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April 1998, Vol. 121, No. 4

Book reviews

Building a strong economy
Private pensions history
Business decisionmaking

Book reviews from past issues

Building a strong economy

The Economics of the Construction Industry. By Gerald Finkel. Armonk, NY, M.E. Sharpe, Inc., 1997, 177 pp. $62.95, cloth; $21.95, paper.

The Economics of the Construction Industry is an overview of major economic aspects of the construction industry. The book explores topics ranging from the structure of the industry, popular economic thought and principles, and analytical views of productivity and unions. The author, Gerald Finkel, has hands-on experience in the construction industry due to an apprenticeship in the electrical trade. In addition, he possesses a Ph.D. in labor economics.

The book begins with an overview of the historical development of the construction market. What the book lacks in detail, it makes up for in the number of topics covered. Indeed, many of the chapters discuss subjects that could be books unto themselves. There are three main subjects addressed in this book: industry structure, statistical issues, and union topics.

In the first three chapters, Finkel conducts a broad-based tour of the framework supporting the industry. He argues that there are two main assertions that describe modern construction. One is that modern day builders face the same basic obstacles as ancient builders—namely issues dealing with variables of building design such as ventilation, structural support, and lighting. The march of technology will continue to shape the choice made by builders, and the author examines major materials used in building (wood, steel, concrete). The second issue is that major social and economic forces have shaped the construction industry. Developments in related industries, such as real estate and manufacturing, also affect the health of construction.

The construction industry is extremely fragmented, with enormous enterprises competing in the same markets as one-person operations. This immense segment of the economy, with more than 2 million businesses operating in 1992, is divided roughly into three sectors—private residential, private commercial, and public construction. Private residential construction, the author asserts, is the mainstay of the industry and is strongly linked with the overall health of the economy. Overall, this segment is relatively unstable and slow to respond to business cycle fluctuations. Private commercial construction is overwhelmingly contract work, as opposed to force account work (where a major company basically does its own building). Important issues facing this segment are sources of funding and building complexity. Public construction is subject to local, State, and Federal regulations, making this segment more complex in many instances. Wage regulation is one of the most important issues affecting public construction. All of these segments are open to union involvement, which often impacts the wage structure and job conditions. Finkel explores unions in greater detail later in the book.

Continuing with the industry overview, the author explores construction in respect to classical economic thought. The economic theories of Adam Smith, Karl Marx, and John Maynard Keynes are explored in respect to the construction industry, but no conclusion is drawn from the competing views.

Major statistical issues affecting the construction industry include data availability, productivity, labor market composition, wages, and construction investment. The book gives broad overviews of the basics of these subjects. Construction’s contribution to the Nation’s real gross domestic product is quickly addressed. It has comprised a significant but declining percentage over the years. The composition of the labor market has also varied over the years. In 1972, about 40 percent of building trade employees belonged to unions, compared with about 18 percent today. In addition, more women and minorities have become employed in the construction industry. Sexual and racial discrimination have been problems in the construction industry, and Finkel explores this subject briefly.

One of the largest issues faced by anyone attempting to analyze an entire industry—the availability of statistics—is a subject to which an entire chapter was devoted. Government data from the Department of Commerce and the Bureau of Labor Statistics are available, but often present comparability problems. There are also several private statistical agencies that produce data. Related to this is the measurement of productivity in the industry, and the author covers this issue in two lengthy chapters.

Measuring productivity in construction is inherently difficult, due to the labor-intensive, diverse nature of the industry. A major stumbling point is the issue of skill differentiation among workers. This creates measurement problems that would not exist if workers were interchangeable, as in manufacturing. In addition, the management differences between small and large-scale operations cloud the issue. For example, the pace of work assigned (time required per installation) becomes a determinant of profitability. To increase productivity, builders have opted for materials with lower installation labor requirements such as plastic pipe rather than copper pipe. There is much reliance today on prefabrication of certain parts (which limits the number of hours of workers onsite) making productivity measurement a challenge.

The presence of unions is an issue that has shaped virtually every direction and trend in the industry. Indeed, almost every chapter has some discussion of union activity. One issue in particular is of major debate: productivity in union versus nonunion shops. Several case studies are presented. The work of Steven Allen in the 1980s, which demonstrated the variations in productivity for different types of building activities is described in length. He used production function estimates and discovered a decline in productivity from 1968 to 1978. The conclusion is that increases in building activity of lower skill installations (homes) lead to a reduction in union labor, which may be more skilled due to apprenticeships and journeyman programs. The demand for younger, inexperienced workers ultimately lowers output per worker.

An opposing view by David M. Gordon (1981) is presented that blames the lower productivity in the late 1960s and 1970s not on union versus nonunion firms, but economic events such as Vietnam, high government spending, oil price shocks, and inflation. A leveling off of wage growth in construction during this time and a rising cost of living resulted in a lower standard of living for construction workers. Finkel spends the remainder of the chapter exploring several other theories on productivity and goes into great detail on the difference between union and nonunion wages and output.

One of the issues that may eventually affect productivity is competition within the construction industry. The ways in which small and large companies compete among each other are explained, as is competition among the diversely skilled employees. Often, the issue of whether these employees are union or nonunion plays a role in their skill level and employability.

What factors impact the wages these workers earn? Mainstream economic thought states that a worker’s wage is equal to his marginal revenue product. According to the author, the picture is more complex for the construction industry. Determination of a construction worker’s wage is based usually on individual skill levels, union membership status, and locality. Wage bargaining is a central issue in the construction industry. Formal bargaining is usually conducted through unions and may result in a set wage per hour for a class of workers, where lump-sum payments and piecework are discouraged. Informal wage bargaining is also conducted frequently, and is usually an individual agreement with a particular employer. The author explores several related points such as wage legislation and union threats and strikes, as well as the application of classical economic thought to wage determination.

Although unions have historically played a leading role in the direction of the construction industry, their impact over time has lessened. More firms have become known as "split shop." This is a firm that works in both union and non-union projects. Some unions seek to prohibit this practice in their collective bargaining agreements.

Unions have long played a central part in a construction worker’s training and eventual skill level. Apprenticeship and journeyman programs have historically been popular and allow more experienced tradesmen to impart their knowledge to new workers. With the decline of union membership, construction is evolving into an open-shop industry, with new types of training programs. They include educational programs and certification classes conducted by building associations. A main problem with the old apprenticeship system was when skilled tradesmen would become loath to impart their knowledge, time, and effort to train less-skilled workers who might displace them. Unions attempt to take the threat away by protecting the skilled tradesman’s job, thus allowing a continuous flow of knowledge.

The construction industry is important to the U.S. economy. Gerald Finkel’s book is a good text for anyone interested in the construction industry’s issues and dynamics in the labor market. Although many chapters serve as only general introductions to complex subjects, readers are provided with enough detail to increase their understanding of the industry. It is a good reference book for anyone who wishes to gain a historical perspective and know more about labor economics in the building industry.

—Jacqueline Warnke
Office of Employment and Unemployment Statistics
Bureau of Labor Statistics

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Private pensions history

 

The Promise of Private Pensions: The First Hundred Years. By Steven A. Sass. Cambridge, MA, Harvard University Press, 1997, 321 pp.

While various periods in the history of the U.S. private pension system have been studied, Steven A. Sass provides the first thorough development of this economic institution from its humble beginnings as a railroad’s welfare enhancement tool to its current decline as a source of retirement security for our aging population. Throughout the author’s presentation, he ushers the reader through the changing incentives facing business and labor; the increased financial savvy of plan sponsors; and the government’s concern over retirement income security, tax avoidance, and its accompanying regulations. Furthermore, he accomplishes this task while explaining the political, social, and economic climate at each stage of the private pension’s development.

 

Sass presents and substantiates three separate explanations for the advent of the corporate use of pensions: promotion of career attachment for white-collar workers, benevolence to promote loyalty among blue-collar workers, and the reduction of the less productive, super-annuated workers of both classes. Each of these three managerial goals was used in the powerful railroad industry of the late 1800s and early 1900s and spread to other corporate structures soon thereafter.

 

The author clearly links the incentives behind the development of private pensions with the financial realities facing the use of pensions as the new, labor-management tool. These financial realities manifested themselves in the early 1920s and 1930s with the failure of pension plans and increased pessimism on the part of pensioners. Thus, parties became increasingly concerned about the appropriate method of guarantees in the pension benefit: a pay-as-you-go system or an actuarially justified funded account. With these concerns, the financial sector of our economy became increasingly important in the pension movement. Insurance companies had been offering savings plans and quickly saw a market for themselves in the employer pension framework by managing employer plans and/or providing consulting services.

 

Public and private concern over pension funding and the maintenance of old-age income forced the private pension to become a public issue and led to the government’s introduction of Federal funding standards and the Social Security system. Additionally, Sass presents a clear argument over the role of Federal tax legislation in the changing focus of private pensions. The tax advantages of private pensions to individuals resulted in an increase in the demand for these pensions, while Social Security reduced corporate pressure to provide basic retirement income security.

 

The labor movement’s social and political role in the development of private and public retirement plans is woven throughout the text. Labor’s initial belief that corporations used pensions as a means to suppress labor organizations resulted in the development of their own pension plans and their promotion of a Federal retirement plan. Although their view of employer pensions had softened over time, the final blow to labor’s stance against employer pensions was the 1948 National Labor Relations Board’s ruling that placed pension benefits as a subject of collective bargaining. Thus, pension benefits began to be viewed as deferred wages of the worker and not a gift from the employer.

 

While evidence of ineffective plan management and corporate abuse in pension plan funding has been well documented, the author presents a very intriguing tale of labor’s role in the events leading up to the Employee Retirement Income Security Act of 1974 (ERISA). Teamsters leader Jimmy Hoffa’s manipulation of pension assets and the United Mine Workers’ movement of pension asset income into the union account are two examples of union abuses prior to ERISA.

 

The final chapter of the book presents the author’s view on the outlook of the traditional private employer pension. His belief is that a decline in the career attachment framework and the weakening of labor unions, government, and large corporations are promoting the decline in private pensions, compelling younger Americans to place increased importance on financing their old-age security through personal savings. Whether or not these economic institutions follow the trend which the author suggests or that personal savings will replace public and/or private retirement plans remains to be seen. Nevertheless, the author’s historical review of the incentives behind private pension development is fundamental to leading our way through the political, social, and economic battles currently brewing over income security for our aging population.

 

 

—Michelle W. Trawick
Assistant professor of economics
University of Wisconsin-Whitewater

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Business decisionmaking

 

Business Decisions, Human Choices: Restoring the Partnership Between People and Their Organization. By Lloyd C. Williams. Westport, CT, Quorum Books, 1996, 208 pp., bibliography.

Since the early 1980s, business decisions have tended to reflect less and less the social and community values of the areas in which they are located. Instead, greed and excessive competition, manifested by downsizing, outsourcing, and off shoring, have replaced community values in business decisionmaking. Something is wrong when a key element of society does not support that society. Previously, business leaders had helped structure societal values. Now, by denigrating values of the society, business organizations endanger the mental health of their own organizations and their workers. In order to provide healthier environments for workers and the organizations themselves, businesses need to use a more holistic approach in examining values and making decisions. So says Lloyd C. Williams in his book Business Decisions, Human Choices: Restoring the Partnership Between People and Their Organization.

 

The book examines the interaction among business organizations, workers, and the community in which both exist. The author considers a number of related topics, including organizational psychosis as reflected in decisionmaking, organizational depression and its impact on individual worker dysfunction, and the transformation of an organization from a hierarchical closed system to a more development-oriented open system. While laborious, the book makes useful points about links between organizational decisionmaking and worker behavior. Although the book provides a possible answer to the problem it describes, this is certainly not a how-to book for business transformation.

 

Williams describes the development of organizational mental health problems and the impact of this organizational ill health on workers’ behavior. He suggests that in its decisionmaking processes, business has lost the balance between its responsibility to maximize value and its responsibility to workers and communities. Business has failed to embrace human and emotional factors as components of decisionmaking; to restore health, these factors must once again become part of the organization.

 

To the extent that business leaders are overfocused on competition and profits to the exclusion of community values, organizational psychosis develops. This psychosis manifests itself in workers as loss of self-direction, lack of clarity in roles, withdrawal, sick-building complaints, and violence. Thus, when business decisions do not appropriately reflect human values, major organizational problems result. So for the organization’s sake, leaders must find a way to include these values in the decisionmaking process.

How does one transform one’s business to better reflect these critical values and still pursue profitability?

 

By embracing a new human process paradigm which balances the needs of business with the values of the workers and the community. This paradigm is a fluid, growth-oriented system that both fosters worker development and continues to develop itself. It consists of developmental processes for both the organization and for the workers, including scans of the business environment with consideration for values and a commitment for inclusion in decisionmaking. This model recognizes the need for personal development of the organization’s workers and makes provision for it.

 

The payoff for this transformation is an organizing system with a more enhanced means of business development, one that includes all of the members of the organization. The company is thus more aware of the choices available to it, so it is more effective framing policies and strategies with attention to human and community values. With everyone in the organization in a constant state of development, the organization itself benefits and prospers.

 

To the critical reader, this sounds too good to be true. Further, while the problems associated with the old organizational system are laid out in detail, the solution is somewhat vague and difficult to follow. As well, there is only one example of the successfully transforming organization cited in the book. Can one read the book and implement the system? In the opinion of this reader, no. Thus, while the book makes an interesting argument for change, the answer provided seems incomplete.

 

 

—Stanley W. Suchman
Bureau of Labor Statistics
Kansas City region

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