December 2002, Vol. 125, No.12
Job provisions and pay
Banking in the Middle East
Book reviews from past issues
Job provisions and pay
How New is the "New Employment Contract?" Evidence from North American Pay Practices. By David I. Levine, Dale Belman, Gary Charness, Erica L. Groshen and K.C. Shaughnessy. Kalamazoo, MI, W.E. Upjohn Institute for Employment Research, 2002, 263 pp., $40/cloth; $22/softcover.
As one could guess by the number of authors, this book has its basis in a number of independently conducted research studies. However, the book as a whole is much better than the sum of its parts. David Levine, who collaborated with the other authors on each of the studies, was also the lead author on every chapter so that the book has continuity and consistency from chapter to chapter.
The "new employment contract" in the title refers to the belief that worker pay has become increasingly geared to occupational labor market conditions, firm financial prospects, and individual worker performance. In this view, jobs with this new employment contract have been displacing jobs in which pay had been buffered from market developments, pay differences within the firm reflected internal priorities, and pay growth came from promotion within the organization—jobs with "old" employment contracts.
The book’s objective is to find evidence on the extent to which the "old" employment contract has been actually displaced by the "new" contract. With one exception (discussed separately below), the authors look for this evidence in changes in the systematic pay differences between firms that persist after accounting for differences in worker occupations, skills, and abilities. Specifically, if the new employment contract is displacing the old one, these inter-firm differences in pay should have become less important over time.
Using several different data sources, the book does report a number of interesting findings about how the wage structure has changed in recent years. In a survey of large employers in the Cleveland area, total variation in pay increased about 19 percent between 1980 and 1996, but very little of this increase could be attributed to increased variability in pay among workers in the same job (Chapter 5). Using another survey having detailed data on job skills, the investigators conclude a substantial proportion of the increased variation in pay is not accounted by widening skill differentials between workers (Chapter 6). Based on these and the other results reported in the book, the authors suggest that systematic differences in pay between firms and industries continue to be important in job markets.
Is the new employment contract then being introduced at a slower pace than commonly believed? Unfortunately, it is difficult to make this inference from the evidence on the wage structure because there are so many competing explanations for why inter-firm pay differences exist. The authors discuss several possible scenarios but do not consider how other labor market developments could have changed both employment provisions and pay differences (for example, the reduced importance of gender in occupational mobility).
Researcher specialists should be familiar with most of the book’s research findings because the chapters are based on journal articles that have already been published. However, many researchers may have missed a study that takes a different approach to obtaining evidence on changes in employment provisions (see Chapter 7). If employment relationships depend on norms of conduct shared by managers and workers, then changes in these norms may also alter the employment contract. In 1997, the authors fielded a survey of attitudes toward employment practices in the Canadian cities of Vancouver and Toronto, as well as in the Silicon Valley area of California. The questions they ask were also part of a 1984–85 Canadian survey, allowing them to compare changes over time in Canada as well as differences between the (presumably more market-oriented) workers in Silicon Valley and Canada in the late 90s. Generally, they found the perceptions of fairness did not change that much in Canada. Perhaps what is more surprising is that notions of fairness in the Canadian cities were very similar to those held in Silicon Valley.
Because the book systematically addresses a fairly wide range of issues about pay differences, it could provide useful supplementary reading for courses in labor economics or industrial relations. (It may be less useful for undergraduates, as there is much researcher jargon sprinkled throughout the text.) For background, students might also read the review by Katz and Autor in the Handbook of Labor Economics (Chapter 26), which takes a more wide-ranging view of the sources of wage inequality but also calls for more research on the inter-firm pay differences that are the focus of this book.
—Anthony J. Barkume
Compensation Research and
Program Development Group,
Bureau of Labor Statistics
Banking in the Middle East
Islamic Banking. By Mervyn K. Lewis and Latifa M. Algaoud. Northampton, MA, Edward Elgar Publishing, 2001, 274 pp., $90/hardcover.
In today’s interdependent global economy, most financial activity is performed according to the commercial customs of advanced Western nations. In the book Islamic Banking, two authors discuss whether this activity can also be conducted according to the mandates of a traditionalist Middle Eastern religion. An Islamic bank resembles a cross between a nonprofit development bank and a socially conscious stock portfolio in that its investments are designed to achieve specific social goals, yet its income alternatives are severely restricted by rigid selection criteria. Mervyn Lewis, an Australian finance professor, and Latifah Algaoud, a Bahraini finance minister, describe the conditions under which such an entity can coexist and compete in the international finance industry.
Islamic banking fundamentally differs from Western-style banking in its project-oriented focus on the investment, as opposed to the specific-return focus of each individual investor. Instead of each player setting his level of commitment to an investment according to his own risk/return threshold, each project is evaluated in terms of its overall virtue, and all investors stand to gain or lose equally. Investments must steer clear of gambling or uncertainty, and must conform to the "value pattern of Islam." Any risk inherent in an investment project must be distributed fairly among all participants; no one is guaranteed a return. Financing arrangements in the Muslim world take the form of partnerships working toward a common goal; they are not to be used as ends in themselves.
The most glaring practical difference in the two banking systems is the Islamic ban on riba—translated from the Arabic as "interest" or "usury." Interest-based transactions guarantee an investment return in spite of the uncertainty of the project, thus protecting some of the parties to the transaction and not others. Interest-based transactions also provide a means to earn money from money—without working—and this is believed to be sinful. Other prohibited financial instruments include derivatives, which represent no ownership rights and resemble gambling, and collateral, which indicates a lack of trust in the partnership, favoring the financier over the entrepreneur.
Westerners take for granted that interest-based financing is a natural product of the evolution of trade. The authors’ treatment of its historical antecedents, including a similar ban on interest in the Christian Middle Ages, recreates a logical continuum. Over time, a distinction was made between acceptable interest and usury, which is excessive and exploitative. While exploitation is wrong, Westerners acknowledge the time value of money and uphold that opportunity cost can be expressed in dollar terms. Because interest loans are contractually bound to be repaid regardless of the funds’ use, moral hazard and adverse selection are mitigated, as are the costs of project research and monitoring. Added costs accrue to a financier who has to educate himself in a technical field, investigate the competency of the entrepreneur, and constantly watch program expenses in order to safeguard his investment. Interest-based debt financing limits these costs and is thus considered the most efficient arrangement.
Making no distinction between interest and usury, Islamic
banks seek to enhance the flow of financial transactions using other,
non-forbidden instruments. Various forms of equity
The authors cite examples of Islamic banking in several
countries as case studies. These examples depict Islamic banking in action: the
services these banks provide; the tools of their trade; the culture and
corporate structure common to them; their customer base; financial health; and
future growth opportunity. Pakistan, Sudan, and Iran offer examples of
The ultimate tone of Islamic Banking is ambiguous—sometimes apologist, sometimes enthusiast, sometimes "just the facts, ma’am"—due perhaps to the backgrounds of the two authors and their unique Arabic-Western perspective. On the one hand, the authors are outstanding in contextualizing the evolution of and demand for Islamic banking on its path through our common history. Careful explanation and detailed development help Western audiences understand the Arabic Islamic cultural perspective. Islamic banking style stems from a broader theory of ethical practice in commerce and rigid business accountability to scripture in a culture where religion is not dissociated from things secular. This stands in stark contrast to the United States today.
On the other hand, it is difficult for the Western reader to
grasp how well Islamic banking actually fulfills its religious obligations in
practice. Praxis is always the hard part to conceptualize: the point where
theory becomes practice, where the word becomes flesh, where banks finance long
The ever-increasing popularity of Islam and a movement to return to traditionalist values improve Islamic banks’ chances of survival in modern financial markets. However, human nature indicates that adaptations will continue to occur. Greed and materialism are not exclusive to Westerners; Muslim business ventures are also measured according to their bottom line. Investors will always seek the best return possible, or at least some security against loss. Therefore, Islamic banks will have to develop culturally acceptable alternatives that provide the security and reasonable rates of return not inherent in the Islamic financial system. The book’s authors even suggest that the future of Islamic banking depends on its creativity. For now, it seems that the more Islamic banks can imitate Western banks, the more competitive they will become.
Bureau of Labor Statistics,
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