Did American Welfare Capitalists Breach Their Implicit Contracts during the Great Depression? Preliminary Findings from Company-Level Data

Abstract

It has been claimed that American employers' experiments in private welfare capitalism collapsed during the Great Depression, giving place to the welfare state and industrial unionism. Recent studies, however, reveal considerable differences in experience across firms. The author of this study, who characterizes private welfare capitalism as a set of human resource management practices constituting an implicit contract equilibrium, tests the implications of implicit contract theory using data from fourteen leading manufacturing firms. The repudiation of implicit contracts, she finds, was positively correlated with the severity of the depression's impact experienced by firms and negatively correlated with the effectiveness of “internal enforcement mechanisms” instituted by firms. Furthermore, she finds that greater breaches of implicit contracts were associated with greater employee support for industrial unions and more explicit employment contracts concluded under the New Deal. A comparative case study complements the quantitative analysis by exploring internal dynamics.

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