Developments in Labour Market Analysis

Caroline Joll, Chris McKenna, Robert McNabb, John Shorey

• Publisher: Taylor & Francis
• Year: 2018
• eBook ISBN: 9780429655746
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1983. This text is designed to enable intermediate and advanced students to attain familiarity with the theoretical concepts used in labour market analysis, and to apply them fruitfully to the economic problem of labour markets.

Each chapter of Section I deals with a different theoretical development of the basic labour market model of utility maximising labour supply and the marginal productivity theory of labour demand. In addition, the authors discuss in depth uncharted territory including the analysis of uncertainty and discrimination in labour markets and advances in human capital theory, in each case covering the implications both for equity and the efficient allocation of resources.

Each chapter of Section II analyses an important economic problem - for instance wage determination, unemployment and inflation - using the theoretical insights derived from Section I. The contributions of different theoretical developments are assessed by reference to the current state of empirical research into labour market problems. This book stresses the interaction between labour market mechanisms and also between market and non-market forces in the belief that this will lead to a greater understanding of the operation of the labour market than can be gained by viewing each theoretical development in isolation from the others.

SECTION II

Introduction

The basic model of the labour market defined in the introduction to Section I of this text has been modified and extended through the six straight theory chapters of that section. At each stage the procedure was to present and develop new ideas by reconsidering one at a time key assumptions of the basic model. The result was a number of distinct, independent, sometimes abstract theoretical structures. The chapters of Section II are also primarily concerned with labour theory. In each of its six chapters we analyse a different issue or problem in labour market analysis, bringing together the various insights developed in Section I. This approach sometimes makes the analysis complex, but also perhaps brings it closer to the real world and at the same time generates a series of relevant and testable predictions. Section I has therefore provided us with a set of analytic cal tools. In Section II we illustrate how economists have sought to apply these tools to topics, like unemployment, that are at the forefront of labour market enquiry. It is intended that this section will not only add to our understanding of these specific topics but also improve our grasp of theoretical tools, and confirm their usefulness.

It is, however, only the empirical tests of the predictions we derive that can ultimately validate our theory. In this section we will be pointing out some of the principal empirical tests that can be applied to each topic and the problems involved. Where possible we will indicate some of the central findings. But this text does not set out to provide a comprehensive treatment of the empirical dimension of developments in labour economics. Instead we refer the reader at each stage to studies which illustrate the issues involved. The empirical literature is a vital accompaniment to this text.

The research methodology employed by labour economists is Shared with all social scientists. We are concerned with understanding how social mechanisms work and, possibly, thereby finding out how to influence those mechanisms towards desired ends. The first step in a research programme is to define interesting and important aspects of the labour market to the researcher. These are then analysed by simplifying a highly complex real world down to a series of models each of which highlights specific phenomena and decision-making processes. Such models embody a series of underlying assumptions about how economic agents behave, hypotheses suggesting causal relationships and theoretical arguments in support of these hypotheses. So, for example, the basic model of labour supply involves the underlying assumption that individuals maximise utility, the theory of goods/leisure choices and the hypothesis that wage increases raise the level of. labour supply. Each model generates pre-dictions: from our example above emerges the prediction that a business contraction which induces a fall in wages will, ceteris paribus, brings about a fall in labour supply. Such model building was the rationale for Section I. Section II continues the process by attempting to integrate various models.

Once a set of predictions is derived the logical next step in our scientific approach is to subject them to the test of consistency with observed reality. Theory must thus generate testable, falsifiable predictions. Increasingly in labour economics testing uses econometric techniques. The basis of this approach is to formulate our models in mathematical terms, that is as a series of equations. Our predictions thus emerge also as equations. Using data collected by the government or by the researcher the coefficients of each equation are ‘estimated’ by various statistical techniques. The simplest kind of estimation process, least squares regression, involves finding the value of the coefficients that produces the closest ‘fit’ of a particular function to the relevant scatter of data. Our predictions are then assessed by how well the estimated function fits the data. The size and sign of the various coefficient estimates can be used to indicate the nature and importance of each causal link contained in the function. Estimation techniques used in applied economics are becoming increasingly sophisticated. The size of the empirical literature on labour economics is growing very rapidly indeed. There is therefore a lot for the reader of this text to look forward to. We proffer only the following guidelines. First, much statistical analysis is about correlation (related variations). It does not necessarily indicate causation so such statistical analysis should always be treated with caution. There is a very real danger of exaggerating the precision of empirical results. Second, although data in labour economics are more plentiful and of higher quality than in most areas of applied economics, there is always a gap between how we would ideally like to set up our tests and how, because of data limitations, they actually emerge. Finally, empirical work can in the end only be as good as the theory that goes to produce it. The next six chapters indicate the manner in which labour economists have refined their theoretical frameworks with this fact in mind.

7

Labour supply adjustments

Labour adjustments mean changes in the stocks of labour in one or more sectors of the economy. Often stocks increase in one sector at the expense of others and involve a flow of people through the economy. So, an increase in hours per worker to a particular firm usually involves an increase in labour time to that firm at the expense of non-market activities. An increase in participation involves an increase in the size of the labour force and usually a flow of people from inactivity to certain sectors of the labour market. An increase in the stock of some particular skill in the whole labour market could involve a flow of people from education or a flow from other skills, which would in turn involve a flow of people through the job structure, either within firms or across them. An increase in the stock of a particular skill in a firm could in addition result from a flow of people within a skill between firms. The basic model of the labour market provides only a very partial explanation of workers’ decision making behind such adjustments and therefore of labour supply as a whole. In this chapter we employ the decision models of Section I to further the theoretical analysis of labour supply adjustments and thus of flows through the labour market.

Figure 7.1 x and y are two skill levels.
The dotted lines (oooo) indicate net participation adjustments; the dotted lines {••••) indicate skill adjustments as job mobility; the continuous lines ( ) indicate skill adjustments as new entry and occupational mobility.

Labour supply is multidimensional. In reality several different labour supply adjustments are the outcome of a single household decision. Various stock adjustments and flows are therefore interdependent. However in this chapter, to assist exposition, we consider only four supply adjustments and analyse them largely independently. In Section 7.1 we consider hours supply adjustments; in Section 7.2 participation adjustments, and in Sections 7.3 and 7.4 the two forms of skill supply adjustment. Figure 7.1 locates the flows discussed in this chapter within the economy.

7.1 Hours supply adjustments

Chapters 1 and 2 described how the basic model of labour supply founded upon utility-maximising behaviour should be modified to encompass household decision making; decisions regarding the allocation of time; institutional constraints on hours; and factors such as taxes, state benefits and domestic activities. Let us for summary and reference purposes express the main ideas in functional form. The forces acting upon individual i’s decision to adjust his supply of hours to his employer j can be expressed as

His hours supply will adjust to any change in his own wage W°; the wage of his spouse W^s; taxes t; non-labour income B, including state, payments SP; the overtime premium p; his household’s tastes for domestic activities T^d; the price of goods used in domestic activities P^gd; and the level of normal hours H.

Investigating these important relationships has been the central point of much empirical work on labour supply. But how might this model be extended to accommodate human capital analysis? First, consider specific human capital formation. Since specific education raises the workers productivity, and thus earnings potential, in only firmj (firm-specific) or one industry (industry-specific), it must act to restrict moonlighting. Furthermore, if the returns to the investment are to be recouped to the full, additional labour will be offered to firm j in the form of additional hours. Specific skills lead the firm to deter quits by offering the worker a significant non-pecuniary element in total rewards. This can usually be consumed only at work, and therefore provides an additional incentive to the skilled worker to offer more hours. In the most extreme case institutionalised hours can be abolished so that the worker sets his hours supply unconstrained. On such arguments we would expect that, ceteris paribus, each worker will adjust his supply of labour upwards as his specific human capital increases.

Second, training usually permits workers to enter higher quality jobs. Contrary to the assumptions of the simple utility-maximising model, workers can derive utility or disutility from performing their tasks at work. Low quality jobs involve extensive division of labour, repetition, physical exertion, boredom and thus some degree of alienation. In contrast, high quality jobs bring workers satisfaction from the performance of their skills and the value of their output. One would therefore expect that, for given wages, the hours offered by those with few or no skills will be significantly less than the hours offered by those with skills. In the former case more hours involve some disutility; in the latter case more hours mean greater utility.

Third, increased skills are often associated with increased technical and supervisory responsibilities. Both increase the hours expected of the worker. But both also increase the worker’s willingness to supply hours, partly as a response to the higher job satisfaction available, partly through a natural desire to discharge any responsibility well. Hours supplied also increase, however, because the worker wants to continue his rise within the job hierarchy to higher incomes; which explains why so often workers accept promotion that appears to bring limited financial gains but much longer hours.

Fourth, the decision to acquire human capital involves the calculation of a stream of benefits through time which are then compared with a set of costs. Because of the discounting process and the deterioration or obsolescence of skills the sooner any benefits can be achieved the higher are net returns. By adjusting the time profile of his hours supplied to the firm a worker can, to a degree, reshape his earnings profile, bringing forward the returns. One would thus expect, ceteris paribus, any newly trained worker to adjust his hours supply upwards.

Fifth, and most obviously, because work and education often compete for workers’ time, workers must adjust their hours downwards to accommodate education programmes. This will generally take place when the worker is young and foregone earnings are lowest. If access to finance is restricted workers may have to increase their hours to generate funds prior to education. For similar reasons one family member may have to increase his hours of work to finance other members’ education.

So let us now consider the impact of uncertainty. Income preferers search across firms not only for higher wages, but also for greater access to overtime. Given a sufficiently wide distribution of the availability of overtime across firms most workers will in time be able to circumvent institutional hours restrictions. Firm / will find that the hours of overtime it is offered will be closely related to the hours it ha...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Preface
• Section I
• Section II
• Index