THE EMPLOYMENT RELATIONSHIP AND INEQUALITY: HOW AND WHY

CHANGES IN EMPLOYMENT PRACTICES ARE RESHAPING REWARDS IN

ORGANIZATIONS*

Matthew Bidwell

Forrest Briscoe

Isabel Fernandez-Mateo

Adina Sterling

To appear in Annals of the Academy of Management in 2013

ABSTRACT

We review the literature on recent changes to US employment relationships, focusing on the

causes of those changes and their consequences for inequality. The US employment model has
moved from a closed, internal system to one more open to external markets and institutional
pressures. We describe the growth of short-term employment relationships, contingent work,
outsourcing, and performance pay as well as the success of social identity movements in shaping
employment benefits. In doing so, we address the role of organizations as sites of conflict within
and between stakeholder groups, examining how struggles among stakeholders have contributed
to reorganizing employment relationships. We also examine how these changes have affected
inequality by (i) influencing the distribution of rewards within organizations (via changes in the
determination of pay and benefits and in the allocation of workers to jobs) and (ii) altering, on a
macro level, how rewards are distributed among different stakeholders. In closing we identify
areas where future work is urgently needed.

*Prepublication Draft December 5, 2012. All authors contributed equally. Author e-mails:
mbidwell@wharton.edu, fbriscoe@psu.edu, ifernandezmateo@london.edu, sterling@wustl.edu

1
 INTRODUCTION

Employment practices have changed radically over the last few decades. Following World

War II, the dominant employment system was closed, inwardly focused, and hierarchically

governed. Most mobility into jobs was from within the organization; workers were expected to

remain with the same firm throughout their careers; pay was aimed at maintaining equity within

the organization; and most functions and workers were fully internalized. Since about 1980,

however, employment systems have changed in ways that reflect an “open systems” approach

(Scott 2003) and an orientation toward external markets rather than internal hierarchies (Bradach

& Eccles, 1989; Williamson, 1975). Employee tenure has declined, downsizing has become

more frequent, and the disparity between the pay of the top and bottom levels of the organization

has grown substantially. Organizations also now employ increasing numbers of contingent

workers via arm’s-length relationships and outsource many previously core functions. Moreover,

the employment relationship is increasingly subject to external institutional forces arising from

civil rights protections that reflect pressure from social identity movements and state regulatory

actors outside the firm.

Although the scope and scale of many of these employment changes have been reviewed

elsewhere (e.g., Ashford, George, & Blatt, 2007; Cappelli, 1999; Davis-Blake & Broschak, 2009;

Hollister, 2011), those accounts have paid little attention to the political and distributional

implications of those changes and, in particular, to their effects on inequality (for a recent

exception, see Kalleberg, 2011). Through their employment practices, organizations directly

influence inequality because they determine which workers are assigned to which jobs and what

pay and benefits are associated with each job. This is one reason why employment practices tend

2
to be highly contested, as the organization’s different stakeholders seek to mold the employment

relationship in their own interests. Our review focuses on these distributional struggles by

examining two questions: What has driven recent changes in the employment relationship? And

how have those changes affected the distribution of rewards in society?

Our review of the literature on the causes of changes in employment therefore takes the

perspective of the organization as a site of conflict among different stakeholders, which include

any party with a direct economic interest in the organization (e.g., shareholders and employees)

as well as other parties in society that seek to influence the organization (e.g.,state, professional,

and social movement actors). All these stakeholders aim to shape employment practices both

through negotiations inside organizations and through broader societal struggles that shape the

institutional environment in which organizations operate. We draw on this perspective to argue

that recent changes in employment relationships are the outcomes of power struggles at the

societal level.

Turning to how these changes in the employment relationship have reshaped the

allocation of rewards, we discuss research on inequality among workers and among the firm’s

different stakeholders. We review what is known about how changes in the employment

relationship have affected the distribution of rewards within organizations by shaping not only

how pay and benefits are allocated within jobs but also how workers are allocated to jobs. These

changes have consequences both for general income inequality and for inequality among

different groups of workers. We assess whether there is evidence that changes in the employment

relationship have led to a redistribution of wealth among stakeholders—in particular, away from

employees and toward shareholders.

3
 We believe that this is an appropriate and pressing topic for management and

organizational scholars, since no other group is better equipped with the interdisciplinary tool kit

needed to understand the roots of the changing employment relationship and its implications for

inequality. Below, we document that the relationship between worker and employer is shaped by

several factors: the activities of labor markets, the attempts of organizations to rationalize their

production activities, the institutional norms that dictate the mutual expectations of workers and

employers in society, the regulations that seek to enforce those norms, and the activity of

multiple groups of stakeholders seeking to mobilize various resources to shift the terms of the

employment relationship in accordance with their own agendas. The breadth of these influences

on employment relationships is matched by the range of research streams that have contributed

to our understanding of them. In this review we therefore draw on relevant literature from such

diverse fields as organizational and transaction cost economics, labor economics, industrial

relations, the sociology of work and occupations, research on stratification and social capital,

neoinstitutional theory, and research on social movements. It is not our goal to contribute directly

to any of these domains of theoretical inquiry; however, we hope that juxtaposing the

contributions that each has made to our understanding of the new employment relationship may

spur useful conversations across those domains.

Our review reflects several deliberate choices that narrow our focus. First, we hew to the

American context because it is the setting in which most empirical research has been conducted

to date. Fully extending our discussion to other contexts would require careful consideration of

the differing ways that societal actors (e.g., the state and social identity movements) shape

employment practices elsewhere, a task beyond the scope of this review. Second, we focus on

employees’ direct material rewards to the exclusion of other outcomes resulting from changes in

4
the employment relationship—for example, worker affective outcomes and organizational

performance—that have been reviewed elsewhere (Kelly et al., 2009). Third, we do not discuss

the broader literature on the causes of changing inequality within the United States except where

it is relevant to our discussion of changes in the employment relationship. Much research has

explored the relative roles of such influences on inequality as technological change (Autor, Levy,

& Murnane, 2003), union decline (Card, 2001), global competition (Freeman, 1995), and

financial deregulation (Phillipon & Resheff, 2009). Although we explore some of the effects of

those influences on the employment relationship, we do not discuss their broader effects on

inequality. Finally, we acknowledge that large bureaucratic organizations, family businesses

(Gomez-Mejia et al., 2011), and entrepreneurial firms (Baron, Hannan, & Burton, 2001) may all

construct the employment relationship in different ways. We generally bring this variation to the

fore when it makes a difference in our arguments, but we mainly talk about the employment

relationship as a general construct. This approach reflects the lack of scholarship examining how

these changes have played out across different kinds of organizations.

The rest of this paper proceeds as follows. The next section provides an overview of the

literature on the changing employment relationship. This is followed by our review of research

on the reasons for change and on how those changes affect inequality. We close with a

discussion of the state of the literature and our recommendations for future research. While our

review highlights that much has been learned about employment relationships and inequality, we

also identify several gaps in our knowledge and make suggestions for future research.

5
 THE CHANGING NATURE OF THE EMPLOYMENT RELATIONSHIP

Where We Have Come From

A defining feature of postwar employment systems was the dominant role played by

administrative hierarchies. The middle of the twentieth century saw the emergence of an

employment model, the “internal labor market”, under which internal administrative procedures

played a central role in determining the allocation of jobs and rewards (Althauser & Kalleberg,

1981; Doeringer & Piore, 1971; Osterman & Burton, 2004). Researchers argued that these

internal labor markets insulated employment from external labor markets in a number of ways.

First, in allocating jobs, internal labor markets strongly favored internal promotions over external

hiring. Indeed, scholars argued that hiring was sometimes restricted to only a few ports of entry

at lower levels of the organization (Althauser & Kalleberg, 1981; Doeringer & Piore, 1971).

Second, seniority played a role in determining which workers were eligible to be promoted or

transferred to other kinds of jobs (Jacoby, 1985; Slichter, Healy, & Livernash, 1960). Seniority

also had a substantial impact on pay and yielded increasing wages as a worker’s tenure increased

(Heneman & Werner, 2005).

The literature on internal labor markets emphasized that there was little movement of

workers between organizations, as employees sought instead to gain and then secure the

advantages of tenure. This detachment of workers from the external labor market meant that

compensation systems became internally focused; in other words, their aim was to maintain

appropriate pay differentials within the organization and not to balance supply and demand with

respect to the external labor market (Doeringer & Piore, 1971). Many nonwage benefits provided

by employers—most notably, health insurance and old age pensions—were also structured to

reward employees for loyalty and long tenure (Jacoby, 1997). As a result of these practices, Kerr

6
(1977) argues that labor markets had become “balkanized” because workers merely competed

with their fellow employees for economic rewards and not with laborers on the open market.

However, the protections stemming from internal labor markets were never universally

available. Research on dual labor markets argues that workers populated two distinct segments

(Piore, 1975). The primary (core) sector provided long-term, stable relationships with employers;

the secondary (peripheral) sector, comprising mostly low-wage workers, did not afford such

benefits and held little opportunity for advancement (Doeringer & Piore, 1971; Sorensen &

Kalleberg, 1981). Women, racial minorities, and low-skilled workers were more apt to be located

in the periphery (Kalleberg & Sorensen, 1979; Piore, 1975).

Many scholars have sought to explain the postwar prevalence of these hierarchically

focused internal labor markets. Some accounts argue that internal labor markets helped the

organization to manage its workforce as organizational needs for firm-specific skills increased,

raising the costs of employee exit (Cappelli, 2000) and engendering disputes over the quasi-rents

that firm-specific skills produced (Williamson, Wachter, & Harris, 1975). Yet Jacoby (1985)

argues that firm-specific skills were actually declining in importance during the periods when

internal labor markets were becoming established, not increasing as those explanations would

require. Marxist accounts also offered a functionalist explanation for internal labor markets,

suggesting that internal labor markets were established to facilitate control of workers as

enterprises grew (Edwards, 1979). Although often based on widely divergent perspectives,

theories of “efficiency wages” led to similar arguments (Akerlof & Yellen, 1986; Doeringer &

Piore, 1971; Sorensen, 1983).

However, there are many qualitative and historical accounts indicating that internal labor

markets amounted to a compromise between the interests of management and labor. Early

7
descriptive work, for example, argued that the structure of internal labor markets was shaped by

workers’ customs and their norms about fairness (Doeringer & Piore, 1971; Osterman & Burton,

2004). Jacoby describes how employers adopted internal labor markets in response to worker

pressures to reduce the “insecurities and inequities produced by a market-oriented employment

system” (1985: 3). When the firm was not forced to adopt internal labor market structures during

collective bargaining with unions, it enacted those structures unilaterally in order to preempt

unionization. Further evidence for unions’ influence on the development of internal labor

markets comes from Baron, Jennings, and Dobbin (1988), who find that seniority-based practices

were initially adopted in unionized industries, and from Slichter, Healy, and Livernash (1960),

who document the conflicts that occurred during collective bargaining over the adoption of

internal labor markets. These accounts therefore view the postwar employment system as the

outcome of explicit and implicit bargaining between workers and employers. Recent years have

seen substantial changes in the compact between those groups.

What Has Changed

The postwar period witnessed the dominance of internal hierarchy in the governance of

employment relationships, but the years since the 1970s have seen a resurgence of

extraorganizational forces. A summary of these changes is provided in Table 1. Much of this

change can be characterized as an increase in the influence of external market forces on the

organizational distribution of work and rewards. Stable long-term exchanges between employers

and employees have been replaced by more flexible arrangements that allow organizations to

adapt to environmental demands for their goods and services by restructuring, downsizing, and

outsourcing.

8
 Market-based practices. One manifestation of these market-based forces is a decline in

employee tenure. Although there was initial debate as to whether the average duration of

employment relationships was actually declining (e.g., DiPrete, Goux, & Maurin, 2002), recent

studies demonstrate substantial changes in worker tenure (Hollister, 2011). These changes have

been especially large among those groups that were previously most isolated from market

conditions—namely, men (Farber, 2008a) and employees of large organizations (Bidwell, 2013).

Although cross-country comparative research on trends in worker tenure is scarce, related work

with European data suggests a significant increase in employment insecurity over the last few

decades (DiPrete et al., 2006). In contrast, studies of Japanese employment find little change in

job stability for more experienced workers (Kambayashi & Kato, 2012).

Another route by which markets have penetrated the employment relationship is through

firms’ use of downsizing to restructure their workforces. Rather than seeking to retrain or

redeploy workers, firms have been abandoning them to the external labor market during

reorganization (Osterman, 1999). That being said, it is not clear that the rate of layoffs has

increased much in recent decades: studies drawing on different data have come to different

conclusions. Layoff data from the Current Population Survey (CPS) show that, aside from a

spike in downsizing during the mid-1990s, there is little evidence of a secular increase since the

1970s (Farber, 2008b). However, Bidwell (2013) argues that there may have been a slight

increase (relative to the overall unemployment rate) in layoffs for experienced men during this

period. Evidence based on transitions from employment to unemployment suggests that

involuntary turnover may actually have declined substantially during the 1990s (Stewart, 2002)

and through the middle of the last decade (Davis, 2008). But studies based on downsizing

9
announcements display a markedly different pattern, one that is characterized by substantial

increase in downsizing at least through the 1990s (Hallock, 2009; Jung, 2011).

Although there is no consistent evidence for a substantial increase in the rate at which

firms dismiss workers, researchers have posited a change in the reasons underlying those layoffs.

Analyses of layoff announcements indicate that layoffs have become less likely to occur in

response to declining demand or poor profitability and more likely to reflect reorganizations and

attempts to control costs (Hallock, 2009; Osterman, 1999). Such evidence suggests that

employers have come to see the reallocation of workers into the external labor market as a

normal business practice rather than a last resort.

There have also been increasing market influences on how employees are paid.

Organizations have implemented contingent-based pay practices that reward workers for their

productivity. Pay-for-performance practices embody arguments from neoclassical economics

that firms should pay employees at their marginal product and that incentives are needed to

induce worker efforts. Performance-contingent pay systems initially gained popularity after

World War II, when organizations began to implement formal evaluation systems (Baron,

Dobbin, & Jennings, 1986a; Mitchell, Lewin, & Lawler, 1990); however, they did not become

widespread until after the 1982 recession, when firms faced enormous pressure to improve

workforce efficiency. By the mid-1980s, more that 80% of U.S. organizations had implemented

performance-contingent pay plans, and this high rate continued into the twenty-first century

(Heneman & Werner, 2005).

Scholars have also claimed that employees’ exposure to the market has been increased in

a more subtle way: by changes in firms’ benefits practices (Fronstin, 2012; Jacoby, 2001;

Maxwell, Briscoe, & Temin, 2000; Shuey & O’Rand, 2004). First, many organizations no longer

10
offer any benefits to their employees. Benefit availability has declined fastest for health

insurance (54% of workers under age 65 received health insurance coverage from their employer

in 2009, compared with 70% in 1980) and has also declined for pensions (43% covered in 2009

versus 51% in 1980; EPI, 2011). An even more dramatic change occurred in retiree health

benefits, which are exempt from legislative protection. Although comprehensive data are

lacking, one recent study estimated that only 26% of large employers provided this benefit in

2011 compared with 66% in 1988 (KFF, 2011). Hence more employees are purchasing benefits

for themselves in the open market, increasing their exposure to market forces.

Second, even for those employees who retain access to benefits through their employer,

changes in benefit format have transferred market risk from employers to employees. A key

change has been the shift from a “defined benefit” to “defined contribution” format. The pure

form of a defined benefit plan prescribes a specific benefit (e.g., fully paid health insurance, a

guaranteed retirement income) to workers with sufficient tenure. In contrast, the pure form of a

defined contribution plan provides a set amount of pretax money in each year of employment,

money that the employee can use toward the purchase of benefits (e.g., a health insurance

product, a 401k investment). Munnell (2006) reports that the shift in the format of benefit plans

has been relatively swift: of the workers covered by retirement plans, from 1981 to 2001 the

portion with defined benefit plans fell from 60% to 23% (see Cobb, 2011). Although the shift in

health benefits is more complex to trace, one indicator is the amount employees must contribute

toward the purchase of their own health insurance; among large US employers, this figure rose

from $1,543 in 1999 to $3,515 in 2011 (KFF, 2011).1

1
This trend is also evident for private pension schemes in the United Kingdom. In most other developed countries,
however, voluntary private coverage for health insurance and pensions is less significant because of compulsory
participation in public health and pension systems (Clark, Munnell, & Orszag, 2006: 374–76).

11
 Just as regular employment relationships have become more exposed to market forces, so

the use of contingent work and outsourcing has also grown. Given these alternative mechanisms,

firms no longer enter into a traditional employment relationship with their workforce. Instead,

researches have shown that companies are able to employ workers using arm’s-length

agreements and thereby bring the flexibility of the market into their dealings with workers

(Davis-Blake & Broschak, 2009; Harrison & Bluestone, 1988; Pfeffer & Baron, 1988).

One focus of the research on such market-like relationships is the use of contingent

workers, who lack any implicit or explicit expectation of long-term employment (Polivka &

Nardone, 1989; Cappelli & Keller, 2013). There is a general consensus among management

scholars that the use of contingent workers—including independent contractors and both on-call

and direct-hire temporary workers—has grown in recent decades (Houseman & Polivka, 2000;

Kalleberg, 2000), although the lack of historical data on the contingent workforce makes it hard

to substantiate that claim. A contingent work supplement to the Current Population Survey was

published only from 1995 to 2005; it showed little growth in the contingent workforce during

that period. Recent data from employer surveys indicate that about 8% of workers across

establishments are in some sort of contingent employment relationship, and there has been a

moderate (but uneven) increase in that figure over time. However, there is considerable variance

across establishments (Cappelli & Keller, 2012).

Studies of the temporary help services industry provide more conclusive evidence of

change, with temporary help employment increasing from less than a quarter of a million in the

early 1970s to some 2.3 million at the end of the 2000s and accounting for nearly 10% of US

employment growth for the period 1990–2000 (Cappelli & Keller, 2012; Lou, Mann, & Holden,

2010; Peck & Theodore, 2007). Data from Europe show similar trends. Although comparable

12
statistics are scarce, estimates suggest that employment through temporary help agencies could

account for about 2% of the labor force in the United Kingdom, 2.7% in France (Storrie, 2002),

and 1.4% in Germany (Mitlacher, 2007). The contingent employment of workers through labor

market intermediaries such as temporary help agencies has received particular attention in the

literature. Introducing a labor market intermediary into the mix changes the nature of the

employment relationship by turning it into a triadic exchange (Bidwell & Fernandez-Mateo,

2008; George & Chattopadhyay, 2005). Workers employed through an intermediary are

employees of the intermediary and not of the firm where they work, so in principle the

intermediary is in charge of managing and supervising them (Davis-Blake & Broschak, 2000).

Such arrangements thus turn a hierarchical, firm–employee relation into a market-based, firm-to-

firm relation.

Another way in which firms have been able to make increasing use of markets to shape

employment is by the outsourcing of entire functions that were previously carried out internally.

Whereas contingent employment typically involves hiring small groups of short-term workers

alongside regular employees, outsourcing involves the firm severing its employment

relationships with an entire group of workers and then contracting with another firm to replace

their output. Although there is a general belief that outsourcing has increased over the last few

decades, the evidence is again somewhat fragmentary (Lamoreaux, Raff, & Temin, 2003;

Langlois, 2003; Schilling & Steensma, 2001). Some scholars have developed case studies of

vertical disintegration and the outsourcing of production in such industries as electronics,

banking, apparel, and automobiles (Jacobides, 2005; Jacobides & Billinger, 2006; Lamoreaux,

Raff, & Temin, 2003; Sturgeon, 2002). However, broader research finds little evidence of an

overall decline in vertical integration since the 1970s (Fan & Lang, 2000; Hitt, 1999). There is

13
evidence that the average size of organizations has declined (Brynjolfsson et al., 1994; Davis &

Cobb, 2010; Zenger & Hesterly, 1997), which may reflect in part the breakup of diversified

conglomerates. Perhaps the strongest evidence of the increase in outsourcing comes from the

rapid growth of the business services industry, which exists solely to provide services to other

companies (Abraham, 1990; Bidwell & Fernandez-Mateo, 2008), and from the growing

concentration of certain occupations (e.g., computer programmers and janitors) in the business

services industry rather than in the industries that rely on their services (Dey, Houseman, &

Polivka, 2009).

Expanding Worker Rights Protections. Even as firms were allowing more market-based

practices into their employment relationships, an expanding collection of workers’ rights

protections were evolving that shielded some workers from the full force of the market. First, the

earlier passage of the federal Civil Rights Act (1964) and its amendments (1972, 1978), the

Equal Pay Act (1963), and associated regulations promoting equality for women and minorities

continued to have a strong influence on employment practices related to hiring, promotion, pay,

benefits, and working conditions from the 1980s onward (Skrentny, 2002).2 At first these

programs shaped employment through regulatory compliance practices—for example,

designating equal employment opportunity (EEO) compliance officers and instituting grievance

and arbitration systems for resolving workplace disputes. As Edelman and colleagues (2011) and

others have argued, many of those practices had by the 1980s and 1990s become institutionalized

and accepted by courts as key ingredients for employers to demonstrate nondiscrimination in

employment.

2
Other major laws during the earlier era, including the Occupational Safety & Health Act (1970) and the Employee
Retirement and Income Security Act (1974), also included provisions designed to ensure equal treatment for
employees.

14
 During this time period, the state also provided some limited dampening of one of the

most potent market-based practices to penetrate firms. By imposing limits on the doctrine of

“employment at will”, which had historically governed individual employment in the United

States, some state courts introduced certain limits—and uncertainty about additional possible

limits—on the firm’s discretion to terminate employees (Edelman, Abraham, & Erlanger, 1992;

Morriss, 1995). Autor, Donohue, and Schwab (2002) indicate that a majority of states now

recognize the implied-contract exception to the at-will doctrine, limiting an employer’s ability to

terminate without good cause when the firm’s policies or practices or even industry norms create

an reasonable expectation of continued employment. Yet employers have proved adept at

circumventing these constraints, altering employment agreements to avoid exposure to this

liability (Arnow-Richman 2010).

Along with these regulatory influences, recent decades have also seen a parallel shift in

the focus of worker protections inside firms—a movement toward a collection of new and mostly

voluntary diversity management programs and benefits. These programs and benefits can also be

viewed as an expansion of worker rights and a limiting of market forces. Yet the influences

shaping these new rights differ from those of the earlier era, when employers made changes in

response to federal legislation. The newer wave of programs and benefits instead reflect

responses to pressure from social identity–based movements that directly petitioned

organizational decision makers to make changes in their firms. In response to this pressure, and

often with the cooperation of human resource (HR) managers and consultants, diversity policies

expanded to encompass training and mentoring programs, culture audits, and Employee

Resource Groups (Briscoe & Safford, 2010; Dobbin & Kelly, 2007). This shift reflected a “soft”

emphasis on addressing stereotypes and psychological bias through education and awareness in

15
place of the earlier, “hard” approach that focused on changing organizational structures assigning

responsibilities.

Beginning in the 1990s, workplace civil rights were also extended by many firms to

workers based on sexual orientation. These protections, too, were adopted without major state

regulatory intervention. Significant developments along these lines are (i) the inclusion of

lesbian, gay, bisexual, and transgender (LGBT) nondiscrimination clauses in employment

policies and (ii) the extension of health benefits to the domestic partners of employees. Prior to

1990, sexual orientation clauses were rare—and domestic partner benefits virtually absent—from

the US private sector. By 2012, however, 86% of the Fortune 500 had adopted sexual orientation

clauses and 60% had adopted domestic partner benefits. These figures appear to be trending

upward (Human Rights Campaign, 2012).

New, family-based employee rights also emerged during the 1980s and 1990s. After a

protracted battle, parental leave was legislated with the passage of the federal Family & Medical

Leave Act (FMLA) in 1993. This act requires firms with 50 or more employees to provide 12

weeks of (unpaid) job-guaranteed leave for childbirth, adoption, or family medical care.

Moreover, many large employers decided to exceed the federal requirement and provide paid

family leave, and a few states (including California, Washington and New Jersey) have passed

legislation to enhance the benefit.

THE REASONS FOR CHANGE

The literature reviewed above suggests that the influence of external markets and institutional

forces on employment relations has grown, at the expense of internal hierarchy. The canonical

research on when activities are governed externally versus internally focuses on the

characteristics of those activities (e.g., Williamson, 1985, 1991). From that perspective, recent

16
changes in employment should be a consequence of fundamental changes in the nature and

requirements of work. As we have moved from nationally-based manufacturing economies to a

technology-enabled and services-heavy global market, the nature of work is much different from

what it used to be. As a result, its governance must also be different. Some scholars have, indeed,

explored the role of technology and globalization in changing employment practices, while

others have explored the effects of demographic change. A central theme in this review, though,

is that the organization of employment shapes “who gets what”, and that many stakeholders

therefore try to influence employment arrangements, seeking to increase their share of the

organization’s returns. 3Below, we discuss research on the influence of both these environmental

and political forces, which are also summarized in Table 2.

The Turbulent Environment: Technology and Globalization

The era of increased market penetration into employment relationships was also an era of rapid

technological change, as digital technology spread into practically every area of economic

activity. By altering the ways in which activities are coordinated, both in organizations and in

markets, these changes had a substantial effect on employment relations. For example, some

scholars have suggested that technological changes made it easier to coordinate across market

interfaces, leading to a decline in the use of organizations to govern such activities as

employment (Brynjolfsson et al., 1994). Other work suggests that new technologies have

required firms to organize work in fundamentally different ways, drawing on new skills and new

product methods (Bresnahan, Brynjolfsson, & Hitt, 2002). Such wholesale changes in the

3
These struggles vary depending on the institutional context, and may have different effects in different
countries. For example, Mitlacher (2007) summarizes differences between the United States and Germany with
respect to the reasons for using contingent employment. A full comparison of these institutional systems is beyond
the scope of this review.

17
organization of work—and the skills required—may have put substantial pressure on the less

responsive, organizationally based employment relationships that characterized the postwar

period.

Some empirical research supports the argument that changing technology has encouraged

the penetration of external markets into firms’ employment models. Bidwell (2013), for instance,

finds evidence that workers are more likely to be laid off from industries with higher

expenditures on information technology. There is also a significant amount of research

associating technology with outsourcing and contingent work. Some studies have found that

firms and industries with higher expenditures on technology are more likely to engage in vertical

disintegration, shed employment, and reduce their level of “value added” (Brynjolfsson et al.,

1994; Hitt, 1999). Sahaym, Steensma, and Schilling (2007) also find that industries making more

IT investment per full-time worker employ a higher proportion of contract agency and temporary

help workers; Schilling and Steensma (2001) find a relationship (albeit a weak one) between

technological change and the use of such workers. However, Gramm and Schnell (2001) find no

relationship between technology use and contingent work in their survey of Alabama employers,

and Bidwell (2013) likewise finds no association between industry technology investments and

declines in tenure. Overall, then, the empirical evidence relating technological change to the

declining importance of internal employment arrangements is not conclusive.

Global competition is another frequently cited source of pressure on the employment

system. Early commentary on changes to employment emphasized the challenges that foreign

competition posed to previously stable markets, especially in manufacturing (Cappelli, 1999;

Harrison & Bluestone, 1988). Such accounts suggest that rapidly declining market shares

triggered a perceived need for aggressive cost cutting, prompting employers to negotiate greater

18
flexibility from their employees. There is no doubt that foreign competition has had a devastating

impact on several US industries, including some (e.g., automotive) that were once the most likely

to close off their employment systems to external labor markets. There is also evidence that these

forces have affected employment relationships. For instance, Cuñat and Guadalupe (2009) find

that greater global competition leads firms to provide stronger employee incentives. Bidwell

(2013) finds little effect of import penetration on worker tenure but does find that imports are

associated with higher layoff rates. Yet just as in the case of technological change, we lack

systematic evidence on the extent to which globalization has been responsible for widespread

changes in employment.

Changing Nature of the Workforce

At the same time that firms’ environments were experiencing substantial changes, the nature of

the workforce was also evolving. In particular, some of the changes in employment relationships

already described could be partly driven by shifts in the composition of the labor force as well as

by workers’ preferences for different types of employment arrangements.

Blau, Ferber, and Winkler (2002) point out that one of the most significant trends in the

last few decades has been the increase in women’s participation in the labor market—not only in

the United States but also in other industrialized countries. The growth of women’s labor force

participation is associated with an increase in the number of dual-career families (Blossfeld &

Drobnic, 2001). This phenomenon may also be associated with some of the changes observed in

employment patterns, including the spread of work-family benefits, increased worker mobility,

and the growth of nonstandard work. There is clear evidence, for example, that the increasing

number of women and dual-career workers of both sexes helps to explain firms’ offering work-

family benefits (Glass & Estes, 1997; Osterman, 1995). Evidence on the relationship between

19
women’s labor force participation and career mobility is less straightforward, though. On the one

hand, some research shows that family mobility is influenced to a greater extent by men’s jobs

than by women’s (Shauman, 2010; Sorenson & Dahl, 2012), and men’s careers are usually given

priority over women’s within married or cohabiting couples. (Bielby & Bielby, 1992; Valcour &

Tolbert, 2003). If so, then a woman may quit her job and search for other employment in

response to her partner’s opportunities. Similarly, Cha (2010) argues that the increased trend for

working long hours in the United States increases the likelihood of women quitting their jobs.

Cha finds that having a husband who works long hours increases the probability that a woman

will quit her own job, but not vice versa. If men’s careers are given more priority and men are

working longer hours, then women’s turnover and external mobility may increase. Yet recent

evidence suggests that, overall, married women’s work tenure has actually increased as the

number of dual-career couples has grown (Farber, 2008a; Hollister, 2011).

Some authors argue that women may prefer such flexible employment arrangements as

part-time work and other forms of nonstandard employment (Kalleberg, 2000; Pfeffer & Baron,

1988; Wienns-Tuers & Hill, 2002), perhaps because many women still do most of the household

work (Shelton & John, 1996). Temporary and other nontraditional employment relations may

also be favored by older workers, who remain in the workforce for longer they used to—either

by choice or necessity—and may often prefer to work fewer or more flexible hours (Cappelli &

Novelli, 2010). Such older workers may thus welcome transitioning to nonstandard work

arrangements (Kalleberg, 2000).

These discussions of demographic shifts suggest that workers’ preferences for less

traditional employment arrangements may underlie part of the growth in new forms of working.

Such preferences may not be limited to women and older workers; some authors claim that

20
younger generations may be more open to the idea of moving frequently across firms and

managing their careers in a flexible way (Smola & Sutton, 2002). Research in the “boundaryless

career” tradition (see Arthur, 1994) emphasizes this individualistic bent, arguing that many

workers currently prefer career trajectories that are not expected to unfold in a traditional

manner. Rather, they expect to move relatively frequently across jobs, locations, functions, and

firms. The assumption underpinning much of this literature is that individuals’ decisions are the

main driver of changes in career trajectories. However, as Rodrigues and Guest (2010) suggest,

there is no strong empirical evidence that macro changes in employment relationships are driven

by the predilection of individuals for an independent career. So even though demographic shifts

and preferences have probably contributed to some of the observed changes in employment

patterns, especially in the area of benefits, they seem not to be the main driver of these

transformations.

Stakeholder Power Struggles

Our review of the available literature leads us to argue that technological change, global

competition, and demographic shifts provided a favorable context for renegotiating the terms of

the employment relationship but did not shape them in a deterministic manner. Technology and

globalization did offer a ready justification for the need to change that was often used by

managers during the 1990s and 2000s. Yet there is no convincing evidence that this trend fully

dictated the direction, pace, or nature of changes to be made. Instead, the changes that developed

can be seen as the outcomes of struggles among stakeholders seizing opportunities to advance

their own agendas and interests.

21
Decline in Workers’ Class-Based Collective Action

Kalleberg (2009) argues that the long sweep of employment history in the United States can be

described as a struggle between the advocates of laissez-faire markets and those of employment

protection and social security. One side gaining the upper hand triggers a backlash, which leads

to pendulum-like swings between free markets and increased protections for workers.

Arguing along these lines explains many of the changes of the last three decades.

Following increased regulation during the 1960s and 1970s and the subsequent crisis in

corporate profitability, employers have been more assertive in attempting to reshape the

institutional landscape in ways that increase their flexibility and limit worker protections. Hacker

and Pierson (2010) document the tremendous increase in resources that corporations have

committed to influencing government from the late 1970s onward (see also Baumgartner et al.,

2009; Hula, 1999; Walker, 1991; Werner 2012; Yackee & Yackee, 2006). These authors argue

that the increased power resulting from such expenditures enabled corporations to further their

interests in multiple areas including taxation, corporate governance, and financial deregulation.

Such efforts were also supported by the rise, in political circles during the 1980s and 1990s, of

economic neoliberalism. In particular, in the 1980s the US Reagan administration and the UK

Thatcher administration promoted industry and labor market deregulation by arguing that freer

markets provide greater individual opportunities and freedoms. Vallas and Prener (2012)

similarly argue that large-scale political and cultural shifts in expectations about work have

greatly contributed to the erosion of worker protections.

Most important for our purposes, powerful corporations were able to defeat attempts to

adapt industrial relations law to the changing economy and were also able to blunt the political

influence of unions. Here again, corporate efforts during the 1980s were supported by elected

22
officials who were ideologically opposed to unions—as symbolized by Reagan’s 1981 mass

firing of striking federal air traffic controllers (Hurd, 2006). As workers lost power relative to

other groups, their ability to demand protections from their employers also declined. Most

observers conclude that political organizations allied with labor presented little in the way of

countervailing force to corporate influences on federal employment policy making during the

1980s and 1990s (Osterman et al., 2001).

Probably the starkest indicator of the shift in power from workers to employers is the

decline in union membership, which has been the focus of much research in the last few decades.

By providing workers with collective organization and voice, unions substantially increase

worker bargaining power. Although that power is most salient in workplaces that have been

unionized, there is considerable evidence that a strong union movement affects all workers

because even the threat of unionization serves to discipline employers (Jacoby, 1985; Podgursky,

1986; Rosen, 1969). Although scholars show that union power is most obviously used to raise

wages (Freeman & Medoff, 1981), that power has also been exercised to insulate workers from

the external labor market. Recent decades have seen an accelerating decline in union

membership in the private sector, falling from about 25% in the mid-1970s to just below 7% in

2012. Many explanations have been proposed for this decline. Some scholars argue that the US

union model is ill suited to modern enterprise (Hirsch, 2008; Jacoby, 1997). However, other

research suggests that the decline in unionization is linked, at least in part, to increasing

employer opposition in both the workplace and regulatory domains (Dubofsky, 1994; Ferguson,

2008). By requiring employees to organize workplace by workplace, US industrial relations law

demands that unions organize new establishments at a high rate just to maintain their

membership levels. Unions have largely failed to surmount this hurdle since the 1950s (Farber &

23
Western, 2001), but the early 1980s witnessed a major collapse in the level of union organization

(Farber & Western, 2002; Tope & Jacobs, 2009). Although there is some dispute over exactly

when union organizing began to decline, the timing roughly coincides with employers’ increased

push into the political arena and the election of a Republican president who was notably hostile

toward unions. Dubofsky (1994) argues that union organizing always relied on the tacit support

of the state. As the state withdrew its support and as employers prevented the updating of

industrial relations policy to reflect the modern workplace, unions were effectively removed

from the employment stage.

Some empirical evidence supports the argument that union decline has contributed to the

increased penetration of external labor markets into the employment relation. Bidwell (2013)

finds a strong association between industry unionization and tenure, and he posits that reduced

unionization could account for much of the decline in tenure during recent years. Western and

Rosenfeld (2011) also find a strong association between local industry unionization levels and

wage inequality, arguing that unions impose norms of equity on the labor market. These authors

argue that the decline of unionization could thereby explain from a fifth to a third of the growth

in inequality. There is also evidence that unions inhibit the spread of contingent work. Both

Houseman (2001) and Gramm and Schnell (2001) find that unionized firms are less likely to use

contingent workers, although Davis-Blake and Uzzi (1993) report some evidence that unionized

establishments are more likely to use temporary agency workers. Unionized workplaces are also

more likely to stave off reductions in health insurance and pensions (Buchmueller, DiNardo, &

Valletta, 2002).

24
Identity-Based Social Movements

Although there is evidence that the US labor movement has been in decline, research also

suggests that the last few decades have seen an increase among workers in new forms of

collective action based on social identity rather than social class. These new forms of action are

intriguing because at first blush they represent a kaleidoscope of potentially conflicting

identities. Despite this challenge, participation has cut across class and occupational lines,

drawing in frontline workers as well as managers, consultants, and others working in and around

corporations who have served as effective advocates for new employment practices. Recent

research has demonstrated the influence of these identity-based movements in shaping specific

practices related to employee benefits, work-family policies, and workforce diversity.

Piore and Safford (2006) define an identity-based social movement as a group of

individuals who share a social identity (e.g., race, ethnicity, gender, age, disability, immigrant

status, sexual orientation) and who are trying to change society through collective action aimed

at influencing the policies of institutional actors such as governments and corporations. The

initial waves of civil rights activism were aimed mainly at the state during the 1960 and 1970s.

Since then, however, identity-based social movements have become more active in influencing

corporate employment practices by applying direct pressure to firms and their leaders. Moreover,

research by Meyerson and Scully (1995), Raeburn (2004), Briscoe and Safford (2008), Kelly

(2009), and others indicates that—although advocacy groups were historically based in

organizations positioned outside the corporate sector—the web of actors involved in

employment-related social advocacy during the 1990s and 2000s included many allies from

within the corporation and its environs. Prominent corporate executives, HR professionals,

management consultants, industry lawyers, union representatives, and government officials were

25
all involved in advocacy efforts championing diversity-based policies and new workplace rights

for families (Bailyn, Drago, & Kochan, 2001; Raeburn, 2004; Thomas, 2005).

In the area of work-family benefits, a diverse set of social identity–based groups during

the 1990s and 2000s worked with companies to implement new employment practices while

advocating for legislative changes. Groups such as the National Partnership for Women and

Families, Work Family Directions, Catalyst, and the Families and Work Institute partnered with

companies to promote work-family benefits, acting effectively as both public issue advocates

and industry consultants as they helped to craft new work-family benefits adopted by large firms.

In the policy arena, these same groups helped push the FMLA legislation through Congress; they

also helped influence a few states (e.g., California and New Jersey) to legislate paid family leave,

a major goal of the movement. As Kelly (2003) and Dobbin (2009) show, these groups

collaborated extensively with allies inside the companies—most notably, with human resources

departments—to shape the work-family benefits (part-time work, flexible working hours, paid

family leave, telecommuting, etc.) that many companies have recently extended to employees.

Advocates for LGBT worker rights emerged from a similarly cross-cutting set of

stakeholders. National LGBT rights groups, including the Human Rights Campaign and Out &

Equal, advocated for nondiscrimination clauses and domestic partner benefits by directly

lobbying firms to change their employment practices. These groups grew out of (and alongside)

the advocacy efforts of company-specific LGBT employee groups that began advocating for

policy changes in the early 1990s and that helped to spread changes through networks extending

across industry (Briscoe & Safford, 2008; Raeburn, 2004). Unlike the work-family advocates,

who found that employer opposition was largely based on concerns over associated costs, LGBT

rights advocates were enmeshed in a wider and more contentious struggle over the legitimacy of

26
homosexuality. Hence the participation of senior managers and corporate board members as

allies in the movement was important for conveying the political legitimacy of these new

employment practices (Gunther, 2006). As the new practices took hold, consulting firms also

participated in further diffusing them across companies.

Some employment-related movements have sought to blend social identity and economic

class. For example, the Industrial Areas Foundation (IAF) and allied community organizations

pushed employers in several cities to adopt “living wage” higher local minimum wage

ordinances, and the SEIU-affiliated Justice for Janitors organization used innovative advocacy

tactics to achieve agreements with commercial cleaning contractors for better wages, health

benefits, and working conditions for low-wage workers. Research by Erickson (2002), Osterman

(2003), and others suggests that IAF mobilization efforts benefited from being rooted in earlier

community organizing traditions and from maintaining close connections to local immigrant

communities. In the company environment, these blended or hybrid social movements occupy a

place similar to that of other, identity-based social movements, and together they represent an

increasingly powerful external influence on corporations shaping their employment

arrangements. That being said, research to date indicates that their impact has so far been limited

to narrow geographic regions and industry sectors.

Shareholder Value Movement

Corporate shareholders constitute another group that is known to influence the employment

relationship. Davis and Thompson (1994) argue that investors as a class consolidated their

influence on a wide range of corporate practices during the 1980s, mobilizing through

shareholders associations such as Institutional Shareholder Services (ISS) and uniting around

concerns that managers and directors were insufficiently responsive to shareholder interests.

27
Mobilization efforts gained traction after American corporations performed poorly during the

1970s, which opened the door to arguments from agency theorists about the market for corporate

control (Fama & Jensen 1983; Jensen & Meckling, 1976). Governance structures emphasizing

shareholder value were implemented during the 1980s and spread most rapidly after the 1987

stock market crash that preceded the longest “bull” run in history. Shareholders took this as a

sign that governance mandates on shareholder value were a catalyst for growth. Shareholders

have been able to maintain their influence in large part due to the concentration of ownership of

American corporations. Historically the individual investor owned a large portion of the common

shares of stock in publicly traded companies in the United States. Today institutional investors

hold approximately 60% of corporate equity, outpacing stock ownership by individual investors

(Westphal & Bednar, 2008).

Extant research suggests that the shareholder value movement legitimized many of the

changes to the employment relationship discussed in the previous section. Because firms

concentrated on a single metric of performance—the return on corporate stock—no

consideration was given to the possible negative ramifications for workers of changes in the

employment relationship. A “retain and reinvest” approach, which kept employees and profits

internal to the organization, was replaced by a “downsize and distribute” approach (Lazonick &

O’Sullivan, 2000). An important line of work confirms an association between the importance of

shareholder control of corporations and an increase in downsizing (Budros, 1997; Fligstein &

Shin, 2007; Useem, 1993). Indeed, shareholder pressures are often cited by firms as a reason for

laying off workers (Budros, 1999). Studies have also linked the presence of active financial

investors to the decline of defined benefit pensions (Cobb, 2012) and to an increase in the use of

equity compensation for incentivizing middle managers (Marler & Faugère, 2010). Briscoe and

28
Murphy (2012) find that financial analysts can affect a company’s decision to reduce retiree

health benefits simply by downgrading their expectations for the firm’s future share

performance.

Human Resource Managers

As various collective actors have pursued their interests in shaping the employment relationship,

their efforts have been reflected in changes within the corporate HR function and its associated

field-level professional associations and consulting firms. When financial investors increased

their influence on senior management during the 1980s, HR professionals began to articulate a

shifting view of their role in the firm—namely, as a partner in the company-wide goal of creating

financial wealth for investors. In broad strokes, the guiding ethos of the profession transitioned

from “manage or avoid relations with unions” and “balance worker and firm interests” to

“become a strategic corporate partner in creating shareholder value” (Foulkes, 1980; Jacoby,

2001; Kochan, 1999). This transition has itself been claimed to reflect the rise of a financial logic

within firms (Fligstein, 1993) and the decline of union strength (Kochan, 1999). Scholars suggest

that the HR professionals of large firms were increasingly called upon to implement the market-

oriented employment practices discussed previously, such as establishing incentive pay, using

outside contractors, and shifting from defined benefit to defined contribution plans (Briscoe,

Maxwell, & Temin, 2005; Cappelli et al., 1997). These changes were supported by influential

HR researchers and consultants who argued that a shift toward market-oriented employment

practices would increase shareholder value (Huselid, Jackson, & Schuler, 1997; Ulrich, 1999).

At the same time, the HR profession from the 1980s to 2000s also became involved with

social identity–based movements in the advancement of diversity employment practices. Indeed,

as pressure to advance financial investors’ interests increased during the 1990s and 2000s, and as

29
HR managers gained fluency in the language and logic of shareholder value creation, the latter

became well-positioned to reframe diversity and work-family practices in terms of the former’s

interests. This gave HR currency among top organizational decision makers. Whereas human

resource managers in the 1980s crafted key employment practices (e.g., formal hiring guidelines,

due process, centralized HR, and job descriptions) as required for compliance with the Civil

Rights Act, the focus shifted during the 1990s and 2000s. In this later era, with the rise of

investor capitalism, HR managers reinvented many employment practices under the concept of

“diversity management”—a rational, business case–oriented focus justified by corporate

effectiveness, not societal fairness (Creed, Scully, & Austin, 2002; Dobbin, 2009). Human

resource managers used this portfolio of ideas to develop work-family programs and LGBT

benefits that were motivated by hiring and retaining talented employees who would contribute to

firm performance (Briscoe & Safford 2008; Kelly, 1999). HR professionals also reinterpreted

existing diversity programs aimed at racial and gender equality, away from a basis in compliance

with government regulations, and toward the business case for diversity’s contribution to firm

performance (Kelly & Dobbin, 1998).4

Scholars have shown how these efforts to theorize and institutionalize diversity practices

played out at the level of the HR profession within and across corporations. Human resources

and management consulting firms helped develop and spread new market-based employment

practices such as performance-based pay, outsourcing, and benefit reforms. Kelly (2003)

documents how consultants shaped and disseminated work-family benefits, and Briscoe and

Murphy (2012) find that benefit consultants invented and then spread potent techniques for

reforming corporate retiree health benefits. Not surprisingly, professional associations were also

4
This occurred even though research on the beneficial impact of diversity remains largely equivocal and
contradictory (Kochan et al., 2003).

30
active in shaping these changes. By the early 1990s, prominent HR organizations—for instance,

the American Society for Training & Development and the Society for Human Resource

Management—were actively promoting training and certification programs in diversity

management (Dobbin, 2009). Dobbin also points out that diversity within the HR occupation

itself may have supported interest in these changes; human resources counted 70% females and

12% African Americans and Latinos within its ranks in 1990, when other managerial groups

remained less diverse.

A related line of research has argued that the scope for HR to shape these new practices

was facilitated by the tendency of relevant US federal laws to be enacted with ambiguous

language. This ambiguity creates an opportunity for professional experts to devise practices that

they believe fulfill regulatory compliance requirements and will stand up in court. Edelman,

Sutton, Dobbin, and colleagues argue that—throughout the postwar decades—HR managers,

employment consultants, and employment lawyers together invented and then disseminated

employment practices that (they argued) would ensure companies of compliance. This argument

has been applied to practices ranging from the earlier establishment of personnel offices,

centralized hiring, internal labor markets (ILMs), and due process (Baron, Dobbin, & Jennings,

1986; Dobbin et al., 1993; Edelman, 1990; Sutton et al., 1994) to the later spread of diversity and

sexual harassment training programs, family leave policies, and dependent care support (Kelly,

2003; Kelly & Dobbin, 1999). One effect of this legal ambiguity was to enable the remarkable

flexibility exhibited by HR professionals as they shifted to a profit-maximizing “business case”

rationale for practices that were maintained, instigated, or changed since the 1980s.

Our review of the reasons for the change in employment relations that occurred during

the 1990s and 2000s has underscored shifts in the power held by key stakeholder groups.

31
Although macro trends associated with globalization, technology, and workforce demographics

clearly set the stage for change in employment practices, we argue that the shift in power from

unions to shareholders is also an important explanatory factor. In addition, we have highlighted

the emerging role of new social identity movements that have affected employment practices

related to targeted groups of workers. Other firm-related institutional actors, such as the HR

profession, have weathered these changes by adapting their rhetoric and activity.

IMPACTS OF CHANGE ON THE DISTRIBUTION OF REWARDS

Within organizations, changes in employment relationships have affected the two sets of

processes that affect how rewards are distributed: how pay and benefits are allocated within jobs;

and the selection of different kinds of workers into jobs that are more- versus less-rewarding.

These changes have reshaped the determinants of success in the labor market, introducing, for

example, new cleavages around how jobs are entered and whether workers are in regular or non-

standard employment. The research emphasizes in particular the challenges that the changing

employment relationship has created for less-privileged workers, such as those with lower skills

or who come from traditionally disadvantaged groups such as women and ethnic minorities.

Although some of these disadvantaged groups may have simultaneously benefited from

institutional pressures on firms to adopt protective practices, it is unclear that those pressures

have effectively counterbalanced the market.

The New Employment Relationship and the Distribution of Rewards within Organizations

Changes in How Pay and Benefits Are Allocated within Jobs

Table 3 summarizes research on how changes in the employment relationship have shaped the

way that workers are rewarded once employed. The literature suggests that the move away from

32
organizationally based governance has weakened the link between employment rewards and

workers’ relationship with their employer; organizational characteristics and worker tenure

appear to play a reduced role in setting pay and other benefits, while performance has become

more important. Research also describes how the relative balance of organizations and markets

in governing employment has also become an important determinant of rewards in its own right,

with pay levels reflecting whether workers entered their jobs through external hiring or internal

mobility and also whether they are employed directly by organizations or through arm’s-length

contracts.

The original literature on internal labor markets argued that compensation within firms

aimed to balance demands for equity across different jobs by establishing appropriate pay

differentials that would maintain incentives within the organization (Doeringer & Piore, 1971).

There is evidence that an internal labor market’s use of formalized processes helps reduce

inequality by minimizing the psychological biases that tend to reproduce inequality among

groups (Reskin & McBrier, 2000; Stainback, Tomaskovic-Devey, & Skaggs, 2010) so that, for

example, the pay of women who make it into the firm’s core management is commensurate with

equivalent men (Anderson & Tomaskovic-Devey, 1995; Elvira & Graham, 2002). Compensation

within the internal labor market was also partly shaped by the employer’s profitability, as

workers leveraged their power to gain a share of the firm’s rents (Hildreth & Oswald, 1997;

Hodson & Kaufman, 1982). The move toward more market-based employment has reduced the

influence of these organizational attributes on pay. Instead, compensation is more likely to

reflect assessments of workers’ performance in addition to how they entered the organization and

how they are employed by it.

33
 A key consequence of more fluid employment relationships should be a decline in the

rewards to seniority. As firms value long-term loyalty less, we should see lower returns to

staying with the same firm over time. There is, unfortunately, no detailed evidence on this score.

DiPrete, Goux, and Maurin (2002) do find that the returns to tenure declined from 1983 to 1998

and that the returns to external experience increased—but only among younger and more

educated workers, whom they argued were more likely to work in “post-Fordist” organizations.

Perhaps the largest changes to the rewards for seniority are manifested in firms’ benefit policies.

With defined benefit pensions, final benefits were usually linked to (a) the ultimate salary a

worker achieved while employed by the organization, and (b) years of service. Because salary

normally increases later in a worker’s career, such systems gave substantially higher pensions to

those who had spent most of their career with a single employer. The move away from defined

benefit plans has eliminated those rewards to long-term organizational membership (Cobb,

2012).

There is some evidence that, with increased penetration of market forces, organizational

characteristics have also become less important in setting pay. One such characteristic that

affects pay is organizational size: workers in large organizations receive systematically higher

pay (Brown & Medoff, 1989). Hollister (2004) argues that the dismantling of internal labor

markets should have reduced that premium, since large firms no longer offer advantages to their

employees. In line with this argument, Hollister finds that the premium associated with

employment in a large firm declined by nearly a third from 1988 to 2003.

There is stronger evidence that ability and performance have become more important for

setting pay. Although research in the early 1980s highlighted the weak relationship between

productivity and pay (see, e.g., Medoff & Abraham, 1981), the growth of performance-based pay

34
has helped close this gap. Case studies show how the implementation of performance pay leads

to a much tighter link between productivity assessments and pay (Lazear, 2000; Shearer, 2004).

Longitudinal data from the Panel Study of Income Dynamics (PSID) has been used to show that

performance pay leads wages to track ability more closely whether ability is proxied by

education or individual fixed effects (Lemieux, Macleod, & Parent, 2009).

Effects on Inequality across Groups of Workers

The employment changes described here have had consequences for several kinds of between-

group inequality. On the one hand, changes in how pay is determined have altered various forms

of already-existing ascriptive inequality, as gender and race shape pay through different routes.

On the other hand, changes in employment relationships have created new distinctions between

groups of workers. Where once all workers might have entered higher-level jobs through

promotion and held regular employment contracts, now we see distinctions between workers

who were promoted versus hired into their jobs and between regular versus contingent workers.

There are good reasons to believe that the new, market-influenced employment

relationship places less emphasis on such ascribed characteristics (e.g. race and gender) when

setting pay, since organizations are now more focused on achievement (McNamee & Miller,

2004). In practice, however, a number of studies suggest that merit-based pay can increase

ascriptive bias—especially when pay plans have not been formalized. For example, Elvira and

Graham (2002) study a financial corporation and find that women received bonuses that were

25% lower than men’s even though their salaries were only about 1% lower. These authors argue

that the reported difference reflects the less formalized nature of the bonus-setting process.

Castilla’s (2008) examination of pay and performance data from another firm finds similar

evidence of gender bias in the allocation of bonuses. In a follow-up study, Castilla and Bernard

35
(2010) demonstrate that the promotion of a meritocratic culture within organizations can increase

bias in pay allocation. It is paradoxical that an emphasis on meritocracy would promote bias,

which underscores the need for future research on why this occurs.

The increasing likelihood that a worker will enter employment via external mobility also

has consequences for the distribution of rewards across workers. For instance, studies show that

workers entering their jobs through hiring earn more than those entering similar jobs through

promotion. Comparing workers who entered similar jobs within a firm by different routes,

Bidwell (2011) finds that hires earned substantially more than those internally promoted or

transferred. Harris and Helfat (1997) similarly find that CEOs hired from outside command

higher pay than internally promoted CEOs. Most studies that follow individuals as they move

sequentially among firms find faster pay growth for workers who voluntarily change

organizations (Brett & Stroh, 1997; Dreher & Cox, 2000; Fuller, 2008). However, other evidence

suggests that this pay growth may partly reflect the lower initial pay of such workers; thus pay

growth helps them catch up with others but does not provide a route to much higher pay levels

(Flinn, 1986; Light & McGarry, 1998). Some research also suggests that the benefits of mobility

may vary across demographic groups, although they reach different conclusions about to which

groups are advantaged. Some studies show that white men benefit disproportionally from

moving firms (Brett & Stroh, 1997; Dreher & Cox, 2000). Kronberg’s (2010) analysis of the

PSID, in contrast, finds that the benefits from changing jobs are more pronounced for black men.

As employment relationships have become more diverse, there is more evidence

suggesting that the terms of a worker’s employment matters. Workers doing similar work under

different employment arrangements may end up being paid very differently, depending on

whether they are regular employees, contractors or outsourced workers. One reason that pay

36
often differs in this way (i.e., as a function of employment status) is that firms outsource work

mainly to reduce their payroll expense. If organizations tend to standardize pay across jobs in

order to reduce social comparison and political problems, then outsourcing (or using contingent

workers) provides a means to reduce the ill effects of that standardization by placing certain

classes of jobs outside the internal labor market. Firms can then reduce the pay of less rewarded

functions to external market rates or increase the pay of the most rewarded functions (Abraham,

1990; Baron & Pfeffer, 1994; Nickerson & Zenger, 2008). The lack of a formal employment

relationship with workers can also allow firms to withhold other benefits from certain sections of

the workforce.

Research on contingent work bears out these arguments. Much of the initial research

examined whether contingent work represented “bad jobs” that provided lower pay and fewer

benefits than regular work (Kalleberg, Reskin, & Hudson, 2000) and focused on the problems

faced by temporary agency workers (Peck & Theodore, 2007). Studies of contingent work in

Europe have called attention to the lower pay and training opportunities often associated with

these positions (Albert, Garcia-Serrano, & Hernanz, 2005; Mitlacher, 2009). However, several

authors emphasize that outcomes for contingent workers need not be bad and instead tend to be

polarized: low-skill contingent workers usually do worse than regular employees but higher-skill

contingent workers often do better (Barley & Kunda, 2004; Marler, Barringer, & Milkovich,

2002). Thus, Segal and Sullivan (1997) find that temporary workers earn significantly less than

similar regular employees in blue-collar and pink-collar occupations but that the gap is small for

white-collar employees (see also Kalleberg & Reskin, 2000). At the high end of the labor market,

independent contractors report choosing contingent work because they are paid more than their

37
regular counterparts (Kunda, Barley, & Evans, 2002), and Houseman and Kalleberg (2003) find

that high skill temp workers make more than regular employees while low skill temps make less.

Similar findings apply to outsourced workers. Abraham and Taylor (1996), for instance,

find that manufacturing firms with higher average wages are more likely to outsource janitorial

services whereas firms with lower average pay levels are more likely to outsource accounting.

Studies of less skilled work have consistently found lower wages among outsourced workers. For

example, van Jaarsveld and Yanadori (2011) compare outsourced versus internal call center

workers using establishment-level data, and Dube and Kaplan (2010) examine the pay of janitors

and security guards using CPS. Both studies find that outsourced workers received lower pay

than workers employed by the end users of their services.

Less research has explored whether contingent or outsourced workers are rewarded for

attributes that differ from regular employees. As noted previously, formalized pay processes

within internal labor markets tend to reduce disparities across different demographic groups. As

workers are taken out of those formalized systems, there is concern that discriminatory processes

may creep back into pay setting. There is scant available evidence on this question. A study of

data from a staffing firm (Fernandez-Mateo, 2009) finds lower wage growth for female versus

male high-skill contractors, although those differences partly reflect differences in contractors’

rates of mobility across clients. Contingent workers may also experience greater gender-based

pay differences because of the frequency with which pay and conditions are renegotiated as they

change assignments. If women are less inclined to negotiate their wage upward (see Babcok &

Laschever, 2003), then their wages may suffer more when negotiations are more frequent.

Effects on Income Inequality

38
There is some evidence that, by altering the basis of rewards within organizations, changes to the

employment relationship have also affected the overall level of wage inequality in the United

States. Perhaps the clearest evidence for such an effect comes from research on performance-

related pay. Because such pay differentiates the compensation of different individuals doing

similar jobs, it can reduce the standardizing effects of organizations on employment. Lemieux,

Macleod, and Parent (2009) use data from the PSID to estimate that the growth of incentive pay

could account for about 20% of the increased dispersion in (log) pay between 1976 and 1993 and

for nearly all of the increase in inequality within the upper half of the income distribution.

External hiring appears to have contributed less to overall inequality. Although the

growth of external hiring could reduce the ability of organizations to standardize pay levels,

Mouw and Kalleberg (2010a) find no evidence of such an effect. Their analysis of male workers

in the PSID suggests that most of the increase in inequality between 1977 and 2005 occurred

among men who remained within their organizations, not among those who moved.

Much less has been written about the direct effect of outsourcing and contingent work on

inequality. The more volatile and variable nature of arms-length relationships typical of

contingent work may increase overall pay variation. For example, Bidwell and Fernandez-Mateo

(2008, 2010) demonstrate substantial variation in wages for temporary agency work, even for the

same worker, with pay frequently increasing or decreasing from assignment to assignment.

Furthermore, there is every reason to believe that the reduced standardization of wages along the

value chain—a consequence of firms outsourcing work—has contributed to increasing

inequality, as evidenced by the lower pay of low-skilled outsourced workers. Davis and Cobb

(2010) also provide important suggestive evidence that the decline in size of the largest

employers, a result of vertical and horizontal disintegration, has contributed to increasing

39
inequality; they report a striking correlation over time between the proportion of workers

employed by the 10 largest US employers and the country’s overall level of wage inequality.

A number of studies also suggest that the decline in employer-provided health and

welfare benefits contributed to the rise of inequality during the 1980s and 1990s (Farber & Levy,

2000; Pierce, 2001). Employer costs associated with health and pension benefits rose for upper-

income earners but fell dramatically for low-income earners, which reinforced existing wage

inequality (Little 1995; Keene & Prokos, 2007; Slottje, Woodbury, & Anderson, 2000).

Changes in How Workers Are Allocated to Jobs

The distribution of rewards within organizations depends not only on how people are paid within

jobs but also on how they are matched to those jobs in the first place (Granovetter, 1981). Pay

and other rewards have always varied radically across different jobs within and between

organizations, and increasing inequality has further sharpened those differences as occupations

have become even more polarized (Autor, Katz, & Kearney, 2006; Mouw & Kalleberg, 2010b;

Weeden et al., 2007).

The literature identifies many ways in which the increased penetration of markets and

institutional forces into the governance of the employment relationship has affected the processes

by which people are allocated to jobs. Most obviously, more people are entering their jobs

through hiring rather than promotions. In addition, the processes that allocate workers to regular

employment versus contingent or outsourced employment are becoming a substantial

determinant of rewards. At the same time, institutional pressures to protect the rights of

minorities and families have led firms to develop practices aimed at increasing the access of

disadvantaged groups to jobs.

The Changing Basis of Access to Jobs within Organizations

40
Research suggests that the growing use of external hiring to fill higher-level jobs advantages

different workers with respect to internal mobility. In particular, external hiring tends to favor

workers with more visible credentials. Employers have more information about their own

employees than they do about potential hires (Doeringer & Piore, 1971; Williamson, Wachter, &

Harris, 1975), which leads them to require stronger visible credentials from outside hires than

from those promoted from within the firm. Studies by Baker, Gibbs, and Holmstrom (1994),

Bidwell (2011), and Oyer (2007) all show that workers hired into jobs have stronger visible

credentials than the workers promoted into similar positions.

At the same time, some scholars have argued that external hiring may increase

discrimination on certain salient characteristics, such as gender. Petersen and Saporta (2004), for

example, argue that discrimination should be more likely during hiring than promotions because

it is harder for external candidates to detect and challenge discrimination. Hence these authors

argue that it should be easier for women to find higher-level jobs by promotion than by hiring. In

accordance with this hypothesis, Petersen and Saporta find—in their study of a large regulated

employer—that women were more likely than men to be hired into lower levels but were

promoted more rapidly than men. Other research has challenged these findings, however. For

instance, two papers by Fernandez and Abraham (2010, 2011) examine hiring throughout a

hierarchy in a retail bank and a biotech company. Although they find a declining proportion of

women are hired into higher levels, they show that this simply reflects declines in the numbers of

female applicants for higher level jobs. In fact, they present evidence that women who applied

were more likely to be offered jobs than men. In a study of lawyers, Gorman and Kmec (2009)

find that women are more likely to enter partnership positions by lateral hiring than by

41
promotion. More work is needed to understand the contingencies that shape how gender affects

workers’ ability to access jobs by promotion versus hiring.

In addition to emphasizing certain visible characteristics of applicants, scholars have also

pointed out that external hiring processes make heavy use of candidates’ social networks when

allocating them to jobs (Bridges & Villemez, 1986; Campbell & Rosenfeld, 1985; De Graaf,

Dirk, & Flap, 1988; Lin, Vaughn, & Ensel, 1981; Marsden & Hurlbert, 1988). There is some

evidence that the use of such networks in hiring has grown more important over time, as the

decline in unions has reduced pressures on firms to enact formal recruitment procedures (Moss &

Tilly, 2001). These findings may have important implications not just for hiring, but for post-

entry social structure and careers. Sterling (2012) shows that individuals that enter organizations

with social ties in place go on to see their networks improve more than those that enter without

such relationships.

There are many studies exploring which workers are most likely to be advantaged by

strong social networks, and these studies indicate the availability of social contacts varies by

race, gender, and socioeconomic background (Briggs, 1998; Korenman & Turner, 1996; Marx &

Leicht, 1992; Smith, 2005; Wilson, 1987). It has been shown, for example, that the use of social

networks to hire generates differences in men and women’s access to jobs, and that network-

based hiring favors the persistence of gender inequality (Bielby, 2000; Drentea, 1998; Fernandez

& Sosa, 2005; Hanson & Pratt, 1991; Kmec, 2005; Padavic & Reskin, 2002; Reskin, McBrier, &

Kmec, 1999). Other studies show how racial minorities’ lack of access to certain kinds of social

networks reduces their job prospects (Elliott, 2001; Moss & Tilly, 2001; Mouw, 2002; Petersen,

Saporta, & Seidel, 2000; Smith, 2005). However, the lack of minorities’ access to jobs due to

network-based hiring is not universal: Fernandez and Fernandez-Mateo (2006) find that

42
minorities face little difficulty being hired through networks when there are already minorities in

the organization.

A third way in which the greater penetration of external markets into organizations has

altered access to jobs is through the increased use of third-party intermediaries to place people in

jobs. Many hiring decisions are made through intermediaries, which include recruiters,

headhunters, and staffing firms (Finlay & Coverdill, 2002). For both business and legal reasons,

the hiring of contingent workers pften takes place through a third party (Barley & Kunda, 2004;

Bidwell & Fernandez-Mateo, 2008; Smith, 2001). An important question for researchers is how

the use of those intermediaries might affect the ability of different kinds of workers to access

jobs. Bidwell and Fernandez Mateo (2010) find evidence that having a longer-term relationship

with an intermediary improves a worker’s chances of being placed in a higher-paying job.

Fernandez-Mateo and King (2011) show how intermediaries can also shape gender differences in

pay in their study of how a staffing agency allocated male and female technology contractors to

different assignments. They find that the agency was more likely to sort women into lower-paid

positions—though partly as a result of the agency’s attempts to anticipate its clients’ preferences.

Sorting into Contingent Work

Beyond the effects of labor market intermediaries, the general question of which workers are

allocated to contingent work arrangements is also important. We have already noted the evidence

that those who hold contingent positions are paid differently than regular workers even when the

tasks are similar. Therefore, how workers are sorted into contingent work arrangements has

significant implications for inequality.

Much research suggests that contingent jobs are often occupied by the least-skilled

workers, both across and within occupations. For example, Kalleberg, Reskin, & Hudson (2000)

43
show that contingent work is disproportionately performed by workers with lower skills, who

have less negotiation power and fewer alternatives than high-skill workers. Other studies show

that US temporary help firms employ a disproportionate share of low-skilled and minority

workers (Autor & Houseman, 2009). Among a higher-skilled sample of graduates of engineering

and technology programs, Bidwell and Briscoe (2009) find that the least experienced workers

were more likely to take contingent positions, as were those who had recently been laid off.

Even so, there is also evidence that contingent work attracts some of the most skilled

workers in the labor market. Qualitative studies emphasize how experts can take control of their

careers through contingent work, and an increasing number of temporary help agencies cater to

this highly skilled population (Barley & Kunda, 2004; Kunda, Barley, & Evans, 2002; Osnowitz,

2010). Among their sample of technology graduates, Bidwell and Briscoe (2009) also find

evidence that contracting is associated with extremely high levels of skill and experience.

In addition, there is evidence that women are at particular risk of working in contingent

jobs. Some studies show that employment in nonstandard work differentially exposes women to

the risks of being allocated to “bad jobs”—that is, jobs with lower wages and benefits and with

worse career prospects (Kalleberg, Reskin, & Hudson, 2000; Segal & Sullivan, 1997). Such

effects are not restricted to low-wage work. For instance, in a study of female scientists and

engineers, Prokos, Padavic, and Schmidt (2009) find that women are more likely to be

overrepresented in nonstandard work arrangements and especially in positions characterized by

lower pay and/or fewer benefits.

Notwithstanding these concerns, longer-term studies offer a slightly less bleak picture of

the role of contingent work in the labor market. The effects of allocation to contingent positions

depend in part on how long workers remain in contingent work; in other words, using such

44
positions as stepping-stones to better jobs has far different implications from remaining in

temporary jobs that offer little scope for advancement (Benner, Leete, & Pastor, 2007; Davis-

Blake & Broschak, 2000). This issue is an especially salient one for low-skill workers, who are

more likely to have entered temporary employment involuntarily and would prefer a permanent

job. The evidence concerning the long-term career effects on low-skill workers of their affiliation

with temporary help firms is not definitive, but a few studies find some positive long-term

effects. Autor (2001), for example, shows that companies often use temporary help firms to

screen workers for permanent positions. Cappelli and Keller (2012) also find that over 90% of

surveyed establishments converted some temporary agency workers into permanent employees.

Andersson, Holzer, and Lane (2005) find that low-skill workers affiliated with temporary help

firms do well more than three years afterward, even though they began with lower earnings.

Similar results based on European data (García-Pérez & Muñoz-Bullón, 2005) also indicate that

affiliation with temporary help firms may be a stepping-stone to more permanent employment

(see also Amuedo-Dorantes, Malo, & Muñoz-Bullón, 2008).

The Effects of New Rights in the Workplace

Although extant research suggests that the growth of market-based practices has often served to

disadvantage women and ethnic minorities, recent decades have also seen firms implement

practices aimed at reducing the historic barriers that those groups have faced when their

members seek to access rewarding jobs. However, despite the growing interest in how firms have

adopted those practices, little is known about how they have actually affected workers’ access to

jobs. This lacuna in our knowledge is surprising when one considers the historical association of

these diversity practices with civil rights legislation intended to limit discrimination associated

with between-group inequality. Some studies have considered the effects of different

45
employment practice changes on between-group wage inequality. Kalev and Dobbin (2006) and

Kalev, Dobbin, and Kelly (2006) compare the effects of different corporate affirmative action

and diversity management policies on race and gender inequality. They find that diversity

management practices such as training or mentoring are seldom effective; the most effective

efforts involve “establishing responsibility” by assigning affirmative action officers, establishing

diversity managers or departments, and/or setting up a committee or task force. Some work also

suggests that LGBT diversity practices have been effective in reducing discrimination. For

instance, Tilcsik (2011) finds that hiring discrimination against openly gay men varies as a

function of state antidiscrimination employment laws; this finding indicates that LGBT diversity

practices do influence access to jobs in organizations (see also Rubenstein, 2002).

Some research has also addressed the effects of work-family benefits on inequality. In

principle, such benefits should help improve mothers’ ability to access and retain jobs. In

practice, however, the research to date finds that work-family benefits are underutilized

(presumably for fear of retaliation) and that using the benefits can have negative consequences

for the worker. Thus, although work-family benefits have spread widely, utilization rates tend to

be low (Glass & Estes, 1997); employees often prefer forgoing the benefits in order to preclude

retaliation or bias (Bailyn, 2006; Blair-Loy & Wharton, 2002, 2004; Eaton, 2003; Epstein et al.,

1999; Kellogg, 2009; Perlow, 1997; Williams, 2000). Kelly and Kalev (2006) explain low

utilization this way: although the polices are formalized (in the sense of being written into

employment policy handbooks), they are crafted to give supervisors discretion in granting or

denying requests. Hence the benefits fall short of providing legal rights or protections, and

employees who perceive this deficiency are therefore wary of negative consequences associated

with utilization.

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 Research on the consequences of work-family benefits use is largely consistent with this

negative view, as it finds such use to be associated with subsequent pay and retention deficits.

Work-family program users appear to suffer from fewer promotions (Dau-Schmidt et al., 2009;

Kalleberg & Reskin, 1995) and lower wages (Kalleberg, 1996), although studies vary in their

ability to address the methodological challenges created by workers’ selection into work-family

benefit usage. After controlling for many confounding variables, Glass (2004) shows that the use

of such policies after childbirth is associated with lower earnings growth over time. Likewise,

Briscoe and Kellogg (2011) find that workers who take advantage of a reduced-hours policy tend

to receive lower bonuses and be at greater risk of exit, although the mean levels masked a great

deal of variance across reduced-hours program users. The authors also find that program users

with better outcomes are those who benefited from earlier ties to powerful supervisors.

Employees who use federally mandated FMLA programs also tend to suffer lower wages

(Jacobsen & Levin, 1995), fewer promotions (Hagan & Kay, 1995; Judeisch & Lyness, 1999),

and higher turnover (Lyness & Judiesch, 2001). There is one bright spot, however: recent

research by Appelbaum and Milkman (2011) shows that employees in California who used

mandated paid family leave benefits were more likely to retain their jobs.

The New Employment Relationship and the Distribution of Rewards across Stakeholders

In addition to affecting the distribution of rewards within organizations as just described,

changing employment practices have also affected inequality by changing the relative share of

wealth received by the firm’s various stakeholders. Certainly, there is considerable and varied

evidence that shareholders and their agents have received an increasing share of national wealth

since the 1980s. For example, Levy and Temin (2007) point out that median wages have not kept

pace with productivity growth since the 1970s and argue that this dynamic reflects the declining

47
bargaining power of workers. Although the decoupling of median wages from productivity could

be due in part to an increasingly skewed distribution of income among workers, other evidence

supports the idea that shareholders have gained at the expense of employees. The share of

workers’ wages in GDP fell from 60.1% in 1980 to 55.2% in 2011, while corporate profits

increased from 6.1% to 9.2% (Bureau of Economic Analysis, 2012). The same period also saw a

spectacular growth in the level of both profits and wages in the financial sector, the industry that

most closely represents shareholders (Davis, 2009; Tomaskovic-Devey & Lin, 2011).

What is less clear, though, is whether the growing income share of corporations relative

to employees is a consequence of the practices documented here or, instead, a manifestation of

the overall shift in power from workers to shareholders. It is possible, for instance, that the

declining power of unions has increased corporate profitability irrespective of any other changes

in the nature of the employment relationship. To our knowledge, no work has directly explored

how employment practices have affected the distribution of wealth between shareholders and

employees. Still, some research has explored the association between employment practices and

employer profitability. Issues of causality are especially thorny in such work: Do more profitable

employers adopt particular practices, or do some practices increase profitability? Such studies

do, however provide some basic evidence on the question of how certain practices might have

benefited shareholders.

For example, an important body of studies has explored the effects of layoffs on

profitability and share prices (Blackwell, Marr, & Spivey, 1990; Cascio, 1993; Farber & Hallock,

2009; Fligstein & Shin, 2007; Hallock, 1998). Although results vary depending on both the time

period in which the layoffs took place and the reasons for the layoffs, these studies tend not to

demonstrate substantial shareholder benefits from layoffs. In fact, announcements of layoffs are

48
usually met with declines in share prices (although the declines have been smaller in recent

years; Farber & Hallock, 2009). Firms engaging in layoffs have also shown lower profitability

than others in their industry. There is some evidence that profitability improves after layoffs,

although this is mostly accounted for by the recovery from poor prior performance (Blackwell,

Marr, & Spivey, 1990; Kalra, Henderson, & Walker, 1994). Cascio, Young, and Morris (1997)

also find evidence of increased profitability for firms that make more reductions in their assets

than in their workforce. In short, it is difficult to find sustained evidence that layoffs have

benefited shareholders.

There is also little evidence that firms’ increased willingness to hire at all levels has

benefited employers and shareholders. To the contrary, evidence continues to accumulate that

turnover—the corollary of such hiring—has damaging effects on business performance

(Glebbeek & Bax, 2004; Morrow & McElroy, 2007; Shaw, 2011; Shaw, Gupta, & Delery, 2005;

Siebert & Zubanov, 2009; Ton & Huckman, 2008). More directly, Bidwell (2011) finds that

external hires are paid more than workers promoted into similar jobs but perform worse, casting

further doubt on the value to employers of dismantling internal labor markets. Of course, it is

possible that these studies understate the dynamic benefits to employers of more market-based

employment systems. For instance, the ability to replace existing employees with new workers

may help organizations seeking to enter new markets. It is also possible that the increased

competition for opportunities implied by the threat of external hiring helps the organization

suppress wages. To our knowledge, no research has explored these topics systematically.

There is stronger (albeit preliminary) evidence that the use of outsourcing and contingent

work has benefited employers. In their survey of publicly traded firms, Lepak, Takeuchi, and

Snell (2003) find that firms relying more heavily on external contract workers exhibit higher

49
profitability. Drawing on information from annual reports, Nayar and Willinger (2001) find that

companies disclosing a high reliance on nonstandard workers report higher subsequent profits

and increased stock returns. Using data from Canadian firms, He (2012) also finds that firms

with higher proportions of nonpermanent workers earn higher profits.

Finally, there is modest evidence that the greater use of incentive pay has increased

employer profitability. Single-firm case studies find evidence that incentive pay raises

productivity more than it raises wage costs (Lazear, 2000) and that it can increase establishment

profitability (Banker et al., 1996). Cross-firm research using data from compensation consultants

also finds that firms making greater use of incentive pay are more profitable (Gerhart &

Milkovich, 1990).

While it is clear that employers have driven many of the changes that we have seen in

employment relationships over the last thirty years, how much they have directly benefited from

those practices therefore remains unclear.

DISCUSSION

Recent changes in US employment relationships have substantially redrawn the social contract

between workers, employers, investors, and other stakeholders. There are strong grounds to

believe that these changes partly reflect the outcome of contests among those groups and that the

changes have altered the distribution of rewards within organizations. We have pursued those

themes in this review, synthesizing the state of current knowledge on (a) why employment

relationships have changed and (b) what those changes have meant for who gets what within

firms and in society as a whole.

A reasonable summary of our efforts is that our knowledge remains thin. Relatively few

studies have directly explored either why the employment relationship has changed or the

50
implications of those changes for inequality. Nonetheless, the first outlines of a narrative are

beginning to emerge from what has been found so far.

First, the evidence points to a combination of environmental changes and political action

in shaping changes to employment. Although we still lack a clear consensus, a number of studies

have implicated technological change and globalization in driving layoffs, the use of contingent

workers, and the growth of incentive-based pay. Other studies suggest that union decline is

behind the decreases in tenure and the increase in using contingent workers. Even less research

has examined the role of shareholder activism in reshaping employment relationships, but early

evidence links such activism to more layoffs, declines in defined benefit pensions, and increasing

use of equity incentives. There is fairly robust evidence on the success of identity-based social

movements in securing new benefits for specific groups.

One useful way to frame these influences is to consider how the effects of such

environmental changes as technological advancement, globalization, and demographic shifts

have been channeled by conflicts among different social interest groups and political actors.

Although there has always been conflict among groups, the changing environment creates new

possibilities for action and leads to shifts in negotiating power within and among those groups.

How they choose to act, though, reflects their interests and strategic choices.

Second, the increased influence of markets on the employment relation seems likely not

only to have increased inequality but also to have accentuated the difficulties faced by such

traditionally disadvantaged groups as women and minorities. The greater use of incentive pay

has increased inequality among workers doing similar jobs, and the growth of both contingent

work and outsourcing has depressed the wages of workers in low-skill occupations. There is

evidence that women and minorities suffer disproportionately from these changes.

51
 As we have emphasized, the increased penetration of market forces into the employment

relationship has been accompanied by increased pressure on organizations to implement

diversity-oriented practices that should, in principle, benefit previously disadvantaged minorities.

But even though we know much about the spread of such practices, we know little about their

effectiveness. Furthermore, those practices are unlikely to address challenges faced by less

skilled workers who are not members of traditionally disadvantaged groups. Hence we cannot

say how much social identity movements have been able to cushion the effects of growing

market forces. Our review also highlights the frequently unintended consequences of many of the

newer employment practices. Attempts to increase meritocracy can accentuate intergroup

differences. Programs intended to benefit disadvantaged groups may sometimes create new

opportunities for cognitive bias to penalize members of those groups and otherwise complicate

efforts to reduce inequality within organizations.

Future Research

This review demonstrates that much has been accomplished, but we believe that further

clarification of why employment relationships have changed—and with what consequences—is

of paramount importance. What strategies employers, workers, shareholders, and other social

stakeholders should pursue to manage future employment relationships depends in large part on

whether changes are viewed as an inevitable consequence of environmental forces or as the

outcome of strategic action. If employment relationships are passively inherited, then this

suggests a muted role for organizations in shaping the link between employment and inequality.

If, in contrast, employment relationships within organizations are actively constructed in

response to environmental changes, then the implication is that organizations play a dominant

role in shaping inequality within their own boundaries and, by extension, across society.

52
Although current research points the way to answering these questions, much more work is

needed before we can be confident in our knowledge.

A Systems Perspective. Before listing several specific topics on which more research is

needed, we offer a few overarching comments on broad directions for future research. We

believe there is a need to reinvigorate a “systems” perspective on the study of the evolving

employment relationship. A systems approach to research considers the holistic set of

environmental influences and internal components that characterize and shape the firm’s

employment policies. This was an important characteristic of earlier research on the employment

relation—especially in the tradition of John Dunlop, Clark Kerr, and others who described the

employment relationship patterns found in industry after World War II. It was also the approach

carried forward in the work on internal labor markets by Doeringer and Piore (1971) and

Osterman (1987) and by Kochan, Katz, and McKersie (1994) in their work characterizing the

later emergence of a strategic choice model of the employment relationship. The virtue of a

systems perspective is that it draws attention to the critical connections across levels of analysis.

Employment practices are understood both as the consequences of interactions among social

actors outside the organization and also as the determinants of outcomes within the

organizations, outcomes that play an important part in shaping the goals of the external actors.

In promoting a systems perspective, we do not mean to suggest that the employment

relationship should be seen in strictly functionalist terms—that is, as a set of interconnected

forces that always operate together to produce a coherent whole. Indeed, a systems perspective

should also identify points of conflict and dysfunctional effects produced by the different forces

coming to bear on the employment relationship and by interactions among the different internal

53
employment practices. Understanding employment requires that we draw systematically on these

multiple influences.

A system perspective draws attention to the multiple levels of action and actors involved

in the employment relationship. Outside the firm, collective actors (e.g., unions, social identity

groups, shareholders) attempt to influence the employment relationship and typically operate at a

field or industry level. Within the firm, organizational structures associated with employment

decision making are important filters: factors that mediate how those environmental influences

shape the employment relation. The firm’s employment relationship can be characterized using a

set of comparable practices such as career ladders, promotion rates, external hiring ratios,

outsourcing policies, pay system features, benefit policies, and diversity practices. We anticipate

that a systems perspective would contribute to the identification of several archetypal patterns of

employment relations—in other words, clusters of employment practices that are often observed

together and that may be observed in frequent association with certain combinations of

environmental forces. For example, flexible commuting policies may accompany pay-for-

performance work practices in certain types of organizations or jobs. Hence, the result of taking

a systems perspective would not be the portrait of a single, monolithic system but rather a

collection of clustered patterns. In line with our focus on the production of inequality in this

review paper, we believe that research should investigate the role such patterned employment

systems play in the allocation of jobs and rewards that produce inequality in society at large.

The adoption of a systems perspective seems to have declined in recent decades, perhaps

because scholars have focused more on contributing to theoretical traditions in their studies of

employment practices. We view those as valuable contributions and encourage more of them.

However, we observe that such theory-oriented scholarship does not necessarily scale up or

54
come together easily to produce a coherent larger portrait of what transpires in the actual

employment relationship.

Stakeholder Influences on Employment. To build out a systems-level understanding of the

new employment relationship, we first need to understand each of the different links between the

environment, organizational practices, and individual outcomes. Our review of the literature

reveals that we are beginning to develop knowledge about some of these connections, but much

remains to be done. In particular, we must answer several important questions about how

different stakeholders affect organizational employment practices—especially as regards the

influence of investors and HR professionals. Despite the great attention paid to the growing

influence of shareholders over corporate policy and even though shareholders have evidently

sought to reduce organizational obligations to employees (Shleifer & Vishny, 1991), we know

very little about what goals investors have pursued in reshaping employment or how effective

they have been in influencing employment relationships and affecting inequality. Given the

extensive evidence that the influence of investors has grown in recent decades, a clear priority is

to unpack their effects on employment practices at all levels of the organization (Tosi & Gomez-

Mejia, 1989).

There are similarly important questions about the role of HR professionals, who play a

pivotal role in administering the employment relationship as they devise and execute

employment strategies. We know that HR professionals were instrumental in the development

and diffusion of internal labor markets (Baron, Dobbin, & Jennings, 1986b; Jacoby, 1985). We

cannot fully understand the subsequent evolution of the new employment relationship without

understanding the agenda of these professionals and the strategies they adopt to pursue it. Prior

research suggests that HR professionals have played a complex role in shaping employment

55
change. On the one hand, they seem to have carried out change on behalf of financial investors

seeking to drive up productivity and shareholder returns (Kochan, 1999); on the other hand, they

have served as a key ally for social identity groups seeking to institute practices that help

traditionally disadvantaged groups. Any research that unpacks how these professionals view their

role in the current environment, the constraints they face, and the opportunities they represent for

strategic action would further our understanding of how organizational practices respond to

environmental pressures.

Social identity movements have become an increasingly prominent part of the firm’s

environment. As the role of unions has declined, social identity movements have become a

stronger influence on organizations’ practices. Yet it would probably be misleading to view such

movements as a substitute for unions. They typically focus on relatively narrow issues, and they

have not sought to challenge the employer’s power in the way that unions do—aiming instead to

work with employers. Nor have social identify movements had anything like the impact of

unions on pay and working conditions. Nonetheless, they represent an important player in

shaping modern employment, and their role needs to be understood more clearly. For instance,

there is still much to learn about the tactics used by social movements to effect change. We

believe that there is much promise in adopting political perspectives when exploring the effects

of social movement groups on organizational practices. Prior work suggests that a group’s power

and success in influencing the organization’s dominant coalition is critical to its claims being

heeded (Fligstein, 1993; Nelson & Bridges, 1999; Stainback, Tomaskovic-Devy, & Skaggs,

2010). Yet we don’t know what tactics are more likely to work or how groups leverage

relationships to affect change. For example: When do social movement organizations use hard

targeting tactics versus soft collaboration tactics to change employment practices? How

56
important are powerful allies within management? It is noteworthy that many diversity

employment practices have been repackaged by social identity groups as market-oriented

behaviors that improve organizational performance and increase shareholder value. What are the

consequences of conflicting interests among different identity groups vying for influence? What

happens when movements become co-opted by managerial interests, as appears to have occurred

in the case of corporate-sponsored diversity Employee Resource Groups? More research on how

these groups affect the distribution of power is key to understanding some of the most important

environmental influences on modern employment relationships.

Relationships among employment practices. Developing a clearer, systems-level

perspective on the new employment relationship also suggests an increased focus on how the

various employment practices that organizations adopt might relate to one another. For example,

do organizations that make more use of performance-based pay tend to offer more or less job

security to their employees or to make more or less use of contingent workers? Are family-

friendly policies most often accompanied by more or fewer market-based practices? Work on

other organizational practices (Bresnahan, Brynjolfsson, & Hitt, 2002) and historical work on

internal labor markets (Osterman, 1987) suggests that groups of different practices are often

linked by a common logic, so that organizations are likely to adopt whole clusters of related

practices rather than choosing piecemeal from a menu of different options. Similarly, that

research finds different practices often having complementary effects; thus the effect that a

practice has on workers depends on what other practices are in place. Although some research

has explored whether the use of contingent workers is correlated with greater job security for

regular employees (Cappelli & Neumark, 2004; Kalleberg, 2001), such systems-level thinking

has been largely absent from research on the new employment relationship.

57
 Effects of practices on income distribution. There is likewise a clear need to extend our

understanding of how the various employment practices reviewed here affect the distribution of

income within organizations and across stakeholders. We have documented preliminary evidence

on the effects of many of these practices, but we lack anything that approaches a solid body of

evidence. In pursuing knowledge of how practices affect inequality, it would be useful to

untangle intended and unintended consequences. Many of the effects of new employment

practices seem intended to affect distributions—either by increasing returns to shareholders or by

more sharply differentiating returns across workers of varied productivity. Some effects,

however, seem unintentional. For example, studies suggest that an increasing use of merit-based

pay practices can increase ascriptive inequality (Castilla, 2008). Hence another important area

for future study is how the effects of different practices might vary. Although current research

often treats practices as having uniform effects across workers, the reality is almost certainly

more complex. We should therefore ask whether contingent workers are rewarded for different

attributes than regular employees, and we should investigate whether the kinds of strategies that

the former must pursue to advance in their careers differ from those of their regular counterparts.

Given that diversity-oriented programs have mixed outcomes for the groups they target, we need

to understand how workers who do use these employee rights programs can still attain success or

at least avoid negative outcomes. For instance, how can mothers use part-time employment

programs without being penalized in their careers? Similar questions exist in connection with

programs targeting racial and ethnic minorities, LGBT employees, immigrants, and disabled

workers.

Meeting methodological challenges. Our goal to increase understanding of the effects of

the new employment relationship involves many methodological challenges. For example,

58
determining how stakeholders affect employment practices across organizations requires that

researchers collect detailed, firm-specific information on those practices. Studies of that nature

tend to be extremely resource intensive (Briscoe & Safford, 2008; Kalev, Kelly, & Dobbin,

2006; Kalleberg et al., 1996). For this reason, it may be that research is best advanced by

pursuing a variety of approaches: linking variations in stakeholder power across time, industries,

and organizations to employment outcomes (cf. Bidwell, 2010; Cobb, 2012); assembling

detailed, single-firm case studies of changes in employment relationships (e.g., Dencker, 2008,

2009); and performing more qualitative analyses of the goals and strategies of different

stakeholders. Comparing the effects of multiple groups in unison would be especially valuable,

though challenging. Briscoe and Murphy (2012) provide an example of such an approach in their

study of cuts in retiree health benefits.

In carrying out such work, scholars must carefully consider selection issues because some

types of individuals and/or organizations are more likely to be associated with employment

changes, which makes it harder to isolate the effects of the changes themselves. In examining the

effects of employment practices on individuals, familiar approaches to this issue include two-

stage models, matched samples, and instrumental variables; access to pre- and post-

implementation data is also quite helpful. At the organizational level, there may be exogenous

sources of variation to exploit—for example, when states adopt new employment regulations at

different times and compel organizations to change practices in the absence of voluntary

compliance. A second challenge is to understand the micro mechanisms that underlie patterns

observed at the organizational or field level. To address this challenge, recent individual-level

studies have used personnel records from employers and employment intermediaries; when

59
combined with site visits, this detailed longitudinal data offers the potential for a more complete

understanding of the intermediate mechanisms involved in producing differences in outcomes.

Work that is sorely needed includes careful methodological approaches capable of

reaping greater insights into the causal mechanisms that generate inequality. Although an

increasing number of studies document associations between employment practices and the

allocation and distribution of rewards, much less is known about the underlying causes of such

associations. Without a fuller understanding of how such associations come about, we are limited

in our ability to address the root causes of disparities. An example of a mechanism relevant to

employment-based inequality is cumulative advantage, whereby initial differences in skills or

other endowments translate into widening gaps between individuals and groups as workers

experience differing employment practices. The power gained by pinpointing such mechanisms

as cumulative advantage is that doing so expands our understanding of the processes through

which employment relationships and inequality are linked, allowing for broader generalization

across employment settings.

Comparative approaches. Of particular importance is attaining a deeper knowledge of

how linkages between changes in relationships and inequality compare across settings. Our

review suggests that such comparative research is still rare. Nonetheless, we believe that much

progress can be made in studying how some of the processes reviewed here operate in different

national contexts and different types of firms. With regard to the former, scholars have begun to

make headway on the questions addressed in this review (see Gautie & Schmitt, 2010; Lee &

Kofman, 2012). As for the latter, there is still much to be learned about such important issues as

the differences among traditional corporations, entrepreneurial firms, family-owned companies,

and so on. Studying these variations is a promising avenue for future research.

60
Conclusion

Sweeping changes in employment relationships are reshaping the way resources are distributed

in society. We believe that organizational and management researchers should be at the forefront

of understanding such change, equipped as they are with a rich set of theoretical frameworks that

can be used to understand the causes of these organizational changes and their complex effects

on the material resources of individuals. Work in this area holds the potential of resolving several

important empirical puzzles, as discussed in this paper, and of contributing to general social

theory on the evolving processes that shape behavior in organizations and market contexts.

61
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 TABLE 1: CHANGES IN EMPLOYMENT

Type Examples Citations

Increased Market Penetration in Employment

Declining tenure  Average tenure of employment (Farber, 2008a)

relationships has fallen since 1970s
(Neumark et al., 1999)
 Changes greatest among men, in the
private sector, and in large organizations
Increased restructuring  Layoffs more likely to take place as (Hallock, 2009)
through layoffs means of reorganization or to control
costs (Farber, 2008b)

 Mixed evidence on overall rate of layoffs (Davis, 2008)

Growing use of  Increased use of contingent workers who (Peck & Theodore, 2007)
contingent workers lack expectation of long-term employment
(Pfeffer & Baron, 1988)
 Often hired through intermediaries such
as temporary service firms (Barley & Kunda, 2004)

Increased outsourcing  Many functions (and the employees (Lamoreaux et al., 2003)
performing them) spun off into separate
firms (Dey et al., 2009)

Increased use of  Pay increasingly shifting from fixed (Heneman & Werner, 2005)
variable incentive pay hourly wage or salary to various forms of
variable, performance-linked pay (Lemieux et al., 2009)

Reduced employer role  Declining employer provision of health (Chernew et al., 2005)
in benefits and retirement benefits
(Clark et al., 2006)
 Shift of risk from employer to worker
through growth of defined contribution (Gruber & McKnight, 2003)
plans
(Briscoe & Murphy, 2012)

Increasing Role of Social Movements and Regulation

Growing regulation of  Employment practices invented to help (Edelman et al., 1992)

workplace practices employers respond to Civil Rights Act;
other regulations subsequently become (Skrentny, 2002)
institutionalized
(Edelman et al., 2007)

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Increased influence of  Groups based onrace, gender, sexual
social movement orientation, and family status increasingly
organizations target organizational employment
practices, leading to spread of new
practices
(Meyerson & Scully, 1995)
(Briscoe & Safford, 2008)
(Kelly, 2003)

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 TABLE 2: RESEARCH ON CAUSES OF CHANGE IN EMPLOYMENT

Causes Effects

Technological change  Increased layoffs (Bidwell, 2013)

 Vertical disintegration (Brynjolfsson et al., 1994; Hitt, 1999)
 Use of contingent workers (Sahaym et al., 2007; Schilling & Steensma
2001); but see Gramm & Schnell (2001)
Global competition  Increased layoffs (Bidwell, 2013)
 More use of incentives (Cuñat & Guadalupe, 2009)
Demographic change  Increased adoption of work-family benefits (Glass & Estes, 1997;
Osterman, 1997)
 Growth of nonstandard work arrangements (Kalleberg, 2000; Wienns-Tuer
& Hill, 2002)
Union decline  Declining worker tenure (Bidwell, 2013)
 Increases in layoffs (Bidwell, 2013)
 Increased use of contingent work (Gramm & Schnell, 2001; Houseman,
2001); but see Davis-Blake & Uzzi (1993)
Identity-based social  Increased use of work-family benefits (Dobbin, 2009; Kelly, 2003)
movements
 Diversity management practices (Briscoe & Safford, 2008; Dobbin, 2009)
Shareholder value  Increased use of downsizing (Budros, 1997; Fligstein & Shin, 2007)
movement
 Cuts in defined benefits pensions and retiree benefits (Briscoe & Murphy,
2012; Cobb, 2012)
 Increased use of equity compensation (Marler & Faugère, 2010)

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 TABLE 3: EFFECTS OF THE NEW EMPLOYMENT RELATIONSHIP ON INEQUALITY

Employment change Effects on rewards within job Effects on allocation to jobs

Declining emphasis on  Declining returns to tenure for younger educated

organizational workers (DiPrete et al., 2002)
membership
 Reduced returns to employment by large firms
(Hollister, 2004)
Increased use of  Increasing relationship between pay and ability
performance pay (Lemieux et al., 2009)
 Increased ascriptive bias (Castilla, 2008; Elvira &
Graham, 2002)
 Growth in overall pay inequality (Lemieux et al., 2009)
Increased cross-firm  Increased pay for workers hired into jobs versus  Easier access to jobs for workers with more visible
mobility promoted (Bidwell, 2011) credentials (Bidwell, 2011) and stronger social
networks (Bridges & Villemez, 1986)
 Interorganizational mobility allows increased wage
growth among higher skilled workers (Brett & Stroh,  Increased potential for discrimination in access to jobs
1997; Dreher & Cox, 2000) (Petersen & Saporta, 2004); but see Fernandez &
Abraham (2010, 2011)
 Job instability harms ability of younger, less educated
workers to achieve sustained wage growth (Bernhardt
et al., 2001)
Growth of contingent  Contingent workers earn less than regular employees in  Relationships with intermediaries help determine
work low-skill occupations (Segal & Sullivan, 1997; access to jobs (Bidwell & Fernandez-Mateo, 2010)
Kalleberg & Reskin, 2000)
 Preemptive screening by intermediaries reinforces
 High-skill independent contractors earn more than gender segregation (Fernandez-Mateo & King, 2011)
regular employees (Kunda, Barley, & Evans, 2003;
Houseman & Kalleberg, 2003)  Low-skill workers sorted into contingent jobs (Autor

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  Higher within-individual variation in pay rates (Bidwell & Houseman 2009; Kalleberg et al., 2000)
& Fernandez-Mateo, 2010)
 Women more likely to enter contingent work
(Kalleberg et al., 2000; Prokos, Padavic, & Schmidt,
2009)
Growth of outsourcing  Outsourced workers in low-skill occupations earn less
than their regular counterparts (Dube & Kaplan, 2010;
van Jaarsveld & Yanadori, 2011)
Declining benefit  Loss of benefits reinforces existing wage inequality
provision (Farber & Levy, 2000; Pierce, 2001)
Shift from Legal/  Mixed effects of diversity management practices on
EEOC compliance to access to jobs (Kalev, Dobbin, & Kelly, 2006)
diversity
management  Reduced discrimination against gays in states with
antidiscrimination laws (Tilcsik, 2011)
Growth of work family  Use of work-family benefits linked to lower wages  Workers using work-family benefits less likely to be
benefits (Briscoe & Kellogg 2011; Glass, 2004; Kalleberg, 1996) promoted (Dau Schmidt et al., 2009; Kalleberg &
Reskin, 1995)
 Workers using paid family leave return to jobs more
(Appelbaum & Milkman, 2011)

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