Advances in the Economic Analysis of Participatory and Labor-Managed Firms: Volume 12

The series Advances in the Economic Analysis of Participatory and Labor-Managed Firms was launched over 25 years ago by Derek C. Jones and Jan Svejnar. Since then, Advances has been a leading forum for high-quality original theoretical and empirical research in the broad area of participatory and labor-managed organizations. Although general and specialized journals publish work in this field, many do so only occasionally. Advances has been the only annual periodical that presents some of the best papers in the field in a single volume.

Continuing in the tradition of earlier volumes in the series, the 12th edition of Advances in the Economic Analysis of Participatory and Labor-Managed Firms interprets the themes of the series quite broadly and, consequently, the following pages traverse a highly variegated terrain. I have marked this expansive landscape with four guideposts around which our discussion is organized, namely sections on job design and organizational performance (Part I); compensation, worker attitudes, and productivity (Part II); worker cooperatives and nonprofit organizations (Part III); and free trade and the ecological effects of alternative socio-economic systems (Part IV). The following essays exhibit a diversity of topics, data sources, modes of analysis, geographic contexts, and philosophies. The contributors are similarly diverse, hailing from seven countries, with representation both inside and outside of academia. It is my hope that, in addition to contributing to our knowledge of the broad subject at hand, the articles contained in this volume will inspire productive future work on the important questions addressed herein.

The purpose of this chapter is to offer new justification for multiskilling practices such as job rotation and extensive training for broad skills and explain why there appear to exist complementarity between multiskilling and the delegation of decision authority to workers.

By developing a new model of incomplete contracting where workers make noncontractable investments in multiple skills, we obtain the key insight that worker investments in firm-specific human capital become strategic substitutes when their skills overlap each other.

The “skill substitution effect” analyzed in this chapter induces the following three major results, unless specialization offers a substantial technological advantage: (1) workers' incentives to invest in firm-specific human capital tend to be stronger; (2) the optimal level of delegation is typically higher; and (3) firms' ex post profits tend to be higher with multiskilling than with specialization.

The novel implication of the chapter is that multiskilling may be desirable from a firm's viewpoint even if there are no technological or informational task complementarities among the combined skills, which have been believed to be primary reasons for multiskilling in prior works.

A substantial literature examines the effect of high-performance workplace practices on various outcomes for firms and workers. However, little attention has been paid to the effect of broad job design on product quality or financial performance. And with rare exception, the empirical literature on outcomes from high-performance work practices treats those practices as exogenously determined. This chapter seeks to address these two shortcomings in the existing literature. Using a nationally representative cross-section of British employers in 2004, we measure the effect of multiskilling on establishment-level labor productivity, product quality, and financial performance. We find that treating multiskilling as an endogenous choice of employers in empirical models of organizational performance has significant implications for the results. In particular, the estimated (positive) effect of multiskilling on labor productivity vanishes when we treat multiskilling as an endogenous choice of employers. Treating multiskilling as an endogenous choice changes its estimated effect on product quality from zero to positive and substantially increases the estimated magnitude of its (positive) effect on financial performance.

I use the 1998–2004 Workplace Employee Relations Survey (WERS) panel data set of British establishments to analyze the effect of team production (either autonomous/self-managed or closely managed) on financial performance. The pattern of evidence is consistent with a positive association between team production in an establishment's largest occupational group and the likelihood of improved financial performance for that establishment. However, the results are mixed concerning whether the positive effects of teams are larger for autonomous teams versus nonautonomous teams.

Institutional rules and economies of scale can create incentives for firms to make inframarginal decisions when offering fringe benefits. We examine how such incentives might affect a firm's offer of health insurance.

We develop and estimate an empirical model of the firm's offer of health insurance that includes incentives created by rules and economies of scale. We quantify the behavioral manifestations from rules and costs as recruiting difficulty in areas outside those in which compensation is set and the percentage of high-skilled jobs in the firm and use the California Health and Employment Surveys (CHES) to estimate the model.

We show a 10–13 percentage point increase in the probability of a firm offering workers health insurance in jobs outside of those in which compensation is being set, if the recruiting difficulty lies in mid- or high-skilled positions. This increase is about twice the size of the increase associated with recruiting difficulty in the position in which compensation is negotiated.

A failure to control for the influence of inframarginal decision making when estimating the wage-insurance tradeoff helps produce wrong-signed estimates.

By bringing institutional rules and economies of scale into the framework of a firm's offer of fringe benefits, we help move the focus of the fringe benefit-wage tradeoff away from the individual level.

In this chapter, we provide the first empirical study of the effects of differing types of majority ownership, including employee ownership, on executive compensation. By investigating the case of Estonia, we also extend the range of geographical coverage of studies of the determinants of executive compensations to the case of Estonia.

Although previous research finds that the type of ownership affects CEO pay, our new panel data, and the exceptional configurations of ownership that prevailed in Estonia during early transition, enable us to construct unusual measures of majority ownership.

Findings indicate that an economically significant determinant of CEO pay is ownership both in state versus privatized firms and in different types of private firms. In firms with majority ownership by employees, pay is about 15% less than in state-owned firms, other things equal. CEO pay is also positively related to size and seldom related to performance although size elasticities are much smaller than those estimated in other studies, mainly for advanced western countries.

Findings provide more general support than previously for the varying importance of principal–agency relationships across firm types and the views that privatization and employee ownership have imposed strong discipline on the level of CEO compensation.

Using the NBER Shared Capitalism Database comprised of over 40,000 employee surveys from 14 firms, we investigate worker attitudes toward employee ownership, profit sharing, and variable pay. Specifically, our study uses detailed survey questions on preferences over profit sharing, forms of employee ownership like company stock and stock option ownership, as well as preferences over variable pay in general, to explore how preferences for these different types of output-contingent pay vary with worker risk aversion, residual control, and views of co-workers and management. Our key results show that, on average, workers want at least a part of their compensation to be performance-related, with stronger preferences for output-contingent pay schemes among workers who have lower levels of risk aversion, greater residual control over the work process, and greater trust of co-workers and management.

This chapter explores the relationship between performance-related pay (PRP) and productivity in the Italian economy. It contributes to the literature in two main ways. First, it provides estimates for the PRP – productivity relationship based on a nationally representative sample of manufacturing and services companies (other studies on Italy are more limited in scope, since they focus on specific sectors). Second, it addresses the question of firms' heterogeneity, an aspect so far not examined in relation to PRP in Italy. We use a two-step approach. In the first step, we estimate a classical production function using longitudinal data on the balance sheet variables of Italian firms over the period 2002–2005. In the second step, we regress the distribution of the firm-specific fixed effects on dummy variables for the presence of PRP and unions, as well as on control variables for the year 2005. The most important results are that the adoption of PRP is positively and uniformly correlated with productivity throughout the whole distribution and that the presence of trade unions has a positive association with firms' unobserved productivity across all quantiles, being significantly higher for the best performing firms (those placed at the highest quantile of the productivity distribution).

Italian worker cooperatives display a high proportion of profits reinvested into asset locks: there is some literature investigating their function, but little has been said about workers' attitude toward them. In this chapter we therefore investigate what workers' motivations are regarding reinvesting profits into asset locks. We propose to interpret them as a common good and we inquire which factors may increase workers' willingness to contribute to it. We test two arguments that are provided in the literature on collective action: the effect of having a long-time perspective within the cooperative and the effect of displaying “collective” motivations and preferences other than self-regarding. We perform this test by means of a survey among workers of cooperatives affiliated to Legacoop Ravenna in Italy.

We identify a positive effect of both factors, although with some distinction. At a first glance, we find a positive correlation between a longer time horizon and a greater concern for profit reinvestment; when looking closer at the data, we nevertheless see a more complex relationship as two other aspects come into the game: the employment insurance role of worker cooperatives and the “feeling of belonging” that links workers to the firm. The positive effect of this second aspect on the willingness to reinvest into locked assets is strong, although it only appears among worker-members. Moreover, its effect seem to become greater as workers' involvement in decision making increases.

The aim of this chapter is to ascertain the degree to which a training policy developed through corporate training centers is recognized as a source of competitive advantage for attracting, developing, and retaining valuable staff. The fieldwork is based on a survey of Human Resource (HR) managers from 66 cooperatives of the Spanish Mondragon cooperative group. The empirical test carried out confirms that Mondragon's training policy, backed up by its corporate training centers, is perceived by HR managers as a tool that provides advantages to attract, develop, and retain valuable human resources. The results also suggest that those advantages are more moderate than has been cited in classic literature on Mondragon. The results of this study can be helpful for the growing number of companies choosing to create and reinforce corporate training centers. The link between training policy and the perceived ability to attract and retain valuable employees showed in this case can also be helpful for other companies that, as Mondragon, face limitations in wage policy. This chapter contributes to the literature on the educational fabric of Mondragon adding updated empirical evidence and incorporating the point of view of HR managers of the group's cooperatives. With respect to the contribution of this chapter to the literature on training policy, the chapter's findings, in particular those regarding the effect of training on worker attraction and retention, add empirical evidence to the few studies on the subject.

Literature on nontraditional firms has focused on behavioral differences with for-profit firms. Less attention has been given to the variations in behavior among nontraditional firms. This chapter examines differences across three types of Uruguayan nonprofit health care organizations.

This chapter draws on a unique dataset of Uruguayan health care organizations during the period 1982–1990, as well as interviews with doctors working in the three types of nonprofits during spring 2010. We use a simple OLS regression to identify differences in average behavior, and differences in reaction to a regulatory change.

The chapter shows that structure of stake holding and governance significantly affect behavior, even where many behaviors are highly regulated.

These findings highlight the importance of specifying governance structure when predicting behavior of nontraditional firms. Empirical tests of behavioral differences between traditional and nontraditional firms will be more meaningful if the governance structure of nontraditional firms is common and specified. A limitation of our study is our inability to control for the timing of degeneration of producer cooperatives. This would be one element of governance structure to consider in future data collection.

These findings highlight the need to avoid drawing broad policy conclusions from the behavior of a specific subset of nontraditional firms.

This chapter highlights the importance of carefully specifying stakeholder and governance structure when predicting behavior of nontraditional firms. It is of interest to anyone using a sample of nontraditional firms to test general hypotheses about their behavior.

There is a fundamental difference between the impacts of two alternative systems of economic organization: capitalist or fully democratic. The latter, based on democratic decisions based on personal rights, including in the area of enterprise management and organization will, in many contexts, protect the natural environment because the decision makers live in and are permanently exposed to that environment. By contrast, the capitalist firm and the system based on it and on profit maximization (where the often “atomized” owners have never even seen their firm) will tend to avoid where possible all environmental-related costs, and thus hurt the natural and human environment. Thus public regulation of capitalist firms will be far more called for than in the case of economic and full democracy. In the chapter that follows I make an attempt to substantiate these claims.

Jaroslav Vanek argues that the ecological degradation of the planet is more severe in a capitalist system than it would be in a fully democratic one. At the heart of the ecological preservation question is how the classic public goods problem can be solved, and we are skeptical that a fully democratic system could solve this problem any better than the capitalist system, particularly given that consumer demand for environmental protection appears to be income elastic and that the capitalist system can be expected to generate higher levels of societal wealth than the democratic system. While we disagree with Vanek's conclusion and with many of its underlying arguments, we agree that the ecological well-being of the planet is of great importance, that it is expected that economic activity will have ecological implications, and, therefore, that it is well worth comparing the expected ecological impacts of alternative socio-economic systems.

I welcome any dialogue on the present subject because it clarifies and makes us reflect on such a significant issue of our times. Especially I would like to stress the subject of the appendix on destructive trade. We live in a world impregnated with the notion of free trade optimality, but in many contexts the notion is incorrect, and such mistakes can be serious for the advanced economies including the United States. For the theoretical mind of economists, let me stress that the theory of optimal comparative advantage includes the conditions of full employment and factor price equalization [or near-equalization], but with wage differentials of the order of one thousand percent the optimality is most unlikely. The unemployment and the financial crisis of the great recession are the most dramatic and convincing verification – as well as substantiation of my arguments concerning global ecology.