The origins of parallel segmented labor and product markets: A reciprocity-based agency model with an application to motor freight

1999 1999

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Abstract (summary)

Why do some workers who apparently perform similar tasks and exercise similar job skills get paid very different wages? And, why do firms have the boundaries we observe; in particular, why do firms using closely related production technologies and serving closely related markets specialize instead of merging? That is, how do labor and product market segments emerge, and why might they persist in a competitive economy? I offer an integrated explanation for the striking case of the emergence of such market segments in for-hire motor freight, after its deregulation in 1980.

Using firm-level data, I provide econometric evidence of the survival value of carrier specialization, as a result of either original status or strategic change, into one of two types. I also document the associated bimodal segmentation of the labor market for drivers/freight handlers. I argue that a difference in optimal human resource policies between the two types of firms is an important cause of the parallel segmentations. Differences in how similar production technologies are used to serve the two markets mean that firms have different optimal solutions to the agency problem they face in motivating employees, leading to high powered incentives at reservation wages in one case, and low powered incentives with positive rents in the other. But this difference in compensation schemes sharply increases the agency or transaction costs involved in bringing both types of production under common hierarchical control, due to pay equity effects, while the corresponding benefits are modest, leading most firms to specialize.

To formalize this account, I extend a simple version of the standard “risk-sharing” principal agent framework by adding a reciprocity component, producing a new model with endogenous segmentation of the specified type. The new model also provides new hypotheses about the source of union wage differentials, and details a mechanism by which technological change can lead to increasing inequality in labor incomes that is distinct from the usual differential returns to skills account.

Indexing (details)

Labor economics;
Business costs
0501: Economics
0510: Labor economics
0505: Business costs
Identifier / keyword
Social sciences; Agency theory; Labor market; Motor freight; Product market; Reciprocity-based
The origins of parallel segmented labor and product markets: A reciprocity-based agency model with an application to motor freight
Burks, Stephen V.
Number of pages
Publication year
Degree date
School code
DAI-A 60/02, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
9780599199194, 0599199199
Bowles, Samuel
University of Massachusetts Amherst
University location
United States -- Massachusetts
Source type
Dissertations & Theses
Document type
Dissertation/thesis number
ProQuest document ID
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
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