Introduction

Robinson Crusoe Economy: Worker = Consumer

Later, division of labour and capital, starting point for
modern economics and Marxism.
Key concepts: the market, principal-agent problem,
scientific management.
Marx on alienation of labour, private property as the
beginning.
More on PA problem: caused by information asymmetry.
Profit = Output Input: = pQ we - Profit, p Price of
product, Q Quantity produced, w Wages, e Effort
Wage is marginal product of labour.
Labour Markets
Supply and Demand curves. Supply is upward sloping,
Demand is downward sloping.
Equilibrium point is the market.
Labour market is a kind of supply/demand curve.
Income vs. substitution: get more money or get something
else (usually leisure).
Discretionary income: DI = C + (1+r)S = (1)wT K
(1+r)L
Tax rate, C Consumption, w Wages, S Savings, T
Working hours, K Costs and expenses, r Market interest
rate, L Debt
PA problem in math: The firms problem: =pQ wN - The
worker/ consumers problem: DI = C +S = wT K L
Employment as social relation: examples from Japan.
Human Capital Theory
Human capital theory: investment in humans (education
etc.) are like investments in any other capital form.
Production function for human capital: Y = a + b f(e) Y
output, a endowment, b rate of return, f(e) effort
function
Training is a kind of investment: general or firm-specific
skills.
Screening model states that investments in human capital
dont necessarily improve productivity, but rather signal to
potential employers.
Observable and unobservable traits: productivity is
unobservable!
Ascriptive and achievement factors for social mobility: Y =
a + D + Z + Compensation
-

Y =+ x
o

Y =earnings

=Starting Salary

=amount of increaseSalary

x= years of work experience

What are factors that determine earnings?

Firm-related
Firm-Size
Industry
Sector

Experience
Tenure
Occupation
Wages rates are higher in occupations that are more
difficult to learn i.e., human capital
Wages rate are higher for those who engage in unsafe
or risky occupations i.e., compensating wage
differentials
Types of Compensations Schemes: salary, hourly
wage, piece rates, salary plus bonus, profit sharing,
team bonuses
Firms profits (): = Q W
Production function (Q): Q = e +
Workers compensation (W): W = W0 + Q = W0 + (e
+ )
Workers cost function (C): C (e) = e2
What is the optimal level of effort (e)?

The primary choice for a firm to increase effort is to

change the beta (incentive) coefficient.

High-Commitment HRM

Earnings Functions as a Diagnostic Tool

Individual Level
Gender
Education

Exchange Theory
o
There are Two Types of market transactions

Exchange Vs Social
o
Exchange

Devoid of social relationships and

human emotions

Social Relationships get in the way of

market transactions

Transactions made purely by prices

and quantity
o
Social

Repeated transactions build trust

Trust build long-term relationships

The bazaar economy

Offer price depended on the

relationship to the customer

Price was only one of many

factors
High-Commitment HRM
o
Features: Employment guarantees,
egalitarianism, premium wages, incentive
compensation, extensive training, etc
Internal labor market
o
Spot-market model

Assumes that there is just one labor

market, where labor is purchased and
sold much like a commodity
exchange
o
Internal Labor Market

In reality, the labor market within

firms is where most transactions take
place
o
Most firms operate like ILMs
o
Internal labor market vs external (core vs
periphery)
o
Downsides

Inflexibility

Resistance to outside appointments

Mediocrity

Bathtub model
o
Promotion as an incentive device
o
Promotion as a tournament

Only a handful progress through each

round i.e., promotion
Drawbacks

Take actions that look good

Suppress actions that look

bad
Up or out rules

Those who lose, lose their

jobs.
Vacancy chains

Workers are promoted only

in the case of vacancies

Discrimination
-

One simple view of inequality is that it is just a matter

of effort
o
If youre poor, youre not trying hard enough
Discrimination is a source of inequality that is beyond
your control
Ascription is one example
Economic discrimination: a groups earnings fall short
of the amount warranted by their abilities
Gender discrimination
Tastes for discrimination
o
Personal prejudice

Kim is willing to work with a donkey,

but not a horse
o
Intensity of ones prejudice is measured by
how much one is willing to forfeit

wf = wm - dr
Statistical
discrimination
o
Based on the use of observable variables to
make inferences about a relevant but
unobservable variable
o
Model assumes employers lack information
about the existence and characteristics of
workers
o
Reinforcement of statistical inferences lead to
stereotypes
o
Screening and signaling model
Employer perceptions are not value-neutral
Self-fulfilling prophecy
o
Feedback between belief and behavior can
cause a situation to become true

Works both ways

Implicit discrimination
o
Instances where discrimination are implicit and
unintentional
Historic discrimination
Policy implications
o
Two ways to think about equality

Equal opportunities

Equal outcomes
o
Affirmative action

Work and Family

- Why is work-family balance important at the macro-level?
o
Families (particularly women) struggle to balance work
and family
o
Low fertility rates among advanced economies
o
Declining population threatens economic growth
- Lifecycle model and social norms in Japan
o
Japanese women are more constrained by social norms
o
School Work Marriage Family. Sequence is
irreversible
o
Smaller variation in lifecycle transitions
- What happens when constraints are moved?
o
Increasing Japanese womens LFPR(Labor force
participation rate) could raise economic output by 7.2
% over the next 10 years
- Why is the female LFPR so high in Sweden?
There are no housewives in Sweden
o
Work-family balance (child-raising subsidies, incentives)
o
Big public sector employment
o
Small gender wage gap

Japanese HRM
- Employment model, characterized by low mobility and high
trust between workers and employers
- Barriers to mobility between firms in Japan
o
Worker protection
o
The importance of seniority in the pay structure
o
Lack of portability of firm-based pensions
o
Firm-size differentials, egalitarian pay norms and
mobility
o
Information problems
o
Problems specific to middle-aged and older workers
o
Regulations concerning fixed period labor contracts
- Barriers to increasing womens labor force participation
o
Government tax and benefit systems
o
Exclusion from the internal labor market (ILM)
o
Policies to reconcile work and family life: Public and
private initiatives
- Bathtub model of employment

Employers are hiring less into core = choking flow of

water into the tub = is decreasing
o
Employers are NOT firing workers out of the core =
remains the same
o
Companies are still honoring lifetime employment for
those already in the core.
o
Japanese firms are downsizing, but at a gradual pace.
o
End result
>
so
K < 0
o
In the long run, Japanese companies will maintain a
smaller core.
- Why is lifetime employment difficult to sustain?
o
Increased female labor force participation
o
Changes (decrease) in the supply-side of labor
o
Globalization
o
Changes in corporate governance (from stakeholder to
shareholder)
o
Smaller core (after the bubble burst) Manage more
with less
o

Global HRM
- FDI in Japan
o
Given its historical past and institutional trajectory, the
default position towards FDI is inward-looking and
isolationist.
o
But in age of globalization, Japan really doesnt have
much choice.
- Foreign firms in Japan
o
face latecomer disadvantage (liability of foreignness) in
the host economy (less affected by reputation effects)
o
Do not have the patience to nurture
professionals/specialists through inhouse training
o
Compensating wage differential (Tradeoff between
higher earnings and lower employment security)
- Hirschs 5 maxims for American managers
o
Return recruiters calls, maintain marketability
o
Avoid overspecialization, maintain generality
o
Avoid long-term and group assignments, maintain
credibility
o
Cultivate networks, maintain visibility
o
Keep your bags packed, maintain mobility

- Why do Americans work more than Europeans?

o
Not because of income vs substitution but due to
marginal tax
- Taxation and incentives
o
Average tax rate (a=t/i), Marginal tax rate (m= t/i)
o
Progressive(a<m), Flat(a=m), Regressive(a>m) =>
Type affects people

Demographics
-

Malthusian Disaster: population exceeds available

resources.
Demographic transition: first death rate drop increases
total population, followed by birth rate drop and
equilibrium.

Change in population affects the GDP. GDP = (B

D + M)
Fertility rate negatively correlated with GDP per capita.
Increase in dependency ratio, more old people.
Difficulty raising retirement age due to costs for
companies.
Various policies to increase birth rate: Russia, Denmark,
Lessons From Rome (tax singles, benefits to those with
kids).
GDP = productivity x population.
Needs major cultural paradigm shifts, encourage
women in workforce, deal with elderly.