“How Does the Division of Labor Affect the Distribution of Earnings? Implications of the Organization of Production” by Seongwuk MOON
This paper shows how a firm’s choice of the division of labor can influence productivity and workers’ bargaining power and examines its implications for the distribution of earnings between management and workers. When a firm chooses a production method — either single-tasking or multitasking — it faces a trade-off between productivity and bargaining power. If a central authority allocates workers’ investments across tasks, multitasking is socially optimal because it allows workers to efficiently allocate their productive efforts over tasks. However, when a firm and workers bargain in production, bargaining power over production can affect workers’ incentives to work. Under single-tasking, a firm can obtain high productivity because workers’ hold-up power can provide them with larger incentives to work. In contrast, under multitasking, a firm reduces workers’ hold-up power by making them substitutable but can lose productivity because workers incur an additional cost of multitasking. The equilibrium outcome depends on the worker’s skill composition and the cost of implementing a production method: Socially inefficient single-tasking can be an equilibrium production method. This paper shows that a worker with specialist skills will earn a higher wage in single-tasking and that one with generalist skills will earn a higher wage in multitasking. Moreover, a shift by a firm from single-tasking to multitasking can widen the earnings gap between management and workers. This paper provides a theoretical explanation of how the organization of a firm influences relative pay between management and workers and mediates the effect of technological change on relative earnings. Lastly, this study suggests that production method can be an explanation for the “inter-industry wage differential”.