Industrial relations (IR) theory is based on the core principle that labor is embodied in human beings

and is not a commodity. The field's two central dependent variables are labor problems and the
employment relationship. This principle, combined with ideas from institutional economics, is used
to develop a theoretical framework that explains the nature of the employment relationship and
labor problems, as well as reveals shortcomings in related theories from labor economics and human
resource management.

The field has its roots in the nineteenth century, with researchers attempting to identify the core
principles that distinguish industrial relations from other labor fields and build upon these principles
to explain key labor/employment outcomes and processes. The most notable exemplars include
contributions by scholars such as Sidney and Beatrice Webb, John R. Commons, and Lujo Brentano.

Despite the century of effort and numerous books and articles on IR theory, there is relatively little
impact or presence of this theorizing in the literature of the last two decades. In this paper, the
author aims to move the project of IR theory building and tool development another step forward by
making five contributions to IR theory.

Historical analysis reveals that at the time of the founding of the IR field, another proposition was
paramount: the core principle of industrial relations was to bring more stability, efficiency, justice,
and human values to the employment relationship. This labor reform project met many obstacles
and objections, including orthodox classical and neoclassical economics, which were widely accepted
and regarded as "orthodox."

Léon Walras, founder of neoclassical general equilibrium (GE) theory, established the orthodox
position in his Elements of Pure Economics (1954). Alfred Marshall applied this theory to labor,
arguing that the human aspect of labor markets makes them considerably less perfect than most
commodity markets and that individual workers often bargain at a disadvantage. The founders of
industrial relations sought to reform and reengineer the unbalanced free trade labor market model,
which they believed promoted national welfare more than unabridged free trade.

The Industrial Relations (IR) school of thought emerged in the 1880s and influenced the American
school of institutional economics and its labor subfield, industrial relations. Early sociologists like
Durkheim and Weber sought to integrate social and institutional elements into economics, with
Parsons being a major source of ideas for his industrial relations systems theory. The German
tradition had a strong influence on Wisconsin labor scholars, who believed that laws could lead to
progress while preserving human betterment. Richard Ely and Henry Carter Adams are considered
forefathers of early American industrial relations, who wrote the first proto-industrial relations book
in America and predicted the masterful treatment of Sydney Webb and Beatrice Webb in their
chapter in Industrial Democracy.
The "new economics" of labor, industrial relations, was based on alternative ideas and methods
found in HSE. The roots of IR can be traced back to the 1890s when Noburo Kanai did graduate work
in economics in Germany and took the lead in founding the Japanese Social Policy Association.
Progressive business people also condemned the labor commodity theory and sought to replace it
with a human theory.

The theoretical foundation of Industrial Relations (IR) aims to identify and explain the central
research foci of the field, the employment relationship and its attendant labor problems, and
demonstrate that IR's chief present-day competitors (neoclassical labor economics and human
resource management) have deep conceptual flaws and do not adequately explain the employment
relationship. Neoclassical labor economics is the core of IR, which is the model of a perfectly
competitive labor market.

Theoretical discussion builds on the employment systems framework in Kaufman (2004b), along with
ideas and concepts from the original HSE/IE, Karl Marx, and Ronald Coase. Linkages to branches of
modern mainstream labor economics, such as imperfect and social labor markets, incomplete
contracts, moral hazard, and principle-agent problems, will be evident and are complementary to the
IR perspective on employment relationships.

Industrial relations is a social labor economics that focuses on the exchange and use of human labor
power in an employment relationship embedded in imperfect markets and hierarchical firms. It
recognizes that labor markets and employment relationships are politically constructed, and core
economic concepts can only be specified once a regime of property rights is established by a
sovereign authority. The theory is based on a complex model of labor markets and employment
relationships, which are politically constructed.

The Chicago School and NLE (modern labor economics) decisively displaced institutionalism and
banished the concept of labor problems in 1960, leading to the portrayal of outcomes such as
unemployment, discrimination, occupational segregation, rigid wages, and internal labor markets as
efficient equilibrium solutions generated by rational choice, competition, and demand and supply.
Critics dismiss special consideration to the human rights and interests of workers as normatively
tainted and non-scientific value judgments.

The theoretical foundation of Industrial Relations (NLE) suggests that in a perfect competition world,
demand and supply optimally allocate resources, all sides benefit from trade, contracts are perfectly
enforced, and labor and capital are paid their marginal contributions to production. However, labor
problems have no theoretical place in NLE, and government mandates are viewed with skepticism.
The competitive model eliminates all labor problems and renders ineffective and unnecessary all of
IR's problem-solving tools, such as worker representation, trade unions, labor law, social insurance,
progressive employee management, and government macroeconomic stabilization policy.
The text explores the labor market and employment relationships, focusing on institutions as social
constructs that define rules, constraints, opportunities, and influence preferences. Neoclassical
microeconomics, a central theoretical device in neoclassical microeconomics, has evolved beyond
the competitive model to include imperfect market problems and non-market institutions. Critics of
the competitive model face a no-win situation, as it assumes that labor is homogeneous and a
commodity. Modifying this assumption to model the labor factor as "substantively human" yields an
IE-based theory that explains the existence of the employment relationship and its key features.

Neoclassical demand-supply (DS) model is a crucial aspect of the competitive labor market,
suggesting that differentiated labor leads to an upward sloping supply curve. This is because firms
are no longer indifferent to which unit of labor they purchase, implying a personal and typically
ongoing relationship between the employer and employee. In contrast, Industrial Relations (IR)
theory lies in the empty shell of neoclassical DS theory, as it cannot provide a determinate
wage/employment outcome.

There are numerous cleavages between NLE and IR with regard to competitive labor markets that
degrade the former and strengthen the latter. For example, if labor is human, then labor supply is
volitional, and wage rates are always and everywhere managed/administered prices, albeit shaped
and constrained by market forces. The human essence of labor means that labor demand and supply
curves are not independent functions, wages are likely to have a large degree of rigidity, and labor
markets are no longer self-regulating.

Industrial relations (IR) denies that a market system is self-equilibrating, and wage cuts principally
come from competitive threats to firm survival in the product market. For a labor market to be
perfectly competitive and yield an efficient outcome, all margins on the labor service sold by the
employee must be completely specified, priced, and delivered to the employer, which only happens
if all dimensions of the property rights are fully covered in a complete and fully enforceable contract.

The Competitive DS model has become the accepted benchmark for labor policy debates, as
managers determine the boundaries and internal structure of firms and influence the reciprocal
boundary and structure of external labor markets. Critics argue that the competitive model and its
free trade and laissez-faire implications are flawed when applied to labor markets and employment
relationships. Modern NLE, which no longer ascribes to the competitive model and labor DS diagram
as core theoretical constructs, has effectively triumphed in a century-long battle between IE and IR.
However, if proponents continue to believe that the competitive model, DS diagram, and invisible
hand story accurately predict labor/employment outcomes and evaluate institutions and policy
initiatives, the battle lines remain in place, emphasizing the need for a more balanced approach to
labor policy.

Industrial relations (IR) is a critical approach to understanding labor market theory and engineering-
oriented production and management theories. It posits that labor is a human factor, and the
employment relationship is a human relation. In National Labor Relations (NLE), firms are more than
production functions; they are governance structures or an "industrial government." Competition
forces firms to adopt efficient governance structures and internal HRM practices, ensuring fair
implementation and enforcement.

IR argues that traditional capitalist firms' governance is likely to be neither efficient nor fair, and it is
not democratic. It also suggests that governance systems should consider other welfare goals, such
as fairness in the workplace and opportunities for human development. The inefficient and non-
democratic nature of employment in traditional firms is due to positive transaction costs, imperfect
labor markets, and the legal power given employers to determine unilaterally how they manage their
business.

Theorizing Industrial Relations (IE/IR) has a separate theory about ILMs, starting with the
Commons/Coase distinction regarding alternative modes of economic coordination. In real-life
economies, production is coordinated by both competition and cooperation, resulting in a mixed
economy. IE provides a determinate account of firm size, focusing on the concept of employment
systems (ES) as a more firm-level version of Dunlop's concept of an "industrial relations system."

IR has evolved over time to focus on fostering positive employment relations, high trust, and
cooperation in production. This approach differs from the orthodox competitive model, which views
workers as commodities and work effort as locked in through complete contracts. Cooperation and
fairness are important active components to higher firm productivity and performance, but they
must be created through far-sighted managers, progressive HRM practices, and supportive
institutions.

IR also recognizes that taking the long view in employment relations and using progressive HRM
brings with it significant fixed and variable costs, such as more HR staff, employment security, above-
market wages and benefits, employee voice, and management discretion. Firms must weigh these
extra costs and decide on the kind of ES to have.

The distribution of employment practices and relations in firms is a bell-shaped pattern, with low
road employers offering unattractive jobs and little HRM, while the middle group is decent places to
work with partially developed ILM and some formalized HRM practices. The top group is considered
"the best places to work" due to secure, challenging, well-paid jobs, well-developed ILMs and HRM
programs, and a variety of commitment practices.

The resource-based view of the firm (RBV) posits that external sources of competitive advantage
have largely eroded, and the remaining best option is to use HRM practices to develop highly
skilled/committed employees. However, the HRM–firm performance hypothesis is problematic, as it
suggests that firms should expand their HRM and ILM systems because they add to profits. This
implies that firms should expand in size and gradually move the economy toward the
Taylorist/Leninist workforce that competitors cannot easily purchase or copy, which promotes
management-centric models.

HRM theorists introduce contingent factors that modify the "main effect" of HRM on performance,
which may not be linear but is almost always presumed to remain positive. Similar to NLE, HRM also
promulgates models that explain all market and non-market outcomes while claiming the economy
operates according to competitive invisible hand standards.

The field of industrial relations focuses on the relationship between labor markets and firms, with
labor economics studying labor markets and HRM studying human resource management. The
theoretical framework presented in this text illustrates how economic performance varies with
different combinations of markets and management. The two upward-sloping lines, NLE and HRM,
graph the fundamental theorems of each field, with NLE predicting that economic performance is
maximized at point B at the Walrasian corner solution of perfect competition and all ELM, and HRM
predicting that performance is maximized at point A at the Taylor/Lenin corner solution of perfect
cooperation (or “perfect unitarism”) and all ILM.

Industrial relations (IR) is often viewed as an unattractive, obstructive, and performance-sapping