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  Helping Great Economists: Clark Kerr, John Dunlop, et al.

  By James Annable | May 29, 2020

  When I began teaching labor economics at MIT in 1969, mainstream thinking in the field was dominated by a loosely organized school of economists who used their neoclassical training to investigate what went on inside large, specialized workplaces. Such information-challenged workplaces spread rapidly in the early 20^st century. The GEM Project has named this school the Early Internal-Labor-Market theorists.

  A keystone innovation of Early ILM literature is the reference wage (W^ń). In the middle 20^th-century, numerous on-site studies of workplace exchange found that employees prefer wages that are consistent with interpersonal and intertemporal reference standards that become ingrained (via repeated application) over time, evolving into a mainstay of workplace standards of acceptable treatment. The literary workplace analysis of Clark Kerr, John Dunlop, Richard Lester, Lloyd Reynolds, Arthur Ross, Frederick Harbison, Charles Myers, and others set the stage for the GEM Project’ generalization of rational exchange that microfounded meaningful wage rigidity (MWR) and chronic labor rent.

  Original Great Idea

  The great insight of the original ILM theorists is that optimizing labor-pricing decision rules, constraints, and mechanisms of exchange in highly specialized workplaces are inherently restricted by costly, asymmetric employer-employee information. They identified rational intra-firm mechanics that differ fundamentally from neoclassical behavior in the marketplace. As noted, they learned that workers resent being treated as a commodity governed by the impersonal interaction of supply and demand. They want, instead, to be taken out of the market. They also learned that workers in highly specialized establishments have sufficient on-the-job latitude to enforce that preference.

  Dunlop (1994, p.380) succinctly described the separate-venue modeling by the Early ILM theorists: “The objective changes in the economy – within sectors, in the emergence of large enterprises and workplaces, and in the ideas and arrangements developed to govern and manage these workplaces – made it quite obvious to a new generation of economists in the 1940s, who were exposed in practical terms to labor markets and labor-management-government issues, that conventional (external) labor-market theory was grossly...

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