Labour Market Theory

Ben Fine

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134706549
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

This book is a commanding assessment of labour market theory across the social sciences. It provides a radically original critique of labour market theory, which draws constructively but critically on existing literature. The work:
* contributes to the debates on key issues in labour economics such as unemployment, gender, equal pay and the minimum theory
* illustrates the policy implications in empirical studies
* supplements existing orthodox labour market theory texts.

Part I

The state of play

1 Introduction and overview

This book is concerned primarily with the economics of labour markets. As such, it is devoted to theoretical considerations and the critical deployment of ideas about the workings of labour markets. The writing has taken place over a period of more than a decade, although much of the text is recently written and the whole text has been revised over the past year.

During this gestation period, however, labour market theory has changed substantially. The oldest part of the work is the critical assessment of segmented labour market theory. Ten years ago, it was dominated by radical political economy, and it was treated with contempt by orthodox economics; it was more comfortably accommodated within mainstream industrial sociology. However, as demonstrated in detail in Chapter 5, the theory was permanently open to question in terms of its content and validity. The literature was prospering if success were to be measured by quantity of output alone, for it did generate an extremely diverse set of empirical case studies. But its rich contribution in terms of empirical content has to be set against theoretical deficiencies and lack of firm analytical foundations.

As shown in Chapter 6, this situation has changed quite dramatically over the intervening period, if not through the resolution of the difficulties within the radical theory. Rather, it is mainstream neoclassical economics that has progressed, positively embracing a role for segmented labour markets. And, to a large extent, the more radical approach has set aside much of its traditional content and has compromised with, indeed has become subordinate to, the orthodoxy. This remarkable change has come about through the capacity of neoclassical economics, despite being based upon a particularly narrow form of methodological individualism, to develop a theory of market structures. Its apparent inability to do so previously had been the basis both for the support by others for critical alternatives as well as the orthodoxy’s hostility to them.

By providing an explanation of how the aggregated behaviour of optimising individuals might give rise to socioeconomic structures within equilibrium, neoclassical orthodoxy has realised three significant accomplishments, certainly from the perspective of just a decade or two before. First, it has broadened its own scope of analysis to incorporate structures and institutions on the basis of methodological individualism. Second, as argued elsewhere (Fine 1997a), new developments within mainstream neoclassical economics are bringing about a reversal of one of the fundamental features of the marginalist revolution of a century previously. At that time, the orthodoxy was established in part by retreating into the most peculiar methodology from the standpoint of other social sciences and which isolated it from them. Methodological individualism in the form of optimisation by individual economic agents has been at the core of neoclassical economics but, at most, on the margins of other social sciences. Consequently, despite its continuing emphasis on individual rationality, mainstream economics is now colonising the territory of the other social sciences rather than abandoning them as barren or, in the vernacular as ‘unscientific’ or lacking ‘rigour’. Third, then, other social science disciplines have been faced with an analytical challenge to which they have been forced to respond.

These more general shifts in economics’ position within the social sciences, its thrust for hegemony over rather than apart from the others, has been no more prominent than in labour market theory, and especially prominent in segmented labour market theory. There has even been, as discussed in Chapter 6, what has been described as a marriage between radical political economy and neoclassical orthodoxy. However much the former may claim to have transformed the latter, the marriage is undoubtedly an incorporation of a few structural insights into the orthodoxy and the casting aside of those methodological and theoretical elements offered by radical political economy that prove incompatible with the new orthodoxy.

This assessment is established in detail in Chapters 5 and 6, but it is also shown that much of the literature, even the majority, continues to occupy a position that straddles the various strands that have just been identified. Indeed, the Cambridge school of segmented labour market theory, one which can hardly be described as having embraced either methodological individualism or neoclassical economics, is identified as being the most developed and accomplished. Similarly, many sociological analyses have remained genuinely and consciously committed to the notion that socioeconomic structures, agents and processes determine labour market outcomes. But, given their failure to progress theoretically and the continued reliance upon an ever-expanding mass of diverse case studies whose descriptive and empirical content barely conceals their conceptual limitations, the orthodoxy from within neoclassical economics has been able to push its own research programme forward with relatively little effective opposition.

This has not been simply a parallel manoeuvre with the initiative from within orthodox economics developing side by side With radical alternatives. Rather, at times insidiously and unnoticed, the latter have been tainted by the former’s conceptual content. This is clearly revealed by the notion and theory of human capital. Twenty years previously, this concept would have been flatly rejected by radical social theory. Yet, today, it has become a standard item across the social sciences as well as within common discourse. Consequently, Chapter 3 is devoted to providing a timely reminder just how unacceptable is this now commonly accepted way of thinking, for it depends, however much it might be amended theoretically or empirically in particular contributions, upon two facile notions: on the one hand, it treats the individual capacity to work as something that is simply produced by the resources devoted to that purpose and, on the other, it treats the labour market as simply rewarding workers according to those capacities. This means that the socioeconomic relations by which labour markets are structured occupy at best a secondary position in the analysis, as divergences from the norm that would be ground out by a perfectly harmonious system of creating and rewarding human capital. This is made explicit in what is the standard, if bizarre, empirical procedure of correcting for human capital effects before examining the impact of other factors such as discrimination.

Chapters 2 and 4 which, along with the chapter on human capital, complete the first part of the book, contain a wide-ranging overview of the state of labour market analysis, if with an uneven and far from comprehensive coverage. Chapter 2 addresses macroeconomics and how it has evolved, focusing in particular upon the notion of there being a long-run natural rate of unemployment, around which there have been short-run variations. In this context, the discussion of macroeconomics is organised around three related themes. First, even from within the orthodoxy itself, the validity and usefulness of the notion of a natural rate is highly questionable. Second, it depends upon a division of factors into ‘short-run’ and ‘long-run’ determinants. This division is open to doubt in principle and is arbitrary in practice. Third, whilst macroeconomics is primarily concerned with the economic aggregates, it is pushed to disaggregate the economy. This is equally so for the labour market, whether dealing with the employed or the unemployed and whether in theory or empirical work.

This last theme is crucial throughout the book, for it necessarily points to an important and central conclusion – that labour markets are different from one another, not only in outcomes in the sense of rewards in the form of wages, conditions and careers, but also in the way in which they are structured and reproduced. There is no single labour market, although labour markets are intimately connected to one another, and no single generally applicable labour market theory. Whilst it is possible to identify appropriate abstract analytical principles, how they apply will differ across labour markets. This simple, even elementary, insight appears to have been implicitly rejected by the vast majority of the literature. This is especially so where a general theory of markets is applied to the putative labour market in particular. Even those attempts to differentiate labour from other markets, as discussed in Chapter 10, have often sought to do so on the basis of general principles which, on close inspection, prove not to have addressed labour markets specifically.

Once accepting that there are labour markets and that each is differentiated from the others in terms of structure and functioning, this still leaves open two questions. First, what are the appropriate analytical principles to be employed in addressing labour markets, especially if neoclassical economics is rejected in favour of an approach that emphasises socioeconomic relations, processes and structures as a starting-point? Second, if such principles are unable to serve as the potential source of a general theory of labour markets, how are they to be applied in practice to delineate one labour market from another and to uncover the presence, distinctiveness and workings of particular labour markets?

Chapter 4 searches for answers to these questions by taking a critical look at other, mainly new, approaches to or studies of labour markets, covering industrial relations and some popular concepts that have emerged recently to straddle different disciplines. Broadly, three different analytical elements can be identified. First, as previously discussed, theory has increasingly been influenced, sometimes only implicitly, as in human capital theory, by dependence upon methodological individualism. This is true of the new, or newly used, organisational theory, but has a longer tradition within the economics literature on trade unions by treating the latter as if they were rational (individual) economic agents with well-defined objective functions – although this also opens up the potential, even if again on an individualistic basis, to explore how trade unions derive their objectives from the collected, not collective, motives of their members (and non-members).

Second, much labour market analysis has fallen back upon a descriptive, particularly an empirical, mode of study. This is not so much a case of ‘so and so did this’ and then ‘this and that happened’, as in older forms of institutional approaches to industrial relations, as an increasingly sophisticated statistical analysis of data-sets, especially those drawn from large data-sets, in which associations are found between various select variables. As such, there is little theoretical and methodological progress, but this does not mean that the work is entirely atheoretical. For the particular choice of variables to explore and the way in which the empirical relations between them are interpreted are the consequences of theoretical predispositions. But this is not itself conducive to analytical innovation nor to critical reflection, except on the basis of empirical refutation or confirmation. Perhaps the strongest representative of this treatment of labour markets is to be found in the Social Change and Economic Life Initiative (SCELI) research programme, some of whose results are considered in this chapter as well as elsewhere throughout the book.

The third broad approach to labour markets that has informed recent work is much more theoretically inventive, and has given a continuing momentum both to theoretical and empirical work. To be more explicit, social as well as labour market theory has been revived by use of concepts such as flexibility, post- or neo-Fordism, Japanisation and globalisation. In general, each of these concepts has a particular intellectual history.

First, an empirical anomaly, however widespread and however legitimate, is presumed to be identified relative to existing hegemonic and inflexible theory – as in the decline of, or counter-examples to, Fordist mass production, for example. Then, a new conceptualisation is developed to correspond to these empirical observations – as in flexible specialisation, to continue the example. Each of these approaches is then embodied in its own theory and evolves accordingly within more or less arbitrary and broad empirical and analytical frameworks – many recent developments in social theory in general and in labour market theory in particular have displayed a predilection for eclecticism, and especially for crude synthesis across different ideas and schools of thought. The next step in the evolution of each new analytical framework is that it is found to be applicable to a range of empirical studies including, not surprisingly, the ones that inspired it, but often overlooking those that do not comfortably correspond to its outlook. Finally, such modes of producing theory and interpreting evidence are subject to popularisation as well as to substantive criticism from a variety of perspectives, lending both legitimacy (it is subject to debate) and sophistication (it needs to develop and be refined in the light of the debate or to incorporate other factors) to the analytical enterprise.

Interestingly, then, labour market theory has proved relatively immune, like most academic endeavours with a strong component of mainstream economics, to the influence of postmodernism that has swept across the more interpretative disciplines and even the social sciences (and history) wherever, for example, cultural or ideological concerns come to the fore. For the ‘harder’ social sciences, such as economics, concerned with the material and empirical realities of labour markets, the descent (or ascent) into critical discourse theory has proved far from palatable, alien in effect. Although mildly influenced by, and borrowing terminology from, postmodernism in some approaches, as in notions of post-Fordism, recent developments within labour market analysis are marked by a general lack of critical conceptual reflection.

Instead, there have been three major influences over current labour market studies: first, colonisation by economics through methodological individualism, either by treating social agents as if they were optimising individuals or by treating optimising individuals as if they were the source of social structures; second, by relying upon organised descriptive analysis, whether as narrative or more or less sophisticated statistics, but drawing predominantly upon well-worn hypotheses; third, the highly inventive creation of abstract categories that are deemed to correspond to and address the most recent transformations in modern capitalism but which are themselves limited in terms of their clarity of theoretical definition, their scope of application beyond the empirical material that has inspired them and the analytical pertinence of the content with which they originated. Only the first and last of these compete actively over theoretical terrain, and it is hardly surprising that the steady march of methodological individualism should prevail over or, at least, progress side-by-side with, what is often a shifting and chaotic set of alternatives. Otherwise, the empirically based option offers secure if analytically unexciting opportunities.

Against this background, it is suggested in Chapter 4 that industrial relations is caught between offering descriptive analyses coupled with theoretical stagnation and being increasingly subordinated to the formalism and individualism of neoclassical economics. The new theory of industrial organisation and institutions, which adopts the labour market as a special case, has been much more subordinated to, and dependent upon, the colonisation of the new neoclassical orthodoxy. Theories of flexibility and globalisation have been innovative but do themselves vary too rapidly in analytical content to establish a firm theoretical or empirical foundation on their own terms, let alone one that is acceptable to the narrower and more conservative criteria of the orthodoxies which have increasingly drawn upon elements of methodological individualism, even if in heavy disguise.

From a critical review of existing literature, the more challenging and controversial aspect of this work is the theoretical alternative that it offers in response to the questions outlined above. This is to be found in the final chapter of Part III. Its location in the part of the book devoted to labour market segmentation is particularly appropriate as it reflects the previously mentioned analytical theme that persists throughout this volume. By drawing critically upon the literature reviews that have gone before, the following conclusions are drawn. First, the capitalist economy is fundamentally based upon a division between capital and labour, and the pursuit of surplus value (or profitability) which give rise to underlying economic laws, tendencies or forces whose complex resolutions or outcomes in turn give rise to a whole variety of economic structures which are open to reproduction and transformation. These include processes such as skilling and deskilling, rising capital-intensity and monopolisation. In addition, the pure division between capital and labour opens the way for and influences other labour market structures as in self-employment, ‘unproductive’ labour as for many state employees, ‘sweated’ employment, and professionals or functionaries for capital.

However, the (re-)creation of such separate labour markets and their distinct mode of functioning cannot be reduced to these abstract principles alone. Rather, there is dependence upon how these labour markets and the capital–labour relation are reproduced both within the economy (and not just in production) and within society more broadly. To address these influences, which have frequently been acknowledged in social theory previously, a much more exacting notion of the concept of the value of labour-power is developed and deployed. The analysis focuses on a number of different aspects.

First, the value of labour-power is examined in terms of its economic aspect – how much value is received in return for the capacity to work. However, this correct general definition of the value of labour-power has usually been developed no further. In particular, the value of labour-power has most often been conceived of as a quantity, bundle or vector of goods for which a given amount of labour-time is required to produce them -with surplus labour left over to make up the profit and other revenues attached to exploitation. This, however, is essentially an equilibrium concept. It takes no account of the dynamic content and intent of the concepts involved. In particular, as productivity increase is associated with the accumulation of capital, the labour-time required to produce commodities, including the putative wage bundle, is reduced.

This raises the age-old question, whether addressed in Marxist terms or otherwise, of who benefits from the increased net output associated with productivity increase. At one extreme, the value of labour-power remains the same, implying that labour is the sole beneficiary; at the other extreme, the wage bundle is unaltered with capital accruing all the gains. The outcome cannot be determined merely by posing the question, since it relates to the whole structure of economic processes and relations through which the productivity effect is created and incorporated. Moreover, these aspects will be uneven, both within and across different sectors of the economy, and this will prove an important element in the differentiation of the labour market into separate and separately functioning labour market structures.

Such primarily economic analysis needs to be complemented by a second aspect of the value of labour-power: the notion that the consumption bundle so provided suffices for social reproduction of the work-force. In the vast majority of the literature, this has rightly been seen as a corrective against economic reductionism – the work-force does not depend solely upon a wage but is engaged in activity outside the place of employment, thereby involving the state, the household and other social relations, structures and processes more generally. There is a further emphasis here, however, the role of consumption as a third aspect of the value of labour-power.

It is argued, first, drawing upon previous work, that the way in which various items enter into consumption differs from one item to another according to the whole chain of activities constituting and surrounding the path leading from production to consumption itself. Second, norms of consumption, as in the definition of the wage bundle, do not constitute some sort of average across the working class as a whole but are to be interpreted as varying systematically across different sections of the population, and hence the structured work-force, according to socioeconomic variables, such as age, income, occupation, etc. Third, then, there is a link between differentiation in consumption and differentiation, and hence structuring, within the labour market. Whilst this is readily recognised in case of income – labour market structures defined by differences in levels of remuneration – the approach offere...