Employment, Wages and Income Distribution

Critical essays in Economics

Kurt W Rothschild

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781134885183
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Whilst there is widespread agreement about the goals of economic policy, consensus about how best to achieve them can be harder to achieve. No issues are more contentious than employment and income distribution. In recent years full employment and a just distribution of incomes have been downgraded as policy objectives, as greater priority has been given to price stability and balance of payments objectives. This emphasis has been supported by a mainstream economic theory which has an unswerving belief in the ability of market forces to achieve a satisfactory regulation of employment and income distribution
Other economists have remained more sceptical, and none more so than Kurt Rothschild. This new volume collects together his twenty two most important essays in the area, many of which are appearing in English for the first time. Throughout pure theory is linked to relevant practical investigations.

Part I: Employment

1 Microeconomics of the labour market

(Translation of (1986) ‘Mikroökonomik des Arbeits marktes’ in H. Schelbert-Seyfrig et al. (eds), Mikroökonomik des Arbeitsmarktes, Bern: Verlag Paul Haupt, pp. 431–8)

The conference of the last two days has enabled us to obtain a good idea of the impressive research carried out by the Bale project on labour market problems. There can be no doubt that the themes treated are important and that valuable, new empirical material has been provided. We can expect that the ensuing discussion will have a lot to say on the interpretation of the results and on the conclusions and recommendations which can be derived from them for Switzerland’s economic policy.

In the introductory remarks to the discussion which I have been asked to make I shall refrain from dealing with these important concrete policy consequences, mainly because as a foreigner I am not sufficiently acquainted with the historical and institutional background of the Swiss labour market processes, which is of considerable importance particularly in this field. So my remarks will be restricted to some observations on the theoretical background which–explicitly or implicitly–underlies the prescribed studies and those in other countries as well. Even where the studies seem to be ‘purely’ empirical some rudimentary theory must exist because without ‘theoretical’ ideas no orderly concept can be developed. Since this conference was dedicated to the microeconomics of the labour market I shall also restrict myself to this sphere. I shall try to consider quite generally what role microeconomics can play, its possibilities and its tasks, when labour market problems are under discussion. I hope that this can be of some service to the ensuing discussion. Needless to say that my considerations are necessarily incomplete and not free from some subjective bias.

Let us start with the question: why should it be necessary to have a special microeconomic theory of the labour market? Why is it not sufficient to have a general theory of the labour market? After all, there is such a thing as a real labour market which we can observe and study. We do not distinguish between a micro- and a macro-market. Why, then, two separate theoretical approaches? Let me begin with some general remarks before dealing with this question in more detail.

For several years now it has become fashionable to ask for a microeconomic foundation of macroeconomic theory. Differences between neoclassical and Keynesian approaches suggested such a demand and difficulties in aggregation pointed in the same direction. How important is such a demand?

One answer would probably be that we want to achieve consistency between various theoretical approaches. With regard to the labour market this sentiment was very clearly expressed in the paper of Wolfgang Franz, when he says: ‘The necessity of a (revised) microeconomic foundation of economic paradigms should be undisputed in view of the breakdown of prominent macroeconomic relations in the past decade.’ But this conclusion is not quite convincing. Are we not also faced with competing micro-theories which do not fit properly? And could the answer to unsatisfactory macro-theories not be found in a revised macro-theory? And, third, why do we not just demand better theories? After all, each and every theory is at best only a partial analysis which tries to provide a logical structure for certain parts of a complex reality. All of them can only claim relative validity for certain aspects and problems. Seen from this perspective a sharp division between micro- and macroeconomics is not immediately self-evident.

But the distinction between micro and macro becomes more meaningful when we deal with the labour market. The special conditions there provide two good reasons for making a microeconomic foundation an issue. The first is that in this field the general micro–macro problem is very pronounced. Keynes’s General Theory gave pride of place to labour market and employment questions in the framework of a theory which was deliberately and wholeheartedly a macro-theory. It provided some startling results which in many ways contradicted traditional classical ideas about employment and unemployment. Counter-arguments appeared now and then but the fundamental backlash occurred round about 1970. The traditional theory hit back, quite generally but also and in particular in relation to labour market issues. The well-known collection of papers issued by Phelps in 1970 was a landmark of this development (Phelps 1970).

This literature of the neoclassical backlash which in the meantime has reached considerable proportions has been excellently treated in the paper by Franz. It tries to stick as far as possible to the traditional assumption of utility maximization as the optimal strategy. In the centre we have optimal information strategies, optimal search strategies, the never-ending comparisons of utility and costs. To some extent this approach presents an attempt to incorporate ‘unpleasant’ facts in such a way that the basic structure of the traditional theory is not endangered. We get an example for Kuhn’s remarks about the defence of traditional paradigms. Some of these novelties are not much more than a translation of some neglected events into the homely language of habitual theories.

The other source for a microeconomic view of the labour market has a far longer history. Much more than is usual in other spheres we have an old tendency in labour market approaches–be they descriptive or theoretical, neoclassical or unorthodox–to take a micro-view of relevant processes. Special works in Labour Economics have existed for a long time, but nothing comparable is written about Good Economics, Service Economics, etc. Good books on Labour Economics always presented a mixture of general theories and numerous micro-elements and studies. Many well-known names come to mind, including Douglas, Dunlop, Reynolds, Phelps, Brown, Kerr and others. Hicks was rather exceptional with his strong theoretical orientation.

Why has this tendency for a specialized presentation and a micro-analysis been so concentrated in this branch of economics? The reason has certainly to be found in the peculiarities of the labour market. These peculiarities– among others–consist of the facts that the ‘goods’ supplied on this market are firmly linked to a person; that income from work constitutes–far more than the income from the sale of commodities–the main source of personal income; that the type of work one supplies has a strong influence on social status; that labour supply is characterized by a specially high degree of heterogeneity; that mobility problems are more serious than in other markets; and last but not least, peculiarities follow from the long-term nature of incompletely determined labour contracts.

It was probably a mistake from the very beginning to treat the labour market in comparison to goods markets and to press it into the usual demand– supply scheme. It would have been far better to look for a special approach to labour market questions. This would probably have led to quite different theories characterized by interdisciplinary analyses in which psychological and sociological elements would play an important role side by side with economic factors. As Franz shows very clearly in his paper, the new microeconomics of the labour market start off with the question: why is the labour market not a spot auction market with continuous market clearing? It is quite obvious that the problem is approached under the perspective of a model which takes general equilibrium as the ‘normal’ case. This is as if a person whose views are firmly based on the Bible took the sentence that people should propagate like the sand at the sea as a basis for a research agenda asking why some families have fewer than fifteen children.

Many questions which are nowadays attacked by micro-analyses, be they classical or unorthodox, are nothing but troublesome attempts to find a way out of the difficulties which were created by a misdirected start of labour market theory. It is not surprising that in this attempt to come into closer contact with the peculiarities of the labour market a multitude of microeconomic approaches are presented. Many subjects have to be considered: differing and changing behaviour patterns, political actions, institutional and other non-economic influences, etc. In this respect it could be fruitful to look for an enrichment of economic theory with sociological and political elements rather than to follow the fashionable path of extending economic methodology to the other social sciences.

There can be no doubt that the new approaches in the classical microeconomic tradition offer an important addition to our understanding of labour market processes and problems. But I believe that more attention should be paid to the contemporary non-orthodox approaches dealing with segmented labour markets, job rationing, screening, discrimination, etc. and to distributional conflicts. These are elements which tend to be neglected in theories which derive their perspective from harmonious equilibrium models. The schizophrenia which this perspective can cause for some theorists is illustrated by the well-known and very useful survey-article by Glen Cain (1976). Although Cain is fully aware of the limitations of the neoclassical approach (‘Neoclassical research can become terribly inbred and out of touch with policy makers...’, p. 1248) and regards modifications in line with the alternative non-classical theories as important, he nevertheless hesitates to grant to the latter full status as labour market theory. He seems to be unable to accept the idea that these non-orthodox approaches can be seen as equally ‘valid’ attacks on a very complex phenomenon.

What seems certain is that all the diverse microeconomic approaches can only be partial explanations. The multi-faceted events in the labour market cannot be gathered in one single comprehensive approach. When different microeconomic theories and studies are compared and judged, the criteria to be used will frequently not be the question whether a theory is ‘right’ or ‘wrong’ but rather whether and when it can be useful. This is not a purely theoretical question; an answer also requires some acquaintance with local and historical conditions. More than elsewhere is it true for labour market questions that the theory is a toolbox which has to be used with care and with a grain of salt.

I should like now to say a few words about possibilities in this area and about the future. Let us return once more to the macro–micro problem. I think that for quite a time we shall have to be content with a more or less peaceful coexistence of the two perspectives without being able to obtain a perfect fit between them. Macro-theory is certainly better suited to find answers when questions regarding total employment and the general level of wages are raised and when we want to see the labour market as a subsystem of the entire economy. In this task the macro-analysis can gain a lot by incorporating some of the elements and insights which the new micro-studies have produced. But if this is to be done in a manageable way it will be necessary to look for radical simplifications of these various approaches in order to find ways to combine them in some sensible analytical apparatus. All this, however, will not prevent a continuation of confrontations between conflicting macro-theories which will tend to form ‘schools’ with diverging prescriptions for economic policies.

The micro-theory cannot offer an alternative for finding better answers to aggregative questions dealing with the economic system as a whole. But as has been said already it can provide many valuable building blocks for a better analysis of different labour market situations, allowing more consideration for local and institutional specificities. Micro-theory cannot yet play a decisive role in judging the qualities and relevance of competing macro-theories; but it can modify them and can help to make their limitations and their relative usability more transparent. Since microeconomic approaches are under less pressure to conform to a given total theoretical structure they can accept their special limitations and assumptions more openly and can thus pay more attention to neglected details and niches. This means that many of these theories look at problems from a special perspective or that they do not necessarily contradict each other but are rather overlapping or supplementary. Peaceful coexistence can be established far more easily than in the case of macro-theories.

Let me summarize my views on the present situation. The literature and research on the microeconomics of the labour market has grown rapidly over the past fifteen years. Survey articles are becoming necessary and have themselves to be surveyed further. Very useful surveys concerning the ‘new (neoclassical) microeconomics’ of the labour market are available (e.g. Cain 1976; Magoulas 1982).

These new studies have sharpened our insights into many peculiarities of the labour market and have led to important empirical investigations with interesting new quantitative information. Even where the results look somewhat trivial or self-evident the studies have provided better foundations for traditional opinions and have provided more detail with regard to data, lags, etc. Further studies may also lead us to new and unexpected perspectives. What becomes obvious, however, is that in this area where traditions, institutions, social structures, etc. play such a prominent role, research on a national scale is particularly needed. Neither with regard to methods nor to results would it be wise to accept blindly the research from other countries: without an addition of domestic know-how one cannot expect to obtain satisfactory conclusions.

What about the future? Spectacular breakthroughs on the theoretical front are unlikely; too complex are the conditions in view of the constantly changing behaviour patterns of individuals, institutions and governments. There will be a continuous need for further and diversified micro-studies–ranging from interviews and descriptive case studies to extensive theoretical and statistical analyses–just in order to keep in touch with a quickly changing environment. We shall probably have to learn to be content to live for a long time in a world where different theories and approaches exist side by side. As Professor Franz rightly observes at the end of his paper, ‘the demand to combine the various detailed studies into one single theoretical structure is understandable, but its realization under the present state of research (and I would add: under present circumstances) must be regarded as hopeless’.

REFERENCES

Cain, G. C. (1976) ‘The challenge of segmented labor market theories to orthodox theory: a survey’, Journal of Economic Literature, 14, 4, 1215–57.

Magoulas, G. (1982) Probleme und Ansätze der Arbeitsmarkttheorie, Bern: Haupt.

Phelps, E. S. ed. (1970) Micro-Economic Foundations of Employment and Inflation Theory, London: Macmillan.

2 Full employment–a special situation?

(Translation of ‘Vollbeschäftigung–eine Aushnahme situation?’, Politik und Zeitgeschichte, no. B31, 1983)

INTRODUCTION

More than twenty years ago Gunnar Myrdal, the famous Swedish economist and Nobel prize winner, wrote an essay on the welfare state in which he pointed out that the greatest step so far on the path to a real welfare state had been the achievement of full employment. And he continued that the people in the Western industrial nations would never permit a reappearance of high unemployment.¹ And as late as 1969 a representative international conference of economists discussed in London the question whether business cycles are a thing of the past.² Only a few years later these ideas and questions had been overtaken by reality. Unemployment as a serious economic and social problem is omnipresent; with more than thirty million unemployed in Western Europe and North America it has reached a level which would have been regarded as unbelievable ten years ago.

‘What can be done to fight unemployment?’ has once again become an urgent question with which economists are confronted. But it seems that neither satisfactory nor unanimous answers are forthcoming. There is no lack of suggestions and recommendations but they are usually contested or prove to be not practicable. In the meantime unemployment continues to grow or to remain at the high levels already reached.

What are the causes of these difficulties? Is economic theory incapable of getting a hold on the problem or are political conditions to blame that no ‘solution’ can be found? What are the possibilities and the limits of a realistic employment policy?

UNEMPLOYMENT AS THE RULE

A realistic assessment of possible therapies against unemployment will depend on the view one takes regarding the ‘normal behaviour’ of the economic system of the Western industrial states. If we look at this system, which can be classified as ‘developed capitalist market economies’, from a historical perspective we see that for almost two hundred years it has been characterized by disturbances and cycles which were always accompanied by considerable degrees of unemployment. Great economists like Marx, Schumpeter, Keynes and diverse trade cycle theorists have made this susceptibility for disturbances and crises a central element in their theories.

If we accept the historical perspective and the theories connected with it we shall have to admit that the difficult situation of stagnation and unemployment with which we are faced just now cannot be called an exceptional situation. Even though the younger generation experiences its first contact with mass unemployment, the events represent more or less a return to the ‘normal’ rhythm of capitalist economies. If we want to talk about exceptional situations it is not the present state of affairs we should think of but rather the ‘golden sixties’ with their historically almost unique prosperity. A similar exceptional situation in the other direction was probably the depression of the 1930s, with its abnormally h...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Preface
• Part I: Employment
• Part II: Wages
• Part III: Income distribution