OUTPUT, WORK HOURS AND EMPLOYMENT IN THE SHORT RUN OF A LABOUR-MANAGED FIRM*

In its pure form the organisation of a labour-managed firm (LMF) differs radically from that of a profit-maximising firm (PMF). LMFs are found not only in Yugoslavia. Many forms of producers' cooperatives and employee-owned firms appear in capitalist economies (e.g. Jones and Svejnar, I982). The theory of the LMF is also relevant to the economics of trade unions, profit sharing, codetermination, and internal labour markets. This is because, where worker participation exists, elements of the economic forces prevalent in an LMF can influence management policies on wages, employment and investment. It follows that by studying the LMF in relation to the PMF we may be better able to grasp the workings of more realistic firm organisations in which both labour and management vie over the division of firm-specific rents. From this perspective on the theory of the firm we examine the short-run behaviour of the competitive LMF, and in particular the tendency for output supply, employment demand and work hours to differ from the neoclassical norm. Traditionally, the short-run analysis of the LMF has focused on its employment response to output price changes. The theorem due to Ward (I958) and Vanek (I970) holds that an increase in output price causes paradoxically a reduction in employment and output if the LMF maximises per capita remuneration. More recent work, in which the LMF maximises the member's expected utility over layoff probabilities and remuneration, demonstrates that the LMF's response to a higher output price is essentially to increase both output and employment (e.g. Steinherr and Thisse (I979), Bonin (I98I) and Miyazaki and Neary (I983a)). The key to this result is that these authors distinguish actual workforce, which is variable in the short run, from LMF membership size which is variable in the long run but fixed in the short run. The precise features of this LMF short-run behaviour also depend on the nature of the LMF's bankruptcy constraint, which is largely determined by the LMF's access to capital markets. In this line of analysis, however, authors have effectively assumed that work hours are institutionally fixed. But variability in work hours (or effort intensity) can also be an important factor in the LMF's response to output price changes. Because a change in the LMF's output price immediately affects the member worker's per capita * Some of the basic results of this paper were originally reported in Sections 7-8 of our July 1979 mimeographed paper, which was read at the Second International Conference on the Economics of Worker's Self-Management, Istanbul, June I980 and also in seminars at Berkeley, British Columbia, Bell Labs, Cornell, Hitotsubashi, Kyoto, Osaka, Tokyo, and Toronto in I979-I980. We thank J. Bonin and the participants of the above conference and seminars for comments on earlier versions. In writing the present version, we especially benefited from the comments of anonymous referees, P. Evans, and T. MaCurdy. We are responsible for any remaining errors, omissions and ambiguities. A detailed computational appendix for our theorems and examples is available on request.