medical treatment) associated with failures of tasks coordination7 . More generally,
the annual (vertical) cost of coordinating employees poorly able to deal with the
tasks they face ranged from 0.6% of GDP in Sweden, 1.1% in Australia, 1.5% in
the UK and in the US, 1.8% in the Netherlands, 2.3% in India to 3% in Hong Kong
(Future Foundation and SHL, 2004).
In principle, vertical coordination may increase or decrease with the management
ratio since a higher proportion of managers both facilitates efficient coordination of
workers and tasks but also raises bureaucratic management costs. We shall therefore
consider both scenarios (more efficient or more bureaucratic vertical coordination
costs).
Overall, if we restrict our attention to the time wasted managing underperform-
ers, vertical coordination costs might be approximated by a minimal shortfall around
2% of firm output, which would correspond to the least costly scenario.
3 The model
The model proposed in this paper considers an economy in discrete time (from 0
to ∞) with an active population of size L8 .Thefirm occupational structure is
composed of two types of jobs: human resources jobs (in fraction ρ of the workforce
employed) and production jobs (in fraction 1-ρ of the workforce employed). Workers
devote time to production (either in the human resources service or in the production
service) and to human capital accumulation.
3.1 Technology and coordination costs
The economy is characterized by a representative firm that produces a homogeneous
(numeraire) good according to the following technology:
yt = At ∙
nt
0 [(1
- Pt) ∙ ht ∙ xt(i) ∙ Lt]1 α di
0<α<1
(1)
7In the US, health care costs and individuals’ health insurance have been rising by approximately
50% over the past two decades and part of this rise could be imputed to organizational changes
(Cartwright and Cooper, 1997). In the 2000 European working condition survey, work-related stress
was the second most common work-related health problem across European economies. Stress
results in greater sickness absenteeism, impaired performance and productivity higher turnover
rates and injuries. In the British industry for instance, almost 40% of all absenteeism could
be attributed to stress at the workplace at a cost of £4.2 billion in 2000 (Hoel et al., 2001).
Workers involved in innovative work organizational practices in fact tend to be subject to greater
psychological discomfort and to face more mental strain than their non innovative counterparts
(Askenazy et al., 2002).
8 Note that when labour is divisible L measures either the number of workers for a fixed working
time, or the volume of hours worked when working time can vary (given a fixed upper bound).
Here we consider the second interpretation.