The "Compulsive Shift" to Institutional Concerns in Recent Labor Economics

By Kinnear, Douglas | Journal of Economic Issues, March 1999 | Go to article overview

The "Compulsive Shift" to Institutional Concerns in Recent Labor Economics


Kinnear, Douglas, Journal of Economic Issues


I foresee that within the next ten or twenty years the now fashionable highly abstract analysis of conventional economists will lose out. Although its logical basis is weak . . . its decline will mainly be an outcome of the tremendous changes that are falling upon us with crushing weight. A more institutional approach will win ground, simply because it is needed to deal in an effective way with the practical and political problems that now tower over us and threaten to overwhelm us.

- Gunnar Myrdal, 1977

While it may be debated whether Myrdal's prediction has come true in other areas of the discipline, it has been partially realized in labor economics. This paper discusses the evolving employment relation of the post-World War II era and the recent changes in that relation - such as the breakdown of the postwar accord that is demonstrated by attacks on organized labor and the rise of contingent employment - that have posed difficulties for mainstream labor analysis. The responses to this paradigmatic crisis, which have resulted in a resurgence of institutionalist methods, will then be discussed.

The Methods and Focus of Institutionalist Economics

Institutionalist methods and focus played an important role in the development of labor economics. The term institutionalist methods describes an inductive, empirical, holistic approach that treats labor as fundamentally distinct from other resources, i.e., one that rejects the methodological individualism and a priori reasoning of neoclassicism. The term institutionalists' focus describes a concentration on the institutional structure of labor markets, on the role of power and collective action in shaping the employment relation, and on a consideration of laborers, capitalists, and other participants as members of social groups, rather than as abstract individual actors. The practice of these methods and foci of analyses are exemplified by the work of John R. Commons [1924, 1934], Robert Hoxie [1931], and other early practitioners of labor economics.

The Post-World War II Accord and the Rise of Formalism in Labor Economics

The institutionalist approach, which often focuses closely on the demand (employers') side of labor markets, was the norm in this century until the late 1940s, when changes in labor law and the employment relation contributed to changes in the practice of labor economics.

Following World War II, what many observers have described as a "social contract" or "social accord" in industrial relations emerged [Harrison and Bluestone 1988, 51; Bluestone and Harrison 1982, 133-139; Bowles et al. 1983, 70-75]. This unwritten accord constituted a new pattern of relations between management and labor, most typically in manufacturing industries. Many factors combined to create this pattern, including passage of the Wagner Act in 1935 (which gave workers the right to organize and collectively bargain); the Taft-Hartley Act in 1947 (which established unfair labor practices and procedures to settle disputes that threaten public safety); and the War Labor Board's encouragement of collective bargaining through - among other actions - its promotion of union security, formal grievance procedures, and uniform wage structures [Derber 1970, 383-388, 393; Kochan et al. 1994, 31-32]. These and other factors combined to establish a relatively stable era in labor-management relations. The major elements of this industrial relations framework included management's recognition of labor's right to organize and collectively bargain, the tying of wage increases to productivity improvements, and bureaucratic rules for grievances and advancement, with the vesting of ultimate managerial control with corporate managers [Kochan et al. 1994, 33-35; Bowles et al. 1983, 73-75].

This relatively peaceful era in labor-management relations was facilitated by several factors including strong economic growth, the United States' dominant position in global trade, rapid technological advance, and high aggregate demand in the United States. …

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