This essay is the result of a long process involving many drafts and revisions. I am grateful to Duncan Foley for the careful and constructive criticisms offered throughout the project. The following people read the manuscript at different stages and, although they often disagreed with me, they generously provided helpful comments: two anonymous referees for this journal, Samuel Bowles, William Dickens, Greg Dow, Robert Drago, Richard Edwards, Kathleen Engel, Richard Freeman, James Galbraith, Herbert Gintis, Jody Hoffer-Gittel, SandfordJacoby, Tom Kochan, David Levine, Lisa Lynch, Paul Osterman, Michael Piore, Bob Rebitzer, Gil Skilman, Dan Slesnick, Robert Thomas, and Tsuyoshi Tsuru. Comments from participants in seminars at the Massachusetts Institute of Technology, University of Massachusetts at Amherst, and Hitotsubashi University are also gratefully acknowledged.

Using an effort-regulation type of efficiency wage model, it is demonstrated that a firm may respond to slackening labor markets by acting to increase the intensity with which workers work. The magnitude of this work intensity effect depends on the structure of employment relations. Where long-term employment relations are prevalent, the effect of labor market slack on work intensity may be diminished. These propositions are tested empirically by estimating the effects unemployment and long-term employment have on productivity growth in two-digit manufacturing industries.

In his seminal 1943 paper on the political business cycle, Michal Kalecki (1971) argued that industrial leaders feared employment because the economic insecurity created by unemployment was necessary to keep wages low and maintain work intensity and discipline on the shop floor. On the basis of this reasoning, Kalecki concluded that governments would not use demand management policies to achieve permanent full employment. In terms of current macroeconomic debates, Kalecki had sketched the outlines of a theory of the neutral or natural rate of unemployment based on the importance of disciplinary unemployment as a regulator of unit labor costs. Kalecki's pessimism about the prospects for employment was premised in part on a view of firms in which the threat of dismissal was the central motivational device used by employers, and employees had only a tenuous connection to employers. This assumption may have been appropriate when analyzing labor markets in the United States during the 1930's. Since that time, however, the spread of unions, implicit employment contracts, and large, bureaucratically organized enterprises has resulted in a modern U.S. labor market in which many workers enjoy long job tenure and in which many firms do not appear to rely on dismissal threats as their primary motivational strategy (see David Gordon, Richard Edwards, and Michael Reich, 1982; Sanford Jacoby, 1983; and my forthcoming paper). From this perspective, it is reasonable to ask whether the presence of long-term employment relations alters the regulatory role played by unemployment. This paper examines the effect that unemployment and long-term employment relations exert on the determination of unit labor costs. The central empirical findings can be briefly summarized. First, as suggested by Kalecki, movements towards employment increase the rate of growth of wages and reduce the rate of growth of labor productivity. Second, where long-term employment relations are prevalent, the effect of unemployment on both wage and labor productivity growth is diminished.

We study the economics of employment relationships in large law firms. Our point of departure is the “property‐rights” approach that emphasizes the centrality of ownership’s legal rights to control significant nonhuman assets of the enterprise. From this perspective, law firms are an interesting object of study because the key asset in these firms is knowledge, particularly knowledge of the needs and interests of clients. We argue that two distinctive organizational features of law firms—the use of “up‐or‐out” promotion contests and the practice of having winners become residual claimants in the firm—emerge naturally in this setting.

The "efficiency wage hypothesis" offers an explanation for employment rents. According to this hypothesis, firms pay wages above the opportunity cost of labor to elicit productivity or quality-enhancing behaviors from employees. Firms pursue this strategy when alternative incentive schemes are unavailable or too costly. Thus, firms will not pay premium wages when employees post sufficiently large performance bonds. This article examines employment rents in a setting where employees post sizable performance bonds-large law firms. Contrary to the efficiency wage hypothesis, we find that associates in these large firms post substantial performance bonds while also receiving substantial, ex ante rents.

This paper describes an organizational setting in which professional employees are required to work inefficiently long hours. The focus of our investigation is large law firms. The income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard. Law firms use indicators of this propensity--especially an associate's record of billable hours--in promotion decisions. Reliance upon work hours as an indicator leads to a "rat-race" equilibrium in which associates work too many hours. We find evidence in support of this conclusion with data we collected from two large law firms.

Recently developed effort regulation models argue that labor markets are segmented because of differences in the technology of supervision across firms. primary jobs pay above market clearing wages because these jobs are difficult to monitor. Secondary jobs, in contrast, pose no monitoring difficulties and therefore pay a market clearing wage. If, as the literature suggests, increases in employer size make supervision more difficult, we should observe that wages increase with employer size in primary jobs but not in secondary jobs. We test this hypothesis using a switching regression model. We find evidence of an employer size wage effect in both primary and secondary labor markets. However, consistent with the prediction of effort control models, the size effect on wages is considerably larger in primary than secondary jobs.

This paper describes an organizational setting in which professional employees are required to work inefficiently long hours. The focus of the authors' investigation is large law firms. The income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard. Law firms use indicators of this propensity--especially an associate's record of billable hours--in promotion decisions. Reliance upon work hours as an indicator leads to a rat-race equilibrium in which associates work too many hours. The authors find evidence in support of this conclusion with data they collected from two large law firms.

Observers of Silicon Valley's computer cluster report that employees move rapidly between competing firms, but evidence supporting this claim is scarce. Job-hopping is important in computer clusters because it facilitates the reallocation of talent and resources toward firms with superior innovations. Using new data on labor mobility, we find higher rates of job-hopping for college-educated men in Silicon Valley's computer industry than in computer clusters located out of the state. Mobility rates in other California computer clusters are similar to Silicon Valley's, suggesting some role for features of California law that make noncompete agreements unenforceable. Consistent with our model of innovation, mobility rates outside computer industries are no higher in California than elsewhere.