RECRUITMENT STRATEGIES: AN OVERVIEW OF SOCIO-ECONOMIC APPROACHES

    - Commented index –

    by PEMINT Italian Team, April 2002

    1. THE FIRM’S PRELIMINARY DILEMMA: MAKE OR BUY

    1.1 Coase: the pioneer of transaction costs

    The “make or buy” dilemma has been raised firstly by R.H. Coase, who considers organisations and

    market as two alternative methods of co-ordinating production. The Coase’s theory concerns in general

    the organisation of productive processes and it considers labour and goods together, as factors of production. As far as recruitment strategies are concerned, the contribution of Coase is important mainly for two reasons:

    1. for the first time cost of transactions in the market are considered and conceptualised;

    2. in particular, he highlights

    - the cost of negotiating and conclude contracts

    - the cost of organise workers in the productive processes

    - the cost of uncertainty in defining tasks and activities in a labour contract These elements are very important in analysing outsourcing and/or recruiting decisions. They are picked up and re-shaped by Williamson in his famous transaction costs theory.

    1.2 An overall theory of transaction costs: Oliver Williamson

    The systematic proposal of the overall theory of transaction cost is widely attributed to Olivier

    Williamson. After having briefly presented the basic hypothesis of the Transaction Cost Economics

    (about bounded rationality, incomplete information, opportunism and limited number of competitors)

    we stress the issues that could be useful for the analysis of recruitment and subcontracting strategies.

    The transaction cost theory is the comparative analysis of the costs of planning, adapting, managing

    and governing contractual relations in different governance assets. The focal problem is: when

    should a firm make rather than buy a good or a service? Three critical dimensions affecting the

    choice:

    1. Frequency, that is the frequency of repetition/renewal of transactions

    2. Uncertainty, connected with the bounded rationality and opportunistic behaviour hypotheses

    3. Specificity, that is the level to which the investments to minimize the production costs are

    specific for transactions involved.

    The theory applies also to labour relations and recruitment, designing the alternative between

    outsourcing and direct hiring (producing). In terms of recruitment strategies this implies an

    alternative choice between the management of contractual employment relation by a third party (the

    subcontractor) in case of the buy strategy and the direct management of employment transactions in

    case of the make strategy (hiring the workers).

    Williamson explicitly states that the transaction cost theory can be applied to three different levels of

    analysis: to the corporate/holding level, to the productive division level, to the employment relation

    level. According to the aims of the present paper, we concentrate on the last one.

    1.3 The empirical evidence: the “quasifirm” in the construction sector

    Using Williamson’s theory to analyse the organisation of work in the construction industry, Robert

    Eccles defined a particular organisation form that is intermediate between market and hierarchy: the

    “quasifirm” form (Eccles, 1981) (in the construction related literature the term “macrofirm” is more

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    commonly used (Costantino and Pietroforte, 2001). This organisation form is based on a set of stable

    relationships between a general contractor and special trade subcontractors.

1.4 Transaction cost variables affecting the “make or buy” dilemma in the PEMINT sectors

    In this section we suggest hypotheses on the application of Williamson’s approach and critical

    dimension to the three PEMINT sectors (Examples for each sectors are outlined as far as uncertainty

    and complexity, frequency and specificity are concerned).

2. NEGLECTED MECHANISMS: THE CULTURAL AND SOCIAL DIMENSIONS

2.1 The explicit consideration of the cultural dimension: William Ouchi

    William Ouchi explicitly recognises the transaction cost approach as the only perspective capable of

    describing organizational efficiency (Ouchi, 1980) and adds to bureaucracies and market a third kind

    of organizational asset: clans. The idea of clan is directly derived from Durkheim’s concept of

    organic solidarity and involves the consideration of the cultural and normative dimensions.

    According to Ouchi - under the assumption that transaction costs arise from equity considerations -

    the transaction cost approach can be reinterpreted considering two critical dimensions in the

    employment relation: ambiguity of performance and goal incongruence. Consequently Ouchi affirms

    that markets are efficient when performance ambiguity is low and goal congruence is high,

    bureaucracies are efficient when both goal incongruence and performance ambiguity are moderately

    high and clans are efficient when goal incongruence is low and performance ambiguity is high.

2.2 Granovetter’s critics: the role of the networks

    Mark Granovetter, in his famous article on the problem of embeddedness (1985), points out that the

    market depicted by Williamson resembles Hobbes’s state of nature. Granovetter argues that “the

    anonymous market of neoclassical models is virtually nonexistent in economic life and that

    transactions of all kinds are rife with the social connections described”. In particular, social relations

    between firms trust relations and routines have an influence also on transactions in the market.

    According to Granovetter’s theory, the crucial factors for the analysis of markets and hierarchies are

    the structures of personal relations and networks rather than the organisational form.

3. OUTSOURCING AND SUBCONTRACTING AS “BUY” RECRUITMENT STRATEGY

    The section begins with an effort to clarify differences in the definition of outsourcing, contracting

    out and subcontracting in order to point out which (economic) factors influence them.

    The section goes on focusing on subcontracting relationships and presenting the theories of two

    authors – Ronald Dore and Mari Sako – who studied Japanese subcontracting relations and

    highlighted the role of goodwill and trust.

3.1 The role of the Goodwill

    Ronald Dore studied the Japanese Textile industry to understand why the trade in intermediates

    among subcontractors is conducted within long term trading relations rather than within the

    competitive market or within the vertical integration (hierarchy) (Dore, 1983). The crucial factor is

    the relational contracting in which “goodwill”, “give-and-take” is expected to temper opportunism.

    In this approach the role of the cultural dimension is also strengthened as Dore points out that in

    Japanese culture the benevolence is a duty that goes over and above the terms of written contract.

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3.2 The trust in subcontracting relations

    Studying long term continuous trading among Japanese firms in the automobile industry, Mari Sako

    has identified three types of trust useful in analysing buyer-supplier relationships and also internal

    labour market (Sako, 1991). In particular:

    - contractual trust, that predicated on both trading partners upholding a universalistic ethical

    standard, namely that of keeping promises;

    - competence trust concerns the expectation of a trading partner performing his role competently;

    - goodwill trust refers to mutual expectations of open commitment to each other (open

    commitment means a commitment to accede to a request from a trading partner or to any

    opportunity that would improve performance).

3.3 Outsourcing strategies in the three PEMINT sectors: tools for analysis

    The elements of Dore’s and Sako’s theories can help us in stressing some important factors in

    subcontracting strategies. In particular, they both highlight the advantages of stable subcontracting

    relationships that are likely to be present in all the three sectors. We attempt to analyse a) why in

    every sector and in different countries some subcontracting relationships are more stable than others,

    b) whether characteristics of activity or institutional framework are relevant in explaining strategic

    choices of managers and c) to what extent trust and goodwill are important in the relationships

    between subcontractors and general contractor.

    Dore’s contribution is also important because it stresses the role of the culture. In comparing

    subcontracting strategies in different countries we have to keep in mind this factor, which can

    explain some national differences within the sectors.

4. DIRECT RECRUITMENT

4.1 A theoretical void: recruitment as problematic and autonomous process

    The strategies of recruitment usually are not deeply analysed per se, as an autonomous phases of the

    match between labour demand and supply. They are considered together with selection processes

    that have been object of several economic, sociological and organisational studies. But according to

    the PEMINT goals, we need to distinguish these two processes and to focus our attention mainly on

    the first. In fact, the firm’s strategies of recruitment concern the ways to reach workers suitable for a

    job, while strategies of selection concern the ways to select the best among them.

4.2 Economic approaches

    In this section we deal with the few economic analysis focused on recruitment without

    detailing the economic approaches to the matching process between the labour demand and

    supply in the labour market. In particular we describe the job market signalling theory

    (Spence, 1971) and some economic empiric researches collected in Devine and Kiefer, 1991.

4.3 Sociological analysis. Granovetter’s ties: networks operating in the recruitment processes

    Granovetter’s theory is focused on the supply side of the labour market and has been mainly

    applied to study workers’ strategies to get a job (Granovetter, 1985). In this section we aim

    at exploiting Granovetter’s approach to analyse recruitment strategies from the firms’ point

    of view.

    4.4 Portes: a perspective on foreign labour force recruitment in a network framework

    Portes’s analysis of migration chains is exploited to deal with recruitment strategies concerning

    foreign workers. As for Granovetter our aim is that of enlarging a supply side-focused perspective by

    considering the demand side.

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    4.5 A theoretical continuum? From recruitment to internal labour markets

    We conclude the chapter proposing a general framework where recruitment may choose between

    internal labour markets (ILM) and occupational labour markets (OLM) as two alternative pools. A

    short assessment of ILM and OLM is sketched according to Doeringer and Piore approach (1971)

    from the one side and Kerr (1977), Althauser and Kalleberg (1981) approaches from the other.

5. A THEORETICAL PROPOSAL TO ANALYSE RECRUITMENT STRATEGIES IN THE THREE PEMINT

    SECTORS

    The conclusive section aims at using the theoretical tools discussed to identify some relevant

    dimensions for the recruitment strategies analysis in each of the sector included in the Pemint Project

    and for the three different level of skills in the core occupations considered.

    The main dimensions in recruitment strategies we take into account are:

    - Labour and workers characteristics (skills specificity, know how, task definition, trust

    relations…)

    - Structural framework (technologic constraints, socio-economic context, labour and product

    market, production organization, labour legislation…)

    - Traditions, firms’ culture.

Some basic references

    Althauser R.P., Kalleberg A.L. (1990), Identifying Career Lines and Internal Labour Markets

    Within Firms, A study in the Interrelationship of Theory and Methods, in Breiger (ed.)

    Social Mobility and Social Structure, Cambridge University Press, Cambridge, pp.308-356. Althauser R.P. (1989), Internal Labour Markets, Annual Review of Sociology, Vol.15, pp. 143-161. Barron J. M., Bishop J. (1985), Extensive Serach, Intesnive Search, and Hiring Costs: New

    Evidence on Employer Hiring Activity, Economic Enquiry, vol. XXIII, n.3, pp.363-382.

    Coase R., The Nature of the Firm, in “Economica”, 1937, 4, pp.386-405

    Dore R. (1983), Goodwill and the Spirit of Market Capitalism, “British Journal of Sociology”, n.34,

    pp.459-482.

    Doeringer, Peter B. e Michael Piore (1971), Internal Labor Markets and Manpower Analysis,

    Lexington, Heath Lexington Books

    Costantino N., Pietroforte R. (2001), Subcontracting practices in USA homebuilding. An empirical thverification of Eccles’s findings twenty years later, paper presented at the 10 International

    IPSERA Annual Conference, 2001

    Devine T.J., Kiefer N.M. (1991), Empirical Labor Economics, Oxford – New York, Oxford

    University Press.

    Doeringer P.B., Piore M.J. (1971), Internal Labor Market and Manpower Analysis, Health

    Lexington Book

    Eccles R.G. (1981), The Quasi-Firm in the Construction Industry, “Journal of Economic Behaviour

    and Organization”, n.2, pp.335-357

    Granovetter M. (1985), Economic Action and Social Structure: the Problem of Embeddedness,

    American Journal of Sociology, n.91, pp.481-510.

    Goschal S., Moran P., (1996) Bad for Practice: a Critique of the Transaction Cost Theory,

    Academy of Management Review, n.21, pp.13-47

    Kerr C. (1977), Labour Market and Wage Determination, University of California Press, Los

    Angeles.

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