Have New Human Resource Management Practices Lowered the Sustainable Unemployment Rate?

Adam Posen,
Adam Posen
Adam Posen President - Peterson Institute for International Economics
Jessica Cohen, and
Jessica Cohen Former Brookings Expert
William T. Dickens
William T. Dickens University Distinguished Professor of Economics & Social Policy - Northeastern University

May 15, 2001

The way work is organized in the United States has undergone a radical change in the last 20 years. Job stability has declined for long-tenured workers, there has been a large increase in the use of contract and temporary workers, especially on the manufacturing shop floor, and there has been widespread adoption of new forms of workplace organization. The business press and industrial relations experts who have traced and documented these trends often associate them with an increasingly competitive environment for U.S. business, driven by international trade and technological change.

The effects of these transformations on income distribution and productivity have been studied, but almost no attention has been paid to the effect they may be having on the ability of the economy to maintain low unemployment. This is surprising considering the coincidence of these changes with an extended decline in unemployment that seems to have produced little inflation, and evidence of a striking improvement in efficiency with which workers are matched with jobs. The combination of low unemployment and inflation suggest a decline in the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Several authors have argued that such a change has taken place over the last five to 15 years. The most popular explanations suggested for such a decline ignore the changes in the organization of work and focus instead on developments on the supply side of the labor market. The possibility that there is a link between the decline in the NAIRU and the adoption of these new practices has not been developed.

In this paper we discuss recent changes in how U.S. firms hire, train, fire, compensate, and manage workers. We then develop explanations for the motivations behind these changes using interviews with human resource executives from U.S. manufacturing. Finally, we use these components to suggest how the major changes in American corporations’ human resource management (HRM) practices could have led to a drop in the NAIRU. A decline in labor rents that has made queuing for high wage jobs less attractive, is an important part of our story. This decline in rents occurred even as returns to skill (and therefore wages) rose for some workers. In fact, we show that inter-industry wage differences, a measure of rents, declined in a two-step sequence with a similar shape and timing to parallel movements in the Beveridge curve—a measure of matching efficiency. These co-movements also match in some important ways the available spotty data on the adoption of innovative work practices.