Labor as a Quasi-Fixed Factor

Author(s): Walter Y. Oi
Source: Journal of Political Economy, Vol. 70, No. 6 (Dec., 1962), pp. 538-555
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1828778 .
Accessed: 06/09/2011 11:43

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to Journal
of Political Economy.

http://www.jstor.org
 LABOR AS A QUASI-FIXEI) FACTOR
WALTER Y. 011
UIfniversityof Washington
T HE cyclical behavior of labor mar- borne out by the available evidence. Thus
kets reveals a number of puzzling
features for which there are no
truly satisfying explanations. Included
among these are (1) occupational differ-
ences in the stability of employment and
earnings, (2) the uneven incidence of un-
employment, (3) the persistence of differ-
ential labor turnover rates, and (4) dis-
criminatory hiring and firing policies. I
believe that the major impediment to
rational explanations for these phenom-
ena lies in the classical treatment of labor
as a purely variable factor.
In this paper I propose a short-run the-
ory of employment which rests on the
premise that labor is a quasi-fixed factor.
The fixed employment costs arise from
investments by firms in hiring and train-
ing activities. The theory of labor as a
quasi-fixed factor is developed in Part I.
In Part II, the implications of this theory
are subjected to various empirical tests.
Finally, Part III turns to an examination
of alternative theories and an extension
of my theory to a theory of occupational
wage differentials.
The concept of labor as a quasi-fixed
factor is, in my opinion, the relevant one
for a short-run theory of employment.
Its implications are amenable to empiri-
cal verification and are, in the main,
1 This paper is taken from my unpublished doc-
toral dissertation "Labor as a Quasi-fixed Factor of
Production" (University of Chicago, 1961). I wish
to express my indebtedness to Professors A. C. Har-
berger, H. G. Lewis, and A. E. Rees. A reading of
two unpublished articles by Professor Gary S. Becker
led me to revise the theory substantially. Financial
and clerical assistance from the Social Science Re-
search Council and the Transportation Center,
Northwestern University are also gratefully ac-
knowledged.
538
my theory provides a unified explanation
for various aspects of the cyclical func-
tioning of labor markets.
I. A SHORT-RUN THEORY OF
EMPLOYMENT
According to the theory presented here
cyclical changes in employment are ex-
plained by differential shifts in factor de-
mands and supplies. The first two sec-
tions develop a theory of factor demands
assuming rigid wage rates. In the next
two sections this assumption is relaxed,
allowing for variations in factor supplies.
A. NATURE OF THE CLASSICAL SHORT-RUN
ADJUSTMENT PROCESS
In the classical short-run model certain
paths of adjustment are barred to the
firm. These barriers usually postulate
the presence of fixed factors, short-run
changes in output being effected by vary-
ing only the remaining factors.
Changes in the amount demanded of
any factor are composed of two parts:
(a) response to changes in the rate of out-
put--the scale effect and (b) response
to variations in relative factor prices-
the substitution effect. With an assump-
tion of rigid wage rates, the substitution
effects may be neglected and attention
focused on the scale effects.
Consider a firm faced by a decline ill
product demand. The adjustment proc-
ess involves a reduction in output ac-
companied by a decline in the demand
for each variable factor. There is no rea-
son to expect that the demands for Lill
variable factors will be (lecreased by the
same proportion. The reduced demands
 LABOR AS A QUASI-FIXED FACTOR 539

for variable factors led to an increase in For analytic purposes fixed employ-
the relative employment of fixed factors. ment costs can be separated into two
In a sense, the firm now employs too categories called, for convenience, hiring
much of the fixed factors and would, and training costs. Hiring costs are de-
therefore, try to substitute fixed factors fined as those costs that have no effect
for variable factors. Consequently, those on a worker's productivity and include
variable factors that tend to be most sub- outlays for recruiting, for processing pay-
stitutable for, or least complementary roll records, and for supplements such
with, the fixed factors will experience the as unemployment compensation. These
greatest relative declines in demand due costs are closely related to the number of
to any given decrease in product demand. new workers and only indirectly related
The converse holds for an increase in to the flow of labor's services. Training
product demand. Thus the variable fac- expenses, on the other hand, are invest-
tors that are most substitutable with the ments in the human agent, specifically
fixed factors will exhibit the greatest rela- designed to improve a worker's produc-
tive shifts in factor demands. tivity. The effect of training on produc-
B. DEMAND FOR A QUASI-FIXED
tivity could be summarized by a produc-
FACTOR OF PRODUCTION tion function showing the increment to a
A quasi-fixed factor is defined as one worker's marginal value product in the
whose total employment cost is partially tth period, AMt, due to an investment in
variable and partially fixed. In the classi- training of K dollars per worker.2
cal short-run model all factors are classi- AMt = g(K). I
fied as either variable or fixed. Each fac-
tor may, however, possess a different de- The total discounted cost, C, of hiring an
gree of fixity along some continuum rath- additional worker is the sum of the pres-
er than lie at one extreme or the other. ent value of expected wage payments, the
From a firm's viewpoint labor is surely hiring cost, H, and training expense, K.
a quasi-fixed factor. The largest part of T
total labor costs is the variable-wages bill C= J:We(l + r) t+H+K, (2)
representing payments for a flow of pro- t=O
ductive services. In addition the firm
where Wt is the expected wage in the tth
ordinarily incurs certain fixed employ-
period, r denotes the rate at which future
ment costs in hiring a specific stock of
costs are discounted, and T denotes the
workers. These fixed employment costs
expected period of employment. The to-
constitute an investment by the firm in
tal discounted revenue, Y, generated by
its labor force. As such, they introduce
the additional worker is similarly defined
an element of capital in the use of labor.
as the present value of his expected mar-
Decisions regarding the labor input can
no longer be based solely on the current ginal value products that, in each period,
relation between wages and marginal val- consist of his marginal product without
ue products but must also take cogni- training, MtI,and the increment due to
zance of the future course of these quan- his training, AMt.
tities. The theoretical implications of la- 2 The training activity typically entails direct

bor's fixity will be analyzed before turn- money outlays as well as numerousimplicit costs
such as the allocation of old workers to teaching
ing to the empirical magnitude of these skills and rejectionof unqualifiedworkersduringthe
fixed costs. trainingperiod.
540
=\M At)1 r-1-
t=Oo
Profitswill be maximizedwhen the total
discounted cost of an additional worker
is just equal to the total discounted
revenue.
T
11 +K= E (Mt+Alf t- WO
t=O
X (1 + r)t
Equation (4) yields the first implication.
In equilibriuma worker'stotal marginal
product, Mt + AMt, must exceed the
wage rate, Wt, so long as the firm incurs
any fixed employment costs. Even un-
der perfect competition wages would be
equated to marginal value products if
and only if labor is a completely variable
factor.
At this point, a digressionon the firm's
investment in training is in order. The
net value of trainingto the firm is simply
the present value of the expected incre-
ment in marginal value product, AMt,
due to training.
T
V = E AMt(1 +r-
t =O
An investment in training will prove
profitableif the net value to the firm, V,
exceedsthe trainingexpense,K. Concep-
tually training may be categorized as
eithergeneralor specific.Specifictraining
is definedas that which increasesa work-
er'sproductivityto a particularfirmwith-
out affecting his productivity in alterna-
tive employments.The time requiredto
adapt workers to the firm's particular
productionprocesses,or to its accounting
and marketingprocesses,exemplifiesspe-
cific training. General training, on the
other hand, is defined as that which in-
creasesa worker'sproductivity in several
WALTER Y. 01
competingemployments,as, for example,
(3)s |-/ training of workers to operate com-
the
puters or to read railroadtariffs.
Rationalbehaviorimpliesthat the bulk
of a firm's investment in training must
be devoted to specific training. If train-
ing were completely general, all returns
would accrue to the worker and none to
the firm. Upon completion of general
(4) training, the workerwould find that his
marginal productivity to several firms
has been increased. He could now de-
mand a higher wage, either from a com-
peting firm or from his presentemployer.
In either case, the net value of the train-
ing to the firm would be reducedto zero.
Indeed, a firm could capture these re-
turns only if there were impedimentsto
competitionsuch as imperfectknowledge
or binding labor contracts. Thus, no ra-
tional firm would underwritecompletely
generaltraining.3If, however, trainingis
specificto a firm,then the worker'salter-
native marginal product remains unaf-
fected. In this latter case, the firm could
weigh the expected returns from this in-
vestment against the training cost. To
simplify the analysis, I shall assume that
the firm bears all specific training costs.
(5) As will be shown in section D below, the
implicationsof the theory are not serious-
ly affected by relaxing this assumption.
Returning to the equilibrium condi-
tion, it is clear that some expectations
model must be formulatedsince the vari-
ables refer to future quantities. Suppose
that the firm formulates the following
single-valuedexpectations:
Wt = W*, Mt = M*, AtJ = AM*
(6)
(for allt= 0, 1, 2, ...T).
3 That a firm offers general training to its em-
ployees does not necessarily imply that the firm
underwrites the general training expense. The work-
er may bear the training cost by accepting a lower
wage than that which he could obtain in some alter-
native employment.
 LABOR AS A QUASI-FIXED FACTOR
Substituting these expected values into
equation (4), the equilibrium condition
reduces to
+ H+K
M* +AM*= T in product price, P*.4 The relevant com-
E
t=O
(1+ r)-- t ~7)(7
The concept of a periodic rent, R, may
be defined as
T the short-run equilibrium condition ap-
(8))
1:( 1+ r)-t
t=O
The periodic rent represents the fixed
employment costs during each period. It
is the surplus that must be earned by
each worker in order to amortize the
initial fixed employment costs over the
expected period of employment, realizing
a rate of return of r per cent on this in-
vestment. Thus, the equilibrium condi-
tion may be rewritten as
M*+AM*=W*+R. (9)
In equilibrium, the total expected mar-
ginal value product must exceed the ex-
pected wage rate by the amount of the
periodic rent. The degree of fixity, f, of
a factor will be defined as the ratio of the
periodic rent, R, to the total employment
cost, W* + R. A value of zero corre-
sponds to a completely variable factor
while the degree of fixity,f, of a complete-
ly fixed factor is designated by a value
of unity.
The periodic rent drives a wedge be-
tween the wage rate and the marginal
value product, the relative magnitude of
the wedge being measured by the degree
of fixity. In the short run, any fixed em-
ployment costs associated with the ac-
quisition of a labor force in prior periods
are sunk costs; as such they should not
affect a firm's short-run decisions.
Suppose that the firm is initially in a
position of long-run equilibrium; that is,
541
the equilibrium condition, equation (9),
is satisfied by every factor or grade of
labor. For a competitive firm, a decline
in product demand is equivalent to a fall
parison for short-run profit maximization
is that between total expected marginal
value product and the expected wage
rate, representing the variable compo-
nent of the total employment cost. Thus
plicable to cyclical declines in product
demands becomes
M* +AM* =W*. (10)
The employment of a quasi-fixed factor
will only be reduced when M* + AM*
falls below W*.
For a completely variable factor, the
long- and short-run equilibrium condi-
tions, (9) and (10), are equivalent. Any
decline in P* will reduce the demand for
a variable factor; with falling employ-
ment, the variable factor's marginal phys-
ical product will be increased until the
equilibrium conditions are again satis-
fied. The decline in P* may not be suf-
ficient, however, to warrant a reduction
in the demand for some other factor with
a higher degree of fixity. In fact, there is,
for each quasi-fixed factor, a critical price
at which the firm will reduce its demand
for that factor. Furthermore, the critical
price, in relation to the long-run equi-
librium price, will be lower for factors
with higher degrees of fixity. Thus, a
given decline in P* may induce a reduc-
tion in demand for factors with low de-
grees of fixity without affecting the de-
mand for factors with higher degrees of
fixity.
Consider next, the case of an increase
4The term, A* + 'AI*, in eq. (9) denotes the
expected marginal value product. For a competitive
firm, this is simply the expected product price, P*,
times the expected marginal physical product, X*
+ AX*.
542 WALTER Y. 01
in P*. Beginningat an initial position of
long-run equilibrium, there is no reason
to expect differential shifts in demand for
factors with varying degrees of fixity. Al-
ternatively, in the initial position, the
firm may have adjusted to a prior decline
in P*. Specifically, assume that the short-
run equilibrium condition, (10), is satisfied
by each quasi-fixed factor. The demand
for a factor will be increased if its total
marginal product, M* + AM*, exceeds
its total expected employment cost, W*
+ R. In this latter case, the argument
is completely analogous to that for a de-
cline in P*. Each quasi-fixed factor again
has its unique critical price at which the
demand for it will be increased; these
critical prices will be higher for factors
with greater degrees of fixity. Thus, a
given increase in P* leads to greater rela-
tive shifts in demand for the factors with
the lower degrees of fixity.
Up to now, changes in P* have been
treated as if they were known with cer-
tainty. The introduction of uncertainty
about future product prices reinforces the
argument. Suppose that a firm makes ap-
propriate adjustments in factor employ-
ments in response to an increase in P*.
If the subsequent increase in actual prod-
uct prices is less than the expected in-
crease, the firm will be obliged to reduce
employment. The readjustment due to
an error in forecasting product demand
necessarily shortens the expected period
of employment, thereby increasing the
magnitude of the ex post periodic rent.5
The costs of these readjustments are
greater for factors with higher degrees of
fixity since the periodic rent comprises a
5 A reduction in the expected period of employ-
ment, T, increases the periodic rent, R, since the
initial fixed employment cost of H + K dollars must
be amortized over a smaller number of periods. From
equation (8), the elasticity of R with respect to T
is found to be negative, independent of HI+ K, and
less than one in absolute value.
larger share of the total employment
costs for these factors. Conversely, con-
sider the case where a reduction in the
quantity employed of some factor is
greater than that warranted by the sub-
sequent decline in actual prices. The re-
adjustment in this case involves the re-
employment of that factor, with addi-
tional outlays for hiring and training.
One might argue that the firm will simply
recall those workers who were previously
laid off, thereby avoiding the hiring and
training expenses. The Bureau of Labor
Statistics data on accessions for the pe-
riod 1953-58 reveal that only 39 per cent
of total accessions in the manufacturing
sector were recalls. Even in this case, re-
adjustments are costlier for factors with
higher degrees of fixity since the firm
cannot be assured that workers who were
laid off will be available for recall. If a
readjustment in factor employments is
required by the subsequent course of ac-
tual prices, it will be preferable to make
these readjustments in the employment
of factors with low degrees of fixity. Such
a policy will tend to minimize the costs
of readjustments (reversals) in factor em-
ployments due to discrepancies between
actual and expected product prices.6
r In summary, certain fixed employment
costs are associated with the employment
of labor. Firms may invest in hiring to
acquire particular workers-or in specific
training to improve labor's productivity.
The periodic rent, representing the amor-
tization of these fixed employment costs,
drives a wedge between the marginal val-
ue product and the wage rate. The rela-
6 The case where the readjustment involves no
reversal in the direction of change in factor employ-
ments has not been discussed. This is the case where
an increase (or decrease) in employment is less than
that warranted by the actual price change. There is
no a priori reason why this type of error should lead
to differential costs for factors with different degrees
of fixity.
 LABOR AS A QUASI-FIXED FACTOR
tive magnitude of this wedge, measured
by the degree of fixity, differs among oc-
cupations or grades of labor. In a sense,
the periodic rent forms a buffer absorbing
short-run variations in a factor's margin-
al value product. Thus, short-run changes
in product demands lead to differential
shifts in factor demands, depending on
the degree of fixity. Factors with lower
degrees of fixity will experience relatively
greater shifts in demand as the result of
any given short-run change in product
demand.
C. SHORT-RUN FACTOR SUPPLIES
In the preceding sections all factor
supplies were assumed to be infinitely
elastic at fixed market wage rates. This
assumption is surely reasonable for a sin-
gle competitive firm. The supply curve
of labor as a whole or of certain skill
categories may, however, be less than in-
finitely elastic or may shift over time.
This section deals with the effect of vari-
ations in short-run factor supplies on
relative factor employments.
Consider the extreme case in which all
factor supplies have zero elasticity and
markets adjust rapidly. In a downswing,
the demand for labor shifts to the left,
the percentage shift being smaller for fac-
tors with higher degrees of fixity. The
downward shifts in demand lead to re-
ductions in wage rates only; factor em-
ployments are determined exogenously
by the assumed supply conditions. The
relative decline in wage rates will be
smaller for factors with higher degrees of
fixity. This case is, however, inconsistent
with the emergence of involuntary un-
employment and may be dismissed as
unrealistic.
Granted the existence of involuntary
in cyclical downswings,
unemployment
the relevance of the concept of a market
sup)p)lycurve becomes highly (question-
543
able. If all factor demands have the same
wage-rate elasticity, and if all wages fall
by the same proportion, the ultimate de-
cline in the employment of high fixity
labor will still be less than the decline in
the employment of labor with lower de-
grees of fixity. On the other hand, if the
elasticity of demand and/or the relative
fall in wages are greater for labor with
lower degrees of fixity, there is a tendency
in the opposite direction. This could off-
set or perhaps even reverse the differen-
tial shifts in employment predicted by
the fixed-cost hypothesis.
WViththe exception of the 1929-33 re-
cession, the available evidence suggests
a widening of occupational wage differen-
tials in the downswing and a narrowing
in the upswing.7 Even in the 1929-33 re-,
cession, the data are consistent with a
hypothesis that there was no change in
the occupational wage structure. As will
be shown in Part II, the wage rate of an
occupation is highly correlated with its
degree of fixity. Thus, over a cycle, the
high-wage occupations with greater de-
grees of fixity exhibit smaller relative
changes in wage rates. Finally, I suspect
that the high-wage, skilled jobs tend to
be most complementary with the fixed
factor, capital. Ceteris paribus, greater
complementarity with the fixed factor
implies a lower elasticity of demand. The
evidence thus indicates smaller relative
changes in wage rates and lower elastici-
ties of demand for factors with higher
degrees of fixity. The observed short-run
variations in factor supplies therefore
predict differential shifts in employment
contrary to those implied by the fixed-
cost hypothesis.
7 Phillip W. Bell, "Cyclical Variations and Trends
in Occupational Wage Differentials in American In-
dustries Since 1914," Reziez of Economics and Sta-
lislics, XXXIII, No. 4 (November, 1954), 329-37.
544 WALTER Y. 01

D. SPECIFICITY OF LABOR TO A FIRM mium increases the present value of ex-

The provision of specific training alters pected wage payments. Second, if the
the labor input. Labor no longer repre- wage premium induces longer employ-
sents an anonymous variable factor but ment tenure, the initial fixed employment
rather a differentiated stream of services costs can be amortized over a larger num-
from certain workers who have received ber of periods, thereby reducing the pe-
specific training. These workers are, in a riodic rent. Such a wage policy would be
sense, specific to the firm. profitable for the firm if the following
In section B, I tacitly assumed that inequality holds:
each factor received a wage equal to its T+kc

marginal productivity in alternative em- E (I1+ r)-

ployments. Since a worker's alternative 'Al < (1+ ~
marginal product is unaffected by specific W- (W T+k*(11)
E (I1+ r )-t
training, competitive wages should not t =O
affect the expected period of employ-
ment. Examination of equation (5), how- The equality in (11) indicates the maxi-
ever, shows that the net value of specific mum relative wage premium, AW1W,
training is increased by an extension of consistent with an induced increase in
the expected period of employment. Con- the period of employment of k periods.
sequently, it behooves a firm to initiate For a given increment of k periods the
practices that tend to minimize the turn- maximum relative wage premium will be
over of specifically trained workers. larger for factors with higher degrees of
Policies aimed at this goal are exempli- fixity or with lower initial expected pe-
fied by pension and profit-sharing plans, riods of employment. If the equality in
provision of better working conditions, (11) applies, the added wage costs would
promotion from within, and payment of just offset the savings to the firm from
wage premiums. Under some profit-shar- longer expected periods of employment.
ing plans, workers forfeit all benefits un- If, however, the inequality holds for some
less they remain with the firm for a speci- factor, that factor does not satisfy the
fied period of time. Firms may also adopt full equilibrium condition given by (9).
discriminatory hiring policies, hiring only The expected total marginal product will
those workers who possess characteristics exceed the expected total employment
associated with long employment tenure. cost. Hence the firm has an incentive to
A wage policy of paying premiums to invest further in specific training. The
specifically trained workers may prove firm may also choose to pay even higher
mutually profitable for both workers and wage premiums if by doing so it induces
firm. Consider the analysis of section B an even greater extension in the expected
where the incidence of all training ex- period of employment.
penses falls on the firm, with workers Suppose that a share of the training
bearing none of the costs. In this case, cost is borne by the worker. During the
a wage premium is clearly profitable for training period a worker might accept
the worker and should encourage longer a wage below his alternative marginal
periods of employment. From the firm's product; the difference represents his in-
viewpoint, the payment of a wage pre- vestment in specific training. The firm
mium affects total employment costs in could compensate the worker for his in-
two opposing ways. First, the wage pre- vestment by promising him a wage pre-
 LABOR AS A QUASI-FIXED FACTOR
mium upon completion of the specific
training. If the present value of his ex-
pected wage premiums exceeds his share
of the training cost, the arrangement
would be acceptable to a rational worker.
Consider the extreme case in which all
specific training costs are paid by the
worker.8 The worker clearly prefers to
remain with the firm since his marginal
product and wages in the specific firm
are higher than his alternative marginal
product. In this case, however, all labor
costs become variable to the firm, and
the firm has no motive for retaining these
workers during a cyclical downswing.
A sensible policy is to have both par-
ties share the specific training expense.
If both workers and firm have made in-
vestments in specific training, both can
gain from longer expected periods of em-
ployment. The specifically trained work-
er could receive a wage above his alterna-
tive marginal product but below his total
marginal product to the firm.9 At the
same time, the firm could lower its total
employment cost by amortizing the fixed
employment costs over a longer period
of time. Short-run variations in factor
supplies would tend to be smaller for
workers who had invested in specific
training. Thus the payment of wage pre-
miums and the sharing of the specif-
ic training costs promote even greater
stability of employment for specifically
trained workers.
8 Firms and workers may differ in their evaluation
of expected periods of employment and pertinent
discount rates. As a result, the optimum investment
per worker in specific training may differ depending
on the incidence of these training costs.
9 Where training is specific to a firm the situation
closely resembles one of bilateral monopoly. From
the firm's viewpoint, the specifically trained worker
is differentiated from other workers. At the same
time, the worker finds that his value to his present
employer is higher than his value to some competing
employer. I wish to thank Professor Rees for point-
ing out this analogue.
545
To sum up, the specificity of labor to
a firm favors the establishment of policies
to lengthen expected periods of employ-
ment. To achieve lower labor turnover,
a firm might adopt a policy by which
workers were required to share specific
training expenses and were rewarded by
subsequent wage premiums. Under such
a policy, both workers and firm would
benefit from lower labor turnover. Final-
ly, the gains from lower labor turnover
are greater for factors with higher degrees
of fixity. Thus a higher degree of fixity
leads not only to greater stability of em-
ployment in terms of numbers or man-
hours employed but also to lower labor
turnover rates.
II. TESTS OF THE THEORY
A. WAGE RATE AS INDEX OF DEGREE
OF FIXITY
A direct test of the theory would re-
quire estimates of the degree of fixity for
different grades of labor. Since such data
are not readily available,10 an auxiliary
variable that is closely correlated with
the degree of fixity must be employed as
a proxy. The use of an occupation's wage
rate as the proxy seems justifiable and
derives support from the empirical evi-
dence presented in this section.
A study undertaken by the Interna-
tional Harvester Company (hereinafter
referred to as "IH") in 1951 estimated
fixed employment costs for three job
categories." The total fixed cost asso-
ciated with an annual labor turnover
of 28,623 workers was $15.9 million, or
roughly 5.4 per cent of total wage pay-
ments. The component cost items were
placed in three categories. The IH esti-
10 The necessary data include (1) the initial fixed
employment cost, H + K, (2) the discount rate, r,
(3) the expected period of employment, T, and (4)
the expected wage rate, W*.
11International Harvester Company, "The Costs
of Labor Turnover" (mimeographed), 1951.
546
mates of the amount invested in each
new worker are presented in the first
four columns of Table 1; my revised esti-
mates appear in the last column.
Hiring costs comprised less than 5 per
cent of total fixed costs. They include the
costs of terminating, laying off, and re-
calling since each worker has a positive
probability of passing through each stage
during his prospective tenure with the
firm. The IH study weighted each cost
by its relative frequency.
AMOUNT OF MONEY INVESTED
WALTERY. OI
is used to recoup any lost productive
time; the result is a substantial reduction
in this cost item. "Intrawork transfers"
represents additional training expenses
due to transfers of old workers to new
jobs within the plant.
Finally, the cost of unemployment
compensation represents the difference
between the firm's actual contributions
and the minimum legal contributions for
unemployment compensation.13 Higher
labor turnover will, in general, increase a
TABLE 1
PER NEW EMPLOYEE, INTERNATIONAL HARVESTER COMPANY, 1951

Costs | Common Two-Year Pro- Four-Year IH Revised IH

Labor gressive Student Apprentice Average Average

Hiring costs:
Recruiting................... $ 4.33 $ 86.38 . . . .. $ 5.48 $ 5.48
Hiring...................... 13.23 29.08 $ 28.89 13.23 13.19
Orientation.................. 1.56 1.56 1.56 1.56 1.56
Terminating ................. 3.77 3.77 3.77 3. 77 3. 77
Laying off ................... 1.21 1.21 1.21 1.21 1.21
Recalling .................... 1.30 1.30 1.30 1.30 1.30
Total ....................... 25.40 123.30 36.73 26.55 26.51
Training costs:
Training .................... 9.08 11,850.00 18,503.00 238.40 151.36
Tools and materials . . . ....... 164.76 41.19 41.19
Unfilled requisitions.......... 14.92 . ............. .............. 83. 12 24.66
Intrawork transfers........... 3.50 .............. .............. 94.14 64.49
Total ....................... 27.50 11,850.00 18, 667.76 456.85 281.70
Unemployment compensation.... 73.52 73.52 73.52 73.52 73.52
Total fixed employment cost..... 126.42 12,046.82 18, 778.01 556.92 381.73

Source: International Harvester Company, op. cit.

Training cost is by far the major fixed
employment cost. Two items under this
heading require further explanation.
"Unfilled requisitions" refers to the im-
plicit cost of lost output, resulting from
the lag between the separation and sub-
sequent replacement of a worker.12In the
IH study the hourly cost of lost productive
time was the gross profits per man-hour
of $1.84. I have revised the estimate by
assuming that standby, overtime labor
12 Supplementary data in the JH study showed an
average lag between separation and replacement of
39.1 hours. The lag was longer for jobs with higher
skill requirements.
firm's actual contributions.14 The differ-
ence between the actual and minimum
legal contributions resembles hiring costs
and is therefore included in fixed em-
ployment costs.
Each component of total fixed costs
appears to rise either at the same rate as
13 Actual unemployment compensation tax rates
differ widely among firms, across states, and over
time. For a discussion of these differences the reader
is referred to R. A. Lester, "Financing Unemploy-
ment Compensation," Industrial and LaborRelations
Review, XIV, No. 1 (October, 1960), 52-67.
14 An exception to this generalization arises if all
separated workers immediately obtain new jobs.
This is, however, rarely the case.
 LABOR AS A QUASI-FIXED FACTOR 547

the wage rate of a job or faster. The data
in Table 1 suggest that the ratio of total
fixed employment costs to wage rate in-
creases as one moves to higher wage jobs.
If the IH estimates of Table 1 are coupled
with some assumptions about wage rates
and expected periods of employment, it
is possible to estimate degrees of fixity
for two overlapping groups of workers.
Thus, degrees of fixity of 0.073 and 0.041
were obtained for "All employees" and
"Common laborers."1 The high-wage,
highly skilled jobs appear to be asso-
ciated with higher degrees of fixity. In
the subsequent empirical tests I shall
assume that an occupation's wage rate
serves as an index of the degree of fixity.
B3. CYCLICAL BE'HAVIOR OF EMPLOYMENT
B3Y OCCUPATION
During cyclical changes in aggregate
employment different rates of change in
employment are observed for different employment.
occupations even within the same firm.
This phenomenon is the subject of the
first empirical test of the theory.
The basic proposition of Part I may
be stated as follows: those factors with tingency
the highest degrees of fixity and the low-
est degrees of substitutability with the 1. No assumptions are required about the joint
fixed factor will experience the smallest
relative changes in employment due to
any given change in product demand.
For the empirical test occupational wage
differentials are assumed to reflect dif-
ferences in the degree of fixity. The hy-
pothesis submitted to a test is: "there
is no relation between wage rates and
the observed rates of change in employ-
" In arriving at these estimates I assumed ex- squares regression between the wage rate and the
pected periods of employment of 24 and 12 months
for "All employees" and "Common labor." The dis-
count rate was fixed at 1 per cent per month; varia-
tions of ? 0.5 per cent had very little effect on the
degree of fixity. Finally, the IH study reported aver-
age hourly earnings for "All employees" of $1.952
in 1951. This figure was converted to a monthly
wage and applied to "All employees." For "Common
labor" I arbitrarily fixed an hourly wage of $1.50.
ment." The alternative hypothesis is that
the high-wage occupations will experi-
ence smaller rates of change in employ-
ment.
The contingency table was chosen as
the experimental design for testing the
hypothesis. The contingency table tests
for the independence of two variables of
classification. The x2 statistic is the cri-
terion for the acceptance or rejection of
the null hypothesis. The occupations in
a firm are first divided into two equal
groups according to the wage rate of the
occupation. The same occupations are
again separated, by reference to the ob-
served rates of change in employment
over a fixed time interval, into equal
groups. All occupations thus fall into the
cells of a contingency table where the
cells identify groups of occupations with
different wages and percentage changes in
The marginal totals, which
are fixed in advance, determine the num-
ber of occupations in each cell to be ex-
pected if in fact the null hypothesis is
true. The major advantages of the con-
table over alternative test pro-
cedures"6 include the following:
probability distribution of the two variables
of classification.
2. The design is fairly insensitive to extreme
values. Since the wage rate is an imperfect
index, the possibility of a few extreme o1)-
servations must be acknowle(dge(d.
Data for this test were taken from the
BES industry wage structure studies.
16 Two alternative test procedures are (1) a least-
percentage change in employment, and (2) a Stu-
dent's "I" test for the difference in mean percentage
changes in employment for two groups of occupa-
tions classified by wage rates. The contingency table
design resembles a non-parametric correlation tech-
nique known as tetrachoric r. This latter technique
is described in W. J. Dixon and F. J. Masey, Intro-
duction to Statistical Analysis (New York: Mc Graw-
Hill Book Co., 1951), p. 235.
548 WALTER Y. 01

Each study presents data on employ- low the median wage rate for all oc-
ment, hours, and earnings, classified by cupations. The occupations were then
occupation, sex, state, and industry, for reclassified by the observed percentage
a single year. Since two adjacent studies change in employment into two equal
are needed, attention was focused on the groups. Employment, in this context, re-
period 1928-31. For each of four indus- fers to the number of employees; the al-
tries a sample of states was selected. The ternative concept of man hours yielded
states included in the sample reported virtually identical results. The two-way
roughly the same number of establish- divisions fix the marginal totals which, in
TABLE 2
No. OF OCCUPATIONS IN SELECTED INDUSTRIES, CLASSIFIED BY
WAGE GROUP AND PER CENT CHANGE IN EMPLOYMENT*

PER CENT CHANGEIN EMPLOYMENT

(No. OF EMPLOYEES)
WAGE GROUP x2 STATISTICt

Below Median Above Median Total

Furniture:
High wage ........ 40 18 58 16.345
(29.26) (28.74) (3.841)
Low wage ......... 17 38 55
(27.74) (27.26)
All wages ......... 57 56 113
Foundries:
High wage ........ 20 16 36 0.889
(18) (18) (3.841)
Low wage ......... 16 20 36
(18) (18)
All wages.......... 36 36 72
Men's clothing:
High wage ........ 13 7 20 4.102
(9.76) (10.24) (3.841)
Low wage ......... 7 14 21
(10.24) (10.76)
All wages ......... 20 21 41

* Source of the data and detailed breakdownby states are shown in my thesis, Appendix C,
C-5, C-6, and C-7.
t Numbersin parenthesesdenote the 5 per cent critical values.

ments covered in the two adjacent sur-
veys. The states were also grouped by
geographic region.'7 For each state, the
occupations were classified as high wage
or low wage, depending on whether an
occupation's wage rate was above or be-
" In these studies the BLS attempted wherever
possible to cover the same establishments as those
covered in the preceding study of the same industry.
Hence, inclusion of only those states showing ap-
proximate equality in the number of establishments
covered tends to minimize errors arising from a shift-
ing establishment composition within states. Geo-
graphic grouping was incorporated to minimize dif-
ferential shifts in product demands.
turn, determine the expected numbers of
occupations under the null hypothesis.
The contingency tables for four indus-
tries are presented in Tables 2 and 3,
where the numbers in parentheses denote
the expected numbers under the null hy-
pothesis."8For furniture and men's cloth-
ing, the x2statistic indicates that the null
hypothesis can be rejected at a 5 per cent
level of significance. The x2 statistic is
18 The procedure was slightly altered for lumber
mills. The larger number of occupations in this in-
dustry permitted a three-way division.
 LABOR AS A QUASI-FIXED FACTOR 549

significant at only a 10 per cent level for
lumber mills. Finally, the data for found-
ries are consistent with the null hy-
pothesis. The discrepancies between ac-
tual and expected numbers of occupa-
tions in the cells of the contingency tables
conform to the pattern anticipated by
the fixed-cost hypothesis. Given these
systematic discrepancies,'9 the additive
nature of x2 permits a test for the aggre-
gate of all four industries. For the four
industries combined, the null hypothesis
can be rejected at a 1 per cent level.
than their production worker counter-
parts. Thus, according to the fixed-cost
hypothesis, non-production workers
should exhibit greater employment sta-
bility.
Consider a simple model in which the
desired rate of employment in the tth
year, Et*, is a linear function of the rate
of output, Xt. That is, the desired de-
mand for some factor is solely a function
of the scale effect, ignoring all substitu-
tion effects.
E*=a+bXt. (12)

TABLE 3
No. OF OCCUPATIONS IN THE LUMBER INDUSTRY CLASSIFIED BY WAGE
GROUP AND PER CENT CHANGE IN EMPLOYMENT, 1928-30*

PER CENT CHANGEIN EMPLOYMENT

WAGE _2TOTAL
GROUP STATISTICt
Lowest 3d Middle 3d Top 3d

No. of employees (SE):

High wage................... 14 17 11 42 6.999
(13.57) (14.86) (13.57) (9.488)
Middle wage................. 19 15 12 46
(14.86) (16.28) (14.86)
Low wage................... 9 14 19 42
(13.57) (14.86) (13.57)
All wages..... 42 46 42 130

* Sourceof data and breakdownby states are shown in my thesis, Appendix C, Table C-8.
t Numbers in parentheses denote the 5 per cent critical values.

Thus, the evidence from the BLS studies
refutes the null hypothesis, and the alter-
native can be accepted. The wage rate
of an occupation is associated with its
percentage change in employment. Low-
wage occupations, corresponding to low
degrees of fixity, do experience relatively
greater changes in employment.
C. EMPLOYMENT OF NON-PRODUCTION WORKERS
Non-production workers in manufac-
turing industries are more highly paid20
and tend to be more specific to the firm
19The contingency table design can only uncover
an association between two variables of classifica-
tion. The direction of this association is only dis-
cernible from an examination of discrepancies be-
tween actual and expected numbers.
Suppose the actual change in employ-
ment from the preceding period is some
proportion, k, of the desired change.
Et-Et1 = k(E*-E __). ( 13)
Substitution in (13) by the expression for
E* in (12) yields the following reduced
form, containing only observable quan-
tities:
Et = ak+ bkXt + ( 1-k)Et-,. (14)
20 Data from the 1954 Census of Manufactures
indicate that the average annual earnings of non-
production workers always exceeded those of produc-
tion workers. The ratio of the earnings of non-
production to those of production workers ranged
from a low of 1.47 in chemicals to a high of 2.11 in
textile mill products.
55( WALTER Y. OI
The parameter, k, may be interpreted as
a short-run coefficient of adjustment.
Higher values of k imply faster short-run
adjustments. Indeed, a value of unity
means that actual and desired rates of
employment always coincide. If non-pro-
duction workers are truly specific to the
firm, they should exhibit a smaller k rela-
tive to production workers.
The slope parameters of the reduced
form, equation (14), were estimated by
least squares using annual data for the
"All Manufacturing" sector. The anal-
ysis was confined to the prewar period,
1920-39, because of a strong secular trend
in employment of non-production work-
ers during the postwar period2' that de-
stroyed the validity of the demand rela-
tion. Output, Xt, was measured by the
Federal Reserve Board's Index of Indus-
trial Production. The least-squares esti-
mates are given by equations (15) and
(16), where N, and Pt, respectively, des-
ignate non-production and production
worker employment.
~t= a k + .0132 X +.561 1 N,-,
(.0024) (.1100) (15)
(R2 = .7 79 3).
K
t = A + .0 722 Xt+.331 8Pt-,
(.0146) (.1340) (16)
(RI= .72 19).
The short-run coefficient of adjustment
for non-production workers is 0.44 while
that for production workers is 0.67; the
difference is statistically significant at
21 In the prewar period, the ratio of non-produc-
tion to production workers exhibited no secular
trend. From 1947 to 1958, virtually all the increase
in manufacturing employment is attributable to the -voluntary
growth in non-production worker employment. For
a discussion of these trends the reader is referred to
lVintel States Bureau of Labor Statistics, ''"Not-
p-o(lutiioll \Workers in I actories, 1919--56,,"AlfIt//l
lilb-r Reivie&, LXX.X, No. 4 (April, 1957), 435 -40.
the 10 per cent level. Furthermore, an ex-
amination of seasonally adjusted month-
ly employment data for the postwar pe-
riod reveals lags in the turning points of
non-production worker employment. The
turning points in non-production worker
employment for the "All Manufactur-
ing" sector lagged from two to six months
behind the turning points in production
worker employment. The smaller short-
run coefficient of adjustment and the lags
in turning points are entirely consistent
with the higher degree of fixity of non-
production workers.
D. DIFFERENTIAL UNEMPLOYMENT AND
THE FIXED-COST HYPOTHESIS
Involuntary unemployment is never
uniformly distributed among all workers.
The fixed-cost hypothesis may help to
explain some of these differences. Fixed
employment costs constitute an invest-
ment by the firm in its labor force. A
firm faced by a cyclical decline in product
demand could protect this investment by
following a discriminatory layoff policy.
To the extent that labor is a quasi-
fixed factor, each new hire, whether an
addition or a replacement, entails an in-
vestment outlay by the firm for hiring
land training. Suppose that a firm is
obliged to reduce the rate of employment
of some factor. At any point in time each
firm observes a distribution of its workers
according to their expected periods of
employment. The average employment
tenure of the workers who remain em-
ployed can be lengthened by laying off
the workers with the shortest expected
periods of employment. Such a discrimi-
natory layoff policy tends to reduce the
quit rate facing the firm. The
policy tends to lower total fixed employ-
rnent costs bly miniimizinigthe number of
future neW hires tllht w(OUl(l 1)e re(ItUire(
to replaicc o1(l workers who milight voluin-
 LABOR AS A QUASI-FIXED FACTOR 551

tarily quit in subsequent periods. Thus, eral, be expected to have longer expected
an implication of the fixed-cost hypoth- periods of employment than either very
esis is that the incidence of unemploy- young or very old workers; this expecta-
ment should be highest for those workers tion has been corroborated by a study of
with the shortest expected periods of em- labor turnover in Swedish factories.22 At
ployment. Since a worker's prospective the same time, married males with spouse
employment tenure cannot be known present tend to be less mobile and should
with certainty and since labor contracts exhibit longer employment tenures than
TABLE 4
UNEMPLOYMEINT RATES BY COLOR, AGE, SEX, AND MARITAL STATUS, 1950

WHITE NON-WHITE

SEX AND AGE

Married, Other . Married, Other
Single Spouse Present Status Singl Spouse Present Status

Male:
14 and over ...... 9.4 3.1 8.7 12.1 5.7 11.2
14-17 ........... 10.6 7.8 4.4 9.5 * *
18-19 ........... 11.2 6.3 17.1 14.1 8.6 18.7
20-24 ........... 9.9 4.5 12.0 14.1 7.2 15.8
25-29 ........... 8.4 3.1 10.2 12.5 6.8 13.9
30-34 ........... 7.6 2.5 8.8 11.2 5.8 11.4
35-44 ........... 7.9 2.6 9.0 9.9 5.1 11.3
45-54 ........... 8.5 3.0 9.0 10.5 5.2 10.0
55-64 ........... 9.5 3.7 8.8 10.3 6.0 10.3
65-74 ........... 8.3 4.3 6.7 7.0 5.7 8.9
75 and over ...... 3.1 2.8 3.8 * 2.7 6.5
Female:
14 and over ...... 4.7 3.2 5.6 10.7 6.6 8.1
14-17 ........... 12.6 13.9 16.1 13.8 18.7 *
18-19 ........... 6.9 6.6 17.5 15.8 12.0 22.8
20-24 ........... 4.3 4.0 9.5 12.3 10.1 15.0
25-29 ........... 3.5 3.5 7.1 8.8 7.8 11.8
30-34 ........... 3.4 3.3 6.5 6.0 6.5 9.5
35-44 ........... 2.8 2.7 5.6 6.5 5.7 6.6
45-54 ........... 2.3 2.8 5.0 5.5 5.0 6.4
55-64 ........... 3.0 2.8 5.0 4.7 4.6 5.5
65-74 ........... 3.1 2.3 3.9 6.9 7.8 4.9
75 and over ...... 3.0 2.8 2.8 * * 3.3

* Base less than 3,000.

Source: Hauser, op. cit., pp. 256-57.

are rarely binding on employees, the firm
can never exercise complete control over
the expected period of employment. Fur-
thermore, seniority rights or other union
practices may prevent a firm from follow-
ing a discriminatory layoff policy.
Certain personal characteristics such
as age, sex, afn(1marital status are al-
lege(1ly associate(1 with employment teni-
ure. 1\fi(Il(e--gaT(Iworkers wvou1(l,in geni-
either single males or males who are di-
vorced, widowed, or separated.
Unemployment rates classified by race,
age, sex, and marital status are presented
in Table 4 for the census year 1950.23 For
2" Magnus Hedberg, "Labor Turnover, the Flow
of Personnel through the Factory" (Stockholm:
Swedish Council for Personnel Administration).
(Mimeographed.)
23 This fromiPhillip M. Hlau-
table is reprlodLuced
scr's article with his kinidpermission. The rea(ler is
552 WALTER Y. 01
both races, and in almost all age groups,
married persons with spouse present re-
vealed the lowest unemployment rates.
The only exception for males was in the
"14-17" age group, while single women
had lower unemployment rates in two
cases. The observed differentials in male
unemployment rates thus conform to the
pattern implied by differences in expected
periods of employment.
The distribution by age of unemploy-
ment rates is roughly the same, except
for level, for each race-marital status
group of the male labor force; similar pat-
terns are evident in data for other years.
Unemployment rates fall over the range
from fourteen to thirty-five years of age
even when marital status is held con-
stant. Beyond thirty-five years of age in-
creasing age is associated with higher un-
employment rates although the trend is
reversed in the oldest age group ("65 and
over"). The problems inherent in defin-
ing the labor force for older workers make
the interpretation of their unemployment
rates particularly difficult. Hauser specu-
lates that this reversal in the age pattern
might be attributable to a withdrawal of
older workers from the labor force when
they become unemployed.24 A logical im-
plication of the withdrawal hypothesis is
that the labor-force participation rate of
older workers will be negatively corre-
lated with cyclical changes in employ-
ment. The latter implication is not sup-
ported by data presented in a study by
Long.25 I cannot explain this contradic-
referred to "Differential Unemployment and Charac-
teristics of the Unemployed in the United States,
1940-1954," The Measurement and Behavior of Un-
employment (Princeton, N.J.: Princeton University
Press, 1957), pp. 243-80.
24 Ibid., p. 251.
Clarence D. Long, The LaborForce under Chang-
25
ing Income and Employment (Princeton, N.J.: Prince-
ton University Press, 1958), pp. 323-25, Table B-2.
tion, but the data indicate, in the main,
higher unemployment rates for younger
and older workers than for middle-aged
workers.
The sex differentials in unemployment
rates cannot be explained by differences
in expected periods of employment. The
volatility of female labor-force participa-
tion rates suggests that unemployment
rates are not the appropriate variable.
Furthermore, the evidence that there are
differences in employment tenure by sex
is not at all convincing."6Finally, the oc-
cupational differentials in unemployment
rates are also consistent with the impli-
cations of the fixed cost hypothesis.
E. ADDITIONAL EVIDENCE
The analysis of subsection ID implies
that labor of higher degrees of fixity
should enjoy lower labor turnover rates.
Manufacturing industries vary widely in
the skill composition of their labor forces.
The high-wage industries typically em-
ploy larger proportions of skilled workers
with higher degrees of fixity. Low labor
turnover rates should, therefore, be ob-
served for high-wage industries. Other
factors that affect labor turnover rates
were held constant by a multivariate re-
gression model that cannot be fully re-
ported here.27 Based on annual data for
sixty-four manufacturing industries from
1951 to 1958, the regression model re-
26The BLS turnover data by sex for two-digit
manufacturing industries reveal slightly higher turn-
over rates for females. Hauser finds (p. 244) that
females in a previous state of employment are less
vulnerable to unemployment than males. This same
stability of employment of female workers was also
found in the Philadelphia study; see United States
Department of Labor, Bureau of Labor Statistics,
The Social and Economic Characterof Unemployment
in Philadelphia (Bulletin No. 520, April, 1929).
27
This portion of the study derived from a paper
I read at the winter, 1960, meetings of the Econo-
metrics Society. I wish to thank Stanley Lebergott
and Jacob Mincer for their helpful comments.
 LABOR AS A QUASI-FIXED FACTOR
vealed a partial correlation between an
industry's average quit rate and its wage
rate of -0.497, a value that is significant-
ly different from zero at the 1 per cent
level. A turnover rate, defined as the
lower of the total accessions and total
separations rates, provides a measure of
average replacement demand. Using this
latter variable, the partial correlation
drops to -0.195, which is significant at
the 10 per cent level. Thus, an industry's
wage rate, which presumably reflects the
average degree of fixity of the labor force,
is related to its labor turnover rate. The
low-wage industries that employ workers
with lower degrees of fixity do experience
higher labor turnover rates.28
The differential shifts in factor de-
mands over a cycle imply greater in-
equality of wage incomes during periods
of low employment. In a recession the
demand for labor with high wages and
high degrees of fixity falls by a smaller
percentage than that for labor in the low-
wage occupations. The greater decline of
employment in the low-wage occupations
implies larger relative declines in wage
incomes in these occupations than in the
high-wage occupations. The changes in
the distribution of wage incomes during
the recession of 1929-33, discovered by
Mendershausen,29 indicated an increase
in the dispersion of wage incomes as un-
employment increased. The pattern held
despite the fact that hourly wage differ-
entials failed to widen in this recession.
28 There is, of
course, an identification problem.
For example, high wage rates that result from union
bargaining may reduce turnover rates. Although this
difficulty is recognized, the results still appear to
verify the implication of the fixed-cost hypothesis.
29 Horst
Mendershausen, Changes in Income Dis-
tribution during the Great Depression ("Studies in
Income and Wealth," Vol. VII [New York: National
Bureau of Economic Research, 1946]), 69-70.
553
III. ALTERNATIVE HYPOTHESES
In this paper certain aspects of the
cyclical behavior of labor markets have
been explained by the fixed-cost hypoth-
esis. What are the alternative hypotheses
that offer explanations for the same phe-
nomena? The theory that changes in fac-
tor employments are due to variations in
relative wage rates was considered in sub-
section IC. This theory was dismissed
because it implied changes in factor em-
ployments that were contrary to the ob-
served changes.
Another theory is contained in the
Reder model.30 Although Reder's theory
is primarily addressed to occupational
wage differentials, it implies systematic
changes in factor employments. Accord-
ing to Reder, firms adjust to a downswing
by raising hiring standards. As a result
the average quality of workers in each
skill category is improved. The higher
standards displace some workers from
each skill category. Some of the displaced
workers in the higher skill categories are
downgraded to lower skill jobs, creating
even further displacement of workers in
these lower skill categories. The succes-
sive bumping effect sifts down through
the skill hierarchy of jobs and results in
relatively greater unemployment in the
low-skill categories. In the upswing, firms
adjust by relaxing hiring standards and
upgrading workers to higher skill jobs. It
is never explicitly stated, but Reder seems
to assume that all factor demands shift
proportionally. If this interpretation of
Reder is correct, there is nothing in his
theory that implies differential shifts in
employment. The theory is, however,
consistent with the emergence of differ-
ential unemployment rates since unem-
30 M. W. Reder, "The Theory of Occupational
Wage Differentials," American Economic Review,
XLV, No. 5 (December, 1955), 833-52, see esp.
pp. 833-40.
554 WALTER Y. 01
ployed workers would be classified by
their previous occupational status.
There are two possible ways in which
differential shifts in employment could
be deduced from Reder's theory. First,
workers in high-skill jobs could perform
the tasks of low-skill jobs while retaining
their old job titles. This would appear to
be highly unlikely. A second possibility
is that hiring standards for high-skill jobs
are advanced less than those for low-skill
jobs. The elusive nature of hiring stand-
ards makes it difficult to test the latter
possibility.
As a theory of the cyclical behavior of
occupational wage differentials, Reder's
theory has an intuitive appeal.3" If the
theory were stated formally, I believe
that its basic behavioral relation could be
put as follows: the relative rate of change
in the wage rate of an occupation, AW1
W, is proportional to the relative excess
demand for or supply of that grade of
labor. Algebraically, it may be written:
AW k (D-S) (17)
where k is a constant and D and S denote
the amounts demanded and supplied of
some grade of labor.
In the Reder model the cyclical ad-
justments involving the upgrading and
downgrading of workers generate differ-
ential shifts in S for different occupa-
tions. In a downswing, the downgrading
of workers creates larger excess supplies
(in absolute values) in the lower skill
jobs. If the same k applies for all occu-
pations-and this must be assumed-the
differences in excess supply imply rela-
tively larger declines in the wage rates of
31 Reynolds agrees with Reder's explanation of
the cyclical behavior of occupational wage differen-
tials; see L. G. Reynolds and C. B. Taft, The Evolu-
lion of Wage Structure (New Haven, Conn.: Yale
University Press, 1956), p. 364.
low-skill jobs. The fixed-cost hypothesis
would also predict a widening of occupa-
tional wage differentials in a downswing
and a narrowing in the upswing if the
behavioral relation (17) holds. Unlike the
Reder model, the fixed-cost hypothesis
involves differential shifts in D. The ad-
vantage of the latter explanation over
Reder's theory is that it can simultane-
ously explain the cyclical behavior of oc-
cupational wage differentials and of rela-
tive factor employments.
IV. CONCLUDING REMARKS
The central theme of this paper has
been the treatment of labor as a quasi-
fixed factor. This concept of labor was
suggested by J. M. Clark, who dealt pri-
marily with the social cost of unemploy-
ment.32 The theory of the demand for a
quasi-fixed factor generated implications
regarding the short-run behavior of labor
markets. Differences in the degree of fixi-
ty for different occupations imply (1) dif-
ferential short-run shifts in employment,
(2) differences in labor turnover rates,
(3) emergence of differential unemploy-
ment rates in the cycle, and (4) cyclical
L variations in relative wage rates. The im-
plications of the fixed-cost hypothesis
are, in the main, borne out by the data
examined.
The theory of labor as a quasi-fixed
factor may also help to explain other phe-
nomena. It is sometimes argued that a
firm will maintain its labor force even
though the wage rate exceeds the current
marginal value product. If the labor has
a high degree of fixity, it is to the firm's
advantage to maintain its labor force
rather than to risk high replacement de-
mands in future periods. Fixed employ-
ment costs could also account for a range
of indeterminacy in wages frequently
32 Studies in the Economics of OverheadCosts (Chi-
cago: University of Chicago Press, 1923), pp. 357-85.
 LABOR AS A QUASI-FIXED FACTOR
mentioned in the literature.3 In the short
run, the specificity of labor to a firm
places an upper limit on the wage rate
equal to labor's total marginal product;
the lower limit is determined by labor's
alternative marginal product. Under col-
lective bargaining a short-run wage rate
could be set and maintained anywhere
within this range.34
33 Rcynolds and Taft, op. cit., 1). 1.
555
The classical treatment of labor as a
completely variable factor may be ade-
quate for a long-run analysis. To explain
the short-run behavior of labor markets,
I believe that labor should be viewed as
a quasi-fixed factor of production.
34 The range of indeterminacy will be wider for
factors (grades of labor) with higher degrees of fixity.
This range is, however, a short-run phenomenon.
The firm would not continue to invest in specific
training unless it could recoup the benefits.