Abstract
This paper compares human resources (HR) policies embedded in the Japanese and U.S. management systems. We adapt a model from the literature on irreversible investment and use it to examine the trade-off between flexibility to adjust the labor force and higher productivity stemming from the greater commitment of the firm to its employees. In the model, two types of contracts with otherwise identical workers can coexist. One possibility is for firms to commit to a permanent employment contract that precludes dismissal at will. The alternative is a temporary employment contract that allows flexibility to adjust the firm's labor force during demand downturns, but involves higher labor cost per unit of output. Using an example, we illustrate the possible magnitude of the value of flexibility and suggest that adopting long-term contracts in the wrong environment can significantly reduce firm value. The model yields predictions for the optimal labor force composition and its relation to the characteristics of the firm's market. We also consider practices that develop to complement permanent employment. The predictions are then examined in light of evidence on the HR practices in Japan and the United States in the past 50 years and are found to be consistent with the stylized facts in the literature. J. Japan. Int. Econ., December 2001, 15(4), pp. 515-556. Hebrew University, Jerusalem, Israel, and University of Illinois at Urbana-Champaign, Urbana, Illinois.
| Original language | English |
|---|---|
| Pages (from-to) | 515-556 |
| Number of pages | 42 |
| Journal | Journal of the Japanese and International Economies |
| Volume | 15 |
| Issue number | 4 |
| DOIs | |
| State | Published - Dec 2001 |
Bibliographical note
Funding Information:Kandel, Eugene, and Pearson, Neil D.—Flexibility versus Commitment in Personnel Management This paper compares human resources (HR) policies embedded in the Japanese and U.S. management systems. We adapt a model from the literature on irreversible investment and use it to examine the trade-off between fl xibility to adjust the labor force and higher productivity stemming from the greater commitment of the fir to its employees. In the model, two types of contracts with otherwise identical workers can coexist. One possibility is for firm to commit to a permanent employment contract that precludes dismissal at will. The alternative is a temporary employment contract that allows fl xibility to adjust the firm s labor force during demand downturns, but involves higher labor cost per unit of output. Using an example, we illustrate the possible magnitude of the value of fl xibility and suggest that adopting long-term contracts in the wrong environment can significantl reduce fir value. The model yields predictions for the optimal labor force composition and its relation to the characteristics of the firm s market. We also consider practices that develop to complement permanent employment. The predictions are then examined in light of evidence on the HR practices in Japan and the United States in the past 50 years and 1We thank Banri Asanuma, Mark Bils, Jeff Campbell, Tom Cooley, Allan Drazen, Ron Gilson, Eric Gould, Masanori Hashimoto, John Long, Yishay Maoz, Joram Mayshar, Robert Pindyck, Mark Schankerman, Avi Simhon, Kenneth Swinnerton, Karen Van Nuys, Yishay Yafeh, and seminar participants at Bar-Ilan, Columbia, Hebrew, Ohio State, Rochester, Tel-Aviv, and the Bank of Israel for their useful comments and suggestions. The paper was presented at the NBER-CEPR-TECR Conference on Unemployment, and the comments of participants are gratefully acknowledged. We thank the Editor, Takeo Hoshi, the discussant, Hideshi Itoh, and an anonymous referee for their valuable input. Kandel gratefully acknowledges financia support from the Lady Davis Fund.