Economics of the Labour Market

Unemployment, Long-Term Unemployment and the Costs of Unemployment

P. N. (Raja) Junankar

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137555199
• Topic: Business
• Subtopic: Pharmaceutical, Biotechnology & Healthcare Industry
• Index: Business

The global crisis has led to dramatic increases in unemployment rates over most of the countries of the OECD. This book provides alternative explanations of this phenomenon. Junankar begins with surveys of the labour market: labour demand, labour supply, and labour force participation. He argues that the growth of unemployment and long-term unemployment is mainly due to a lack of aggregated demand and not due to high unemployment benefits. Economics of the Labour Market shows that unemployment and long-term unemployment impose serious and significant costs on individuals, families, and society in general.
Raja Junankar focuses on vital social issues arising from the malfunctioning of economies and this collection of essays tackles the real cost of unemployment.

1

Introduction

P. N. (Raja) Junankar

The world economies have gone through one of the worst depressions since the Great Depression of 1929. It appears that some of the OECD countries are now slowly recovering from the crisis, although many European countries have very high unemployment rates and their Gross Domestic Product (GDP) has still not reached the pre-crisis levels. As Atkinson (2008) argues:

Government budgets are under stress, but citizens are going to expect that, if funds can be found to rescue banks, then governments can fund unemployment benefits and employment subsidies. If governments can take on the role of lender of last resort, then we should be willing to see government as the employer of last resort (emphasis in original).

In a recent paper, Larry Summers (2015) has argued that countries are now going through a process of “secular stagnation,” that is unemployment levels are likely to remain at high levels. Over the past few years there has been a debate about the role of technological change in influencing employment and unemployment. On the employment side, technological change has led to a shift in demand away from unskilled to skilled labour. Technological change has also led to replacing labour by capital, and hence displacing workers. But at the same time increasing incomes have increased the demand for all goods and services and hence there has not been a trend increase in unemployment. However, a recent worry has been that while technological change has been taking place and incomes have been rising, income inequality has been increasing and as a result aggregate consumption may not increase sufficiently to prevent unemployment from increasing. In a modern economy, there is continual change with new firms being set up and old firms closing down. Jobs are created and jobs are destroyed simultaneously in the process, see Davis, Haltiwanger and Schuh (1996). The net impact on the economy and the labour market then depends on the relative magnitudes of these two opposing (dialectical?) forces. In an upswing more firms are expanding and being set up, while in a downturn more firms are declining and closing down. Capitalist economies go through a cyclical process that Keynes argues are due to fluctuations in the “animal spirits” of firms investing in real capital goods.

This book studies the labour market of developed and developing countries. It then studies the causes and consequences of unemployment in these countries. It is a collection of selected published papers in various journals.

One of the features of this collection of papers, chapters now, is that it emphasises the social nature of the labour market. In the labour market, workers do not sell themselves (slavery is illegal in most countries) but they sell their labour power (labour services, or the flow of services offered from the stock of employment). The quality of the labour services they provide depends on both the worker and the employer: if workers are treated well, they would go out of their way to help the employer. If they are treated badly, workers may simply provide limited services to avoid being sacked. The labour market is (or labour markets are) not like the market for fresh tomatoes in a farmers’ market. At the end of the day in a farmers’ market, tomatoes are sold off at very low prices otherwise they will just get spoilt. In a labour market, even if a firm finds out that it has too many workers it just cannot throw them out into a garbage bin. The workers are not going to sell their labour services at knock-down prices! To coin a phrase: a labour market is different from markets for other commodities because workers think. If an employer tried to cut their wages to keep their costs down, workers would either work less efficiently or just leave the employer. If the workers are unionised they would go on strike. Tomatoes do not go on strike if their price is lowered! Labour markets are different from other markets. In particular they are not like auction markets that clear instantaneously. They are influenced by “custom and practice,” (Okun, 1981). When an employer is hiring a worker, s/he has to think about how the worker would perform over a period of time into the future, while the worker offered a job has to consider how his/her income and conditions of work would play out over a period of time. They are both making an investment in a “job”.

What is a labour market?

Distinctive features of labour as a commodity:

1. (a) Except for a slave society we can only buy and sell labour services. As a result the skills of a worker cannot be separately sold. If an employer trains a worker who subsequently leaves the firm, the worker takes away with her the skills she acquired in her employment.
2. (b) The quality of the labour services provided depends not only on the innate ability of the workers but also on their attitudes to work, to their fellow workers and to their employers (bosses).
3. (c) The motivation of workers is very important in the production process. This motivation may be influenced not only by monetary incentives like better pay, but also by “social” factors.
4. (d) Most employment contracts last for a fairly long time and hence we do not have frequent repeat purchases of the “commodity”. However, there has been an increasing trend towards part-time work and the casualisation of labour.
5. (e) There is asymmetric information in the labour market: the employee has a better idea of his/her abilities while the employer simply has some information about formal qualifications and work experience. The employer may use some worker characteristics (e.g. gender, colour, dress, etc.) to provide a “signal” about the worker’s productivity.
6. (f) There is an unequal power relationship in the labour market: the employer is in a much stronger bargaining position, see quotation from Marx in Section (iv) Radical and Marxist.
7. (g) Decisions to supply labour may be influenced by the family (e.g. child care availability) and other social factors; it may not depend simply on wages.
8. (h) The labour market is a social institution, see Solow (1990).

Different labour markets

There is not one but several labour markets differentiated by:

1. (i) Regions,
2. (ii) Skills,
3. (iii) Occupations,
4. (iv) Industries,
5. (v) Gender, and
6. (vi) Race, etc.

It has been argued that there are segmented labour markets: there is a primary labour market and a secondary labour market. The primary labour market consists of workers who have proper contracts, good pay and conditions, while the secondary labour market consists of workers on part-time, temporary or casual work contracts on poor pay and conditions of work.

Institutional constraints

Unlike markets for other commodities there are several institutional and legal constraints which affect the working of labour markets:

1. (i) Trade unions,
2. (ii) Wage bargaining procedures,
3. (iii) Minimum wage legislation,
4. (iv) Employment protection legislation,
5. (v) Equal rights legislation, and
6. (vi) Custom and practice.

What are the questions?

Employment

1. (i) Why do employers prefer to hire workers who already hold a job somewhere else? Or why is it easier to find a job when you already have a job? Generally, when employers are faced with two applicants for one job, they would prefer the person with experience, and the fact that s/he is employed is evidence of good employability characteristics. An unemployed job seeker may be treated as someone with problems of holding a job.
2. (ii) Why do employers prefer to hire part-time workers rather than full-time workers? Employers may prefer part-time workers as they can adjust the working hours flexibly and they may not have to pay for leave, etc.
3. (iii) Why do employers tend to promote people within the firm rather than hire outsiders? Many employers work on the basis of promoting internally as it is likely to give workers an incentive to be more productive (internal labour markets). A promotion is like a reward for good behaviour.
4. (iv) Do employers discriminate against women, migrants, blacks, etc.? There is a large literature on discrimination in the labour market against particular groups. According to Becker (1957) employers may have a taste for discrimination which leads them to hire particular groups even if it leads to higher costs. Another explanation is called “statistical discrimination”: if employers believe that a “minority/ethnic” group is less productive (either through past experience or through some contacts) they would assume that all members of that group are less productive.
5. (v) In a downturn which workers are fired (sacked) first? Why? When an economy slows down in a recession, firms cut down the hours of part-time workers, and fire temporary and part-time workers first. Experienced workers may be kept on in case of an upturn in demand; furthermore, permanent workers cannot be sacked, for legal or institutional reasons without paying them redundancy payments – hence it is more costly to get rid of them.
6. (vi) In a recession why do firms not fire more workers and then re-hire them in an upswing? There is an interesting literature on the concept of reciprocity in the labour market. If firms treat workers well then workers will be more productive for the employers. In a downturn, if employers fire workers then when the economy picks up they may not be able to hire the better (more productive) workers as they were not treated well.

Unemployment

Before beginning a discussion about unemployment, it is important to note that different countries from the OECD have faced different conditions since the global crisis. Most of the OECD countries had unemployment rates increase significantly, with Germany managing to run its economy with the unemployment rate falling due to work sharing. However, some countries like Spain had unemployment rise to dramatic levels (over 25%), see Figure 1.1.

Figure 1.1Unemployment rates in the OECD (%)
Source: OECD.Stat.

1. (i) Why does unemployment exist? Is it accidental or necessary? Some unemployment in capitalist societies is inevitable. There are always going to be some people who are between jobs (transitional unemployment) looking for new work. But more importantly, the economy goes through a business cycle with periods of declining aggregate demand for goods and services which leads to increasing unemployment. When the economy picks up, demand for labour increases and employment increases and unemployment decreases. It has also been argued that to contain inflation, there is a certain amount of unemployment necessary. Neoclassical economists talk about a “non-accelerating inflation rate of unemployment” (NAIRU). Marx and Kalecki had argued that in a capitalist system unemployment helps to control wages and prices and keeps the workers’ “pretensions in check”. It also makes the sack an effective (credible) threat.
2. (ii) Is unemployment voluntary or involuntary? Over decades there has been a debate in the economics literature on whether unemployment is voluntary or involuntary. Keynes in his General Theory argued convincingly that unemployment is involuntary. In the post-war period neoclassical (and New Classical) economists have been arguing that unemployment is voluntary and influenced by the existence of unemployment benefits or high (minimum) wages. A group of neoclassical economist argue that the unemployed are simply “searching” for a suitable job and if unemployment benefits are available and generous they will continue to search for a higher paid job. Keynesian economists have long argued that unemployment is involuntary and due to a lack of aggregate demand.
3. (iii) Why are there fluctuations in unemployment? Keynesian economists argue that fluctuations in unemployment are caused by fluctuations in aggregate demand. Neoclassical and New Classical economists argue that these fluctuations are either random or due to sudden changes in the preferences of people for “leisure.”
4. (iv) Does immigration cause unemployment? There is overwhelming evidence that immigration does not cause unemployment in the recipient country. Immigration leads to an increase in the supply of workers but at the same time it leads to an increase in aggregate demand.
5. (v) Why is the unemployment rate among youths and migrants higher than for other Australians? Why do unskilled workers have higher rates of unemployment? Why do less educated people have higher rates of unemployment? Youths and migrants enter the labour market with little knowledge of the availability of jobs. Young people have less experience in the workforce, and migrants’ experience from the home country may not be recognised by employers. Young people who leave school early have less educational qualifications and hence are assumed to be lower productivity workers and ...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Foreword
• Preface and Acknowledgements
• 1 Introduction
• 2 The Labour Market
• 3 Youth Labour Markets
• 4 Unemployment
• 5 Long-Term Unemployment
• 6 Costs of Unemployment
• Index