September 2002, Vol. 125, No. 9
Worker co-op lessons
Book reviews from past issues
Worker co-op lessons
Worker Participation: Lessons from the Worker Co-ops of the Pacific Northwest. By John Pencavel. Russell Sage Foundation, New York, 2001, 117 pp., $12.95/softcover.
The two most important factors causing firms to shift away from traditional systems of work and toward systems involving more worker participation are the growing demand for qualitative flexibility and the increasingly indirect nature of work. Qualitative flexibility refers to capabilities for qualitative improvement in the areas of product design, manufacture, and delivery—such as capabilities for reducing the time and cost incurred in switching between alternative product lines, improving a product design, or incorporating design improvements into the production of a good. Competitive demands for qualitative flexibility have increased as standards of living have risen over time, as world populations have become increasingly stratified along the lines of tastes and custom, and as microprocessor technologies have greatly reduced the costs of information. Demands for qualitative flexibility call for work systems based on positive incentives that will engage workers’ skills and knowledge toward improving quality and productivity, and toward mastering the frequent changes in the process that these goals require.
A second factor causing firms to shift toward greater worker participation is the increasingly indirect nature of work, which has resulted as service sector employment has displaced manufacturing sector employment and as microprocessor technology is implemented throughout the operations of firms. Much service work is indirect for the same reason that computer-based work is—it’s mental. The reduced ability to monitor such work reduces the effectiveness of incentive systems based on monitoring and the threat of dismissal, and instead calls for a system based on positive incentives and motivation that is intrinsic to the work itself.
An important area of research spanning fields in economics, sociology, and management science concerns the characterization and assessment of U.S. firms’ efforts to respond to the changing nature of work and to new imperatives for qualitative flexibility by shifting toward systems based on positive incentives and worker participation. Although competition has been increasing and becoming more global in scope since well before World War II, there exists only a relatively short history of experience during which firms have confronted both greatly increased competitive demands for qualitative flexibility and the wide dissemination of microprocessor technology. This confluence of events has increased the complexity of decisionmaking, as microprocessor technology provides an effective, extremely flexible tool for building qualitative flexibility into the production process. Because of this flexibility, firms can implement microprocessor technologies in ways that reinforce and reproduce existing practices in the firm, including the social and cultural environment, or they can use the new technologies in ways that help bring about wide-sweeping cultural change. The last decade has, in fact, revealed a proliferation of strategies by firms.
John Pencavel’s book, Worker Participation: Lessons from the Worker Co-ops of the Pacific Northwest, is a comparative study of the internal organization, market behavior, and performance characteristics of organizations that epitomize the extreme case of worker participation in the United States—the plywood and forestry workers’ cooperatives of the Pacific Northwest. Pencavel evaluates the relative effectiveness of the worker cooperative and conventional capitalist firm along each of these dimensions, using data that Pencavel and Ben Craig collected for most of the population of plywood cooperatives existing in Washington State over the 80s and 90s. Pencavel provides a simple, clear analysis that is of potential value to a diverse audience of researchers, firms, and lay individuals.
The distinctive feature of the worker cooperative’s internal organization is workers’ role as both owners and managers of the establishment; they both supply capital to its operations and reap the profits. The owner/manager role of workers in cooperative establishments provides the social foundation for organizational structures that coordinate production, motivate and monitor worker activity, and provide effective constraints against moral hazard in ways that illustrate a logic of organization very different from that seen in conventional capitalist firms.
Cooperative establishments coordinate activity by the mechanism of "voice," involving extensive sharing of information and use of the democratic process in decisionmaking. Voice mechanisms work best in organizations in which workers are homogeneous and the costs of decision- making are low. For this reason, co-ops attempt to increase worker homogeneity by implementing rules and policies that minimize skill and pay differentials, and by maintaining a strong culture of cooperation, trust, and mutual respect. The voice mechanism of coordination contrasts with the traditional hierarchies still used in some firms, in which "exit" is the primary means of dealing with manager/worker conflict. Pencavel suggests that the relative efficiency of systems based on "voice" versus "exit" depends on the cost of switching between alternative employment relationships; "voice" mechanisms should dominate in contexts wherein the costs of switching are high.
Recent research suggests that changes in the nature of work and in the imperatives of competition discussed earlier have, in fact, increased the cost of identifying good matches between the skills and capabilities of particular workers and the work to which they are assigned. Over the last decade, firms’ shifts to quality-oriented, customer-driven production systems have led to a proliferation of both customized products and of the customer-service strategies designed to deliver them. These shifts have greatly increased the degree of specialization within occupational categories—especially within professional, technical, and service jobs—and are very likely to have increased the costs of finding suitable candidates for individual jobs.
The owner/manager role of workers in co-ops keeps worker motivation high for much the same reasons that self-employed individuals tend to be highly motivated; workers both own the establishment and reap the benefits of its operation. While this effect is diluted in the co-op by the spreading of profits among many workers, motivation is kept high by maintaining high rates of worker participation in managing the establishment. Membership on the planning board is rotated among workers such that no worker group dominates, and the flow of information is very high. Workers monitor each other under this system, and co-ops’ efforts at increasing worker homogeneity and raising awareness of the equal interest of each in the organization’s success is partially aimed at encouraging this worker-worker monitoring. Worker motivation in the cooperative setting is in sharp contrast with the system in most conventional capitalist firms, in which the attachment of worker pay to time worked creates the need to monitor workers’ efforts. Employee monitoring in this setting is both costly and often brings forth only grudging effort on the part of workers.
The owner/manager role of workers in the cooperative also avoids problems of moral hazard created by the separation of ownership and control in conventional firms, which are very often addressed today by conferring on managers’ ownership shares in the firms they manage. Recent U.S. experience with the misuse of schemes that partially compensate managers in the form of stock options attests to the complexity of the moral hazard issue, and to the vulnerability of such schemes designed to mitigate moral hazard to environmental changes that alter the spectrum of opportunities facing managers. Ownership of the plywood co-ops was structured such that each worker purchased a single share upon joining the co-op, and a number of shares were issued to roughly correspond to the number expected to be working at one time. The price of shares was kept within the reach of ordinary workers.
The market behavior of worker cooperatives presents more of a challenge for promoters of this organizational form. Cooperatives’ responses to market price signals conform well to the predictions of the income maximization model of organization. Wages are not included in the calculation of costs in this model, and the decision problem is one of balancing diminishing returns to labor against the gains to income from spreading fixed costs over many units of output. Adjustment to changes in output price takes the form of price adjustment rather than quantity adjustment. A price increase of the good is soon reflected in a similar wage increase paid to workers, and vice versa, while the amount of quantity adjustment is minimal. Cooperative establishments thus fail to respond to market price signals in ways that allocate resources efficiently. They fail to direct significant additional resources toward the increased production of goods that are rising in value, and they fail to direct significant resources away from the production of goods whose value to society is declining.
There also exists evidence that banks view cooperative establishments as being somewhat complicated, and as having both a surplus of interested decisionmaking parties and a scarcity of individuals equipped with real business acumen. These factors, together with the inherent risk of the cooperative form, account for significantly higher capital costs than those incurred by capitalist firms.
Turning to the characteristics of the production process, the capital equipment and the process itself were much the same in cooperatives and capitalist firms. The ratio of capital to output was similar, and although the lathes were bigger in co-ops, the work in both was noisy, mind-numbing, and workers’ role in the process was basically that of an extension of the machine. The main differences between the production processes used in cooperatives and capitalist firms lay in the scale of operations used and in the focus of workers’ efforts. While output and employment of the cooperatives and unionized capitalist mills were about the same, the classical (non-union) capitalist mills were about one-third the size. Workers in the larger cooperative establishments also took extraordinary care in choosing the logs and in performing the work, such that quality was kept high and wastage at an absolute minimum. This emphasis on minimizing waste is consistent with the notion that activity in a worker cooperative is directed to the goal of maximizing worker income. In the classical mills, workers’ efforts appear to be more focused on maximizing output per time period, an emphasis more consistent with a model of profit maximization in which worker wages are counted as a cost of production.
These differences accounted for 36 percent lower output per worker in the cooperative than in the capitalist mill, and 36 percent greater output per log in the cooperative than in the classical mill. The elasticity of output with respect to input usage was much lower in the cooperative mills than in the capitalist mills, and the number of labor hours per log used was more than four times greater in the cooperative mills. Both of these factors reflected the great care the co-ops used to minimize waste, relative to that seen in the capitalist mills.
These contrasts also correspond to differences in the estimated parameters of the production function, that is, the mathematical model that describes the relationship between inputs and output in the two settings. Direct comparison of the productivity of the capitalist versus cooperative production processes is complicated by large differences in the scale of operations used in the two settings. Pencavel and Craig modeled the productivity performance of the two processes by separately applying the parameters of the cooperative and capitalist firms’ production functions to a range of input levels, thus yielding the implied output for a range of production counterfactual cases at different levels of input usage. The results suggested that cooperative establishments were considerably more productive than classical mills at each level of input usage, and further suggested the existence of increasing returns to scale in the plywood industry, which the cooperatives exploited to better effect than the capitalist mills.
Pencavel also estimated and compared the lifetime returns to working in a cooperative versus a capitalist mill. While the lifetime expected return to working in a cooperative appears to be significantly higher than that in a classical mill, these gains come at the expense of a high degree of worker risk. Not only are workers’ wages closely tied to the often volatile output price, but what can amount to a large portion of the worker’s life-savings are invested in the ownership share that he is required to purchase and hold as a condition of membership. According to Pencavel, these risks probably account for the under-valuation of cooperative shares.
The high degree of financial risk incurred by workers in the plywood cooperatives was also accompanied by a significantly higher risk of physical injury than existed in the capitalist mills. According to Pencavel, these observations suggest the possibility that individuals self-selected into the cooperatives and capitalist firms on the basis of attitudes toward risk and other, perhaps correlated, features of the cultural environment. Pencavel proposes the intriguing notion that a so-called "separating equilibrium" between establishment types based on different systems of shared values could explain the 80-year-long co-existence of cooperatives and capitalist firms.
While Pencavel’s analysis remains within the confines of the economist’s model of organization—with its restrictive assumptions regarding the nature of self interest, the exogeneity of preferences, and the bases of worker motivation—he nonetheless stresses the importance of the "black box" elements, which that model largely ignores. Among the black box items that Pencavel suggests is important to understanding worker participation is a model of social process by which social capital in the environment is embodied in the relationships between organizations and individuals. Pencavel reminds us that the social foundations of worker participation in the United States today are very different from those that molded the character of the highly participatory work systems of the past in Europe and elsewhere. For example, worker franchise in U.S. cooperatives has always been based on legal rights of ownership; it was never based on workers’ social role as workers in the wider society. Similarly, the culture of individual capitalist firms in the United States is a deliberately created, firm-specific culture; it is not the product of exogenous factors in the firm environment that account for a high degree of worker homogeneity.
These considerations are important because of the large role that culture plays in work systems based on positive incentives. While worker autonomy and decisionmaking authority are key to high worker motivation in such systems, cultural values of mutual respect, trust, and cooperation play a key role in harnessing worker initiative, skill, and creativity into a highly effective coordination mechanism. Pencavel notes that the under-utilization of voice mechanisms of coordination in the United States is partially due to the public good characteristics of worker participation, but also to the character of labor laws such as the National Labor Relations Act of 1935. This law effectively circumscribes joint worker/management cooperation to settings exclusively reserved for collective bargaining. More generally, the character of U.S. economic and legal institutions that were erected with the New Deal legislation of the 30s reflect the timing of U.S. industrialization during the era of mass production. These institutions are accordingly predicated on the needs and assumptions of that system, including the assumptions of cheap labor, conflicting labor relations, economies of scale, and expanding markets.
In Worker Participation: Lessons from the Worker Co-ops of the Pacific Northwest, John Pencavel provides a clear and simple account of the factors that shape stark differences in the functioning and performance of cooperative versus capitalist firms. While much recent research is aimed at demonstrating the importance to firms’ productivity performance of the particular mix of policies impacting worker activity, the use of participatory practices in U.S. firms still serves primarily as a motivational tool, not as the primary means of coordinating activity. Pencavel’s examination of U.S. worker cooperatives, in which worker participation is the actual means of coordinating activity, shows how assumptions regarding the structure of ownership account for basic differences in the model of organization functioning. These include basic differences not only in the way activity is coordinated, but also in the way the work is accomplished and in the factors affecting worker motivation. The reader takes away a solid practical understanding of why cooperatives, although quite risky and failing to allocate resources efficiently, nonetheless outperform other organizational forms in the high degree of worker motivation, productive efficiency, and resource conservation that is achieved.
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