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The pluralist industrial relations paradigm analyzes work and the employment relationship from a theoretical perspective rooted in an inherent conflict of interest between employers and employees interacting in imperfect labor markets.
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Prepared for: Theoretical Perspectives on Work and the Employment Relationship Industrial Relations Research Association, 2004 Research Volume Bruce E. Kaufman (editor)
WHY A BALANCE IS BEST: THE PLURALIST INDUSTRIAL RELATIONS PARADIGM OF BALANCING COMPETING INTERESTS John W. Budd University of Minnesota Rafael Gomez London School of Economics Noah M. Meltz University of Toronto Version Date: February 20, 2004
The pluralist industrial relations paradigm analyzes work and the employment relationship from a theoretical perspective rooted in an inherent conflict of interest between employers and employees interacting in imperfect labor markets. The employment relationship is viewed as a bargaining problem between stakeholders with competing interests; employment outcomes depend on the varied elements of the environment that determine each stakeholder’s bargaining power.^1 Modeling the employment relationship as a bargaining problem raises central questions about the distribution of resources and the rules governing interactions between employers and employees. As a result, corporations, labor unions, public policies, and dispute resolution procedures are important institutions (broadly-defined) and research subjects in pluralist industrial relations. Moreover, individual employees, managers, owners, and union leaders are viewed as human agents rather than purely economic, rational agents. Behavioral elements of individual decision-making are therefore important—cognitive limitations, emotions, social or cultural norms and values, habits, intrinsic as well as extrinsic motivators, and concern for others, fairness, and justice. The pluralist industrial relations school of thought traces back to Sidney and Beatrice Webb in England, John R. Commons (the father of U.S. industrial relations), and members of the Wisconsin school of institutional labor economists in the early twentieth century. Its views were enshrined in the New Deal U.S. labor policies of the 1930s Great Depression era and cemented in practice by a generation of postwar scholar-arbitrators. This school of thought continues today as the mainstream industrial relations paradigm in North America.^2 With the postwar rise to dominance of the neoclassical paradigm in economics, however, industrial relations has been frequently criticized for allegedly being limited to atheoretical fact-gathering, and therefore not a
efficient—as would be the case under a neo-classical paradigm—but because they strike a balance between the competing interests of different individuals, stakeholders, and institutio ns. Moreover, since individuals are viewed analytically as human rather than economic agents, industrial relations scholarship dating back to the early twentieth century questions not only how employees behave but also what standards of treatment they deserve as human beings in a democratic society. With imperfect labor markets, the presence of powerful corporations or desperate competition among workers can result in substandard employment conditions. As such, the analytical foundations of pluralist industrial relations also create a strong normative agenda—creating a balance between the competing interests in the employment relationship. Individual, organizational, and social outcomes beyond efficiency or productivity are therefore important dimensions of industrial relations scholarship. While launched by the inequality of the early twentieth century employment relationship, these analytical tenets and normative issues continue to be very relevant for the employment relationship a century later. The Central Interests of the Employment Relationship The starting point for scholarship on the employment relationship is the objectives of this relationship (Budd 2004). In neoclassical economics, these objectives reduce to allocative efficiency. The invisible hand of competitive markets will guide self- interested individuals towards efficient outcomes in which aggregate welfare is maximized and scarce resources are used to their most productive ends. The key objective is therefore efficiency: companies want efficient production processes to maximize profits, consumers want efficient companies to maximize value, and employees want efficient employment opportunities to maximize their earnings and leisure. With rational individuals and competitive markets, there is no divergence between public and private interests—no groups have a power advantage over others, market
prices (including wages) fully reflect social value. Workers participate in the determination of their working conditions through entry into desirable jobs and out of undesirable ones (Troy 1999); outcomes are viewed as equitable or fair because each commodity—labor included—is rewarded with its value (McClelland 1990). In contrast, a hallmark of the industrial relations perspective is that workers are not simply commodities (Kaufman 1993; Webb and Webb 1897). Workers are human beings with aspirations, feelings, emotions, needs, and rights; work provides more than extrinsic, monetary rewards by fulfilling important psychological and social needs. Moreover, if markets are not competitive, then prices do not accurately reflect social value (Slichter 1924). As such, a realistic analysis of welfare requires explicit consideration of the nature of work and workers’ lives. The industrial relations paradigm therefore explicitly considers interests of the employment relationship that are not limited to (but include) efficiency. The nature of work and workers’ lives were graphically apparent to Commons and other early institutionalists through the labor problem of the early twentieth century—excessive working hours, low wages, dangerous working conditions, and widespread worker insecurity from business cycles, seasonal labor demand, accidents or disease, old age, and discriminatory or arbitrary firings (Kaufman 1993, 1997). According to government surveys around 1910, 85 percent of wage-earners had a standard workweek of more than 54 hours, and among iron and steel industry workers, over 40 percent worked more than 72 hours per week and about 20 percent worked more than 84 hours per week (Lauck and Sydenstricker 1917). The long hours were often for low pay in dangerous and unhealthy conditions. A March 1911 fire at the Triangle Shirtwaist Company in New York City killed 146 workers because of inadequate and locked fire exits. According to one estimate, industrial accidents resulted in 25,000 deaths, 25,
of “(1) having a say in the work, (2), due process in the handling of complaints, (3) fair treatment at work, (4) meaningful work, (5) fair compensation and secure employment.” Both Barbash and Meltz further emphasize the multifaceted relationship between efficiency and equity—the need for equity stems from the need to protect human labor from the abuses of a pure efficiency regime as well as from the need to treat human labor fairly in order to achieve superior efficiency. In other words, sometimes efficiency and equity clash; at other times they are complements. As such, the central feature of the industrial relations paradigm is balancing the distinct, yet mutually-dependent, interests of employers and employees: efficiency and equity (Meltz 1989). Budd (2004) extends this thinking by distinguishing between equity and voice. Equity is fair employment standards for both material outcomes (such as wages and safety) and personal treatment (especially nondiscrimination). Voice is the ability to have meaningful input into decisions, including both industrial democracy and autonomy or control. The basis for the equity-voice distinction is the view that equity is instrumental and can be provided unilaterally by employers or government regulations while voice is intrinsic and can only be achieved by worker participation. As such, while equity and voice might often be mutually supporting, they can also be competing objectives of the employment relationship—industrywide collective bargaining, for example, might be very effective at establishing equitable minimum wage standards, but at the expense of rank and file participation in decision- making. In Budd’s (2004) analysis, therefore, the central interests of the employment relationship are efficiency, equity, and voice.^4
The Theory of Competing Interests The fundamental theoretical assumptions of pluralist industrial relations are that 1) there is a conflict of interest in the employment relationship, 2) labor markets are not perfectly competitive, and 3) employees are human beings, not simply commodities or factors of production. These assumptions yield a theoretical perspective of the employment relationship significantly distinct from the other views of the employment relationship—neoclassical economics, human resource management, and critical industrial relations. Neoclassical economics is built around rational agents in competitive markets.^5 Conflict is not an important construct—buyers and sellers of labor or other commodities simply search for transactions that maximize their utility. Work is undertaken only to earn money to afford leisure and consumption. Competitive markets simultaneously maximize aggregate welfare and place checks on abuse (Friedman and Friedman 1980; Troy 1999). In contrast, pluralist industrial relations, critical industrial relations, and human resource management reject the deterministic importance of competitive markets and rational economic agents, but differ from each other on their view of employment relationship conflict (Budd 2004; Hills 1995; Kaufman 1993; Kochan 1998). Human resource management embraces a unitarist view of conflict in which employment policies and practices can align the interests of employees and employers (Fox 1974; Lewin 2001). At the other end of the spectrum, employment relations conflict in the critical or Marxist industrial relations paradigm is rooted in unequal power relations between classes throughout society (Giles and Murray 1997; Hyman 1975). In between these two views is the pluralist industrial relations school’s perspective that the employment relationship is characterized by a variety of competing interests—higher wages versus lower labor costs, employment security versus flexibility, safe work pace versus high output—as well
employers and employees thereby promoting the optimal operation of markets rather than interfering with it (as predicted by theories rooted in competitive markets). Common research questions in pluralist industrial relations therefore include how labor markets work (Kaufman
(Freeman and Rogers 1999), or fulfillment of self-actualization (Kaufman 1993; Webb and Webb 1897). Decisions by workers and managers are not always made on a purely rational basis. Aggression and frustration might lead to strikes (Wheeler 1985), coercive comparisons might affect wage outcomes (Ross 1948), and complexity might create internal labor markets at odds with competitive forces (Doeringer and Piore 1971; Lester 1988). The recent growth in quasi- rational and experimental economics offers mainstream economic theory a way of modeling human actions that brings economic thought closer to the longstanding pluralist paradigm, but such modeling continues to be a hallmark of pluralist rather than neoclassical research on the employment research. 7 In sum, the building blocks of the pluralist industrial relations paradigm yield a theory of competing interests: the employment relationship is modeled as a bargaining problem between stakeholders with competing and shared interests, such as cost discipline and PEEP (Barbash 1984), efficiency and equity (Meltz 1989) or efficiency, equity, and voice (Budd 2004). The competing interests are not reconciled solely by market forces—which are often imperfect and often favor employers—but also by complex individual and collective interactions shaped by institutions, behavioral decision- making factors, customs, and values.^8 At the same time, the shared interests bind the stakeholders together and the focal point of the pluralist industrial relations paradigm is resolving conflicts of interest to produce mutual gain (Barbash 1984; Budd 2004; Commons 1934; Kochan 1998; Meltz 1989).^9 This theoretical perspective of the employment relationship provides testable hypotheses regarding the determinants of employment outcomes. The pluralist industrial relations conception of the employment relationship as a mixed- motive interaction between human agents in imperfect labor markets is a legitimate theory of the
workers as human rather than economic agents—and as people rather than commodities— normative questions are unavoidable: how should people be treated (Webb and Webb 1897)? What rights do they have in a democratic society (Derber 1970)? Who does the economic system serve (Slichter 1948)? As argued by Richard Ely (1900, 72-73, emphases in original), “Among the most serious mistakes is to consider man simply as a producer of goods, one ‘by whom’ are all things of interest to [economics], while the infinitely greater truth is that man is the one ‘for whom’ they are all produced” and that “in making of man the best possible manufacturing machine they make him a very poor sort of a man.” As a result, it is common for industrial relations to assert that human beings are entitled to decent working and living conditions as well as democratic rights of participation in decision- making (Budd 2004)—the view that “the labor market is to be tempered by more humane considerations” than “a purely Darwinian view of unrestrained labor market competition” (Meltz 1989, 111).^10 A true industrial democracy requires the protection of all interests in the employment relationship—owners, workers, consumers, and the public (Webb and Webb 1897). As people, workers are entitled to standards of work that respect inherent human dignity, such as a living wage (Bowie 1999; Ryan 1912) and autonomy or control (Bowie 1999; Hodson 2001). As people and as citizens in a democratic society, wo rkers are entitled to have a voice in decisions that affect their work lives (Adams 1995; Budd 2004; Gross 1999; Lauck 1926). At the same time, the pluralist industrial relations paradigm fully respects capitalism and the business owners’ need to make a profit.^11 As such, striking a balance between the competing objectives of employers and employees is warranted. The need for balancing competing interests can also be grounded in a human rights perspective (Budd 2004). Conflicts between efficiency, equity, and voice are conflicts between
property rights and labor rights. Property rights have traditionally been viewed as the foundation of individual freedom and liberty, but in the employment relationship, property rights serve economic efficiency as much as liberty. Property rights in this context are therefore not inviolable, and the evolution of human rights thought has elevated second generation economic and social rights to have equal status with first generation civil and political rights. As such, the conflict between property rights and labor rights represents a conflict between competing human rights. As these human rights are equal, they must be balanced. The pluralist industrial relations paradigm focuses on balancing property rights with labor rights in order to balance efficiency, equity, and voice (Budd 2004). The arguments for balance discussed above are normative arguments for how the employment relationship should work. But the industrial relations emphasis on balance should not be dismissed as a solely normative desire. The theoretical foundations of industrial relations also yield the key testable prediction that the employment relationship works best when competing interests are balanced. Note carefully that this is not a normative statement about how the employment relationship ought to work, but is an analytical claim about how the employment relationship actually works. In other words, pluralist theory implies that a lack of balance in the employment system not only creates suboptimal outcomes, but that unbalanced outcomes are ultimately unstable and short- lived. These analytical claims are illustrated in Figure 1. Panel A summarizes the traditional neoclassical economics framework: perfect competition and individual freedoms create a balance between employers and employees (and all other market participants) which yield optimal economic outcomes that maximize efficiency and utility. As such, a critical building block of neoclassical theory is competitive markets. In contrast, Panel B sketches the pluralist industrial
In other words, apart from being good in a moral sense, equity and voice are also instrumentally important because their absence are primary sources of industrial tension. In pluralist industrial relations, the presence of imperfect markets and human (not purely economic) agents means that equity and voice are needed to generate perceptio ns of fairness amongst workers, which is required if workers are to voluntarily accept the conditions of the modern employment relationship. This occurs at every level of the employment relationship and also extends to the economy as a whole.^13 Individuals born without initial endowments of wealth and lacking access to the decision- making process involved in generating these outcomes, are more likely to perceive the system as unfair. If there is no serious effort on the part of government, management, or labor to address these imbalances, then why should the disenfranchised respect the system in the first place? These questions are not new; indeed the role of voice and fairness expectations in justifying wealth distribution has some interesting historical and biblical antecedents.^14 Pluralist industrial relations applies these analytical propositions to the micro and macro dimensions of the employment relationship (see below) and hypothesizes that the employment system is most effective when competing interests are balanced. Finally, consider the philosophical underpinning of the balancing paradigm, which literally extends back to the very foundations of Western thought. Here we see how both normative and positive implications of the balancing paradigm are int ertwined. The “Golden Mean”—originally a mathematical relation—was argued by Aristotle to extend to the proper governance and conduct of societal and individual action. According to Aristotle, moderation between two extremes is the key to acting virtuously, and to fulfilling the needs of a community. Aristotelian justice therefore includes a central industrial relations belief: might does not make right (Solomon 1992). Note carefully that these views include both the normative and positive
implications of balance discussed above. Normatively, it is argued that individuals should act virtuously and should not favor might over right. Positively, it is argued that communities operate most effectively when individuals are virtuous and when might does not make right. As in the balancing of competing interests between human agents interacting in imperfect markets, the true virtue is a “golden mean” between extremes—normatively and analytically. Balancing Competing Interests: The Micro Level Many of the early institutionalists disputed not the analytical value of the neoclassical economics paradigm, but rather its incomplete treatment of the employment relationship and the economy, and its narrowness when applied to public policy (Yonay 1998). We share a similar perspective on other schools of thought on the employment relationship—Marxist analyses reveal the importance of embedded power relations and the human resource management school contributes to our understanding of the determinants of organizational performance. By including aspects of markets, conflict, and human agents from the other schools, the pluralist industrial relations paradigm provides a unique theoretical framework for understanding the employment relationship through the linkages between efficienc y, equity, and voice which are absent in competing paradigms. This section describes two important examples at the micro level where the balancing paradigm adds analytical value—collective bargaining and high performance work practices.^15 Collective Bargaining: Market Impediment or Mediating Institution? In the standard neoclassical economics model, competition among firms, workers, consumers, investors, and suppliers under ideal conditions yields optimal prices, output, wages, and consumption. The interests of the employment relationship are fulfilled by competition— allocative efficiency is achieved, equity is fulfilled because all factors of production are rewarded
predictable wage increases in the postwar period. The resulting system of job control unionism consists of very detailed and legalistic union contracts, enforced by a quasi-judicial grievance procedure, that tie employee rights to very narrowly-defined jobs while removing labor from decision- making (Katz 1985; Kochan, Katz, and McKersie 1986). In the neoclassical economics paradigm, such work rules are viewed as distortionary restraints on the employment relationship that stem from the monopoly power of unions and harm productivity and profits. In the industrial relations paradigm, work rules, seniority rights, and grievance arbitration are seen as balancing competing interests by bringing justice into the workplace while also largely maintaining management’s right to manage and serving the mass manufacturing need to stability and predictability. Unions might therefore improve economic as well as social outcomes. Or consider the frequently-researched union wage premium. It is well-documented that wages for unionized workers in the United States are approximately 15 percent higher than similar nonunion workers (Lewis 1986). In neoclassical economics, this union wage premium is arguably the classic demonstration of the distortionary power of labor unions. In contrast, the National Labor Relations Act was enacted in 1935 explicitly to help unions raise wages because of the pluralist industrial relations model in which market imperfections create imbalances and suboptimal economic and social outcomes (Kaufman 1996). This contrast starkly reveals the differing analytical views of these two schools of thought on the employment relationship. Similarly, while debates in economics and human resource management over the role of unions in the 21st century workplace focus narrowly on efficiency concerns, pluralist industrial relations scholars cast a wider net in analyzing the effects of new forms of unionism not only on organizational performance, but also on workers and society (Budd 2004; Heckscher 1988; Turner, Katz, and Hurd 2000). As such, the industrial relations paradigm produces a very
different set of analytical predictions about labor unions and collective bargaining than other paradigms. Similar differences are apparent in the research on high-performance work practices. High-Performance Work Practices: Win-Win or Work-Work? By many accounts, the employment relationship, especially in North America, has been transformed since the 1970s (Appelbaum and Batt 1994; Cappelli 1999; Heckscher 1988; Kochan, Katz, and McKersie 1986; Osterman et al. 2001; Piore and Sabel 1984). Competitive pressures have caused a breakdown in traditional forms of collective bargaining, a decline in union power, and the adoption of new practices and polices to manage labor. Some of these policies focus on slashing labor costs through concessions, decertifying unions, and adding more contingent workers; other practices attempt to enhance organizational performance through high- performance work practices such as flexible work arrangements, performance-based pay, employee participation, work teams, and job security. Arguably the most important research stream that has resulted from this sharp increase in the interest in high-performance work practices is analyzing the effects of these practices. By implication, this line of inquiry also addresses the more fundamental question of why these practices exist. The uniqueness and significance of the industrial relations paradigm is illustrated by the increased understanding of these questions that can result from an integration of the analytical tenets of the balancing paradigm. 16 In the neoclassical economics and human resource management paradigms, questions of the effects of high-performance work practices largely reduce to efficiency: Are firms that adopt such practices more profitable than those that do not? Do work teams produce higher quality output than individuals in narrowly-defined jobs? Are workers who are involved in production decisions more loyal and productive than those who are not? The literature often concludes that
