Specialization, Multiskilling and Human Capital: Complementarity vs. Substitutability

Abstract

The introduction of team-based flexible production system substantially enhanced productivity and product quality at some progressive plants which adopted them. Most of these plants adopted a bundle of human resource practices which are designed to encourage workers to acquire broad skills and share information, and delegate more responsibilities to production workers. The existing literature, however, has not fully explained why workers are better motivated under these high-performance workplace practices despite their seemingly higher responsibilities and weaker hold-up power. It also does not answer why firms delegate considerable decision rights to workers given the possibility that such delegation may increase the bargaining power of the workers more than the firms want. In order to answer these questions, we focus on an incentive aspect of the multiskilling practices and compare it with that of specialization in the traditional work systems. We discover that organizational forms significantly affect the workers' incentives to acquire firm-specific human capital and the optimal allocation of decision rights. Key is that information-sharing by multiskilled workers induces the workers' investments in firm-specific human capital to become strategic substitutes. In the traditional work systems, on the contrary, they are more likely to be strategic complements. Assuming worker-employer relationship with ex post bargaining based on skill acquisition rather than output-contingent contracts, the following basic results are derived: (1) workers' incentives to invest in firm-specific human capital tend to be stronger; and (2) the optimal level of delegation is typically higher, in organizations with multiskilling practices than in those with specialization. Other implications of human capital complementarity and substitutability for collusion, labor union formation and job design are also discussed.