It is widely felt that technology has an important, if not fully determina- tive, influence on the employment relationship. I agree, but take exception with the usual view in several respects. First, for the reasons given in the preceding chapter, indivisibilities (of the usual kinds) are neither necessary nor sufficient for market contracting to be supplanted by internal organi- zation. Second, I contend that nonseparabilities at most explain small-group organization. Third, and most important, I argue that the leading reason why an internal labor market supplants spot contracting is because of small- numbers exchange relations. This last turns on task idiosyncracies as these appear in a moving equilibrium context.
1. Conventional Treatments
The implications for economic organization of indivisibilities of both physical capital and informational types were examined in the discussion of peer groups. As indicated there, it is entirely feasible, as a technological matter, for physical assets and informational services for which indivis- ibilities are significant to be monopoly owned and sold for hire. What impedes such ownership and exchange arrangements are the transactional difficulties which attend small-numbers trades (see Section 1.1 of Chapter 3). I raise the issue at this time merely to restate my position that conventional arguments which rely on indivisibilities to explain the employment relation do not, without more, go through. Recourse to transactional considerations is ultimately necessary.
More relevant to our purposes here is the allegation that technological nonseparabilities constitute the principal reason for the employment relation, whence hierarchy, to appear (Alchian and Demsetz, 1972). But for such technological conditions, a “normal sales relationship” would purportedly govern the terms under which labor would be made available for hire.
Again, the discussion of the preceding chapter ( see Chapter 3, Section 3.1) applies. As indicated there, it is the joining of nonseparability with opportunism and a condition of information impactedness, rather than nonseparability by itself, that occasions the substitution of hierarchy for market exchange. Absent opportunism, free riding problems, of which shirking is one, would never appear. Absent information impactedness, opportunistic inclinations could be checked by paying the appropriate discriminating wage.
Regarded in transactional terms, technological nonseparability represents a case where information impactedness is particularly severe; but I emphasize that this is merely a matter of degree. Lesser degrees of information impactedness plainly exist that do not have these same techno- logical origins but which can and often do occasion the supplanting of markets by hierarchies.31 (As urged in the preceding chapter, most tasks appear to be separable in a buffer inventory sense — often as between indi- vidual workers and almost invariably between small groups of workers — yet hierarchy commonly appears.) Our assessment of the technological nonseparability argument thus comes down to this: Such conditions are merely symptomatic of a set of underlying transactional factors which, both here and elsewhere, ultimately explain the organization of economic activity as between markets and hierarchies.
2. Small Numbers and Task Idiosyncracies
It is generally agreed that small-numbers exchange conditions are attended by serious market exchange problems (see the discussion of the lighthouse example in Section 2.2 of Chapter 2). The frequency of and manner in which small-numbers labor exchange conditions develop, how- ever, is less widely appreciated. It is the thesis of this chapter that task idiosyncracies are common, that these give rise to small-numbers exchange conditions, and that market contracting is supplanted by an employment relation principally for this reason.
Doeringer and Piore describe idiosyncratic tasks in the following way ( 1971, pp. 15-16):
Almost every job involves some specific skills. Even the simplest custodial tasks are facilitated by familiarity with the physical environment specific to the workplace in which they are being performed. The apparently routine operation of standard machines can be importantly aided by familiarity with the particular piece of operating equipment. … In some cases workers are able to anticipate trouble and diagnose its source by subtle changes in the sound or smell of the equipment. Moreover, performance in some production or managerial jobs involves a team element, and a critical skill is the ability to operate effectively with the given members of the team. This ability is dependent upon the interaction skills of the personalities of the members, and the individual’s work “skills” are specific in the sense that skills necessary to work on one team are never quite the same as those required on another.
More generally, task idiosyncracies can arise in at least four ways: (1) equipment idiosyncracies, due to incompletely standardized, albeit common, equipment, the unique characteristics of which become known through experience: (2) process idiosyncracies, which are fashioned or “adopted” by the worker and his associates in specific operating contexts: (3) informal team accommodations, attributable to mutual adaptation among parties engaged in recurrent contact but which are upset, to the possible detriment of group performance, when the membership is altered: and (4) communication idiosyncracies with respect to information channels and codes that are of value only within the firm. Because “technology is [partly] unwritten and that part of the specificity derives from improvements which the work force itself introduces, workers are in a position to perfect their monopoly over the knowledge of the technology should there be an incentive to do so” (Doeringer and Piore, 1971, p. 84).
Training for idiosyncratic jobs ordinarily takes place in an on-the-job context. Classroom training is unsuitable both because the unique attributes associated with particular operations, machines, the work group, and, more generally, the atmosphere of the workplace may be impossible to duplicate in the classroom, and because job incumbents, who are in possession of the requisite skills and knowledge with which the new recruit or candidate must become familiar, may be unable to describe, demonstrate, or otherwise impart this information except in an operational context (Doeringer and Piore, 1971, p. 20). Teaching-by-doing thus facilitates the learning-by-doing process. Where such uniqueness and teaching attributes are at all important, specific exposure in the workplace at some stage becomes essential. Outsiders who lack specific experience can thus achieve parity with insiders only by being hired and incurring the necessary startup costs.
The success of on-the-job training is plainly conditional on the infor- mation disclosure attitudes of incumbent employees. Both individually and as a group, incumbents are in possession of a valuable resource (knowledge) and can be expected to fully and candidly reveal it only in exchange for value. The way the employment relation is structured turns out to be important in this connection. The danger is that incumbent employees will hoard information to their personal advantage and engage in a series of bilateral monopolistic exchanges with the management — to the detriment of both the firm and other employees as well.
An additional feature of these tasks not described above but nevertheless important to an understanding of the contractual problems associated with the employment relation is that the activity in question is subject to periodic disturbance by environmental changes. Shifts in demand due to changes in the prices of complements or substitutes or to changes in consumer incomes or tastes occur; relative factor price changes appear; and technological changes of both product design and production technique types take place. Successive adaptations to changes of each of these kinds is typically needed if efficient production performance is to be realized. In addition, life cycle changes in the work force occur which occasion turnover, upgrading, and continuous training. The tasks in question are thus to be regarded in moving equilibrium terms. Put differently, they are not tasks for which a once-for-all adaptation by workers is sufficient, thereafter to remain unchanged.
The production tasks that are of transactional interest in this chapter are ones that are either themselves rather complex or are embedded in a complex set of technological and organizational circumstances. Furthermore, successive adaptations are required to realize efficiency in the face of changing internal and environmental events. A nontrivial degree of uncertainty/complexity may thus be said to characterize the tasks. Training for such tasks occurs in an on-the-job context because of the impossibility, or great cost, of disclosing job nuances in a classroom situation. The relevant job details simply cannot be identified, accurately described, and effectively communicated in a classroom context on account of information processing limitations of both originators (teachers) and receivers (trainees). Sometimes, indeed, the requisite language will not even exist. The pairing of bounded rationality with an uncertainty/complexity condition thus gives rise to the job-specific training situation. Teaching-bv-doing and learning-by-doing both economize on bounded rationality in these idiosyncratic job circumstances.
Specialized skills and knowledge accrue to individuals and small groups as a result of their specific training and experience. But while such skills and information accrue naturally, they can be disclosed strategically — in an incomplete or distorted fashion — if the affected parties should choose to. Whether this will obtain depends on the structure of the bargaining relationship. Where job incumbents acquire nontrivial first-mover advantages over outsiders, and, in addition, are opportunistically inclined, what was once a large-numbers bidding situation, at the time original job assignments were made, is converted into a small-numbers bargaining situation if adaptations to unplanned (and perhaps unforeseeable) internal and market changes are subsequently proposed. The reasons for and consequences of this shift from a large-numbers bargaining relationship at the outset to bilateral bargaining subsequently are further developed below.
Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.