From a different angle, an employer solves a set of problems for employees—smoothing out the income stream, and doing a bunch of logistical details associated with finding work, having what’s needed to do the work, and getting paid. This is apparently so valuable that free-lancers get paid between 2 and 3 times as much per hour as employees.
This is a seductive explanation, but competing hypotheses exist, for instance Coase’s, which states that firms, as a phenomenon, arise due to the transaction costs incurred when hiring on an open market a freelancer to perform a job you need.
If there is an economic advantage to reducing these transaction costs by having the job performed “internally”, and this advantage overcomes the intrinsic costs of keeping the job internal, firms will tend to form, and grow larger as the discrepancy between these costs.
So here, rather than “employees choose to work in firms” we have an explanation of the form “firms have an interest in acquiring employees”, and no particular reason to expect that the formation of firms benefits employees.
What evidence (as opposed to just-so stories) can we find for or against each of these hypotheses?
I was offering a different angle, not saying that employment can be fully explained either by employer or employee motivations.
There are circumstances where a government forces matters in one direction or the other. In Slavery by Another Name, it’s explained that after the Civil War, there were laws requiring black people to get permission from their employers to get a job with someone else, and also vagrancy laws against being unemployed.
On the employee’s side, there can be laws (France, the Soviet Union) or customary contracts (tenure) which make it impossible or almost impossible to fire them.
In general, I’d frame it as employees and employers are hoping that the other will solve problems for them, and the hope is frequently more or less realized.
I am very surprised that you see Ronald’s explanation in contrast to Nancy’s. Income-smoothing is the only example she gives that does not look to me like a transaction cost. I think the economics party line is that the transaction costs will be split between the employee and the firm, with agnosticism about who will get the bulk of the benefit.
From a different angle, an employer solves a set of problems for employees—smoothing out the income stream, and doing a bunch of logistical details associated with finding work, having what’s needed to do the work, and getting paid. This is apparently so valuable that free-lancers get paid between 2 and 3 times as much per hour as employees.
This is a seductive explanation, but competing hypotheses exist, for instance Coase’s, which states that firms, as a phenomenon, arise due to the transaction costs incurred when hiring on an open market a freelancer to perform a job you need.
If there is an economic advantage to reducing these transaction costs by having the job performed “internally”, and this advantage overcomes the intrinsic costs of keeping the job internal, firms will tend to form, and grow larger as the discrepancy between these costs.
So here, rather than “employees choose to work in firms” we have an explanation of the form “firms have an interest in acquiring employees”, and no particular reason to expect that the formation of firms benefits employees.
What evidence (as opposed to just-so stories) can we find for or against each of these hypotheses?
I was offering a different angle, not saying that employment can be fully explained either by employer or employee motivations.
There are circumstances where a government forces matters in one direction or the other. In Slavery by Another Name, it’s explained that after the Civil War, there were laws requiring black people to get permission from their employers to get a job with someone else, and also vagrancy laws against being unemployed.
On the employee’s side, there can be laws (France, the Soviet Union) or customary contracts (tenure) which make it impossible or almost impossible to fire them.
In general, I’d frame it as employees and employers are hoping that the other will solve problems for them, and the hope is frequently more or less realized.
I am very surprised that you see Ronald’s explanation in contrast to Nancy’s. Income-smoothing is the only example she gives that does not look to me like a transaction cost. I think the economics party line is that the transaction costs will be split between the employee and the firm, with agnosticism about who will get the bulk of the benefit.