What is New in "New Structuralist" Analyses of Earnings?

What is New in "New Structuralist" Analyses of Earnings?Author(s): Michael R. SmithSource: American Sociological Review, Vol. 55, No. 6 (Dec., 1990), pp. 827-841Published by: American Sociological AssociationStable URL: http://www.jstor.org/stable/2095748 .

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WHAT IS NEW IN "NEW STRUCTURALIST" ANALYSES OF EARNINGS?*

MICHAEL R. SMiTH McGill University

The substantial body of sociological research on earnings that has accumulated in recent years begins with the assumption that neoclassical economic analyses of earnings are inadequate because they (1) are not strongly supported by the evidence; (2) rest on several unreasonable assumptions; (3) evade falsifiability by attributing discrepant findings to "market imperfections"; (4) neglect power; and (5) do not recognize the significance of internal labor markets. Some recent "new structuralist" research on earnings claims to remedy these defects and produce a superior and distinctively sociological analysis of earnings. I show that new structuralist research (1) caricatures the neoclassical analysis of earnings; (2) for the most part, simply relabels orthodox economic analyses; and (3) in central respects is not well supported by the evidence.

Intil relatively recently, the explanation of earnings differentials was largely left to

economists. Sociological research on inequality was overwhelmingly concerned either with occupational prestige (e.g., Treiman 1977) or the relative importance of achievement and ascrip- tion in occupational attainment (e.g., Blau and Duncan 1967; Featherman and Hauser 1978). Over the last fifteen or so years this has changed: sociological research has directly addressed earnings differentials. In doing so it became nec- essary to confront economic writings on the subject since, if economic accounts were satisfactory, sociological treatments would be unnec- essary. There is now a substantial corpus of so- called "new structuralist" research on earnings whose fundamental premise is that neoclassical accounts of earnings differentials are inadequate. New structuralists make two connected assertions. First, no single process of earnings determination describes the whole economy - earnings are determined in different ways in different segments of the economy. Second, earnings are profoundly affected by wage earners' bargaining power, especially their collective power. These two assertions describe aspects of structure, neglect of which is the central defect of orthodox economic accounts.

In what follows I argue that, in their current forn, these new structuralist claims are unconvincing. I do not suggest that the neoclassical account of earnings inequality is adequate simply that new structuralist writings fail to come to grips with whatever its limitations might be.

ARE ECONOMIC TREATMENTS OF EARNINGS INADEQUATE?

Economic analyses of earnings emphasize two factors: skills and job characteristics. Jobs that require more skill have higher rates of pay because fewer people are qualified to do them. If education and experience are adequate indicators of skill, they should be associated with higher pay (e.g., Becker 1975). Jobs also vary in the extent to which they are dull, dirty, dangerous, or oth- erwise unpleasant. The pay of unpleasant jobs should be higher - there should be "compensating differentials" to induce workers to take them (Smith 1970, p. 201). Now, according to new structuralists, there is a fundamental flaw in these interpretations: they are excessively indi- vidualistic. This general flaw is associated with the following specific deficiencies.

* Support for the research from which this paper is a by-product was provided by the Social Sciences and Humanities Research Council of Canada and the Fonds pour la Formation de Chercheurs et Aide a la Recher- che of the government of Quebec. I am indebted to several ASR reviewers and to the editor for extremely helpful comments on earlier versions of this paper.

Many of the ideas in it originated in (usually) good humoured conversations with Tony Masi, to whom I am also indebted. This is not to say that any of the above share the views expressed here. Only I should be blamed for the final result.

' There are new structuralist analyses of other labor market outcomes (e.g., Sorensen and Tuma 1981; Bielby and Baron 1983). I would argue that they display similar problems to those displayed in the earnings determination literature.

American Sociological Review, 1990,Vol. 55( December:827-841) 827



828 AMERICAN SOCIOLOGICAL REVIEW

First, economic theories of earnings are not strongly supported by the evidence. Kalleberg and S0rensen (1979, p. 352) make passing reference to the theory of compensating differentials and its "apparent falsity" and quickly pass on to other explanations of labor market outcomes. Sorensen (1983, p. 266) has observed that the effect of education in earnings equations is rather modest. Berg (1970), Collins (1980) and Faia (1981) have all tried to show that the link between education and income has less to do with personal productivity (as human capital theory assumes) than with "credentialism", an interpretation that is sometimes seen as supported by Bowles and Gin- tis's (1976, pp. 108-22) finding that the effect of I.Q. on income is quite small, after controlling for education. It is true that experience does well in earnings equations (Sorensen 1983, p. 266). But, as we will see, experience has been reinterpreted as ameasure of powerratherthan skill (Kalleberg, Wallace, and Althauser 1981, pp. 658-9).

Second, economic analyses rest on all sorts of unreasonable assumptions, the most important of which are labor market homogeneity and perfect competition (Bibb and Form 1977, p. 975; Beck, Horan and Tolbert 1978, pp. 706, 717; Tigges 1987, p. 21; Kalleberg 1988, p. 212). If workers competed in a single, perfectly competitive labor market, those with equivalent skills would be paid the same in different parts of the economy. Ac- cording to new structuralist analyses of earnings they are not paid the same because "workers do not compete in a single labor market" (Bibb and Form 1977, p. 976). Because of this, the reward to skills and the incidence of discrimination vary across the economy (Beck, Horan, and Tolbert 1978, p. 707; 1980; Coverdill 1988, pp. 971-3).

Economists, it is conceded, do recognize that discrimination and shelters from competition obstruct the equalization of earnings. They treat them as "market imperfections". This is a third deficiency of neoclassical analyses (Colbjomsen 1986, pp. 46-8). For the concept of market imperfection is frequently used to render neoclassical theory unfalsifiable. If there is a difference in earnings between persons with similar characteristics in different parts of the economy, that difference is simply attributed to market imperfections. This provides a sure-fire escape for any inconsistency between theory and observations, but not a methodologically satisfactory one.

Fourth, neoclassical economic theories are defective because they neglect power (e.g., Bibb and Form 1977, p. 976; Kalleberg, Wallace, and Althauser 1981, pp. 653-4; Kalleberg 1989, p.

589). Effective power rests largely on collective organization and plays a major role in determin- ing who gets paid more. Economic theories that neglect power - that assume atomistic individuals - are necessarily inadequate.

Fifth, the assumptions of neoclassical theories of earnings are violated by the existence of internal labor markets (for synopses see Kalleberg and Sorensen 1979; Sorensen 1983). Once recruited into an internal labor market, workers are insu- lated from external competition. Such employment arrangements are substantially produced through the exercise of worker power (Kalleberg, Wallace, and Althauser 1981, p. 657; Hodson and Kaufman 1982, p. 730; Kalleberg 1989, p. 588). But economic theory assumes that economic arrangements originate through competitive selection rather than worker power. Moreover, even if efficient, internal labor markets break the link between marginal productivity and earnings that is at the core of neoclassical theories of earnings (cf. S0rensen 1983, pp. 272-8; Sorensen and Kalleberg 1981, p. 57).

These, then, are the new structuralist criticisms. In the rest of this section I examine each criticism, except for the one asserting the importance of power. I treat that issue in the subsequent section, where I examine the principal new structuralist claims.

Human Capital, Ability, and Earnings

Human capital theory originated as an attempt to estimate rates of return to education in the Unit- ed States. Above all, it was a theory of decisions to invest in education and, secondarily, a theory of the effects of those decisions on the distribution of earnings and income (Becker 1975, pp. 15- 16). Its underlying assumption is that earnings are associated with individual productivity which, in turn, depends on individual capacities. Do the modest direct effects of education on earnings indicate the minor importance of individual capacities in earnings determination and, by ex- tension, the need for a structural theory?

Note, first, that not all marketable capacities originate in education and training. No matter how many years of training they experienced, it is unlikely that anyone reading this article could ever have thrown a baseball sufficiently hard and accurately to earn a major (or even very minor) league salary. It is often thought that this sort of ability plays a minor role in earnings determination. This may be so, but it does play some role; some unexplained variance in earnings will be



ON "NEW STRUCTURALIST" ANALYSES 829

accounted for by such individual attributes. Besides, there is another aspect of individual

capacities that seems to have a substantial effect on earnings but is not usually controlled in new structural analyses. Many people are disqualified from lucrative jobs by health problems. For example, Burkhauser, Butler and Mitchell (1986) estimated that 25 percent of the population between the ages of 45 and 64 had been treated for arthritis and that, for those working, arthritis ap- proximately halved earnings. People with diabe- tes, heart disease, a history of psychiatric problems, are also disqualified from a range of better- paid jobs. Consequently, on average they earn less than their level of education and experience would warrant.

Even if attention is restricted to trained skills, years of education is a poor indicator of individual capacities. People with identical levels of education vary widely in the talent that they bring to their jobs. Casual observation of different faculty performance levels in sociology depart- ments shows that this is so, and I would argue that this is also true at lower levels of education. People graduating at any level of the educational system vary greatly in their capacity to concen- trate, take initiative, make simple calculations quickly and accurately, and write clearly, among other things.

There are obvious reasons for this. One is the huge variability in the quality of schools. Twelve years at a public school in a run-down section of Detroit does not usually equal twelve years education at Choate, or even at a Catholic parochial school. Another reason is that much relevant training goes on within the family. The immigrant families in the United States who buy two copies of textbooks for their children - one for their child and one to be used by the mother to help with the child's school work - are almost certainly making a decision that pays off in better performance at whatever number of years of education they cease studies (Coleman 1988, pp. S109-13). The crux of human capital theory is that earnings tend to correspond to personal capacities; but years of education is a seriously flawed indicator of personal capacities.

One of the few direct measures of personal capacities that has been used is I.Q. Controlling for I.Q. only slightly reduces the association between education and income. This is certainly, in part, a consequence of credentialism. But it is also clear that the educational system transmits productivity-enhancing skills other than the general cognitive ability measured by an I.Q. test.

Education seems to affect individual productivity, and hence earnings, by affecting personality. Thus, Bowles and Gintis (1976) tried to show that for most students the educational system in- culcates an ability to follow orders and approach work conscientiously. More positively, Jencks et al. (1979, p. 157) found that a series of personality traits, as well as social skills, predicted income. Thus, the small effect of I.Q. on income, net of education, may reflect the fact that, for most of the labor force, education affects personal productivity through its impact on personality in general and work habits in particular rather than its effect on cognition.

In sum, then, the modest effect of education on earnings in most equations tells us very little about the role of individual ability in the earnings determination process.

Working Conditions

Is it reasonable to conclude with Kalleberg and S0rensen (1979) that the theory of compensating differentials is false? The issue is quite complicated.

There is a lot of evidence that, other things being equal, a greater risk of death or injury is associated with higher pay (Viscusi 1978, 1983; Thaler and Rosen 1975; Duncan 1976; Duncan and Holmlund 1983; Low and McPheters 1983; Arnould and Nichols 1983; Leigh and Folsom 1984). For that particular job characteristic compensating differentials theory does well. It is for other job characteristics that the evidence is inconsistent. Why might this be so? It may be that the theory is quite simply wrong; that workers do not have enough power or information to extract compensation from their employers for unpleasant working conditions. Some economists have drawn this conclusion (Thaler and Rosen 1975, p. 267).2 But there are some other possible explanations for the weak results.

First, compensating differentials theory may be broadly correct but apply only to a narrow range ofjob characteristics. Compared to risks of

2 See Brown (1980, pp. 115-7) for a summary of mixed results of previous studies. See Duncan and Holmlund (1983, pp. 375) for a more recent study reporting mixed results. For recent studies supporting compensating differentials interpretations see: Kumar and Coates (1982), Gerking and Weirick (1983), Ehrenberg and Schumann (1984), Filer (1985), Eberts and Stone (1985), Dunn (1986), Hendricks and Kahn (1986), Low and Villegas (1987), Killingsworth (1987), McNabb (1989).




injury and death on the job, there are "less ex- treme aspects, such as repetitive or fast-paced work, to which workers may not be sufficiently averse to establish compensating wage differentials in the labor market" (Duncan and Holmlund 1983, p. 367). There are, in fact, sociological writings broadly consistent with this position. Dubin (1956), Goldthorpe, Lockwood, Bech- hofer, and Platt (1968) and Hamilton and Wright (1986) have all stressed the relative indifference of most workers to aspects of their jobs, other than pay. That some of the coefficients in tests for compensating differentials are insignificant or have the wrong sign may indicate either the inadequacy of the theory or a lack of rigor in the identification of working conditions for which compensating differentials should be expected.

Second, research on compensating differentials confronts two serious methodological difficulties. One is that job characteristics are hard to measure. Some studies have used surveys that include direct questions about jobs. But these probably produce a great deal of measurement error. What constitutes "excessive" noise or "fast-paced" or "dull" work is likely to be substantially affected by the work context of a particular respondent. Workers in the quieter, cooler, less dusty parts of a steel mill, for example, may not think their work is particularly hot, noisy, and dusty because, in comparison to the other workers in the mill, their work is relatively pleasant. Yet in comparison with other industries, their working conditions may be dreadful. Other studies assign industry or occupation averages to the respondents in a survey. The difficulties of this approach are obvious; because of substantial industrial and occupational heterogeneity (Baron and Bielby 1980), the attribution of averages to individuals always involves substantial error.

The second methodological problem is omitted variable bias. In most data sets, characteristics of workers and jobs that may be relevant to pay determination are unmeasured, often because the data sets were generated for another purpose. Assume, for example, that motivation or intelligence are significant in the earnings determination process but that, as is often the case, information on one or both variables is unavailable. Jobs re- quiring more intelligence and motivation are also likely to involve less dust, noise, and heat, and to be less repetitive. If intelligence or motivation are not controlled in estimating equations the association between working conditions and earnings may be weakened, because some workers in less unpleasant jobs are paid well.

All this is to say, then, that the mixed results from tests of compensating differentials theory can be explained either by the intrinsic inadequacy of the theory or because of methodological difficulties in testing it. Some recent research suggests that it is the latter rather than the former. Jencks, Perman, and Rainwater (1988) have shown that some working conditions are very important in people's appraisals of their jobs. It would therefore be surprising if variations in these working conditions had no effect on the relative supply of labor to different jobs and on pay differentials. Akerlof, Rose, and Yellen (1988) have provided direct evidence of such effects on job switching decisions.

Demand, Labor Market Homogeneity, and the Problem of Equilibrium

The human capital and compensating differentials theories emphasize the supply of workers to different kinds of jobs. But, as S0rensen has observed (1983, pp. 269-70), price is also influenced by demand. Education or work-related experience will increase income only where there is a demand for a particular combination of education and experience, as many newly-minted Ph.D.s discovered in the late 1970s and 1980s. Thus, differences in returns to education by class or segment of the economy may reflect the power of capitalists, managers, or monopoly sector workers to extract higher rewards for their education (Fligstein, Hicks, and Morgan 1983, pp. 293-5). But they may also simply reflect the fact that the demand for additional years or levels of education varies by class or segment because jobs' in some sectors or classes are more techni- cally complicated, or require more self-discipline and determination.

A new structuralist might object that, in a neoclassical world, labor market homogeneity and a tendency to equilibrium ought to eliminate such differentials. Higher returns to education in jobs in one part of an economy - whether class or sector - would induce a flood of applications from people in the part with lower returns and the increased competition should eliminate the differential. If the supply of workers with the requisite skills were not large enough to eliminate -the differential in the short run, investments in education and training by individuals should increase supply sufficiently to do so in the medium term. Is this objection well-founded?

Becker (of all people!) recognized and analyzed barriers to the equalization of rates of re-




turn to human capital between industries. His explanation was as follows. First there is the cost of moving. Industries are usually concentrated in different parts of the country and the wage premium attached to a new job for which a worker qualifies may not be sufficient to offset the cost of moving. Second, there is the effect of specificity of skills to a particular employer. Suppose that, because of an increase in productivity, average wage rates of high school graduates employed in the chemical industry rise relative to average wage rates of high school graduates in manufac- turing industry as a whole. If part of their productivity is based on years of experience with particular employers in that industry, then there can be no flood of workers from, say, apparel manufacture, to bid down their wages. Ten years at a sewing machine does not equip someone to monitor a butadienne refining process (see Becker 1975, p. 36). Now, occupation-specific skills and significant moving expenses are a form of labor market heterogeneity and a dynamic economy exposed to external shocks will always be char- acterized by such heterogeneity. It is not true, then, that all neoclassical analyses assume labor market homogeneity (Willis 1988, pp. 556-60).3

However, while mobility costs and skill specificity may explain some delay in the convergence of wage rates for comparably qualified workers in different industries, sooner or later new entrants to a competitive labor market should tend to eliminate the differential between any pair of industries. It is the persistence of differential rates of return to human capital that is at issue (Colb- jornsen 1985, p. 48). Is there evidence that rates of return to human capital differ across industries for sufficiently long periods of time to render the human capital account implausible? Not, for the most part, in the new structuralist research, which usually analyzes cross-sectional data for a single point in time. The exception is Tigges (1987, 1988), who compares earnings equations for different years. Her results show that from 1960 to 1980 there was a sustained earnings advantage to employment in the core, net of education, in- dicating a persistent difference in returns to education by sector. Research by some economists

has found something similar (see Wood 1979, pp. 175-9).

Do sustained inter-industry differences in the rate of return to human capital warrant the conclusion that the world fails to tend to equilibrate along neoclassical lines? The standard neoclassical answer to persistent inter-industry differences in earnings is that unmeasured differences in working conditions and worker quality account for them (e.g., Murphy and Topel 1987). Other economists contest this view (e.g., Krueger and Summers 1987, 1988). Tests have been incon- clusive, largely because they have involved the ingenious use of readily available data rather than more venturesome methods that might allow more direct tests.

Now, along with Thaler (1989), I doubt that unobserved differences in worker quality and working conditions provide a sufficient account of inter-industry differences in the rate of return to human capital. It may turn out that inter-industry wage differentials are explained, in part, by "differential capacities to realise profits on the basis of exchange advantages" (Fligstein, Hicks, and Morgan 1983 p. 297) or "the organizational power of occupational groups" (Bibb and Form 1977, p. 978). But the point is that new structuralist research has not assembled any.data that can allow the worker quality/working conditions hypothesis to be rejected. The new structuralist research has done nothing useful to settle this issue.

What about differentials in the rate of return to education by class? Surely these must indicate the unfair exploitation of position? A college education is, of course, more highly valued in the executive suite than on the shop floor. But if orthodox economic accounts are correct, why does a college-educated blue-collar worker not force down the wage differential by competing for the executive suite job? A possible answer is that their college degrees are not comparable. College education is about as heterogeneous a commodity as high school education and college quality is positively associated with earnings (Jencks et al. 1979, p. 187). A degree from Har- vard or Stanford is certainly a better credential than a degree from many other colleges; but it is also conceivable that the superiority of the credential actually reflects a superior education. So the college-educated blue-collar worker with a degree from a teacher's college in a remote area of a remote state may well be poorly qualified for the executive suite job and at the same time receives no pay premium from his or her current

I The deskilling literature suggests that most jobs can be held by most people. I simply note, first, that the new structuralist literature, in which internal labor markets play a central role, assumes non interchange- able skills and, second, for the particular example given here - the chemical industry - some indica- tion of the importance of familiarity with particular processes can be found in (Perrow 1984, Chapter 4).




employer because a college education has no value in a blue-collar job.

I would argue, then, that differences in the rate of return to human capital between industries that show up in a one-shot cross-sectional study may be accounted for by differences in demand and/or unmeasured differences in worker quality or working conditions. Persistent differences in the rate of return between industries or classes may be due to unmeasured differences in worker quality or working conditions. In either case, the results would be perfectly consistent with orthodox economics and its assumption that the economy tends to equilibrium. It is also possible that factors not incorporated in neoclassical economics account for the difference - power, for instance. The point is that the methods and mea- surements of the new structuralists have not in the least advanced our capacity to choose between these alternatives.

Market Imperfections and Falsifiability

In neoclassical economics, differences in human capital and in working conditions are translated into differences in earnings through competition in product, capital, and labor markets. If, however, a trade union regulates the supply of labor, wages are likely to be higher in general but may be lower for some workers because unions discriminate (Cain 1976, p. 1233). When the rate ofreturn in an industry is regulated by the government, employers may, under some circumstances, de- cide to pay workers more because any increase in costs can normally be recouped through a rate increase granted by the regulatory body (Shakett andTrepani 1987, p. 526; Hendricks 1977, p. 493). When government is the employer, workers may be paid more because elected officials reap no economic rewardfrompayingthemless (Niskanen 1971; Hamermesh and Rees 1988, pp. 337-9).

Oligopolistic industrial organization may also affect earnings, although the economic mechanism is less obvious in this case. After all, even if a firm makes monopoly profits, why would it pay its employees more than the labor market requires (Fligstein and Fernandez 1988, p. 12)? Employers might, as Fligstein, Hicks, and Mor- gan (1983, p. 295) argue, use monopoly profits to hire better quality labor. But that does not explain any wage premium to monopoly profits since, in principle, hiring more productive labor ought to increase profits. If it did not, why-would an employer hire the better quality labor? Em- ployers might well, however, use their privileged

market position to indulge idiosyncratic tastes; that is, to discriminate. This argument has vener- able antecedents in the neoclassical literature (see Cain 1976, p. 1233).

Does all this add up to the neoclassical evasion of falsifiability asserted by Colbjornsen? First, note that neoclassical economists have tended to deprecate market imperfections. Almost forty years ago Milton Friedman (1953, p. 15) asserted the robustness of neoclassical models despite the patent falsity of the assumption of "perfect competition." Stigler (1949, pp. 12-24; see also Stigler and Kindahl 1970) tried to show that prices are much more responsive to market conditions than suggested by theorists of imperfect competition (e.g., Robinson 1933; Chamberlin 1933). In the massive Handbook of Labor Economics (Ashenfelter and Layard 1986) market imperfections other than unions and public employment are barely mentioned. If economists wish to use market imperfections to evade falsification this is an odd way to proceed.

Second, it cannot be argued that imperfect competition has been treated as, in Goldthorpe's term (1978, pp. 186-7), a "residual category" of explanation - that is, as an unexamined factor, hauled out to account for observations discrepant to the theory. There is a substantial body of theoretic work examining properties of various forms of imperfect competition (number of firms, barriers to entry, government regulation), and empirical work on the relative roles of technical efficiency and market power in producing superior profits (usefully reviewed in Green 1990, Chapters 3,6, and 9). One does not evade falsification by specifying the implications of a theory and testing them!

Third, estimates of the effects of market imperfections on earnings suggest that they are modest. Working for the federal government seems to produce a wage premium; working for state and local governments does not (Hamermesh and Rees 1988, pp. 337-9). Working in aregulat- ed industry may increase pay, depending on the form of regulation and the profit record of the firm (Hendricks 1977). The evidence on market concentration and earnings is inconsistent (Hey- wood 1986, p. 342).

Colbjornsen is probably right that the assertion of market imperfections is sometimes used by orthodox economists to evade falsifiability. (Though he does not cite a single example!) But this is clearly not a pervasive problem in the economic literature on earnings; on the contrary, in that literature, both theoretic and empirical anal-




yses of the effects of market imperfections abound. What is more striking is that very little of the empirical literature finding modest market imperfection effects gets considered in new structuralist writings.

Internal Labor Markets, Efficiency, and Marginal Productivity

New structuralist writings assert that internal labor markets are created by worker power (in part) and that they break the link between marginal productivity and earnings. Their existence thus violates the assumptions of neoclassical economic theory. There are, of course, several reasons why internal labor markets might be efficient. Skill specificity provides employers with an incentive to elaborate a promotion hierarchy to reduce quitting and to provide security of employment in order to reduce worker reluctance to train potential replacements (Doeringer and Piore 1971). Dificulties in monitoring employee performance provide another reason. If supervision or piece- work do not provide sufficient control, employers can establish a system of ranks and a "rank order tournament." Employees will then work hard because they are competing for the fairly steeply graded increase in rewards associated with an organizational hierarchy (Lazear and Rosen 1981).

So internal labor markets can just as easily be explained as the product of competitive processes as of worker power. Their mere existence does not contradict a theory that assumes that employment institutions exist largely because they are efficient. The extent to which internal labor markets are the creation of power or efficiency is an empirical question that has not been answered by new structuralist research.4

However, even if internal labor markets are efficient, does their existence pose problems for orthodox economics by breaking the link between marginal productivity and pay, as S0rensen has claimed? England and Farkas (1986, pp. 135-6) show that the issue is really one of the time period over which earnings are supposed to equal marginal productivity. If positions and the pay scales attached to them are arranged to serve as an incentive for workers to stay with a firm, train other workers, and/or to motivate those whose work is not easily monitored rather than to reward individual productivity, then earnings are likely to

exceed productivity at the higher levels. But if workers are paid less than their productivity at lower levels, over the long haul labor may get paid something like its marginal product. It is easier to make this argument than to assemble evidence in support of it. But the important points are, first, that internal labor markets can be recon- ciled with orthodox theories of earnings and second, that there is no single time period over which earnings must equal marginal productivity.

AN IMPROVED ACCOUNT?

Even if neoclassical theories of earnings are stronger than new structuralists claim, it does not follow that they exhaust what is interesting in earnings determination. The new structuralist emphasis on power and segments may provide a useful and distinctively sociological supplement to neoclassical theories. That it does so has been claimed by Tigges (1988, pp. 677-8) and Kalle- berg (1989, p. 589), among others.5 According to new structuralists, people earn what they do because of the positions they occupy and, in particular, the power associated with the positions. Three sorts of positions have been emphasised: positions in the class structure, positions within classes that provide power resources, and positions in different "sectors." In each case, favored positions enable incumbents to earn more than comparably qualified individuals in less favored positions.

1) Class position. At the upper reaches of the class structure, employers and managers earn more than their human capital warrants. Capitalists get more because "they have control over all aspects of production" (Fligstein, Hicks, and Morgan 1983, p. 298).6 Managers earn more because capitalists depend on them to assist in the extrac- tion and realization of surplus value (Wright 1979, pp. 88-91; Kalleberg and Griffin, 1980, p. 732).

2) Positions of power within classes. Certain

I Historical work shows that some internal labor markets were created in response to the exercise of power by unions. See, in particular, Jacoby (1985).

I The degree to which new structuralists regard their work as alternative or complement to orthodox economics is not entirely clear (Tigges 1988, p. 678). However, the new structuralist literature is almost uniformly animated by a strong attack on neoclassical precepts.

6 1 do not consider here new structuralist analyses of employers' earnings (e.g., Fligstein, Hicks, and Mor- gan 1983; Kalleberg and Griffin 1980). Earnings are a small part of capitalists' income and are probably not worth looking at separate from profits and interest income, since the form in which a capitalist takes income will be largely dictated by different tax rates to different forms of income.




attributes of work provide a basis for collective and individual actions to improve earnings. First, there is skill. "Skilled workers are generally more socially cohesive and better able to control their work environment than unskilled workers" (Bibb and Form 1977, p. 977). Consequently, they are often able to force wages above market levels. Second, some jobs are unionized and unionization is a collective resource that can be used to extract higher earnings in some industries or firms (e.g., Bibb and Form 1977 p. 977; Hodson 1987 pp. 488-9; Fligstein, Hicks, and Morgan 1983, p. 298) or within organizations (Baron and New- man, 1990). Third, occupational licensure increases the bargaining power of some professionals (Kalleberg, Wallace, and Althauser 1981, p. 659). Fourth, employers become progressive- ly more dependent on employees who have accumulated seniority (Kalleberg, Wallace, and Althauser 1981, pp. 658-9).

3) Sectors. Sectoral effects are a bit more complicated. Assume for simplicity of exposition that the economy can be divided into two sectors: a primary (or core) sector with large firms and plants, capital intensive production, and relatively sheltered product markets (few producers, government contracts, or government regulation) and a secondary sector (or periphery) that is not sheltered.7 Alternatively, there are jobs within organizations that vary in the extent to which they are sheltered from competition (Baron and Bielby 1980). This sectoral organization of the economy affects earnings in a number of ways.

First, firms sheltered from competition make higher profits, some proportion of which employees can lever away as higher earnings (Bibb and Form 1977, p. 977). These profits may be invested in work arrangements that procure a more stable, higher quality labor force. The most important device for doing this is the internal labor market, which is one of the defining ele- ments of core employment (Beck, Horan, and Tolbert 1978, p. 707; Kalleberg, Wallace, and Althauser 1981, p. 659). Since they cannot be replaced by workers from outside their firm or by employees with less seniority, workers in an internal labor market are relatively powerful vis a vis their employers (Kalleberg, Wallace, and Althauser 1981, p. 657). Furthermore, unions are likely to be stronger in large, highly concentrated plants. This also increases worker bargaining power (Kalleberg, Wallace, and Althauser 1981,

pp. 672-5). Together, these factors produce an additive effect of sector on earnings.

Second, power resources attached to particular positions can be used more effectively in the core than in the periphery. Skill, seniority, union membership, and occupational licensure should pay off better in the core than in the periphery and should interact significantly with sector in earnings models (Kalleberg, Wallace, and Al- thauser 1981, p. 675-8).

Third, the payoff to human capital factors (when not simply regarded as indices of power, as in Kalleberg, Wallace, and Althauser's treat- ment of seniority) is expected to vary by segment. The availability of more funds means that education and experience are better rewarded in the core (Fligstein, Hicks, and Morgan 1983, p. 299; Zucker and Rosenstein 1981, p. 879).

Fourth, segments provide different opportuni- ties for discrimination. The earnings differential by race and sex for individuals with comparable skills should be greater in the core than in the periphery because employers can more readily exercise their prejudices (for example, by deval- uing women's credentials) when there is less competition. This is true between industries (e.g., Beck, Horan, and Tolbert 1980, p. 115) and between different parts of a single firm (Bridges and Nelson 1989, p. 654; Baron and Newman 1990, pp. 169-7 1). In either case the differential between men and women in returns to education should be higher in the more sheltered sector (Coverdill 1988, p. 973).

These, then, are the principal new structuralist claims. Some are well supported by the evidence. Controlling for human capital, managers earn more than workers (Kalleberg and Griffin 1980; Fligstein, Hicks, and Morgan 1983). Earnings increase with experience with a single employer, as they should in an internal labor market (Kalle- berg, Wallace, and Althauser 1981, p. 670; Kal- leberg and Lincoln 1988, pp. S 144-5). Unioniza- tion (Bibb and Form 1977; Kalleberg, Wallace, and Althauser 1981; Fligstein, Hicks, and Mor- gan 1983) and occupational licensure increase earnings (Kalleberg, Wallace, and Althauser 1981, p. 670). Within organizations, women seem to be most disadvantaged in jobs that are sheltered from external competition (Bridges and Nelson 1989; Baron and Newman 1990).

The results are not strong, however, for estimates of the effects of sector on earnings - which are supposed to be one of the principal contributions of new structuralism (Tigges 1988, p. 676; Coverdill 1988, p. 986). Additive effects esti-

I The literature has largely abandoned this assumption, but it is still assumed by Tigges (1987, 1988).




mated by classification of industries into groups and comparison of mean earnings are widely recognized to involve an unconvincing circulari- ty (e.g., Colbjornsen 1986, p. 60). Additive effects estimated by decomposing segments into defining components (concentration, capital intensity, size, government purchases) have produced inconsistent results (e.g., compare Kalle- berg, Wallace, and Althauser 1981 with Hodson 1987). Most of the interactions between segment and power estimated by Kalleberg, Wallace, and Althauser are insignificant; when significant they are inconsistent across model specifications (the sole exception is the union/concentration inter- action) and add little to explained variance in earnings (1981, p. 677). The same inconsistency appears in interactions between sector and human capital (compare Kalleberg, Wallace and Al- thauser 1981, p. 679 with Fligstein, Hicks, and Morgan 1983, p. 303; see also Zucker and Rosenstein 1981, p. 877) and between sector and discrimination (Zucker and Rosenstein 1981, p. 877; Coverdill 1988, pp. 973_4).8

New Structuralism as an Alternative

New structuralist claims, then, do not rest on a solid empirical foundation. In any case, there is a more fundamental problem with them. I would argue that there is either nothing novel in new structuralist interpretations or, if there is something novel, no method has been developed for distinguishing new structuralist from orthodox economic predictions. Consider first the measures of power (except for managerial status, to which I return) for which earnings effects have been established.

Occupational licensure distorts the operation of markets. But that restrictions on the supply of labor push up its price (Kalleberg, Wallace, and Althauser 1981, p. 659) is hardly a distinctively sociological contribution. Indeed, one of the ear- liest, most scathing, accounts of occupational licensure is found in the writing of that most orthodox of economists, Milton Friedman (1962, Chapter 9). Union effects on income are similar- ly compatible with orthodox economics (unions restrict the supply of labor) and played a central role in the work of another orthodox Chicago

economist, Henry Simons (1948, Chapter 6). The new structuralist writing adds no distinctive mechanism. As a matter of fact, most of the good empirical work on union effects on wages has been produced by economists. This work has been largely ignored in new structuralist writings but better addresses some of the relevant methodological problems (usefully summarized by Lewis 1986).9

There is also seniority: "workers acquire or- ganizationally specific power by accumulating tenure with a specific employer" (Kalleberg, Wallace, and Althauser 1981, p. 658). This is often, of course, true. But it does tend to blur the distinction between a new structuralist account and an economic one. Seniority is a straightforward human capital measure and, unless one assumes that employers increase workers' pay out of the goodness of their hearts (a notion quite alien to orthodox economics!), is presumably based, at least in part, on the bargaining power attached to the possibility of quitting. There is even some evidence that whatever bargaining power is involved is based on the superior productivity of the experienced worker, as human capital theory predicts it should be (Kostink and Follman 1989).

Finally, there is the effect of exposure to markets on sex differences in earnings. While research using industry classifications or industry measures (e.g., concentration) has produced un- reliable results, recent research suggests that within organizations, women and nonwhites are less disadvantaged if they are in jobs exposed to markets (Bridges and Nelson 1989; Baron and Newman 1990). This is interesting but hardly novel. Far from constituting an alternative to neoclassical economics this finding would simply reaffirm what economic liberals have been writing about the virtues of competition for decades (e.g., Friedman 1962, Chapter 7; Sowell 1981).

So, in their interpretation of most of the effects for which there is some evidence, new structuralists advance no mechanisms distinct from those already commonly analyzed within orthodox economics. This is also largely true for the effects for which evidence is weak.

As we saw above, Fligstein, Hicks, and Mor-

8 As Coverdill emphasises (1988, p. 980), earnings are lower in the periphery than in the core and women are concentrated in peripheral occupations. If sub- stantively distinct sectors have been identified, their existence has considerable significance for earnings differences between men and women.

9 For example, skilled workers are more likely to unionize. Once a firm is unionized and its workers secure higher wages, it is likely to have more candi- dates forjobs and can select more skilled workers. This means that, unless skills are perfectly controlled, the effect of unionization on wages is likely to be overes- timated (Lewis 1986, p. 46).




gan (1983, pp. 294-5) provide a straightforward human capital account for a relation between concentration and earnings - extra revenues are used to purchase better quality labor. Hodson provides another answer for capital intensity. High capital intensity means that workers are more powerful because they are responsible for costly equipment (1987, pp. 490-1,498). But what does this mean other than that workers who can be trusted with expensive equipment - a distinctive personal characteristic - are in short supply? The other sectoral variables are selling to the government or being employed by the state. Each is hypothesized to raise earnings. For pri- vate sector suppliers the government provides an "assured market" (Kalleberg, Wallace, and Al- thauser 1981, p. 653); furthermore, the government imposes various 'fair wage' regulations on its contractors (Hodson 1987, p. 491). That government regulations can raise the wages of some workers is hardly surprising. But the "assured market" account runs into the same difficulty as the concentration, size, and capital intensity hy- potheses. Why would employers choose to share governmental largesse with their employees? One answer is that when contracts have a "cost plus" character of the sort often found in the defense industry, there is no incentive to contain wages and there may be an incentive to raise them, since they are a component of costs on which revenues will be based. Peck and Scherer (1962; see also Scherer 1964) provided some evidence that this has occurred in the U.S. defense industry. Thus, a plausible "assured market" process is already established in the economic literature. What about the effects of state sector employment? Accord- ing to Fligstein, Hicks, and Morgan (1983, p. 298) state workers are paid more because their wage bill is funded out of taxes. This, again, very much has the flavor of right wing economic or- thodoxy (e.g., Bush and Denzau 1977).

Kalleberg has summarized the accomplishment of recent sociological writings on earnings as follows: They "reject human capital explanations of earnings in favor of more structural theories that emphasized the power of workers to realize their interests in labor market exchanges"; and in doing so, "sociologists have developed their own distinct, noneconomic, theoretical contributions to explaining economic inequality" (1989, p. 589). I would argue that, on the contrary, for the most part, new structuralist earnings determination mechanisms -are entirely familiar to anyone with a passing acquaintance with orthodox economics. There is no distinctive new structuralist anal-

ysis of the effects of unionization and occupational licensure or of the implications of market imperfections for the incidence of discrimination. Purged of their distinctive vocabulary, analyses in this genre of the effects of seniority, state employment, and most sectoral attributes, are entirely commonplace.

There are, however, some exceptions. Consis- tent with his results, Hodson hypothesizes that concentration increases the ability of employers to resist workers and keep wages down. Kalle- berg, Wallace, and Althauser (1981, p. 677) in- terpret the lower pay off to unionization in firms in concentrated industries along similar lines. In some new structuralist writings skill is not (or not just) a measure of human capital but rather an indicator of the potential for collective organization of workers (Bibb and Form 1977, p. 977). Finally, there is occupancy of a managerial position. Wright (1979, pp. 88-91) has argued that managerial pay is not just a reward to competence ("responsible and creative behavior"); it is also influenced by the fact that "large income differentials between hierarchical levels are es- sential for underwriting the legitimacy of au- thority." Thus, net of competence, managers get a higher than average return to education to induce subordinates to accept their superiority.

So the new structuralist literature offers three earnings determination mechanisms that are both genuinely structural and distinct from orthodox economics. The problem is that the methods used in the relevant research provide no direct check for these mechanisms. Little evidence supple- mental to the entirely standard regression coefficients estimated has been provided. Discussions of the industrial structure/employer resistance effects (Hodson 1987, pp. 488-90; Kalleberg, Wallace, and Althauser 1981, p. 677) are quite casual and speculative. Bibb and Form's skill and social cohesion effect is better documented. But, again, all they showed is that skilled workers earn more, a finding that is as consistent with human capital theory as with their account. And showing that, say, a high school-educated man- ager is higher paid than a high school-educated blue-collar worker (net of experience) means little unless it can be shown that the two employees are equally capable of taking initiative, worked equally hard at relevant phases of their career, and so on. Neither Wright nor other new structuralist analysts of managerial earnings have shown this.

By and large, then, I think it is fair to describe new structuralist work on earnings as an exercise




in relabelling. The familiar demand and supply curves of orthodox economics provides an appa- ratus for analyzing the mechanisms linking "structure" to earnings. The new structuralists provide few alternative mechanisms and no alternative methods for detecting their presence. So if we attempt to appraise the relative adequa- cy of economic and new structuralist accounts of earnings determination we are reduced to com- paring a sophisticated analytic framework with a set of labels. One might reasonably conclude that there is no contest!

WHAT IS TO BE DONE?

First, it makes sense to bear in mind measurement problems before drawing a conclusion from the statistical analyses of earnings determination that we have at our disposal. Years of education is a poor measure of skills; Dictionary of Occu- pational Titles estimates of the job characteristics of survey respondents are fraught with error. While they may be the only available measures of human capital or compensating differential effects, such measures will not support strong conclusions, certainly not the categorical rejec- tion of orthodox economic accounts common in some recent sociological writings.10 It follows from this that future research should incorporate better measures of economic factors relevant to earnings determination, including quality of education, work conditions, and health. This is easier said than done. But unless it is recognized that current measures are grossly inadequate, researchers are unlikely to try to generate better ones."

Second, the new structuralist literature on earnings determination generally minimizes the relevance of orthodox economic accounts. This tactic has produced caricatures of economic writings. Detailed discussions of writings by economists treating the characteristics being rejected (perfect competition, equilibrium, homo- geneous labor markets) are infrequent in new structuralist analyses. In fact, many of the mechanisms identified by economists that originate in the working of supply and demand have considerable plausibility.

Granovetter's (1981) approach is more sensi- ble. The task for sociologists in the analysis of labor markets is, he argues, to provide explanations for shifts in demand and supply, for differences in demand and supply elasticities, or for obstacles to equilibrium. In a later paper he argues that part of the contribution of sociology is to introduce multiple objectives in the explanation of choices -that is, "sociability, approved status, and power" (Granovetter 1985, p. 506). In other words, sociology should be a complement to economics rather than a vehicle for its refutation.

Third, labelling a factor affecting earnings "power" does not make it either sociological or interesting. Unions are sometimes able to force up the wages of their members. The interesting question is, how? Granovetter and Tilly (1988, p. 201) treat this question. Most of the factors they list are rather narrowly economic: the price elasticity of the demand for whatever the workers are hired to produce, the substitutability of labor and capital, the supply elasticity of capital that might be substituted for labor, the share of total costs accounted for by labor, the overall condition of the labor market, and employer vulnerability to short-run disruptions of production. They also cite "the unity of workers" which sounds less economic. Nonetheless, it is important to recognize that, even in the case of "the unity of workers," by approaching the problem with the rather rigid set of assumptions found in some economic analyses (income maximizing individuals disposed to free ride) Olson (1965) has had a significant impact on sociological analyses of trade unions. 2

All of this may sound as if I am arguing that

'? The possible effect of unmeasured variables is addressed directly by Wright (1979, pp. 100-1) in the context of a discussion of social class effects. He argues that "It is always possible ... to make the claim that some unmeasured variable will account for observed differences between groups. The burden of proof in such cases rests with the critic." There is something to be said for this view. But in the case of new structuralist analyses it is inappropriate. First, new structuralists have been challenging orthodox economic accounts withoutproviding suitable evidence to support their alternative interpretations. The new structuralists are the "critics" in this case. Second, if proponents of alternative interpretations of the same data continually assert that it is the other side that has to come up with evidence that discriminates between accounts the prospects forprogress in the social sciences are rather dim.

" For a brilliantly conceived example of what can be done, see Blackburn and Mann (1979).

1 For an entirely derivative analysis see Crouch (1982). There are many criticisms of Olson, but his aggressive methodological individualism has influenced some of the better recent work on earnings (e.g., Colbjornsen 1986, pp. 29-31). No modem writer on the organization of interest groups would neglect the free rider problem.




sociology has nothing to add to our understand- ing of the earnings determination process. I do think that recent writings within the new structuralist genre have added little or nothing to what we already know from economic treatments. But my view is that they are deficient not only because they simply relabel familiar economic mechanisms, but also because they ignore plausible and distinctively sociological earnings de- termining mechanisms.

The rhetoric of disputes over earnings is couched in terms of "fairness". Employed professionals usually defend pay demands in terms of the "responsibility" of their jobs or their training (Thompson 1982, pp. 390-4). Union "pattern bargaining" involves appeals to customary differentials (e.g., Bourdon 1979). Within plants workers sometimes complain because a change in the payment scheme upsets intra-plant differentials (e.g., Whyte 1961, pp. 113-7; Bridges and Nelson 1989, pp. 634-5). Interest groups are currently disputing the fairness of pay for jobs in which women are overrepresented. Governments use minimum wage law and, sometimes, wage and price legislation to intervene directly in the wage-setting process to ensure a decent living wage for certain groups of workers. It is likely that people involved in disputes over earnings appeal to fairness because there is some experience that such arguments work.

Now, there is a well-established body of research within sociology showing that economic decisions are socially constrained. For example, people exploit the obligations incurred in social networks to find jobs (Granovetter 1974); they often do not free ride (Marwell and Ames 1981); and employees are sometimes more generously treated than a collective agreement specifies because contractual provisions are modified to conform to evolving norms of fairness (Gould- ner 1954). All this suggests that even in the economic arena moral judgments matter. This does not mean that there is a socially prevalent set of rigid judgments about appropriate wages. To argue that considerations of fairness enter into earnings negotiations does not imply an "oversocialized conception of man" (Wrong 1961). It is simply to say that various judgments of wage fairness exist, that within the distributions of fairness judgments central tendencies can be discerned (e.g., Alves and Rossi 1978), and that they are a resource that can be tapped in particular earnings disputes.

With the exception of the problem of discrimination, these sorts of considerations are almost

entirely absent from new structuralist writings on earnings determination. Ironically, over the last decade or so, some economists have shown increasing interest in the implications of fairness judgments (although they cannot be described as the mainstream of the discipline). Fairness judgments have been invoked to explain persistent inter-industry wage differentials (Wood 1979, pp. 177-9; Thaler 1989, pp. 179-81); to explain the apparent failure of nominal wages to decline during recessions even in occupations like dish- washing where skills are not specific to a particular employer and the normal implicit contract analysis is irrelevant (Kahneman, Knetsch, and Thaler 1986, p. 739); and to explain the apparent association between the macroeconomic performance of nations and institutions that influence perceptions of the relative fairness of wage increases (e.g., Bruno and Sachs 1985, p. 231).

Not only, then, can the findings reported in new structuralist writings on earnings be inter- preted largely in orthodox economic terms; in addition, the processes about which sociologists are most qualified by training to say something useful seem increasingly to have attracted interest from economists. If sociological research on earnings continues to be informed by new structuralist precepts, there is a disturbing possibility that while sociologists produce relabelled but in- ferior economics, economists will take responsibility for the production of intelligent sociology.'3 That is not an appealing thought.

MICHAEL R. SMITH is Associate Professor and Chair in the Department of Sociology at McGill University. In recent years he has published on social and political theories ofpostwar macroeconomic performance, the effects of information technology on office organization, and the Canada/US free trade agreement. He recently completed a study of the implications for the Canadian chemical industry of the creation of the European Community single market. He is currently completing a book on postwar inflation and partici- pating with Anthony Masi, Axel van den Berg, and Joe Smucker in projects on labor markets in Canada and Sweden.

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What is New in "New Structuralist" Analyses of Earnings?