Employees, the Firm, and the Corporation

Last week you may have seen the 2010 productivity numbers from the Bureau of Labor Statistics.  Overall nonfarm business productivity was up 3.6 percent for 2010, almost identical to 2009's 3.5 percent growth.  Wages, however, were fairly stagnant -- real hourly compensation was up only 0.3 percent.   These most recent numbers are just the latest instantiation of the growing gap between productivity and employee compensation -- a trend that began in the 1970s.  For a nice series of graphical illustrations of this divergence, check out BLS's The compensation-productivity gap: a visual essay.  A similar trend can be seen in this rising share of GDP attributable to corporate dividends.  Karl Smith at Modeled Behavior breaks this down: since the late 1980s, dividends as a share of GDP have more than doubled.

These trends illustrate, in my view, another societal development: the corporation has become the perfect legal machine for separating workers from the firm.  In Employees and the Boundaries of the Corporation, I argue that our legal construction of the corporation has diverged quite significantly from our theoretical conception of the firm.  It's actually quite striking: whenever we think of a firm--whether it be Coase, respondeat superior, or the work-for-hire doctrine--we think of employees.  But employees are nowhere to be found in corporate law.  The result has been a "firm" that consists mainly of employees and a "corporation" that consists of shareholders, directors, and officers.  Labor and employment law seeks to redress the vulnerability of employees left outside corporate boundaries, but these can only go so far.

"Employees and the Boundaries of the Corporation" is a contribution to Elgar's forthcoming Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.).   (David Walker is also contributing The Law and Economics of Executive Compensation: Theory and Evidence).  I would love to hear your thoughts.