Sidney and Beatrice Webb's Institutional Theory of Labor Markets and Wage Determination

Abstract

were among the most influential institutional labor economists of the pre-World War II period yet this portion of their work has fallen out of sight for more than a half-century. This paper reconstructs the Webbs' theory of labor markets and wage determination and explains how it differs from the rival neoclassical labor theory of Alfred Marshall. Key institutional components of their theory are developed, such as rent theory, institutional pyramid, chain of bargains, inequality of bargaining power, unemployed residuum, and common rule. The Webbs' theory is then used to explain the operation of labor markets and why in the absence of regulation they generate numerous social problems, including widespread poverty wages, excessive work hours and injuries, substantial unemployment, and human capital exploitation. Also described is the set of labor policies the Webbs advocate to solve these problems. Implications for modern labor theory and policy are developed.

The Changing Nature and Organization of Work: An Integrative Review of the Literature

“…These trends raise questions of fairness and equity in the labor market. Kaufman (2013) observed that each nation has a concept of what is fair in employment relations and that if these values are violated, social and political pressures will force a change in the rules. Adler (2016) concurred when he observed that the future of work will not be determined by technology, but by the regulation that will govern how it used.…”

How Capitalism Endogenously Creates Rising Income Inequality and Economic Crisis: The Macro Political Economy Model of Early Industrial Relations

“…The IEIR economists’ view (also, Stiglitz : Ch. 2) is that the canon of self‐interest predicts that capitalists, located at the top of the economic pyramid (per the Webbs, Kaufman ), seek to extract large rents from the rest of society by gaining an institutional order of one‐sided competition . An example is maximum competition and open markets on the input and cost side and restricted competition and sheltered markets on the output and sales side (Clark ; Slichter ).…”

“…The more severe is this inequality, such as for low‐skill workers in an oversupplied labor market, the lower and more tipped are wages, compensating differentials, and labor conditions (per the Webbs' chain of bargains analysis, Kaufman ). An IEIR insight is that government influences the breadth/depth of unequal bargaining power by labor‐law regimes that shift up or down the aggregate labor supply curve.…”

“…If it is reasonably assumed primary workers save more than secondary workers, wealth inequality also grows—strongly if saving is near zero for secondary workers. Also, the earnings of primary workers contain economic rent of triangle W M1 NX (wage above minimum supply price) while the earnings of secondary workers have zero rent (Commons ; Hobson ; Kaufman ; Webb and Webb ). Because rent is “income received but not earned” (earned = required payment for productive contribution), it may be removed, such as with a progressive income tax—strongly pushed by all IEIR economists, along with an inheritance tax—without harming allocative efficiency.…”

Experience with Company Unions and their Treatment under the Wagner Act: A Four Frames of Reference Analysis

“…Some radicals were revolutionary and thought capitalism had to be completely displaced in a worker‐led uprising; others counseled an evolutionary and democratic approach and were willing to retain elements of private property and markets. Sidney and Beatrice Webb, two of the co‐founders of the industrial relations field, were evolutionary/democratic radicals because they sought to use trade unions and a labor party to bring Fabian socialism to Britain (Harrison ; Kaufman ). Likewise, Richard Ely—root stem of the Wisconsin School of industrial relations—early in his career advocated producers’ cooperatives as an alternative to capitalist‐organized industry and was in mid‐career nearly fired from the university for advocating socialism (Rader ).…”