An Enterprise Incentive Fund for Labour Mobility in the Cooperative Economy

Abstract

The purpose of this paper is to develop, within a decentralized planning framework, a system of incentive payments to firms as a means of correcting labour misallocation in an economy of labour-managed or cooperative firms. This scheme, we believe, may offer certain advantages over existing proposals. If the labour-managed firm is assumed to adjust its labour force and other inputs to maximize income per worker, then at the firm's optimum (assuming that inputs are homogeneous and that the firm is a price-taker) the value of the marginal product of labour will be equal to income per worker; and the level of any non-labour variable input will be defined, ceteris paribus, by the equality of its price per unit with the value of its marginal product. Ward (1958; 1967, Chapter 9) demonstrates that the labour market tends to be rigid in an economy of such firms. Thus, for example, at prevailing levels of income per worker there might be excess supply of labour, yet existing cooperatives will not expand membership if to do so would reduce income per worker. Moreover, consider two cooperatives each at its respective equilibrium at which income per worker is maximized, but let income per worker differ between them. Domar (1966) and others have argued it is not possible for labour to move from the poor to the rich cooperative because any such movement would reduce income per worker in both firms. Since income per worker in each cooperative is equal to the value of the marginal product of labour, it follows that there are differences in the latter between the cooperatives. Thus there is a misallocation of labour and of other resources among cooperatives in equilibrium at different levels of income per worker. Ward (1958) has also shown, for a singleproduct cooperative maximizing income per worker with labour the only variable input, that the typical reaction to an increase in output price is a contraction of employment and output levels. The cooperative economy thus fails in the short run to attract labour to its most highly valued uses. Two points should be made before we consider solutions to this misallocation problem. First, as McCain (1973) and Furubotn and Pejovich (1973) suggest, contrary to the view taken in the simple income per worker maximizing model, the labour force of the cooperative firm may not easily be adjusted in the short run, especially when membership reduction is considered. Some approaches to labour force adjustment are indicated in the next section. Secondly, we would not wish to deny the importance of other problems of the cooperative economy not considered here, such as those relating to the investment decision discussed by Vanek (1975, Chapter 28) and Furubotn (1976). It has also been argued by Vanek (1970, Part III;