February, 2001, Vol. 124, No. 2
Précis
The third wave of revolution?
Employee involvement
Rise in stocks and labor supply
Roughly 100 years ago, new technologies began to radically change the economic landscape. Two of the most important technologies in driving economic and social change were the automobile and electrification. Some people believe we are in the midst of a similar upheaval with the Internet, and economist Robert Gordon asks, "Does the ‘New Economy’ Measure up to the Great Inventions of the Past?" (The Journal of Economic Perspectives, Fall 2000).
Despite what many others claim, his analysis leads him to believe the answer is "no." Gordon writes that the first industrial revolution occurred from 1760 to 1830, chiefly in Great Britain; and the second from, roughly, 1860 to 1900. It is the second that "led to the golden age of productivity from 1913 to 1972." Much of what he describes as critical to the revolution leading to the "golden age" center around "five clusters of inventions" we take for granted today. The five he names are (1) electricity; (2) the internal combustion engine; (3) the use and manipulation of petroleum and natural gas; (4) the flow of entertainment, communication, and information; and (5) "perhaps the most tangible improvement in the everyday standard of living besides electricity [was] the rapid spread of running water, indoor plumbing, and urban sanitation infrastructure."
Notwithstanding the notion that most people would choose indoor plumbing over plumbing the depths of the Internet, Gordon notes that "there are deeper reasons, rooted in basic principles … like diminishing returns" why, 50 years from now, historians and economists will likely not view "the present surge in computer investment as the harbinger of a Third Industrial Revolution." While this technology, without a doubt, represents an important and amazing shift in the way people process and manipulate large amounts of information, it appears to be of far lesser magnitude than the more life-altering technologies that emerged in the early 1900s.
In "The Anatomy of Employee Involvement and Its Effects on Firms and Workers" (NBER Working Paper No. 8050), Richard B. Freeman, Morris M. Kleiner, and Cheri Ostroff study several aspects about the locus and economic impacts of employee involvement (EI). The authors find that when American firms implement programs such as self-directed work teams, total quality management, quality circles, and profit sharing, employees get more involved in their jobs.
Having information from both employees and firms, the authors are able "to ask not only what EI does for firms … but also what EI does for workers." They find that "EI practices are linked in an hierarchical structure that provides a natural scaling of EI activities and the intensity of the EI effort."
The adoption of EI is beneficial to some firms. They may garner a competitive advantage in the marketplace. Some may use EI as a way out of financial trouble. Other firms believe EI is a more profitable or morally better way to operate their business. However, the authors state that EI has a weak and poorly specified effect on output per worker, and that management has not devolved sufficient authority to employees for EI to work most effectively.
EI clearly benefits workers more so than firms. It boosts employee well-being, granting them a greater say about their jobs. It also evokes more positive assessments of workplace relations, as well as greater trust employees place in their firm.
Rise in stocks and labor supply
There is no question that the returns to stocks in the second half of the 1990s were high by historical standards. There are questions, however, about the effects that those returns had on the behavior of individuals. In "The effect of the run-up in the stock market on labor supply," Ing-Haw Cheng and Eric French ask if the increase in stock market wealth in the 1990s led to a decrease in labor supply. Their assessment appears in the Federal Reserve Bank of Chicago journal, Economic Perspectives, Fourth Quarter 2000.
Cheng, a student at the University of Chicago, and French, an economist at the Federal Reserve Bank of Chicago, provide evidence that much of the increase in stock prices in the 1990s was unanticipated. Their figures show that $1 invested in the stock market on December 31, 1994, would have reached $2.82 on December 31, 1999, and that $1.12 of the $1.82 gain would have been above what would have been predicted, based on historical averages.
With everything else equal, Cheng and French would expect groups with large unanticipated wealth increases to decrease their labor force participation. However, in this case, persons age 55 and more had the greatest unanticipated wealth increases (because they have the highest levels of stock wealth), and yet labor force participation rates for that age group actually increased between 1994 and 1999.
Cheng and French "believe these results imply that the run-up in the stock market has not been the primary determinant of recent changes in labor force participation rates." The authors cite other possible reasons for the rise in labor force participation of older workers, such as higher wages and improved job opportunities due to the strong economy.
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