Workplace research. Serious academic research on large-establishment employee behavior can be roughly dated from the celebrated 1924-32 Hawthorne experiments. Conducted at the Hawthorne plant of the Western Electric Company, the study was originally designed to be technical in nature: to determine the relation between conditions of work and the incidence of fatigue and monotony among workers. As the study progressed, however, the technical factors – rest pauses, lighting, work scheduling, and so on – fared poorly as explanations for productivity variation. Much more important were worker attitudes and the role of informal work groups. The central issue changed from the design of the work environment to inducing employees’ acceptance of the firm’s objectives. (For elaboration, see Annable (1984).)
The impact of the Hawthorne experiments, others like it, and ongoing management learning-by-doing was substantial. Practitioner understanding of labor productivity shifted from a simple to a more complex view of worker conduct. A critical branch of the growing research, using a neoclassical economic perspective to expand and, where needed, modify early interpretations of the Hawthorne results, was soon forthcoming from a loose collection of American and British scholars, including Clark Kerr, John Dunlop, Frederick Harbison, Charles Myers, Richard Lester, Lloyd Reynolds, Arthur Ross, Albert Rees, George Schultz, Henry Phelps Brown, and J.A.C. Brown. Writing largely from the 1930s into the1990s, they drew descriptions of employee on-the-job behavior (OJB) mostly from experience with war labor boards, government adventures into wage controls, and as arbitrators and researchers with broad access to the internal workings of large firms. They carefully investigated employee preferences and produced a remarkably detailed picture of what occurs in the specialized, large-establishment workplace.
Reference standards. Many interrelated insights were forthcoming from the labor economists’ on-site observations and analysis, including market balkanization, internal labor “markets”, bounded mobility, the purpose and consequences of long-tenured employment, the repeal of the law of the single wage (i.e., large, highly specialized establishments paying more than small, less complex firms for market-equivalent labor), the ubiquitous practice of wage imitation and pattern setting, spontaneous and intentional industry labor-cost cartelization, the modeling of labor-union objectives, and the nature and organization of collective worker action. Of all the contributions of Kerr, Dunlop, Harbison, Myers, et al., macroeconomic theory would most benefit from incorporating their finding that positional concerns, especially interpersonal and intertemporal wage comparisons, play a crucial role in employee satisfaction.
John Dunlop (1957) emphasized the power and ubiquity of intra-firm reference standards in the determination of labor compensation, naming them “wage clusters”. Arthur Ross (1948), focusing on external and intertemporal standards in the context of collective behavior, coined the more colorful “orbits of coercive comparison”. The extensive literature documenting worker preferences and behavior identifies the interpersonal and intertemporal comparison of wages as centrally influencing employee utility.
The hands-on labor economists understood they were not discovering something new about human nature. It was then and continues to be a fundamental tenet of psychology that standards of comparison are central in the determination of individual satisfaction. Behavioral economists notably rediscovered and emphasized the role of reference standards in determining satisfaction from economic exchange, providing guidance for the proper specification of axiomatic preferences. See Camerer, et al. (2004). See also Frank (1985, 2005) and Solnick and Hemenway (2005) for other modern examples of economic applications of positional concerns and their effect on utility specifications. Deserving special mention here is Akerlof’s (2007) forceful argument for the wider use of reference standards to motivate rational behavior throughout many branches of macroeconomic theory.
The 20th century, hands-on labor economists were close to providing an early solution to what has become a persistent, debilitating class of labor-related deficiencies in contemporary macro theory. They uncovered the facts but ultimately failed to construct a coherent theory of rational workplace behavior. As a result, they worked increasingly outside the economic mainstream. Kerr (1988, p.21) recognized the difficulty: “Perhaps the most serious problem … was that the revisionists dealt bit by bit with pieces of the puzzle and never assembled them into an integrated statement, let alone into a model or a consistent theory; and it takes a new theory to replace or change an orthodox theory.” Kerr’s assessment, which he strongly reiterated in private correspondence, provides inspiration for coherent workplace-equilibrium theory. The unequal division of labor is recognized. The important labor economists, by carefully documenting what actually goes on inside the firm, had already done most of the heavy lifting.
Especially notable is Kerr’s (1954) fundamental idea of distinct labor-management systems contingent on firm size. Work here has continued sporadically, typically contributing to the “internal labor-market” literature. An important contribution, which integrated much of the hands-on labor economists’ descriptive analysis, is Doeringer and Piore (1971). They mapped the rules and tradeoffs used to organize large-establishment workplaces, emphasizing the roles of closed job ladders and workplace ports of entry. The macro consequences of separate venues of rational labor-pricing decision rules and constraints were first modeled as a macro optimization problem by Annable (1980, 1984, 1988); see also Bulow and Summers (1986) and Saint-Paul (1996). For a useful summary of developments in the general approach inspired by Kerr and his colleagues, see Kaufman (1994).
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