETICAL FOUNDATION OF INDUSTRIAL RELATIONS
AND ITS IMPLICATIONS FOR LABOR ECONOMICS
AND HUMAN RESOURCE MANAGEMENT
BRUCE E. KAUFMAN*
The author identifies the core principle that forms the theoretical and policy
foundation for the field of industrial relations?labor is embodied in human
beings and is not a commodity?and argues that the field's two central
dependent variables are labor problems and the employment relationship.
Next, he uses this core principle, along with complementary ideas from
institutional economics, to develop a theoretical framework that not only
explains the nature of the employment relationship and labor problems
but also reveals shortcomings in related theories from labor economics
and human resource management. Finally, this framework is used to
derive the "fundamental theorem" of industrial relations, demonstrate that
optimal economic performance occurs in a mixed economy of imperfect
labor markets and organizations, and show that a certain amount of
labor protectionism promotes economic efficiency and human welfare.
From the commercial point of view, children are not particularly valuable and fish
are. - Rheta Dorr (1912: 45)
The world of zero transaction cost turns out to be as strange as the physical world
would be without friction - George Stigler (1972: 12)
writing and research, its roots extend far

The industrial
entity in the relations
social sciencesfield as a formal
goes back back into the nineteenth century. Over
to the early 1920s in North America, the this period, researchers have attempted to
late 1940s in the United Kingdom, and one identify the core principles that distinguish
to two decades later in most other countries
the subject of industrial relations from
and regions. As an identifiable area of other labor fields and build upon these
principles theories and models that
* Bruce E. Kaufman is Professor of Economics and explain key labor/employment outcomes
Senior Associate of the W.T. Beebe Institute of Person and processes. Sidney and Beatrice Webb,
nel & Employment Relations at Georgia State Univer John R. Commons, and Lujo Brentano
sity in Atlanta, Georgia; Senior Research Fellow of the began this task in, respectively, Britain, the
Centre for Work, Organization and Wellbeing, Busi United States, and Germany at the end of
ness School, at Griffith University in Brisbane, AU; and the nineteenth century, and succeeding
Principle Research Fellow of the Work and Employ generations of scholars have followed suit
ment Research Unit, Business School, at the University up to the present day. The most notable
of Hertsfordshire in Hatfield, UK. exemplars include contributions by Kelly
Industrial and Labor Relations Review, Vol. 64, No. 1 (October 2010). ? by Cornell University.
0019-7939/00/6401 $05.00
74
75 INDUSTRIAL AND LABOR RELATIONS REVIEW
(1998), Budd (2004), M?ller-Jentsch (2004) Conceptions of Industrial Relations

and Piore and Safford (2006), along with
The subject domain and key features of
the "classics" such as Dunlop (1958) and industrial relations must first be delineated.
Fox (1974). A number of researchers and scholars have
The record in developing a unique base
defined and conceptualized industrial
of industrial relations (IR) theory, with its
relations in articles, chapters and books,
associated body of tools and concepts, is
making an in-depth review unnecessary
mixed, but on balance surely disappointing.
here (see Ackers and Wilkinson 2003;
Despite the century of effort as well as
Adams and Meltz 1993; Colling and Terry
numerous books and articles on the subject
2010; Edwards 2005; Heery, Bacon, Blyton,
of IR theory, there is relatively little impact or
and Fiorito 2008; M?ller-Jentsch 2004;
presence of this theorizing in the literature
Whalen 2008a; Whitfield and Strauss 1998).
of the last two decades.1 In this paper I strive
Two points deserve highlight, however, as a
to move the project of IR theory building
bridge to the theorizing that follows.
and tool development another step forward.
The first highlight is that industrial
In particular, I hope to make five relations has been defined both broadly
contributions to IR theory. First, I use
and narrowly. The original (pre-World
historical analysis to identify the field's core
War II) IR paradigm made the core subject
theoretical and normative principle?the
of study the employment relationship and
proposition that labor is embodied in human
positioned itself as a critique and alternative
beings and is not a commodity. Second, I use
to the labor theory of classical/neoclassical
this principle to develop a theoretical (orthodox) economics (Kaufman 2004a).
explanation for the twin "dependent
variables" of industrial relations, the Considerably more so in the United States
than elsewhere, early IR also included
employment relationship and its attendant
not only collective bargaining and union
labor problems. Third, I develop this
studies but also in equal measure the
theoretical explanation using concepts from
institutional economics (IE), American IR's study of personnel/human resource
management and labor/employment
intellectual home base, and in so doing law. After World War II (WWII), most IR
help meld "original" and "new" versions of
IE. Fourth, I use the theoretical framework academics continued to pay lip service to
this broad definition, but in practice they
as a platform for a wide-ranging critique of
neoclassical labor economics and, to lesser increasingly narrowed the focus of the field
to trade unions and collective forms of workforce
degree, human resource management. governance (Adams 1993; Whitfield and
Fifth, I utilize this framework to deduce
Strauss 1998). In recent years, a number
new concepts and hypotheses about the
of scholars have argued that the IR field
employment relationship, including should return to the broader employment
delineation of the field's "fundamental
theorem." relationship definition (e.g., Kochan 1998;
Edwards 2005; Heery et al. 2008), a position
that informs the theory developed here.
1 Osterman, Rochan, Locke and Piore (2001: vii)
The second highlight is that the IR
argued, for example, that the analysis and conclusions
in Working in America are guided by an "institutional field has not yet settled on what represents
perspective," but that articulating this perspective is its core organizing principle or concept,
hampered by "the absence of a coherent intellectual which also makes theorizing difficult. Here
framework." Similarly, the British University Industrial
is a small sampling of opinions drawn
Relations Association, in reaction to the disbanding of
the IR unit at Keele University, issued What's the Point from the literature: rules of the workplace
of Industrial Relations? (Darlington 2009). The main (Dunlop 1958); job regulation (Flanders
rationales advanced for preserving the field are that IR 1965); social regulation of production
"has fundamental moral and practical importance" and (Cox 1971); the employment relationship
that it provides a "critical social science" perspective on
work and employment (pp. 53-54). The idea that IR
as structured antagonism (Edwards 2005);
provides something useful in the theory area is not social regulation of market forces (Hyman
mentioned in any of its fourteen chapters. 1995); process of capitalist production
THE THEORETICAL FOUNDATION OF INDUSTRIAL RELATIONS 76
and accumulation and the derived political aspects of competitive laissez-faire capitalism
and social class relations (Caire 1996); and traditional labor management
conflict of interests and pluralist forms of methods. The IR solution was a pragmatic,
workplace governance (Kochan 1998); class incremental but cumulatively substantial
mobilization and social justice (Kelly 1998); reform, reengineering and re-balancing
the advancement of efficiency, equity, and of the institutions of capitalism in order
voice in the employment relationship (Budd to bring more stability, efficiency, justice,
2004); collective representation and social and human values to the employment
dialogue (European Industrial Relations relationship.
Observatory 2002); and representation and This labor reform project met many
political regulation of different interests obstacles and objections. In the world of
(Eberwein, Tholen, and Schuster 2002). ideas, the most important was orthodox
All of these propositions have merit. classical and neoclassical economics (Fine
Historical analysis reveals, however, that at 1956; Jacoby 1990; Rodgers 1998). This
the time of the founding of the IR field, body of theory, largely imported from
another proposition was paramount. Britain but secondarily from France, was
widely accepted, hence establishing it as
The Core Principle of
"orthodox." The most widely accepted lesson
Industrial Relations: What History Reveals of orthodox economics at this time was the
Industrial relations originated as a principle of free trade (Knight 1967); second
response to the worldwide "Labor Problem" on the list was Say's Law (Kates 1998)?
(or "Social Question") that emerged and the contention that a free-market system
grew in ferocity in industrializing countries automatically returns to an equilibrium
in the period roughly spanning 1870-1920 position of full employment. Free trade
(Kaufman 2004a). The overarching goal applied first and foremost to international
of American IR founders was to solve the exchange of goods between countries,
Labor Problem but within the context of but the principle was extended with only
a democratic capitalist economic system? negligible qualification to domestic and
indicated in the remark by Commons factor markets, including, most importantly,
(1934a: 143) that his life objective was "to labor markets. Competition, along with the
save capitalism by making it good."2 Early doctrine of compensating wage differentials,
industrial relations was thus positioned as a was regarded as sufficient to protect the
"middle way" program between laissez-faire workers' interests in labor markets and "if
capitalism and socialist revolution. The IR they [workers] are cheated in the exchange,
diagnosis of the Labor Problem was that it they have nobody to blame but themselves"
grew out of the dysfunctional and inhumane (Perry 1878: 200). Likewise, Say's Law
(i.e., a persistent demand-deficient glut is
2 In Britain, Sydney Webb and Beatrice Webb, also impossible in a competitive economy) is a
co-founders of the IR field, were Fabian socialists and macroeconomic theory but its implications
sought a gradual replacement of capitalism, which thus were applied to labor markets and, in
appears to contradict this proposition. However, the particular, the notion that the free interplay
IR field was born in America in the early 1920s and
I therefore give the American position precedence. of demand and supply adjusts wages up and
Apropos the theme of this paper, the Webbs founded down until labor resources are fully and
the London School of Economics expressly to provide efficiently employed.
a home for development of an alternative type of These points are fundamental to
social/historical economics just as Commons used
Wisconsin as a home for institutional economics. IR understanding the origins of industrial
in my interpretation is the labor studies subfield of relations and its core principle. In
this social-institutional type of economics. Therefore, particular, both premises require for their
I make economics the base of industrial relations; in theoretical demonstration and validity that
Europe and Latin America, however, economics plays a
labor be treated as a commodity in a competitive
distinctly secondary role and the center of IR is instead
located in sociology and labor law. The theoretical market. A modest excursion into the history
framework developed here has ample space for the of thought is useful to demonstrate this
latter perspectives. contention; it also brings back into view the
intellectual foundations of the IR field now of labor or capital or anything else, rests,
mostly forgotten. like the keystone of an arch, balanced
The orthodox position was established by in equilibrium between the contending
L?on Walras in his Elements of Pure Economics pressures of its two opposing sides; the
( 1954), the birth place of neoclassical general forces of demand press on the one side,
equilibrium (GE) theory. He claimed the and those of supply on the other" (p. 526).
focus of economic science is market exchange When Marshall applied this theory to labor,
and "our task then is to discover the laws he noted, "the habit of some economists...
to which these purchases and sales tend to of treating labor simply as a commodity
conform automatically. To this end, we shall and regarding the labor market as like
suppose that the market is perfectly competitive, every other market" (p. 336). Although
just as in pure mechanics we suppose, to start he concluded as a matter of real life that
with, that machines are perfectly frictionless" the human aspect of labor markets makes
(p. 84, emphasis added). Walras acquired them considerably less perfect than most
this vision of economics from watching commodity markets and that individual
stocks being traded on the Paris exchange, workers as a consequence often bargain at
but rather than model trade in stocks per a disadvantage, he asserted, nonetheless,
se, he adopted the more general concept that this divergence between a human and
of a commodity. The term "commodity" is at commodity market is for purposes of theory
once generic and critically important to the inconsequential. Therefore, Marshall
model of perfect competition: the essence concluded, "the differences between the
of perfect competition is that prices and two [are] not fundamental from the point
quantities are entirely market-determined. of view of theory" (p. 336).4
This outcome depends critically on the These examples illustrate that a commodity
assumption that the goods or services model of labor and a frictionless demand/
traded are homogeneous?the property of supply (DS) or "buy low, sell high" view of the
commodities such as shares of stock and employment relationship was at the core of
bushels of wheat. early neoclassical labor economics (NLE).
When Walras came to factor markets, The theory of DS capitalism provided,
he proceeded to model labor as just one in turn, an intellectual rationale for a
more of commodities for which price laissez-faire and unregulated regime of free
trade in labor, unilateral and harsh labor
and quantity are determined by demand,
supply, and competitive bidding in a perfect management practices, and a commercial
market. This treatment became standard in "dollars and cents" ethos that regards the
the literature and remains so today among output of canned fish as more valuable than
many economists.3 One additional example the health of the children producing it, as
from the history of thought is apropos on the Dorr epigraph suggests.
The founders of industrial relations
this point. concluded that the unbalanced free trade
In the Pnnciples of Economics, Alfred
Marshall (8th ed., 1920) first asserted the labor market model was a large contributor
to the Labor Problem and, therefore,
general case that "the normal value of
sought to reform and reengineer it. Since
everything, whether it be a particular kind
the orthodox economic theory of the day
blocked the way, they sought to develop an
3 Addison and Hirsch (1997: 127) observed, for
example, that "the standard competitive model views
labor markets as not fundamentally different in 4 Like Adam Smith, Marshall introduced significant
kind from product or other markets." Moreover, in qualifications to the competitive model, including
microeconomic theory, the production function is Q important social and institutional elements. These
= f(Xj, x2, xn) with labor treated identically to the elements have been given highlight and analytical
other Xi factors. The basis of IR is the proposition this treatment by modern theorists, such as Akerlof,
theory is mis-specified because labor is unique from Samuelson, Solow and Stiglitz. Dunlop (1984)
other inputs; if not the case then a field devoted to claimed these models are congenial to IR whereas the
employment relations would be an empty space like competitive/imperialistic approach of the Chicago
fields for "capital relations" and "land relations." School is not.
alternative. Here we find the roots of IR. Rutherford 2001). The strong influence of
Germany in the late nineteenth century the German tradition on Wisconsin labor
had the best university system in the world scholars is well illustrated in this passage
and more professorial chairs of political from McCarthy's (1912: 30-31) book The
economy than any other nation (Wittrock Wisconsin Idea. In it, he explained that
1993; Tribe 1995). The Germans, however,
had become disenchanted with English German professors have come repeatedly to
orthodox economics, thinking it was too Wisconsin and have been surprised by the
abstract, individualized, static, biased German spirit in the university. Therefore it is
toward laissez-faire, and Anglo-centric; they only natural that the legislation of Wisconsin
sought, therefore, to pioneer a new model should receive an impetus from men who believe
(Riha 1985). I refer to it as "historical/social that laws can be constructed as to lead to progress
and at the same time preserve to the fullest all
economics" (HSE); Schumpeter (1954) human betterment; that the advice of scholars
labeled it "economic sociology."5 may be sought; that what has made Germany
With regard to policy, German economists happy and prosperous may be duplicated in
(e.g., List 1841) took the heterodox position America... If Wisconsin is a prosperous state to
that some degree of market protection day, there is no doubt that it is largely because
promotes the national welfare more so of German ideas and ideals, early instituted in
the state.
than unabridged free trade. Of particular
interest to American labor reformers, HSE
provided theoretical support for Germany's The two men who most deserve to be
pioneering programs in the 1880s of considered forefathers of early American
accident, unemployment, and old age social industrial relations are economists Richard
insurance. These programs were widely Ely and Henry Carter Adams. Both men
regarded in the United States as an opening did their graduate work in economics at
wedge for socialism (a charge leveled today German universities. Ely (1886) wrote
against universal health insurance?a the first proto-industrial relations book
program the American institutionalists in America, titled The Labor Movement
began to lobby for in the 1910s) and outside in America. In his chapter entitled "The
the pale of good economics and wise social Economic Value of Labor Organizations,"
policy (Fine 1956; Rodgers 1998). Laissez he anticipated the masterful and more
faire in labor was the rule, evidenced by the in-depth treatment Sydney Webb and
fact the United States did not even have a Beatrice Webb gave in their chapter
national child labor law until 1938. in Industrial Democracy (1897) entitled
HSE jumped the Atlantic in the 1880s "Trade Union Theory." In opposition to
and came to America, first from Germany orthodox economics, Ely asserted that
and then later from England, primarily labor organizations are often a benefit to
from the writings not only of Sydney Webb the economy because they balance what is
otherwise a "one-sided determination of the
and Beatrice Webb but also of John Hobson,
Cliffe Leslie, R.H. Tawney, and others (Ely price and conditions of labor... [and] the
1884; Koot 1987). In the 1910s HSE spawned almost unlimited control of the employer
the American school of institutional over...his employees" (p. 100). Adams, in
economics and its labor subfield, industrial his influential essay entitled "The Relation
relations (Champlin and Knoedler 2004; of the State to Industrial Action" (1887: 78,
88), is apparently the first person to use the
5 Durkheim (1895) defined sociology as the study of
term "industrial relations." He proceeded
social institutions, and he and other early sociologists to set out the leitmotif of what would become
(e.g., Weber, Parsons) treated markets as one such the field of industrial relations, arguing
institution. Early IR founders, such as the Webbs, that "it should be the purpose of all laws,
Ely, and Commons, were part sociologists and sought
touching matters of business, to maintain
to integrate social and institutional elements into
economics. Dunlop (1958) credited Parsons as a major the beneficent results of competitive action
source of ideas for his industrial relations systems while safeguarding society from the evil
theory. consequences of unrestrained competition"
(p. 86). Note here the heterodox idea however, that one principle stands out as
that competition can be excessive and the foundation upon which the IR field,
destructive. in both its positive and normative aspects,
Ely, Adams, and other rebels sought to is based. Stated in the affirmative, this core
create a new type of economics that would principle of industrial relations asserts that
be more realistic, relevant, and receptive labor is embodied in human beings; stated in the
to institutional reform (Jacoby 1990). They negative, it asserts labor is not a commodity. In
also wanted to craft a closer connection the 1910s and 1920s, the positive way to state
between economics and the other social this principle was often to refer to labor as
sciences, making it less physics-like and the human factor (Kaufman 2008b). Budd
more human. Toward this end, Ely took (2004) recaptured the human dimension
the lead role in founding the American of labor when he titled his book Employment
Economics Association, broadly modeled with a Human Face; numerous other IR
on the German and HES-dominated scholars (e.g., Kochan and Katz 1988;
Verein f?r Sozialpolitik (Society for SocialEdwards 2005; Isaac 2007) also emphasize
Policy).6 This new school later coalesced labor's human dimension.
into institutional economics. Ely brought Rejection of the "labor commodity"
John R. Commons to Wisconsin in 1904, principle and "demand/supply" concept of
and Commons made Wisconsin the center employment was widespread among labor
in the United States for the study of labor. reformers and early founders of industrial
Moreover, Commons became the founder relations. The International Labor
of labor economics (broadly defined) and aOrganization (ILO), for example, was born
co-founder of American industrial relations, in the same period (1919-1920) as the new
personnel/human resource management field of industrial relations, which sprang
(HRM), academic labor law, andfrom the same HSE intellectual roots and
institutional economics (Kaufman 2007a, social concerns with the Labor Problem
2008b). Industrial relations, in effect, was (Kaufman 2004a). In fact, the statesmen
founded by Commons and associates as the who crafted the Treaty of Versailles, which
labor subfield of IE; institutionalism and IR created the ILO, were intent on ending
dominated labor economics until the 1960s; two kinds of warfare that they regarded as
and the two served as major intellectual a mutual threat to democratic capitalism:
sources for the "labor protection" program political warfare and industrial warfare.
of the New Deal and development of theThus, it is instructive that the first of nine
American welfare state.7
principles enumerated in the Constitution
This "new economics" of labor?that is, of the ILO reads: "Labor should not be
industrial relations?was based on a number
regarded as a commodity or article of
of alternative ideas and methods foundcommerce."
in HSE.8 Historical investigation reveals, Early IR academics uniformly rejected
the labor commodity principle. Ely (1886:
6 IR carne to Japanese universities after World War II 99) declared that "the machine which yields
largely from America (Kaufman 2004a) but the roots its services to man is itself a commodity,
go back to the 1890s when Noburo Kanai did graduate
work in economics in Germany, brought back the
and is only a means to an end, while the
ideas of HSE and "social policy," and took the lead in laborer who parts with labor is no longer a
founding the Japanese Social Policy Association. commodity in civilized lands, but is an end
7 In this regard, Boulding (1957: 7) explained, in himself, for man is the beginning and
"Commons was the intellectual origin of the New termination of all economic life." Likewise,
Deal, of labor legislation, of social security, of the
whole movement in the country toward a welfare
the Webbs (1897: 842) observed this
state." Commons and IE were also "proto-Keynesians" incongruity, writing, "The capitalist is very
in the 1920s, and in the 1940s they integrated Keynes fond of declaring that labor is a commodity,
into a "social Keynesian" model of labor markets. This and the wage contract a bargain of purchase
model was later the object of attack by Chicago School
economists.
8 Kerr (1994: 71), for example, asserted that he mainstream of social economics." He cited Schumpeter
and fellow IR colleagues were "in the current of the and Keynes as major influences.
and sale like any other. But ... why is the employees, and are socially undesirable"
workman expected to touch his hat to his (p. 6). In a similar vein, a British employer
employer, and to say 'sir' to him without observed, "the majority of works and
reciprocity, when the employer meets on factories are still conducted on the 'laisser
terms of equality the persons ... from whom faire principles of the Manchester school
he buys his raw material or makes the other of economists. The teaching of this school
bargains incidental to his trade?" results in paying the worker the smallest
Not surprisingly, another early group possible wage, and in making none but the
who wanted to replace a commodity legally necessary provisions for his social or
theory of labor with a human conception physical comfort. Under these conditions
was trade unionists. Said an English labor of employment, the usual relation between
leader, "notwithstanding all the teachings employers and employed is one of
of political economists, all the doctrines antagonism" (Kershaw 1903: 334).9
of supply and demand, they [the Miner's Theoretical Foundation: Overview
Federation] said there was a greater
doctrine over-riding all these, and that Having identified the core principle
was the doctrine of humanity" (quoted in of early industrial relations, I want to use
Webb and Webb 1897: 589). Likewise, the this principle to construct a theoretical
American Federation of Labor declared the foundation for the field. This foundation is
Clayton Act of 1914 "Labor's Magna Carta/' intended to do two innovative things: first,
when the unions succeeded in inserting to identify and then provide a theoretical
a provision in it that stated "the labor of a explanation for the two central research foci
human being is not a commodity or article of the field (the employment relationship
of commerce."
and its attendant labor problems); and,
Perhaps more surprising, progressive second, to demonstrate that IR's chief
business people also condemned the labor present-day competitors (neoclassical labor
commodity theory and sought to replace economics on one side and human resource
it with a human theory. Indeed, it was management on the other) have deep
businessmen, includingjohn D. Rockefeller, conceptual flaws and in important respects
Jr. in the United States and Montague Burton do not adequately explain the employment
in the United Kingdom, who provided the relationship.
funds necessary to institutionalize industrial As I explain below, of these two rivals the
relations initially in both American and more serious and fundamental threat comes
British universities (i.e., the Princeton IR from neoclassical labor economics; hence
Section in 1922; the three Burton IR chairs NLE receives the bulk of the attention
in the mid-1930s).
and almost exclusively so in the next two
Two examples from the historical sections. In particular, the object of analysis
literature illustrate the critical position and criticism is the core of neoclassical labor
progressive business people took toward the economics?that is, the model of a perfectly
labor commodity theory. One of the first
published documents to use the industrial
9 The labor law field has also been sympathetic to
relations term in the title is Report on "labor protectionism" and has also claimed a semi
Industrial Relations, issued by the Merchants autonomous position relative to ordinary contract and
Association of New York (1919). The Report tort law (like IE labor economics does with respect
lists "three features of our industrial system, to price theory). This position rests on the unique
"human" nature of the labor contract. Bru?re (1929:
which are not compatible with satisfactory
industrial relations" and cites as one of 458) claimed, for example, that "the thing which
distinguishes the labor contract from all contracts
them: "The law of supply and demand as involving property alone is that it expresses the state's
the determining factor in fixing wages and concerns in the workman as a human being and a
citizen" (see also Commons and Andrews 1936: 504
conditions of employment." The Report 05). The labor law field also became the focus of a
continues, "Many of the results of this Chicago-led counter-revolution through the "law and
economic law are unfair and prejudicial economics" movement (Hovenkamp 1990; Kaufman
to the interests of both employers and 2009).
competitive labor market (Kniesner and therefore leads to the conclusion...[that]

Goldsmith 1987).10 Since the late 1950s accommodations [required by law for
this approach to labor economics has been people with disabilities] are inherently
most closely identified with the Chicago inefficient" (p. 344).
School?which Reder (1982: 12) described The following theoretical discussion
as grounded on the proposition that "in builds on the employment systems framework
the absence of sufficient evidence to the in Kaufman (2004b), along with ideas
contrary, one may treat observed prices and concepts from the original HSE/IE,
and quantities as good approximations to Karl Marx, and Ronald Coase. Linkages
their long-run competitive equilibrium to branches of modern mainstream labor
values." This DS model, supplemented economics, such as on imperfect and social
by the theory of compensating wage labor markets, incomplete contracts, moral
differentials, still provides the baseline used hazard and principle-agent problems,
by NLE researchers to evaluate the effect of will be evident and are in many respects
institutional interventions in labor markets, complementary to the IR perspective on
such as the minimum wage, collective employment relationships. Also evident
bargaining, and occupational safety and will be linkages to theorizing in more
health (Boeri and Ours 1958; Neumark and overtly non-neoclassical traditions, such
as economic sociology, labor process
W?scher 2008), and it provides the grounds
on which these researchers typically and post-Keynesian theories, the French
arrive at skeptical-to-negative conclusions. r?gulation school, and German social market
Consider, for example, Stigler's (1982) economics.
assertion that "one evidence of professional In keeping with the historical roots of
integrity of the economist is the fact that it original industrial relations, the resulting
is not possible to enlist good economists to theory?certainly in its policy implications?
defend...the minimum wage laws" (p. 60; is a middle way between NLE and Marxist/
emphasis in original). Another exemplar radical economics (and sociology). In this
was Harris and Stein's (2009) observation respect, industrial relations accepts and
that "the neoclassical economic model uses various component parts of NLE; at
a paradigm level, however, IR cannot be
10 The definition of "neoclassical" is important. In integrated into the Walrasian DS structure
IE, economics is about the noun economy (Commons of standard economics (a prime mission
1950; Kaufman 2004c), Adam Smith is the father, and
of modern NLE) and is fundamentally
"neoclassical" connotes a Walrasian-type flexible price heterodox because it denies the central
theory of a competitive market economy, described
by Boyer and Smith (2001) as "a sparse model of propositions of the Walrasian DS core.11 This
maximizing behavior in the face of competition and core maintains that a competitive market
constraints" (p. 212). The First Fundamental Welfare economy is self-regulating; tends toward full
theorem holds that a competitive economy via the
"invisible hand" reaches an optimum of efficiency.
Becker (1976) and followers, building on Robbins 11 E/IR does not reject NLE tools such as
(1932), define economics by the verb economize (e.g., maximization, marginalism and equilibrium. Rather,
incentives and consequent resource allocations), the position is that NLE tools and models are useful
argue that economics is largely defined by its approach in a subset of economic relations where the requisite
and set of tools (e.g., maximization, equilibrium, continuity, completeness, convexity and stationarity
model-building), in effect elevates Jeremy Bentham conditions hold. They are not universally applicable,
to a "father" of economics (i.e., Bentham-inspired however, because historical, social, and institutional
constrained utility maximization or "rational choice" elements violate them (i.e., create a non-integral
theory takes over more of the "heavy lifting" from mathematical space; see Potts 2000). Maximization,
competitive price theory), and argue this approach for example, requires a closed set but fundamental
is applicable to all aspects of market and non-market uncertainty creates gaps; likewise, management systems
behavior. The former notion of NLE omits social operate as an asymmetrical power and rationing
and institutional elements; the latter includes them. device, making the equilibrium concept (i.e., stable
A drawback of the "method" definition is that NLE balance of forces) inappropriate. The downside of IE is
becomes a m?lange of models with no common core of less mathematical tractability and more indeterminacy;
predictions or restrictions outside the law of demand the upside is room for important features of a human
and claims that outcomes are somehow efficient economy, such as entrepreneurship, path dependency,
(Lazear 2000; Boyer and Smith 2001). and strategy.
employment; leads to efficient utilization (i) depicts a perfectly competitive labor

of resources; and in labor markets sets market. This is the classic representation
wages, employment, and work conditions of the NLE "labor-as-a-commodity" theory.
at efficient and fair (non-exploitative) The demand curve D and supply curve
levels. Conversely, industrial relations can S determine the equilibrium wage Wj
be conceived of as an effort to construct and employment level Lj in the external
a multidisciplinary and quasi-heterodox labor market (ELM). Just as the quantity
type of social labor economics based on a variable Q in a product market DS diagram
more realistic model of the human agent, represents some uniform physical entity
centered not on an exchange of commodity (e.g., bushels of wheat of the same grade),
labor inputs in competitive markets but on the variable L in the labor market diagram
the exchange and use of human labor power also represents a uniform quantity of labor
in an employment relationship embedded services, measured in discrete physical units
in imperfect markets and hierarchical such as number of workers or work hours.
firms and surrounded by an institutional Panel (ii) depicts a firm or other
infrastructure of laws, cultures, social/ production unit (plant, mill, and so
ethical norms, and historical traditions on), depicted as a hierarchical system
(Kaufman 2004b, Figure 1). of command and control with the chief
In this model, a market economy?most executive officer and other top managers at
particularly the labor market?is not self the peak of the pyramid and the employees
regulating or efficient and thus requires at the bottom. The firm is where production
guidance, coordination, and control by the takes place, depicted by the production
government and other human institutions? function relating the level of output Q to
leading to what Commons (1934b) called a the level of factor inputs capital (K), labor
"managed equilibrium." Similarly, laissez (L), and natural resources (N). The labor
faire markets lead to considerable instability, input is first allocated and coordinated in
waste, conflict and substandard conditions the firm's internal labor market (ILM) and
for labor and are outperformed in real life then converted into work and output in the
by some version (not necessarily European) production function or "labor process."
of a "social market economy," that is, a Panel (iii) is a photograph taken in
competitively organized economy but 1915 at the Colorado Fuel & Iron Co.
with social buffers and protections (Tribe (CF&I). It portrays the owner, John D.
1995). Industrial relations is thus a "social Rockefeller, Jr. (right), with one of his coal
labor economics;" it is equally a "political miner employees (left), and Rockefeller's
economy" of labor. That is, IR recognizes: Canadian industrial relations consultant,
first, that labor markets and employment William Lyon Mackenzie King (middle).
relationships are politically constructed; The historic and symbolic significance
second, that core economic concepts of this photograph has been explained
(e.g., demand/supply curves, production elsewhere (Kaufman 2004a), but suffice it
functions, price, efficiency) can only be to say here that if there is a "birth photo"
specified once a regime of property rights of early IR in the American context,
is established by a sovereign authority; this is it. (British readers can substitute
third, that the regime of laws and property Burton for Rockefeller.) The theoretical
rights determines "whose interests count" significance is that the photo represents
and therefore the distribution of benefits the human essence of industrial relations
and costs of economic activity; and fourth, and, in particular, how the new science and
that the Invisible Hand, though powerful practice of industrial relations, represented
and often constructive, must be guided, by King in the middle, stands between the
regulated, and supplemented by the Visible warring employer and employee on the
Hand of the state (Commons 1950; Solow (metaphorical) right and left and restores
1990; Hyman 2008). industrial peace (removes "frictions"),
The place to begin formalization of this creates a more efficient and equitable
theoretical discussion is Figure 1. Panel employment relationship, and saves
Figure 1. The Industrial Relations System
Li L
(i) competitive labor market (?i) firm (iii) industrial relations3
a L to R: Archie Dennison, Mr. King, and Mr. Rockefeller. Photo permission granted by Rockefeller Archive
Center.
capitalism from destruction by its radical 1960, however, the Chicago School and
enemies or internal dysfunctionalities. NLE (aka, modern labor economics)
Before proceeding to discuss Figure decisively displaced institutionalism and
1 further, it is important to point out one quickly banished the concept of labor
inescapable but rarely articulated insight. It problems with its implications of sub
is why neoclassical economics in its Walrasian optimality and need for intervention and
core has fatal consequences for the survival concomitant receptivity to government
and growth of the IR field (and vice versa). and unions (Reder 1982; Freedman 2008;
For this reason, the two paradigms are, in Kaufman 2010a). Increasingly, outcomes
pure form, incommensurate and opposed. such as unemployment, discrimination,
Industrial relations rests on the occupational segregation, rigid wages, and
proposition that labor problems are an internal labor markets were depicted as
inherent outcome of the employment efficient equilibrium solutions generated
relationship (Barbash 1984). It further by rational choice, competition, and
rests on a policy program that endeavors demand and supply. As an example, Boyer
to ameliorate or solve these labor problems and Smith (2001: 211) observed in their
through a mix of institutional interventions,
historical review of NLE that "it is the
view of neoclassical labor economists that
social re-engineering, and humanist ethical
practices in labor and other markets layoff unemployment is not inconsistent
(Osterman, Kochan, Locke and Piore 2001). with economic theory," in part because
The more one subscribes to the competitive "jobseekers could be seen as rationally
NLE model, the less validity and merit these choosing unemployment" (p. 210, emphasis
parts of industrial relations have, to the in original).
extent that in a state of perfect competition Given the competitive and efficient re
IR becomes an empty space. interpretation of these once-thought labor
It is not happenstance that the term problems, it is then an easy step in modern
"labor problems" was widely used as
relations," now has a dated connotation. A better
the title for labor economics texts (e.g.,
expression might be "employment problems," with
Watkins 1922) in the pre-1960 era since "employment relations" (ER) replacing IR. The
the American labor field was dominated ER expression dates back to the 1920s but has only
by institutional economists who subscribed recently caught on. Although broader, it still does
to this idea (McNulty 1980).12 After not capture the field's territory, which is work; the
structure, management, governance, and outcomes of
the employment relationship; and the quality of work
12 The phrase "labor problems," like "industrial life.
NLE?particularly when the theory of the the employment relationship using the
second best (Lipsey and Lancaster 1956) is competitive market model in panel (i),
ignored?to conclude that labor regulation then for all intents and purposes there is no
and industrial relations are not only need for the field and practice of industrial
unnecessary but most often harmful. Thus, relations in panel (iii)?it can simply
W?chter (2004: 165) observed that "policy disappear with no loss in social welfare
cannot improve on those [competitive] (actually, there is a gain!). That is, in the
outcomes" and where imperfections theoretical world of perfect competition,
occur "the optimal solution is to make the demand and supply, without friction or
market more competitive." Similarly, if, in cost, optimally allocate resources to their
a model or policy argument an IR scholar most efficient use, all sides gain from trade,
gives special consideration to the human contracts and commitments are perfectly
rights and interests of workers, NLE critics enforced, and labor and capital are paid
dismiss it as a normatively tainted and their marginal contributions to production.
non-scientific value judgment.13 Industrial These are, of course, theoretical predictions
relations maintains, on the other hand, and not literal statements of fact;
that in modeling workers as commodities it nonetheless, the hypothesis maintained by
is NLE that makes a normative and biased NLE proponents is that these predictions
assumption. In this spirit, Stiglitz (2000: represent in most situations useful first
3) remarked that "it might seem as if the approximations to behavior of aggregates of
fundamental propositions of neoclassical people in real world markets (Reder 1982).
economics were designed to undermine More specifically, DS establishes the
the rights and position of labor." One way optimal configuration of all terms and
NLE does this is by making social welfare a conditions of employment, including not
function of consumption goods but not the only the wage rate but also hours of work,
quality of work life?a logical assumption if pace of work, safety and health conditions,
labor is regarded as a commodity production and non-wage benefits. Thus, competitive
cost to be minimized.14
labor markets lead to a Pareto optimal
In the context of Figure 1, what I am outcome in which it is not possible to make
saying is that if we choose to theorize one person better off without reducing the
welfare of another, which may be rephrased
13 In his critique of Osterman, Kochan, Locke, and as "the best possible state of the world"?
Piore (2001), Neumark (2002: 722-23; emphasis in
original) claimed, "perhaps owing to my training as an
given existing technology, preferences,
economist, I become uncomfortable when conclusions and factor endowments. Evidently, in a
stemming from equity concerns are intermingled theoretical best possible state of the world
with conclusions that are supposed to emerge from no "labor problems" exist to study and any
objective analysis. While we have specialized knowledge institutional intervention in the market is
[on].... how labor markets do work, we are on a level
playing field with laypersons in discussing how labor preordained to lower efficiency. In the real
markets should work. I would have thought the same world, labor problems may exist, but they are
is true of those with an 'institutional' perspective." In generally spotty and small, often explicable
response, IE argues that fairness requires inclusion as optimizing and efficient adaptations to
in theory because it is an important determinant of
work outcomes; normatively, since distributive and frictions and imperfections, and in other
procedural justice clearly matter to people to neglect cases likely to have distinctly man-made
fairness is to then take a biased and normative "only origins, such as the misguided policies
more GDP counts" position. Yes, fairness is subjective, and practices of unions and governments
but so is utility and opportunity cost and thereby (Friedman and Friedman 1990; Lazear
efficiency.
14 The Dorr epigraph is again apropos. If fish are in 2000). Labor problems, therefore, have no
short supply but child workers are readily available, theoretical place in NLE, and government
the efficient market outcome is to have firms invest a
mandates are always viewed with skepticism;
large amount to reduce fish spoilage but to do little
to reduce child spoilage. Society cannot be oblivious
at an empirical level, significant waste,
to relative resource costs; however, weighing human exploitation, coercion, blocked choices,
life on the same pecuniary scale as fish is a hugely
and unfairness are denied or rationalized
normative-laden assumption. away in terms of being significant social
concerns, thus obviating a need for a field In terms of Figure 1, the message of
such as industrial relations to study and fix the competitive model is that DS in panel
these problems. (i) optimally perform everything and the
The mortal threat to industrial relations Mackenzie Kings of industrial relations
from the competitive model goes even (e.g., IR professors, HR managers, union
further. For example, not only do demand leaders, labor lawyers, mediators, central
and supply eliminate all labor problems, but bank chairs, government safety inspectors)
they also render ineffective and unnecessary in panel (iii) have nothing to do and no value
all of IR's problem-solving tools, such as to contribute in maintaining equilibrium in
worker representation and trade unions, the employment relationship. Panel (iii)
labor law and social insurance, progressive again effectively drops out of the diagram.
employee management, and government Not only is industrial relations redundant,
but it is a detriment to the social welfare to
macroeconomic stabilization policy. As
Samuelson (1957) observed with respect the extent that King and colleagues interfere
to labor markets, and the Coase Theorem with DS. The message of NLE, therefore, is
more generally suggests, an implication of that the firm and employment relationship
perfect competition is that "institutions are, as a realistic matter, comprised of human
don't matter" (or "institutions are a beings, such as those pictured in panel (iii),
veil"). That is, a competitive labor market but for the purpose of understanding and
efficiently allocates resources independently predicting the operation and outcomes of
of the specification of property rights, other the employment relationship, the human
institutional rules and mechanisms, and aspect of these people can be neglected in
social structure (Furubotn and Richter 2005: theory-building without substantive harm
12-14) ,15 This means that labor demand and (per Alfred Marshall's dictum).17
Given this introduction, I now want to
supply handle all aspects of HRM (e.g., DS
explore features of Figure 1 more deeply,
set wages, provide a workforce, encourage
workers to get training, motivate work effort
first by offering a more detailed analysis
of the labor market and, second, by doing
through the threat of termination and
unemployment), keep the macro-economy
at full employment (Say's law), solve all theory in effect a "non-institutional" economics.
Institutions structure and segment labor markets,
conflicts of interest without labor law (via
leading Kerr (1950, 1954) to claim NLE price theory
private bargaining), and obviate the need is mostly applicable to "unstructured" labor markets
for unions to prevent exploitation and while IR covers "structured" markets. Becker (1976: 5),
however, argued persuasively that all social structure can
injustice.16
be explained by economic considerations alone (? la
economic imperialism), thus effectively marginalizing
15 Institutions are social constructs (formal and IR's "institutional" approach and making all manner of
informal) that define the rules of the game, specify structured labor markets (e.g., internal labor markets)
agents' constraints and opportunities, and influence consistent with a Pareto efficient invisible hand story
preferences (through norms, and so on). The standard (Lazear 2000). In this paper, I argue that the Beckerian
view is that NLE is about labor markets and IR is thesis is logically untenable in a human economy with
about labor institutions (principally unions) and the positive transaction cost, implying "social structure
former can proceed independently of the latter (e.g., matters"?as long claimed by IE/IR.
Hamermesh and Rees 1984). The IE position holds that 17 The NLE "mechanical" theory of economics is well
all labor markets and employment relationships are illustrated by this statement of Nobel laureate James
"institutionalized" (or "organized") and as one moves Buchanan, made in reaction to the finding of Card and
away from spot markets, the substantive importance Krueger (1995) that a higher minimum wage in some
grows. Thus, in the NLE view IR applies only (or mostly) regressions increased employment in New Jersey fast
to the 8 percent of the unionized U.S. private sector; food restaurants. He argued that "just as no physicist
in the IE view, it is competitive NLE that occupies this would claim that 'water runs uphill,' no self-respecting
niche domain (of mostly spot labor exchange) and IR economist would claim that increases in the minimum
remains completely viable even if union density is zero. wage increase employment" (quoted in Leonard 2000:
16 Deakin and Wilkinson (2005: 278) observed, for 137). The IR response is that human beings run up
example, "in a world of zero transaction costs, there hill and the minimum wage in a human economy
is, strictly speaking, no economic function for law to can be accommodated in other ways than by cutting
perform" (emphasis in original). This applies equally jobs. NLE looks at negative static allocative efficiency
well to other institutions, making competitive price effects; IE brings in positive dynamic efficiency effects.
the same for the firm (more generally, a Though a welcome development from an
production unit). This division is convenient IR perspective, the construction of modern
for expository purposes; moreover, it NLE nonetheless leaves a critic of the
captures the central components of the paradigm, or proponent of an alternative
employment relationship?the firm and paradigm, in a close to no-win situation.
associated internal labor market and labor That is, critique the core competitive model
process where employers coordinate, and you are beating a simplistic dead horse
motivate, and direct employees in the act of economists no longer take seriously; argue
production, and the labor market external to that policies such as minimum wage laws
the firm where demand/supply match up and unions are good for economic welfare
firms and workers and delimit the terms on and out comes the competitive DS diagram
which property rights to labor services are to show the critic does not understand
bought and sold. economic principles.18 With due regard
to this conflicted situation, I proceed to
Labor Market Theory examine the competitive model for three
At the heart of neoclassical reasons. First, it continues to provide the
central
microeconomics, and thus at the heart of the theoretical device economists use
to think about employment relationships;
orthodox paradigm, is the model of perfect
competition. As every person familiarsecond, it is this model that all generations
with economics recognizes, modern of industrial relationists have rejected as
NLE
seriously misleading; and, third, doing
now extends far beyond the competitive
model and theorizes a whole host so of
yields new insights, tools, and ways of
thinking.
imperfect market problems and non-market
The competitive model necessarily
institutions and behaviors (Lazear 2000;
assumes that labor is homogeneous?that
Boyer and Smith 2001; Levitt and Dubner
is, it is a commodity (Polanyi 1944; Prasch
2005; Boeri and Ours 2008). Recognizing
2003) What I am arguing here is that a
this, however, does not mean that modern
labor economics has abandonedcritical
the analysis of this assumption leads
to 11)
competitive model. Manning (2003: two important conclusions: first, it is
asserted, for example, that "currently, the neoclassical model that is the "empty
labor
economics consists of the competitive model when it comes to a logical and
space"
with bits bolted onto it when necessary insightful
to explanation for the employment
relationship and, second, modifying this
explain away anomalies." Likewise, Lucas
assumption
(2007) argued that "about 99% of all so that the labor factor is
successful applied economics is stillmodeled
based as "substantively human" yields
an
on the idea of a competitive equilibrium"IE-based theory that does explain not
only the existence of the employment
(quoted in Samuelson and Barnett 2007:
relationship but also its key features.19
64). And in the same vein, Solow (1990:
xvi) observed that "in today's preferred style
the labor market is usually modeled as18justModern NLE becomes nearly impervious to outside
criticism because any alleged inefficiency or deviant
clearing or, more subtly, producing efficient
observation can be "explained" by a new model. This
contracts." Thus, the competitive model still
procedure, besides introducing considerable ex post
forms the core of the neoclassical research
rationalization, also obfuscates identification of how
program, but it is now surrounded by areal
large
world labor markets operate. To illustrate, to
the best
and constantly expanding protective belt ofof my knowledge, no article in the Journal of
Labor Economics since its inception (1983), nor in any
disparate and often mutually inconsistent
of the 53 chapters in the Handbook of Labor Economics
models and theories?now more frequently
(Ashenfelter and Card 1999), provides an empirically
called "mainstream" than neoclassical?
based description of a representative labor market
in action or examination of how labor markets and
that in various ways relax or abandon
DS actually
key competitive assumptions. Indeed, a set wages. Markets become disembodied
diagrams,
noticeable "institutional turn" is evident in statistics, and equations.
19 "Substantively human" means an abstract model
modern labor economics (Blau and that
Kahnmaintains fidelity to fundamental properties
1999; Freeman 2008). of real human beings. Bounded rationality (BR) is
First, it is important to examine the NLE varying degrees (Taylor and Pierson 1957;
competitive model. If labor is differentiated, Kaufman 1988; 2008c).20 Since employers
then the supply curve of labor becomes are wage-setters and have a modicum of
upward sloping, necessarily so since firms market power, industrial relations also
are no longer indifferent to which unit recognizes that wages and other terms and
of labor they purchase. It is existentially conditions of employment are likely to
impossible for labor not to be differentiated be set to serve the interests of employers,
since the labor service purchased by the such as wages below the competitive level
employer is embodied in and inseparable for infra-marginal workers (Manning
from the employee who sells it (a form of 2003; Erickson and Mitchell 2007). Both
indivisibility not present with commodity the Webbs and Commons referred to this
suppliers of wheat, oil, and so on), implying imbalance in wage determination as "labor's
the employer and employee of necessity have inequality of bargaining power" (Kaufman
a personal and typically ongoing relation (an 2010b).21 Workers are also often not paid
"industrial relation") rather than a one-time their marginal product and feelings of
market-mediated anonymous exchange. unfairness can creep into the employment
Just as no well-defined product supply relationship (Budd 2004). Part of the
curve exists for an imperfectly competitive intellectual framework of IR, therefore
firm (e.g., a monopolist), no conventional includes concepts such as administered and
labor demand curve exists for a firm in an bargained wages, inequality of power, and
imperfectly competitive labor market (e.g., distributive inequity; part of the normative
framework of traditional IR includes the
a monopsonist; Fleischer and Kniesner
1980: 198). Thus, on the plane of pure assessment that these problems can be
logic, if we follow early IR and hold to the reasonably resolved through institutional
proposition that labor is not a commodity,reform of capitalism, rather than its
then the implication is perilous for NLE? elimination, as labor radicals propose
that is, in panel (i) one-half of the DS model (Braverman 1974; Hyman 1975).
deconstructs and disappears. There are numerous other cleavages
On the empty shell of neoclassical DS between NLE and IR with regard to
theory is the foundation for IR theory. Since competitive labor markets that in each case
DS in the external labor market cannot degrade the former and strengthen the
latter. Below I outline several.
provide a determinate wage/employment
outcome, the firm through management If labor is human, then labor supply is
volitional, as originally emphasized by Marx
fiat and HRM policy?possibly modified
(1935) in his distinction between units of
by government regulation or union
labor and effective labor power. Whereas the
negotiation?must close the terms of the
wage/employment bargain. Thus, industrial
relations asserts that wage rates, rather than 20 NLE claims to have a theory of a "market
determined" wage, but it has no such thing. The
being solely market-determined as assumed competitive DS model (two equations with two
in the core version of NLE, are always and unknowns) yields an equilibrium point in price/
everywhere managed/administered pnces, albeit quantity space, but has no (consistent) equations that
describe the bidding process that moves the market
shaped and constrained by market forces to
to equilibrium (the wage is parametric, so no agent
can bid it up or down). Walras invented a fictional
described by Commons (1934b) as self-interested auctioneer to solve this problem. Since no auctioneer
and purposeful behavior constrained by stupidity, exists, and demand and supply are inanimate forces,
ignorance, and passion (see Kaufman 1999b). BRis the the human beings that most likely set wages are
key to IE since it leads to positive transaction cost (TC) managers, implying that firms have market power and
from which flows incomplete contracts and all the rest. wages are administered prices.
The IE demand in theorizing is "substantive realism" 21 From an NLE perspective, it appears contradictory
(empirically informed and congruent priors at strategic to foster competition in product markets through
places), not the hugely successful but equally bogus the Sherman Act anti-trust law but to foster cartels in
straw man of "descriptive realism" (Friedman 1953). IE labor markets (unions) through the Wagner Act labor
theory looks to behavioral and experimental economics relations law. In IE these policies are consistent?both
for empirically valid generalizations (Kaufman 1999a). protect the weaker party (consumers, workers).
BTUs from a ton of coal and the tensile (Levine 1993). Likewise, firms are reluctant
strength of a steel beam (both commodities) to cut wages in a situation of excess labor
are determinate, the work effort of human supply since doing so harms morale and
beings is discretionary and highly variable? often reduces work effort and productivity
ranging from zero (sleeping on the job) to more than proportionately (Bewley
some maximum that differs from person to 1999; Fehr and Falk 1999). Persistent
person (Boyer 2002; Bowles 2004). Hence, unemployment may therefore result, not
the well-defined neoclassical labor demand due to minimum wage laws, unions or
curve develops a potentially large area of other such institutional impediments (the
indeterminacy since a given unit of labor usual NLE story), but from the hard-wired
purchased by the firm (e.g., the time of one though analytically inconvenient facts of
worker) may yield in production a highly human nature.23 Industrial relations and
variable marginal product, depending on Keynesian economics thus have a close
the amount of labor power (physical, mental, intellectual link, starting with the influence
emotional effort) supplied, an outcome Commons' ideas had on Keynes' General
itself highly contingent on IR factors such Theory (Whalen 2008b; Kates 2008).24
as supervision, morale, and fairness.22 The The human essence of labor opens
relationship between wage and marginal up yet other insights. Commons (1934b)
product is thus highly variable in a human argued that ownership and property r?ghts are
economy; moreover, if work effort responds the foundation of institutional economics.
positively to an increase in the wage the labor Applied to labor markets., it is important
demand curve may become upward sloping to keep in mind that firms typically own
at places, thus further calling into question the capital and land inputs but rent labor.
NLE propositions such as the law of demand In a world of perfect competition this
and law of one price. These anomalies, long distinction is irrelevant (the "institutions
noted by IR scholars (e.g., Dunlop 1984), are a veil" proposition) since market forces
have recently received formal analytical ensure equal terms and conditions for labor
representation in game theory, efficiency in either contractual mode; in the real
wage models, and post-Keynesian theory world of imperfect competition, however,
(Akerlof 1990; Solow 1990; Miller 1991;
economic rationality leads firms to give
Lavoie 2006; Bulow and Summers 1986).more attention and care to the resources
The human essence of labor also means
they own than to the ones they rent. S.
that labor demand and supply curves are
Webb (1912) observed, for example, that
not independent functions, wages are
street railway companies took better care
likely to have a large degree of rigidity, and
of their horses than their workers; similarly,
labor markets are no longer self-regulating
(Solow 1990; Bowles 2004; Kaufman 2007a).
A leftward shift of the labor demand curve, 23 The idea that firms are the source of wage rigidity
due to morale and efficiency considerations was
for example, may cause a leftward shift of widely recognized by early E/IR writers (e.g., Slichter
the labor supply curve if layoffs and wage 1920), in part because they talked to business people
reductions are perceived as unfair and (also see Bewley 1999), but Friedman (1953) later
workers therefore reduce labor supply convinced economists this procedure is "bad method"
and the findings untrustworthy. As Dunlop (1944)
also observed, wage cuts principally come not from
22 Readers may object that I attribute fairness to IR excess supply (unemployment) in the labor market,
when NLE also includes it (Boyer and Smith 2001). as portrayed in the DS diagram, but from competitive
The "theory" version of NLE cannot include fairness threats to firm survival in the product market?again
without sacrificing competitive equilibrium and the suggesting firms control the wage.
first welfare theorem (because interdependent utility 24 IE denies that a market system is self-equilibrating.
functions introduce an externality); in the modern For example, Leiserson (1931: 3) quoted a banker's
"method" version of NLE, however, numerous models newsletter: "The time-tested laws of supply and demand
include fairness. Consistent with the position taken must be allowed a free hand [to cure the Depression]."
in this paper, Rees (1993: 243) explained that "the He then asked, "Would any sensible person nowadays
neoclassical theory of wage determination, which I say that the time-tested law of gravitation must be
have taught for 30 years . . . , has nothing to say about allowed a free hand?to sink ships, to drop bridges, or
fairness." to topple skyscrapers?"
in recessions employees (rented labor) are Positive TC and incomplete contracts,

discharged by the millions with society left however, create an opening for other non
to bear the cost of labor maintenance (a market institutions to play a role in the
social subsidization of capital and implicit coordination and regulation of the labor
tax on labor) whereas firms if at all possible exchange, and, hence, a multi-disciplinary
keep and maintain idle or partially utilized role for other academic fields related to
facilities and equipment (their owned the study of labor (Whalen 2008a); they
capital). also create an opening for a divergence
Given the IE emphasis on ownership, between the private and social cost of labor,
Commons (1934b: 55) made the harmful firm practices for workers, and
transaction?the legal transfer of property a rationale for institutional intervention
rights?the fundamental unit of economic (Stabile 1993). Indeed, the IR implication is
activity. The implication for theory is that that externalities and contracting problems
in the labor market, such as panel (i), what are inherent to labor markets, rather than
is bought and sold (the variable L on the a special case as in NLE, and institutions
horizontal axis of the usual DS diagram)
are essential?rather than inimical?to
are units of labor (e.g., work hours) but achievement of economic efficiency.
what enters the production function is likely There is yet one more theoretical
to be quite different, not only due to the conundrum for the NLE commodity
distinction between labor and labor power model of labor demand/supply. Since
but also due to the incomplete nature of perfect markets are always the lowest (zero)
the employment contract (Simon 1951; cost coordinating device, Coase (1937)
Marsden 1999; Kaufman 2010b). demonstrated that economic activity will
For a labor market to be perfectly devolve into a market structure that may be
competitive and yield an efficient outcome, labeled "perfect decentralization," or what
Commons called "extreme individualism"
all margins on the labor service sold by the
employee must be completely specified, (Commons, 1934b: 108; Kaufman 2003a).
priced and delivered to the employer, In this economy, all coordination takes
which only happens if all dimensions of place through markets, implying firms
the property rights are fully covered in a disaggregate into single person entities,
complete and fully enforceable contract. such as independent contractors and
Any un-priced dimension of a property right family farms. That is, multi-person firms
creates an externality-like problem. Perfect rely on management to coordinate labor
resources in internal labor markets, but this
competition, therefore, requires complete is inefficient since external labor markets
contracts, and complete contracts arise, in
turn, only in a state of zero transaction cost
do it at zero cost, causing all firms to
vertically dis-integrate (or dis-agglomerate)
(Dow 1997).25 In IE theory, zero transaction
into the lowest unit of aggregation, a sole
cost (TC) means exchange in markets takes
proprietor-type operation. Single person
place without cost or friction, which is exactly
the Walrasian competitive model. It is this
firms, however, by definition have no
assumption that makes market exchange
employees and, thus, no employment
relationship to study. Nor do they have a
the preferred mechanism for allocating and
labor demand curve since they obtain labor
coordinating economic activity; that allows
services from other firms (e.g., independent
NLE to eliminate all institutions except
the market as active forces; and that makes contractors) selling labor services in the
form of intermediate goods in product markets
wages and other outcomes independent of (Kaufman 2007b, 2008c). Therefore, we
custom, social norms, and equity concerns.
again find that a deeper analysis of the labor
commodity DS model reveals serious logical
25 The transaction cost idea still lives on the fringes of contradictions?not only does Coasian
labor economics, illustrated by its complete omission
from leading NLE textbooks and only a single reference logic suggest the neoclassical DS diagram
in the five volumes of the Handbook of Labor Economics (again) deconstructs but it also reveals that
(Ashenfelter and Card 1999). in a world of perfect competition (zero TC)
the employment relationship?the central is more general because it makes the size,
dependent variable in industrial relations? existence and structure of labor markets
disappears and has by the strict application endogenous and, in fact, a mirror image (a
of logic no theoretical existence. "dual") of the size, existence and structure
The reader may question one or more of of firms, given that the two coordination
the points raised here; my claim, however, modes vary inversely with TC.27
is that considered as a whole these IE The reader may also wonder if all of this
arguments provide a powerful critique of discussion is simply an arcane theoretical
the logical foundation of the commodity squabble or a rehash of old and mostly
labor DS model. In a sentence, the model forgotten debates. But clearly it is not. The
has a deep logical contradiction. If we accept logical consistency of a theory is important
the model of perfect competition in labor for evaluating its scientific status; that is, the
markets and attendant demand/supply less internally consistent the more ad hoc
diagram, then the employment relationship a theory becomes and the less credibility
disappears. If, instead, we postulate positive it carries.28 The IR claim, therefore, is
TC so the theory can accommodate an that NLE lacks a strong micro foundation,
employment relationship, then labor markets which is exactly the same critique that
are always and everywhere imperfect and the Chicago-type "new classical" economists
demand/supply diagram disappears.26 have vigorously used to attack the scientific
Note, first, that this critique of NLE is far status of the Keynesian model. But equally
more fundamental and damaging than important, a theory's logical consistency
the usual market failure argument, such affects its applicability and credibility for
as monopsony and externalities, since the policy analysis. Here the implications of
former calls into question the very existence the foregoing line of argument are equally
of the competitive model while the latter profound and the stakes higher.
only questions its range of applicability. Conservative free market economists
Further, note that the Commons/Coase and proponents of neoliberalism have since
emphasis on positive TC also provides the early 1980s occupied the theoretical
industrial relations with a theoretical high ground in labor policy debates
foundation for explaining not only the precisely because the competitive DS model
existence of an employment relationship has become the accepted benchmark for
but also features of this relationship, such
as the boundary line between external and 27 Because managers determine the boundaries and
internal labor markets, the structure of internal structure of firms, they likewise influence the
alternative types of firm-level employment reciprocal boundary and structure of external labor
markets. Thus, managers are "market makers," and
systems, and the structure of national-level just as wages are (partially) administered to promote
industrial relations systems (Williamson, firms' interests, so are the labor markets themselves,
W?chter, and Harris 1975; Osterman 1987; albeit constrained by large collective action problems
Marsden 1999; Katz and Darbishire 2000; (thus employers' associations, local personnel groups,
and so on).
Hall and Soskice 2001). Further, while 28 The competitive model can also be evaluated
NLE takes the existence of labor markets
regarding empirical prediction. The E/IR position
as an exogenous "given" (i.e., "assume a (e.g., Thurow 1983; Dunlop 1984) is that it often fails
competitive labor market"), E/IR theory this test, at least without significant amendment. NLE
economists tend to fall back on the law of demand as
an example of the theory's predictive ability but this
26 IR does not deny "supply and demand" or counsel is also weak. First, Becker (1962) demonstrated the
throwing-out the DS diagram. It suggests, on one hand, law of demand is a fact of scarcity and not a unique
that labor DS is more often adjusted through quantity prediction of neoclassical theory (it holds true at a
and quality dimensions than price (akin to the quantity global level even if people act irrationally); second,
adjusting "Keynesian cross" model of aggregate DS) evidence (Doucoliagos and Stanley 2009) indicates a
and that disequilibrium and excess supply are the norm modest increase in the wage is often associated with
in labor markets. On the other, IR recognizes that the no statistically significant decrease in labor demand;
flexible price DS model provides a useful pedagogical and, third, the crucial test of NLE is not the law of
and comparative static device and well explains certain demand but the market-equilibrating role of wages?a
aspects of labor markets. prediction NLE notably shies away from examining.
policy evaluation.29 It is obvious that when transaction cost for orthodox price theory
the competitive model is the basic frame of (the second epigraph). Defenders of Stigle
reference?exemplified by the ubiquitous and NLE, of course, may well point out tha
use of the DS diagram in mainstream competitive price theory can be modified t
analyses of trade unions, minimum incorporate transaction cost, or any other
wages, mandated benefit programs, and deviation/extension discussed here, and
international labor standards?then IR that the modern NLE has anyway moved fa
scholars and other proponents of these beyond the competitive model (Boyer an
measures necessarily face a steep uphill Smith 2001). These claims can be readil
battle. That is, since the debate commences ceded without impairing the fundamental
from what is in effect a "guilty-until-proven proposition of industrial relations?that th
innocent" position, the critics of these competitive DS model and its free trade an
institutions merely have to draw a DS laissez-faire implications are seriously flaw
diagram and point out as their first move the when applied to many aspects of labo
well known negative implications whereas markets and employment relationships
the proponents face the far more difficult If modern NLE indeed no longer ascribe
task of demonstrating why market failures to the competitive model and the labor
or social concerns are so large and serious as DS diagram as core theoretical construct
to merit intervention. Seriously impugning except possibly as broad-brush heurist
the theoretical integrity of the DS model, devices for textbooks or analysis of lon
therefore, is not simply a theoretical nit run trends, then IE and IR have effective
pick; rather, it is the key to creating a more triumphed in a century-long battle, albeit
level playing field in debating labor policy by with little analytical contribution of their
replacing the model of perfect competition own and with success mostly provid
in commodity labor markets as the general by methods and models from the lates
case with models of imperfect competition in generation of non-competitive mainstream
human labor markets (Stiglitz 2004). This economic theorizing. If, on the othe
was the central motive that led Lester, Kerr, hand, NLE proponents continue to believ
Dunlop and other neo-institutional labor that the competitive model, DS diagram
economists to found the Industrial Relations and invisible hand story well explain an
Research Association (IRRA) shortly after predict most labor/employment outcom
WWII (Kaufman 1993). Its chief purpose and provide an accurate and impartia
was to promote a "social science" approach evaluation of institutions and policy
initiatives, then the battle lines remain in
to labor/employment economics, yielding
models closer to imperfect reality and less place. What modern NLE cannot do an
remain transitive is have it both ways.
reflexively opposed to labor protection
measures.
Theory of Firms, Production, and HRM
Viewed in this light, Stigler ofThe
thediscussion so far has centered on
Chicago School?an ardent defender of the
competitive model, critic of labor the theoretical and empirical aspects of th
market
competitive
regulation, and b?te noire of the post-war labor market model in pan
(i). Equally
labor neo-institutionalists?might take as important and the other half
cold comfort just how prescient he thewas
story are similar aspects of the orthod
treatment
concerning the destructive consequence of of the firm and producti
process in panel (ii). The employmen
relationship, after all, is composed o
29 Chicago School "market fundamentalism"
(Freedman 2008) gained a deep hold post-1970 and firms and both price an
markets
partly because of its analytical advances and partly
command methods of resource allocatio
(Simon 1951; Marsden 1999; Kaufma
because neoliberal economies performed relatively
well. This view is certain to be seriously dented,
2004b). This part of the paper provide
however, by the 2008-2010 economic crisis. Policy
further critique of NLE; it also provides a
makers are desperately stanching the deflation that
entr?e
orthodox theory says is the market's route back to fullto my critique of modern IR's othe
employment. academic competitor, human resourc
management. 1972; Lazear 2001), and if workers are

Because the microeconomic core of NLE dissatisfied, they can voice their displeasure
treats labor as a commodity, its theory of the at zero cost by quitting (voting with their
firm and production is an unduly simplistic feet).30
and incomplete abstraction and therefore From an IR perspective, the governance
critically flawed for understanding many of the traditional capitalist firm is likely
aspects of employment relationships. to be neither efficient nor fair and it is
Much the same objection was raised by certainly not democratic (Webb and Webb
early industrial relationists to Frederick 1897; Weiler 1990; Kaufman 2007b).
Taylor's theory of scientific management Similarly, IR argues that governance
(Taylor 1911; Hoxie 1915; Commons systems are not properly evaluated only
1919: 7-16). Here, workers were modeled on the basis of efficiency and, therefore,
much as machines (or stimulus-response other important welfare goals, such as
mechanisms) to be manipulated and fairness in the workplace and opportunities
controlled by managers who, versed in for human development, should also be
the scientifically revealed "one best way" considered (Budd 2004; Budd and Scoville
of managing organizations, could then 2005; Kaufman 2005).
achieve the highest level of enterprise The inefficient and non-democratic
efficiency. This managerial approach also nature of employment in traditional firms
seemed sound in theory but proved to yield is an inevitable consequence of positive
its own harvest of labor problems. Viewed transaction cost, imperfect labor markets,
from this perspective, industrial relations and the legal power given employers to
is meant to be not only a critique and determine unilaterally how they manage
reformulation of orthodox labor market their business. Firm owners are, in effect,
theory but also a critique and reformulation "industrial monarchs" with relatively
of engineering-oriented production and unrestricted rights to hire, fire, and pay as
management theories. In both cases, the they see fit?constrained in an unregulated
fundamental point of departure is the same: labor market only by the workers' imperfect
labor is a human factor and the employment threat of exit (Leiserson 1922; Derber
relationship is a human relation. In 1970). The exit threat is made imperfect
management, this proposition was the by mobility costs, a reserve of unemployed
starting-off point of Elton Mayo and the job seekers in most years, and in many
"human relations" school (a 1940s-1950s cases quickly exhausted financial resources.
branch of IR). Naturally, when firms enjoy the advantage in
In institutional economics and industrial legal and market power they use this power
relations, firms are more than production to design and administer the workforce
functions; they are also governance structures, governance system to promote their
or what Commons (1950) referred to as interests. This often takes the form, as in any
an "industrial government." In NLE, and a political monarchy lacking formal checks
subset of what is called "new institutional and balances, of unilaterally determined
economics" (NIE), the governance structure and administered rules, arbitrary and
idea does not lead to a rationale for sometimes unfair administration of justice,
institutional intervention or management lack of representation and participation
reengineering of the firm's employment in decision-making, and banishment
system. The reason is that competition without right of appeal. Thus, with external
is presumed to force firms to adopt a
governance structure and set of internal 30 Alchian and Demsetz (1972: 777) explained, "[the
HRM practices that are efficient (Williamson firm] has no power of fiat, no authority. . . . Telling
1985; Lazear 2000); competition also an employee to type this letter rather than file that
document is like telling a grocer to sell me this brand
ensures that these rules and practices are
of tuna rather than that brand of bread." Similarly,
fairly implemented and enforced (Dow Lazear (2001: 613) claimed, "Firms hire workers in
1997). Moreover, competitive firms have no a competitive labor market and cannot simply take
power over workers (Alchian and Demsetz advantage of them."
exit impeded and internal voice under First, ILMs cannot be reconciled with a
supplied (partly a public goods form of competitive invisible hand economy since
market failure), the worker's inequality they arise partly from large transaction costs
of power in ELMs is mirrored in a similar (e.g., due to firm-specific human capital),
power imbalance in ILMs (Freeman and which necessarily tilt the economy toward
Medoff 1984; Bowles 2004; Kaufman 2009). imperfect competition. Second, NLE
This tilted system of political governance provides no logically defensible explanation
is unproblematic for commodity inputs for why ILMs yield efficient outcomes. The
but hardly so for human inputs, with deep standard argument is that competitive
ramifications for efficiency, fairness, and forces pressure firms and managers to
elemental human rights (Blainpain 2001; adopt efficient practices, but this argument
Gross and Compa 2009).31 is a logical non sequitur since, as just noted,
The E/IR focus on firms as governance competitive pressures are necessarily
structures leads to another important partially obstructed by transaction costs.
concept: the internal labor market. Early Further, these same transaction costs create
IR theorists, such as Commons (1919) principle-agent problems within firms, and
and Slichter (1920), discussed internal thus managers have both the incentive
employment systems, but the ILM term and slack to sacrifice efficiency?efficiency
and theory was developed later (Kerr 1954; being of most value to shareholders?
Dunlop 1966; Doeringer and Piore 1971). in favor of outcomes that promote their
IE provides a distinct way to think about own interests (e.g., salaries with a large
ILMs that diverges from standard economics monopoly rent). And, third, ILM outcomes
(Jacoby 1990). may be "equilibrium" solutions in the
The methodological imperative of NLE narrow sense of a solution to a constrained
when presented with a new problem or issue maximization problem, but they are not
is to put it into a maximization/equilibrium equilibrium outcomes in the broader sense
framework, derive an efficient solution, and of a demand/supply balance as in external
advance some argument that reconciles it labor markets. A principal reason firms
with the paradigm's invisible hand story.32 set up ILMs is to promote greater work
This method has led to many interesting effort, and to do so they deliberately ration
models and insights. Nonetheless, IE/IR rewards and opportunities for advancement
argues that in important ways this approach through non-price means, in effect creating
to theorizing ILMs is flawed and incomplete. an internal situation of persistent excess
demand (as opposed to the Beckerian
31 Fundamental to NLE is the idea that "all sides equilibrium-based human capital theory of
gain from trade," implying more trade improves on-the-job training).33
efficiency and human welfare up to the optimum
where everything is tradable. Human rights, however,
are restrictions on trade since they create a claim that 33 A concrete illustration is NLE tournament theories
certain "property rights"?such as sale of one's body for of managerial compensation (Neilson 2007). Non
slavery or sex or one's vote in political elections?are equilibrium rationing exists since all the contenders
indivisible with human personhood and cannot (or would take the job (e.g., CEO) at the going wage but
should not) be alienated for trade. It is a fair statement only one gets it. Further, since the size of the prize is
to say, therefore, that enlargement of human/ set by managers, wage rates as claimed in IE are an
labor rights has come only over the indifference administered price (and not just by a little). Likewise,
to-opposition of neoclassical economics. The ILO, the motivation comes from a Veblen-like relative
for example, pushes nations to adopt improved wage comparison. One then wonders, if wages are an
"decent work" labor standards but, as one economist administered price, then how can labor markets be
(Gillingham 2000: 244) observed, "Economic theory self-regulating? Moreover, in a tournament model,
compensation in the current job is not a function of
provides little support for ILO methods."
2 For example, Lazear (2001: 612) wrote, "Adam current performance but past performance, so what
Smith's early notion of the invisible hand makes its happens to the presumed link between marginal
way into personnel economics"; "almost all theories in productivity and pay? The principle-agent problem
personnel economics are consistent with some notion ("separation of ownership and control" in IE) permits
of equilibrium"; and "personnel economics assumes executive "insiders" to reward themselves with
that the worker and the firm are rational maximizing tournament salaries far higher than efficient levels,
agents." leading to soaring CEO pay.
IE/IR has a separate theory about "workers' cooperative" run by a system of

ILMs. It starts with the Commons/Coase top-down national management ("central
distinction regarding alternative modes planning"). Here cooperation displaces
of economic coordination. Production competition and managers using HRM and
in an economy necessitates a division of other tools coordinate the entire division of
labor, and an insight of IE is that it can labor (Kaufman 2003a). The first option is
be organized and coordinated by one a perfectly competitive economy ? la Walras
of two different mechanisms. The first where the ELM = 100%; the second is the
is competition among autonomous actors "economy as one big unitarist factory" ? la
in external markets using demand/ Lenin's macro model of Taylor's scientific
supply and prices; the second is cooperation management (Scoville 2001; Stiglitz 2004)
among interdependent coworkers inside in which the ILM = 100%. In the former,
hierarchical firms organized and fostered by efficiency is maximized through the market
management-constructed human resource and the Invisible Hand; in the latter, the
management practices. The former Visible Hand of management attains the
embeds labor contracting in an individual same result. Brought to light here is the
bargaining relationship; the latter embeds heterodox insight that it is really perfect
it in a group administrative relationship. information, not perfect competition, that
Commons (1934b) captured this dichotomy is strategic to Pareto optimality and the first
by distinguishing between "bargaining" welfare theorem (Potts 2000).
and "managerial" (or "administrative") The implication of the previous analysis
transactions; in the NIE this dichotomy is that the relative role of cooperation,
is called "make vs. buy." Make vs. buy is ILMs, and HRM increases as multi-person
represented in Figure 1 by the ELM in panel firms grow in number and size, hence the
(i) and the firm and associated ILM in panel first task is to explain the determinants
(ii) . of firm size. The answer suggested by
In real-life economies, production is Coase (1937) is that firms grow when the
coordinated by both competition and cost of market exchange becomes more
cooperation and yields a "mixed economy;" expensive; that is, firm size is a positive
for theorizing, however, IE fruitfully points function of TC. A second factor, heavily
out that the possible combinations range discounted by Williamson (1985) and
from "all markets" and "all competition" to others in the NIE community but endorsed
"all organization" and "all cooperation."34 by Commons (Commons 1950; Kaufman
One end of this spectrum is anchored 2003a), is technological in nature; that is,
by the model of perfect decentralization firm size also grows as economies of scale
(described above) where production dis and other internal efficiencies make in
agglomerates to single-person firms and house production cheaper than external
competition through markets performs all purchase.35 Given this, the second task is
coordination of the division of labor. At to identify the important "independent
the other end the economy is a model of variables" that determine the size of
"perfect centralization;" that is, production transaction costs and internal production
agglomerates from a host of individual efficiencies. Williamson (1985) argued that
firms to the highest possible level?i.e., asset specificity (e.g., firm-specific human
one giant national-sized "firm," "team," or capital) is the principal variable; based on
34 Neoclassical economics covers only one-half of the 35 NLE of course recognizes scale economies but
spectrum of economic organizational forms, i.e., from then has to omit them from the competitive model lest
competitive to monopoly markets. It omits (or assigns they disrupt competitive equilibrium. With constant
to comparative economic systems) macro command returns to scale, however, firm size is indeterminate
forms and assigns to management departments the (single person firms and giant firms have equal unit
"micro" version of economic planning?the firm costs) except for ad hoc restrictions, such as limits
(Galbraith 1967). Central planning at Wal-Mart to management coordination (but with perfect
produces an annual "GDP" three times larger than information?). IE provides a determinate account of
Cuba's. firm size.
Commons' work, I expanded this list of five models, including the "commodity"
variables to five: degree of bounded decision (DS) model, the "machine" (scientific
making; degree of complementarity among management) model, and the "goodwill"
objects in agents' utility functions; degree (high commitment) model.37 Another
of complementarity among inputs in firms' influential typology in IR was developed
production functions (e.g., asset specificity) ; by Kerr (1954); also relevant are models
degree of incompleteness/indivisibility in of labor control developed in the labor
property rights; and extent of government process literature (e.g., Edwards 1979). The
mandated restrictions on exchange of ES configuration that has most captured
property rights (the "political economy" attention in recent years is the high
dimension) (see Kaufman 2003b). As the performance (or high involvement) work
latter four variables become larger, TC system (HPWS)?an HRM intensive system
and internal economies grow, firm size that employs a package of employment
increases, and ILMs proliferate; in the limit, practices such as teams, extensive cross
the economy goes to the corner solution of training, broad jobs, performance-based
all ILM36 (see Kaufman (2003a). pay, employee involvement, job security,
ILMs vary, of course, in their breadth, and an egalitarian organizational culture
structure, and formalization, and a to achieve superior productivity and profits
fruitful theory of ILMs must account for (Frost 2008; Boxali and Mackay 2009).
this variation. E/IR does it through the Part of the efficiency gain from ILMs
concept of employment systems (Osterman comes from engendering distinctly human
1987; Begin 1991; Marsden 1999), which aspects oflabor, such as commitment, morale,
is a more firm-level version of Dunlop's and trust. I quoted above a British employer
(1958) concept of an "industrial relations who observed that with a commodity "buy
system." An employment system (ES) is low-sell-high" philosophy of employment
the configuration of structures, policies, "the usual relation between employers
programs, and practices that firms adopt
and employed is one of antagonism." This
to obtain and dismiss, develop, motivate,
viewpoint identifies one crucial defect of
coordinate, and govern the labor input
("human resources") in the manner a commodity/machine model of labor:
the emergence of an adversarial low-trust
that best achieves organizational goals.
"prisoner's dilemma" form of employment
The proposition of industrial relations is
that interactive variation in the external relationship and consequent poor firm
environment of firms, their internal performance (Commons 1919; Fox 1974;
structure and organizational characteristics, Thompson and Newsome 2004). The reason
and their organizational goals and strategies
lead the owners/executives to craft a finite 37 Ironically, today IR is considered a union-centered
field with a somewhat anti-management normative
number of distinct ES configurations or stance (Godard and Delaney 2000). When IR was
"HRM architectures" (Lepak and Snell born in the early 1920s, however, the major reasons
1999). were first, to study and promote the solution of the
The ES idea in the IR field dates back Labor Problem through new models of progressive
to Commons (1919), who distinguished management and employee voice (hence the leading
role of Rockefeller, Jr. and other corporate liberals)
and, second, to provide a strategic dimension to
36 Larger bounded decision-making creates greater personnel management (Kaufman 2001, 2008b). Until
contract incompleteness and higher TC; larger IR and HRM split apart in the 1960s, IR provided
complementarity (interdependency) in utility most of the research authorities on personnel systems
functions means fewer principle-agent problems and and the authors of the best-known personnel texts
greater internal efficiency; larger complementarity (e.g., authors such as Yoder, Heneman, Myers, and
(non-separability) in production functions creates Strauss) as well as provided the external and strategic
scale/team economies and greater internal efficiency; dimension. From 1960-1980, personnel management
greater indivisibility in property rights increases TC; was dominated by "micro" behavioral scientists
and greater legal restraints on exchange raise TC. (principally I-O psychologists) and thus was very
These five factors form a "periodic table of economic inward and individualist-looking. Strategic HRM was
organization" (Kaufman 2003a, Table 1) that explains therefore invented post-1980 in part to perform IR's
basic permutations in economic organization. missing function.
early twentieth-century business people profit contribution (the marginal revenue

became involved in industrial relations, product) of increased cooperation and
accordingly, was to discover and implement fairnessagainsttheextracost;simultaneously,
new labor management practices and they must also examine the cost/benefit
workforce governance structures that would ratio of alternative ways to achieve a given
increase firm performance by fostering level of "cooperation" (e.g., using control
positive employment relations, high trust, techniques, such as time clocks and
and the most desired of all workplace assembly lines, or commitment techniques,
behaviors?cooperation in production (King such as employee participation and good
1918; Rockefeller 1923; Kochan, Katz, and benefits). Out of these calculations emerge
McKersie 1986; Kaufman 2003b, 2008b). a decision about what kind of ES to have.
Cooperation and fairness are moot Some firms (e.g., small retail stores) find
issues in the orthodox competitive that maximum profit comes from a "simple"
model because workers are perceived ES with a largely informal and bare-bones
as commodities, work effort is locked in HRM program and considerable exposure
through complete contracts, and utility to the external labor market; others (e.g.,
functions are individualistic; indeed, poultry processing plants) maximize
introducing cooperation and fairness into profit with a "factory" ES featuring tightly
the model creates an externality problem controlled behavior through finely divided
and competitive ELMs are no longer jobs, assembly line production methods,
efficient. IR takes a different perspective. standardized HRM classifications, and a
In real-world economies, cooperation and hire-and-fire discipline; still others (e.g.,
fairness are important active components to semi-conductor manufacturers) adopt a
higher firm productivity and performance "commitment" ES that maximizes profit by
and do not just automatically occur. Rather, eliciting high work effort, organizational
they have to be created through far-sighted learning, and good citizenship behavior
managers, progressive HRM practices, and through a large measure of job autonomy
supportive institutions (Osterman, Kochan, and self-direction, extensive opportunities
Locke and Piore 2001; Heckscher and Adler for training and advancement, job security,
2006) .38 At the same time, IR also recognizes and mutual-gains pay.
The result is that firms sort into a
that taking the long view in employment
relations and using progressive HRM brings distribution of employment practices and
with it significant fixed and variable costs relations, typically showing an approximate
(e.g., more HR staff, employment security, bell-shaped pattern (Kaufman 2010c).
above-market wages and benefits, employee At the bottom are firms (e.g., "low road"
voice), reduces management discretion, and employers, sweatshops) offering very
circumscribes its short-run power (Barbash unattractive jobs, utilizing little HRM,
1984). Further, the ability of firms to cover exploiting or ill-treating their workers in
these costs depends critically on profitability, various ways, and hence engaging in a
competitive position in the industry, state of highly adversarial (win-lose) employment
relation. In the middle of the distribution
the macro economy (boom or depression),
and so on. are the bulk of firms; they are decent places
Firms must therefore weigh the extra to work, have a partially-developed ILM,
and utilize some degree of formalized and
professional HRM practices, resulting in a
38 Commons (1934b: 6) opened Institutional Economics
on this theme, asserting that "efficiency . . . overcomes
"part conflict-part cooperation" (mixed
scarcity by cooperation. But cooperation does not arise motive) employment relation. Toward
from a presupposed harmony of interests [the Invisible the top of the distribution are the firms
Hand] as the older economists assumed. It arises from
rated "the best places to work" because
the necessity of creating a new harmony of interests
[through human-devised institutions, such as stabilized
they provide secure, challenging, and well
markets and progressive HRM]?or at least order, if paid jobs, well developed ILMs and HRM
harmony is impossible?out of the conflict of interests programs, and a plethora of commitment
among the hoped-for cooperators." practices, thus creating a unitarist (win-win)
employment relation.39 This distribution Conversely, an "externalized" employment

then shifts left and right over the short-run system is regarded as the low-road option
with the business cycle (left during recessions with high turnover, low skill development,
and depressions, right during booms) and and lack of loyalty and commitment
typically to the right over the long-run with (Delery and Doty 1996). Illustrative of
advancements in technology, management the HRM field's "more HRM -> higher
science, laws, and social norms. performance" perspective, Huselid (1995:
NLE has no account of ILMs and their 644) posited that "all else being equal, the
structural, spatial and temporal variation use of high performance work practices
that matches the account provided by IE/ and good internal fit should lead to positive
IR; indeed, in several respects its account is outcomes for all types of firms." Similarly, a
contradictory (as described above). HRM recent meta-analysis of ninety-two empirical
is in a somewhat better position because its HRM-performance studies (Combs, Liu,
theoretical explanation for alternative HRM Hall and Ketchen 2006: 504) specified the
architectures parallels in a number of respects maintained hypothesis as: APerformance/
the ES account in IR and to significant AHRM > 0.42 Not only is the sign on the
degree (usually unacknowledged) is derived HRM variable assumed uniformly positive,
from it.40 When more closely examined, but its quantitative size is also apparently
however, the HRM literature, like NLE, also quite large given the conclusion of Becker
suffers from serious mis-specification, albeit and Huselid (2006: 907) that, "the effect of
of an opposite nature. a one standard deviation change [increase]
In NLE, "more markets" and "more in the HR system is 10-20% of a firm's
competition" are predicted to lead to higher market value."
economic performance (the first welfare Closer consideration suggests, however,
theorem), leading to the Walrasian corner that the HRM-firm performance hypothesis
solution of 100% ELM. Conversely, ILMs are is highly problematic. If it were correct,
portrayed as introducing "distortions" and firms should expand their HRM and ILM
"wedges" in a competitive market (Neilson systems because they add to profits. Why,
2007). In the HRM literature, management then, haven't they already done this and
theorists posit just the opposite. That is, based thus driven the return of additional HRM
on the "resource based view of the firm" (see to zero? Further, if extrapolated to its
Allen and Wright 2007), the maintained logical conclusion, the "more HRM ?
hypothesis is that "more HRM" and "more more profit" hypothesis implies that firms
ILM" lead to higher firm performance?a should expand in size and gradually move
proposition that might be called HRM's the economy toward the Taylorist/Leninist
"first fundamental performance theorem."41
workforce that competitors cannot easily purchase
39 The terms "best practice" and "high performance" or copy. This is an "internal" source of competitive
are often applied in the HRM literature to this top advantage and one that promotes management
echelon of "HRM intensive" firms. Doing so attaches centric models.
an unwarranted normative evaluation to this model; 42 HRM theorists also introduce contingent factors
furthermore, the only metric in a capitalist economy that modify what Huselid (1995) called the "main
for measuring "best practice" and "high performance" effect" of HRM on performance (see Delery and Doty
in firms is "highest return on capital," which could 1996; Boxali and Purcell 2008); the relationship thus
equally well be the sweatshop model. may not be linear but it is almost always presumed to
40 IR's founding role and contribution to HRM was remain positive. Just as NLE "tries to have its cake and
very large through the 1950s (Kaufman 2001; 2008b). eat it too" by devising models that "explain" all market
The term "human resource management" is traceable and non-market outcomes and at the same time
to IR scholar E. Wight Bakke's The Human Resource claim the economy operates according to (largely)
Function (1958); the term "human resource" as applied competitive invisible hand standards, so too does
to labor goes back to Commons (1919: 129). HRM, but in an opposite manner. On one hand, HRM
41 The resource-based view of the firm (RBV) posits (Delery and Doty 1996) promulgates models that
that external sources of competitive advantage (e.g., contain both "low HRM" and "high HRM" ESs (thus
scale economies, proprietary technology) have largely covering all bases); however, the literature posits that
eroded and the remaining best option is to use HRM only one model?the advanced HRM model?is in fact
practices to develop a highly skilled/committed highest performing.
corner solution of 100% ILM and 0% ELM. HRM = 100% .

43 Not only is no such tendency observable The two upward-sloping lines, NLE
but it also directly opposes the maintained and HRM, graph the "fundamental
hypothesis of NLE (?Performance/AELM theorems" of each field; that is, the line
>0).44 NLE depicts the "more competition (ELM)
The Value-Added of Industrial Relations ?? higher-performance" theorem of labor
economics and the line HRM depicts
The two central components of the the "more cooperation (ILM) ?? higher
employment relationship are labor markets performance" theorem of human resource
and firms; since labor economics studies management. The former predicts that
the former and HRM studies the latter, why economic performance is maximized at
have a field of industrial relations?45 This is point at the Walrasian corner solution of
not a rhetorical question since the field has perfect competition and all ELM; the latter
suffered a substantial long-term decline in predicts that performance is maximized
many countries and now inhabits a small at point A at the Taylor/Lenin corner
and marginalized position in the United solution of perfect cooperation (or "perfect
States (Jarley, Chandler, and Faulk 2001). unitarism") and all ILM. For a given state of
With the help of the theoretical framework technology and set of factor endowments,
presented here, along with Figure 2, I points A and are identical (i.e., they
provide an answer. are on the same production possibility
Figure 2 illustrates how economic frontier); the only difference is in one
performance (the vertical axes) of the case an omniscient auctioneer perfectly
"employment sector" (the sphere occupied coordinates the outcome through markets
by labor markets and HRM systems) varies and in the other an omniscient manager/
with different combinations of markets and planner does the same (both with zero
management. The horizontal axis measures TC) through command and administration
strength of labor market competition (Stiglitz 2004).46
(Competition) fromleftto right (0% ?>100%) Obviously, both fundamental theorems
with the right-hand end point representing cannot be true at the same time. The power
the economy of perfect decentralization of the E/IR theory presented here is that it
and ELM =100%; moving from right to left, demonstrates neither is true given one?and
it measures strength of intrafirm manager only one?precondition: that the model of
and employee cooperation (Cooperation), the human agent has some degree of bounded
with the left-hand end point representing decision-making (Kaufman 2003a, Table 1).
the perfect centralization economy of ILM/ Given this condition, the economy features
positive TC, an employment relationship,
43 This conclusion is not explicitly stated by HRMand incomplete labor contracts.
researchers. Strauss (1968) noted that the OB theory Positive TC leads to a "mixed" or
HRM is built on is "optimistic, even Utopian" (p. 266) "industrial relations" economy featuring
and I am simply developing the logic to its fullest.
44 Theory in HRM (like NLE) is partly crafted to serve
a normative purpose; in this case, to raise the long-time 4b The intersection point of the two lines has no
marginal position and low status of the HRM field. behavioral or predictive significance as presented
For example, Wright, Dunford, and Snell (2001: 72) here; however, the diagram points the way to a formal
observed, "Growing acceptance of internal resources as model in which each firm chooses employment
sources of competitive advantage brought legitimacy to practices (e.g., method/form of compensation)
HR's assertion that people are strategically important based on a Coasean comparison of the marginal
to firm success." performance gain/resource cost of shifting from
45 This matter is made increasingly urgent since both external to internal coordination (and vice versa). For
fields now claim jurisdiction over the employment expositional simplicity, the NLE and HRM intercepts
relationship. Neilson (2007: 1) claimed, for example, are located at zero. Also note in the diagram that IR has
that "personnel economics is the study of the no functional role to play at either corner solution of
employment relationship"; similarly, Ferris et al. (1995:
"perfect markets" and "perfect organization" because
1) defined human resource management as "the no labor problems exist?consistent in the latter case
science and practice that deals with the nature of the with the Marxist claim that IR is redundant in a fully
employment relationship." socialist economy.
THE THEORETICAL FOUNDATION OF INDUSTRIAL RELATIONS
Figure 2. The Optimal Mix of ELMs and ILMs in NLE, HRM, and IR
Perf. Perf.
0% Competitio
100% ? Coope
both ELMs and

point C, ILM
the e
competition
and and co
ILMs, co
adversarial and
and unitar
adversar
relations. With bounde
relationships
(i.e., limited brains,
point emo
will var
imperfectindustries,
informatio n
response
uncertainty), the to
econo
of resource endowment
workers' char
reduces the maximum
etc.), variati
economic of economic
performance. M
however, it described
also createsear
p
in
fundamentally utility
changesa
between performance
and other su
of influence
ELMs/ILMs. Theth
i
line marked
and"IR" show
economie
performanceproduction,
is g
maximize
Rockefeller" interior solu
configuration
both a micro and macro level. numerous and sometimes serious labor
Four additional insights deserve brief problems. The employment relationship,
mention. First, it is evident why both NLE in particular, is problem-prone because
and HRM regard IR as an unattractive, its two central coordinating modes?
obstructive, and performance-sapping prices in markets and management
activity. At the level of core theory, HRM command in organizations?and its two
and NLE (particularly the latter) look central coordinating methods?individual
at the employment sphere through
the rose-colored glasses of, respectively
competition and group cooperation?
conflict and thus threaten to undermine
"perfect unitarism" and "perfect markets."
Accordingly, these models of a perfect/ each other. In particular, if market
Utopian world predict a performance level competition is unchecked and unregulated,
of Points A and when the best that IR it will undercut cooperation in production
can promise with its mix of imperfect and (a form of negative externality); hence,
sometimes protectionist institutions is Point a central task of every IR system is to put
C. Industrial relations thus looks like a appropriate and efficiency-enhancing
distinct drag on performance and something constraints on markets. In effect, IR
to be supported and excited about only for "constructs cooperation" through
social justice or other normative/political appropriately designed and operated
grounds. But, if HRM or NLE actually got institutions?including measures for
their wish and the economy was indeed "all
labor protection and employee voice?
ILM" or "all ELM," performance with real in order to escape a prisoner's dilemma
people would not be the predicted maximum
"low performance/high conflict" outcome
at Point A or but Point D or E as given by (Miller 1991).
the vertical intercepts of the IR function (as
explained below). The distances A-D and Put another way, as the force of
B-E thus represent the theory-reality gap in competition in external labor markets
HRM and NLE.47 becomes stronger (as in "financial
The second insight concerns why capitalism") wage/employment instability
point C on the IR function is the highest increases and short-run cost-cutting
performing combination of ELM and ILM pressure grows, both of which undercut
and, correlatively, why maximum ILM/ firm viability and cooperation inside
ELM are inferior. IR posits a real world of firms. Workers, for example, withdraw
imperfect people; thus capitalism and all cooperation and erect protective barriers
its institutions are imperfect. Two of these (including unions) in direct proportion to
imperfect institutions are the employer perceived employment insecurity (Perlman
employee relationship and wage method of 1928; Polanyi 1944); likewise, firms see
compensation (payment per unit of time)?
fewer reasons to foster cooperation and
the methods in capitalism that acquire and
cut back expensive fixed-cost investments
allocate labor for production across the
in HRM and positive employer-employee
market/firm interface. Being imperfect,
these institutions inevitably generate relations (e.g., stable wages, secure jobs,
health insurance, pensions). Conversely, as
the force of cooperation becomes stronger
47 Indicative of the size of the theory-reality gap in
NLE is Rees's (1993) statement: "I began to find myself
in internal labor markets, workers become
in a series of roles in which I participated in setting or more immobile and firms face less pressure
controlling wages and salaries.In none of those to minimize cost, both of which undercut
roles did I find the theory I had been teaching for so
long to be the slightest help. The factors involved in market efficiency and competition.
setting wages .. . seemed to be very different than those Workers, for example, become complacent
specified in the neoclassical theory" (pp. 243-44). In and develop an entitlement mentality;
HRM Rynes Giluk, and Brown (2007: 987) observed,
"the gap between science and practice is so persistent
likewise, managers have less motivation to
and pervasive that some have despaired of its ever hold down labor cost, pursue innovation,
being narrowed." Also see Dunlop (1977). and adopt flexible employment practices
(Bardwickl991).48 this intermediate zone.51 A corollary and

E/IR predict, therefore, that all ILM highly revisionist and heterodox conclusion
or all ELM lead not to points A or for economic theory also flows from IR's
(predicted high performance) but to fundamental theorem. It implies that the
points D or E (actual low performance) NLE first fundamental welfare theorem is
because of a contradictory mismatch incorrect in any economy in which people
between cooperation and competition. are less than omniscient beings ("gods") and
An improvement in performance may be that with positive TC the optimal efficiency
obtained by moving away from these corner level occurs in an economy of imperfect
solutions and to the IR interior solution at competition. In an economy of imperfect
Point C with a mix of ELM and ILM and competition, in turn, some degree of labor
cooperation and competition.49 protection for workers is both consistent
The third insight is that IR has its own with and sanctioned by "good economics."
"fundamental theorem," which posits The fourth insight provides another
the following: highest economic performance perspective on the "value-added" question
and human welfare are reached with a mix of IR. Figure 2 indicates that the core
of markets and hierarchical organizations', a parts of NLE and HRM are fundamentally
balance of competition and cooperation; and mis-specified because the former is far
a juxtaposition of individual initiative and too market-centric and therefore unduly
profit-making on the one hand and social neglects the role of organizations and
responsibility and government regulation on the management whereas HRM suffers from
other (also see Budd 2004).50 Importantly, the opposite problem. The contribution
people in their role as employees are also of IR is to serve as the connective and
most likely to maximize their well being in integrative bridge between the two;
in effect, NLE and HRM are "partial
48 All employment-related practices and outcomes equilibrium" theories of labor markets and
are potential "dependent variables" for IR quantitative internal labor management systems; IR
analysis; what makes this statistical research provides the "general equilibrium" theory
distinctively "IR," according to the model presented that demonstrates how the interaction
here, are five things. The first is that the regression
equation be derived from, or at least interpretable as, a between the market and production
reduced form solution of the competition (ELM) and systems mutually determine employment
cooperation (ILM) functions facing each employer outcomes.52 Viewed from a GE angle,
(implying independent variables are included that
reflect the multidisciplinary role of both market and
organizational/social considerations); the second 51 NLE assumes competitive markets are a "plus"
is that behavioral relations exhibit contingency, for workers relative to nonunion imperfect markets
complementarity, and heterogeneity across alternative since they offer higher wages, greater protection
employment systems; the third is that behavioral against substandard conditions, and more choices and
relations are consistent with or incorporate effects mobility. From an E/IR (and HRM) perspective, job
of bounded rationality, human agency, social satisfaction is likely higher in imperfect labor markets
interdependency, incomplete contracts and market/ in which firms have ILMs with secure jobs, attractive
organizational failures; the fourth is that recognition wages and benefits, and internal voice. In addition,
is given to the long-run endogenous relationship these firms can offer a better package because ILMs
between market and organizational structure variables; and cooperation create a larger pie to split. Thus, a
and, the fifth is that the performance maximizing level testable hypothesis is whether workers' utility (job
of an employment practice for firms should occur at an satisfaction) is higher around Point C or rightward
intermediate level somewhere between ELM and ILM with more ELM.
= 100% (an interior solution). 52 By this standard, Freeman and Medoff (1984) and
49 The IR function is also a "competition-cooperation Card and Krueger (1995) are "one-half industrial
frontier." relations. Both identify one or more labor problems
50 The spirit of this theorem is contained in the (e.g., sub-optimal firm efficiency; below competitive
earlier-cited quotation from Henry Carter Adams wages) and both construct a theory to explain them.
(1887); it is also enunciated by Commons (1935: However, in the former, the human dimension of
223), who pointed out that "the problem is to give to labor plays a strategic role only in the ILM (the role
profit its due place but to restrain its excesses without of voice) but not in the ELM (a competitive market);
destroying its initiative." IE and Keynesian economics in the latter, the human role plays a strategic role
are both "pro-capitalism" in the sense they seek to save in generating monopsony in the ELM (employee
the system from being destroyed by its excesses. turnover) but plays no similar role in the ILM and
one implication is that institutional labor about the employment relationship that are
economics has two separate parts: the first missing or incorrectly specified in NLE and
is "labor market" economics (current-day HRM, including a statement of the IR field's
NLE), and the second is "management fundamental theorem and identification of
economics" (current day HRM, called by its two central dependent variables. Third,
Commons "administrative economics"). this framework has demonstrated why a
The value-added of IR comes from the certain degree of imperfect competition
simultaneous consideration of these two and labor protection policies are good
disparate and partially incommensurate for society, the economy, and workers.
components. For IR to prosper, however, Fourth, it has revealed as a core principle
this must translate into concrete and of industrial relations the interdependence
insight-producing theorizing that spans and tension that exists between the
the market/organizational interface; it structure and performance of, respectively,
cannot be achieved simply by adding some external labor markets and the internal
"market" and "management" chapters in a production systems of firms. And, fifth, this
labor textbook or including some NLE and theoretical framework has demonstrated
HRM papers on a conference program. IR the explanatory power of institutional
cannot evade "Samuelson's Dictum:" "it
economics and, in particular, its ability
takes a theory to kill a theory; facts [and to yield a bona fide theory of industrial
criticism] can only dent the theorist's hide" relations. These contributions help lay to
(Samuelson 1951: 323).53 rest claims such as Becker's (1971: viii) that
Conclusion "there is only one kind of economic theory"
(p. viii); Smith and Boyer's (2001: 201) that
The theoretical framework presented IE is merely "descriptive economics"; and
here makes five contributions to the
Hyman's (2004: 265) that "it is futile to seek
industrial relations field. First it has
a theory of industrial relations."
yielded many useful points of critique Above and beyond these particular
regarding the theoretical shortcomings contributions, this paper has helped to
and normative biases of IR's two principal identify what is the unique and value
competitors, modern labor economics and added employment relations approach that
human resource management. Second, distinguishes the IR field from others. In
the framework has generated numerous particular, this approach embodies:
insightful ideas, concepts and hypotheses
a subject domain that covers the totality
production system. Both mostly utilize NLE method? of the employment relationship. That is,
the place (analytical model-building) where to most IR encompasses all aspects of work, the
economists NLE's comparative advantage is largest but structure, management and governance of
which is gained only by making important relations
the employment relationship, and the quality
(e.g., the worker's utility function, the firm's labor
demand curve) continuous and complete when more of work life, as well as all the behaviors,
realistic but less tractable assumptions yield different outcomes, and problems that arise from
and stronger sub-optimal implications. employment;
53 Blanchflower and Oswald (1994: 368) argued a corpus of theory based on a human/
that industries and nations exhibit a "wage curve"
(the wage rate and unemployment rate are inversely social conception of labor and the human
related), and that this is opposite the prediction of agent; the strategic interdependence
DS theory. As they explained on the last page of their that exists between imperfect markets and
book, "The way to convince theorists of the value of
competition and imperfect organizations and
data is, presumably, to show them image-breaking facts"
(p. 368). The E/IR field has 90 years of experience cooperation', the structuring/guiding role
suggesting this is probably a vain hope, implying the of institutional forces emanating from the
wage curve needs a theory. Candidates are "imperfect" state, society, history, and employer and
bargaining and efficiency wage models (cited by these employee organizations; and a systems
authors); following E/IR, another place to look is the
production system (e.g., successful entrepreneurship perspective that organizes employment
creates prosperous industries, employment growth, relationships into discrete models/
and higher wages). patterns;
a welfare function that includes not and policy.54 Barbash (1989: 46), quoting
only consumers' interests and economic Commons, made exactly this point: "The
efficiency but also workers' interests labor problem begins with 'the peculiar
and distinctly social/humanistic goals, nature of labor as a commodity.' Unlike
such as procedural and distributive other commodities, labor has a 'soul.'"
justice; protection of basic human The fact that labor "has a soul" transforms
rights (e.g., freedom from child labor, labor markets and management systems
discrimination, involuntary servitude; and both work fundamentally differently
freedom of association); provision of than mechanical theories suggest. Thus,
elemental democratic procedures at the motto of industrial relations, as
work (e.g., participation, representation, Commons framed it, is this (1919: 17): "The
due process, voice); and opportunities commodity theory of labor ... is not false,
for human self-development and self it is incomplete"; six decades later, Dunlop
actualization at work; (1984: 23) restated it thus: "The competitive
a method that welcomes abstraction, model, or economic considerations alone,
formalization, and mathematics, but are not an adequate tool unassisted by . .
insists on empincally informed/congruent . industrial relations tools and concepts.
p?ors at strategic places; recognition The failure of IR has been its inability to
that significant parts of the employment better fill this gap with more of these "tools
world violate margin?list conditions of and concepts." The contribution I have
divisibility, completeness, continuity tried to make here is to point a way forward.
and stationarity; and a holistic/integrative
approach that draws from and endeavors to 54 Two universities dominated American labor
meld theories, concepts and techniques economics in the twentieth century?Wisconsin in
the first half and Chicago in the last half. Lucas (in
from all the disciplines that touch on the Klamer 1984: 36) stated, regarding Chicago, "[i]n the
employment relationship. tradition of Friedman and Lewis, it is hard to think
about labor markets without supply and demand." The
Wisconsin approach partially supplants and modifies
Everyone in industrial relations demand/supply and at the same time gives greater
recognizes that labor inevitably possesses emphasis to other social and institutional factors by
the characteristics of a commodity since it is substituting the term "employment relationship" for
the term "labor market" in the Lucas quote. Given
valuable and is traded in markets; their point that a high-performance employment relationship
of departure is to insist that labor is also and competitive labor market partially conflict, the
distinctively and uniquely human and this Wisconsin recommendation is to opt for the former
on the grounds that a high-performance employment
fact is of strategic importance for theorizing relationship is of greater strategic importance and
about the employment relationship and utility to achieving the prosperity and happiness of a
formulating and implementing practice nation's people than is a competitive labor market.
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The Theoretical Foundation of Industrial Relations and Its Implications

Article in Industrial and Labor Relations Review · October 2010

Nonunion Representation View project

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writing and research, its roots extend far

(1998), Budd (2004), M?ller-Jentsch (2004) Conceptions of Industrial Relations

competitive labor market (Kniesner and therefore leads to the conclusion...[that]

employment; leads to efficient utilization (i) depicts a perfectly competitive labor

Figure 1. The Industrial Relations System

(i) competitive labor market (?i) firm (iii) industrial relations3

in recessions employees (rented labor) are Positive TC and incomplete contracts,

management. 1972; Lazear 2001), and if workers are

IE/IR has a separate theory about "workers' cooperative" run by a system of

early twentieth-century business people profit contribution (the marginal revenue

employment relation.39 This distribution Conversely, an "externalized" employment

corner solution of 100% ILM and 0% ELM. HRM = 100% .

both ELMs and

(Bardwickl991).48 this intermediate zone.51 A corollary and

Ackers, Peter, and Adrian Wilkinson. 2003. Press.

New York: Wiley, pp. 92-110. Princeton University Press.

in a Progressive Era. Cambridge: Harvard University Management. New York: Harper.

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