Understanding the employment relation: Concluding Remarks

Organizational failure and systems considerations appear repeatedly in the foregoing assessment of the properties of alternative contracting modes in relation to idiosyncratic tasks. These highlights are briefly recapitulated here, after which some qualifications are offered.

1. Application of the Organizational Failures Framework 

But for uncertainty, adaptive sequential decision-making problems would never be posed. Accordingly, the occasion to devise flexible contracts would never develop.

But for bounded rationality, complex contingent claims contracts could be written, and there would be no occasion to investigate other forms of contracting.

But for opportunism, individuals would honestly disclose all informa- tion pertinent to the bargain and would self-enforce promises to forego the monopoly powers which accrue to incumbents. Alternatively, were it not for task idiosyncracies, information impactedness conditions would never develop and outsiders would be on a parity with incumbents in bidding for jobs. In either event, the distortions associated with monopoly advantage would vanish and spot market contracting would suffice. In circumstances, however, where incumbents realize idiosyncratic knowledge and skill advantages over otherwise qualified outsiders, small- numbers conditions evolve. If, additionally, incumbents behave opportunistically, spot market contracting is hazardous.

2. The Collective Agreement as a Systems Solution 

Frequently more important than the question of whether workers accept authority in the limited sense of “do this” or “do that,” at the appointed time and place and in some highly prescribed manner, is their attitude toward cooperation. We have accordingly distinguished between perfunctory and consummate cooperation and hâve argued that collective organization, in the form of an internal labor market, is well-suited to promote consummate cooperation.

In this resPect and Others, internal labor markets serve to promote e îciency. Job evaluation attaches wages to jobs, rather than to individuals, thereby foreclosing individual bargaining. The resulting wage structure reflects objective long-term job values rather than current bargaining exigencies. Internal promotion ladders encourage a positive worker attitude toward on- the-job training and enable the firm to reward cooperative behavior. A grievance procedure, with impartial arbitration as the usual mal step, allows the firm and the workers to deal with continually changing conditions in a relatively nonlitigious manner. Contract revision and renewal take place in an atmosphere of mutual restraint in which the parties are committed to continuing accommodation. Unionization commonly facilitates the orderly achievement of these results, though it is not strictly necessary, especially in small organizations.

3. Qualifications 

It should be reemphasized that the argument applies strictly to pro- duction tasks of the idiosyncratic kind. Also, as noted in Section 4.3, above, the employment relation and collective agreements are subject to hazards. Only affirmative aspects are dealt with in this chapter.

Finally, there is the organization form issue, to wit, merely to transfer a transaction from the market to the firm does not, by itself, assure that market frictions will be mitigated. To be efficacious, the parties to the transaction must experience different incentives. Although this may partly come about as a result of a deeper appreciation for mutual interdependence, more than this is usually necessary. What internal organization offers is access to a distinctive inventory of incentive and control techniques and a related atmosphere within which to operate. For the benefits to be realized requires that the potential be consciously tapped.

Some of the disabilities of internal organization are examined in Chapter 7, while the organization form issue is more fully developed in Chapters 8 and 10.

Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.

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