Economics of the Labour Market

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).

The field of labor economics is involved with the study of the labor market, including the determinants of employment, unemployment, and wages. The labor market developed as societies moved from feudal to capitalist processes. The development of capitalism in turn led to powerful capitalist owners and an industrial workforce that was concentrated in factories. Conditions of work became, by present Western standards, dirty, demanding, and dangerous. As a result, workers organized unions and began to demand better pay and working conditions, and they set up political organizations like the Labour Party in the United Kingdom. Over the years, organized labor managed to achieve many of their goals, as legislation was introduced in many countries to provide minimum wages, poverty relief, unemployment benefits, and pensions, and to ensure safe working conditions.

The “demand for labor” is usually understood by economists to mean the demand for labor services by a firm, an industry, or the economy at a given real wage. In a capitalist economy, labor becomes a commodity that is bought and sold on the market just like any other commodity, such as bread or butter. Labor is a unique commodity, however, and when an employer buys labor, he or she obtains a worker’s “labor power” which is the amount of services that the employer gets from the worker. These services depend on the power the employer has over the worker. If there is high unemployment, for example, the worker is in a weak position and greater labor services can be extracted from him or her. The amount of labor services that the employer obtains (not only in terms of hours of work, but in terms of the efficiency of those services) also depends on the nature of the employment contract, the real wage paid to the worker, the conditions of employment, and the attitude of the employer to the worker (and vice versa).

For economists, “labor supply” usually means the hours of work, usually per week, offered for pay or profit. This definition therefore excludes unpaid household work and voluntary work. Usually, the question of labor-force participation (the question of whether a person is working or looking for work) is treated separately. Research on both the theoretical and applied labor supply exploded in the 1980s and 1990s, with the work ranging from models of individual behavior in a static one-period model to dynamic multi-period models for a household. Simple theoretical models that gave a backward-bending supply curve (where labor supply first increased and then decreased with wage rates, for which little evidence exists) have given way to empirical labor-supply curves that are usually (but not always) positively sloped with respect to the wage rate. Beginning in the late twentieth century, much of the focus of research has been on labor supply as a whole, not on particular firms, industries, or occupations.

The labor force participation rate is defined as the proportion of a population that is either employed for pay or profit (for one hour or more in the reference week or fortnight) or looking for paid work over some period of time. By definition, people who are carrying out unpaid work in the home or voluntary work are not counted as employed.

The concepts of employment and unemployment are most easily defined for a developed capitalist economy that has a market for wage labour. Employment is defined as working for at least one hour a week for some payment, either for a wage or for profit, or commission, or without pay in a family business. However, this definition usually excludes people (mainly women) who provide unpaid household services. Unemployment is defined in terms of not being employed while being available and looking for work. In less developed countries, where wage labour is not a predominant form of employment, the concept of unemployment becomes ‘fuzzy’: the line between employment in the informal sector (selling cigarettes on the street corners) and unemployment is not clearly defined (Turnham 1993). In most economies people may not ‘look for work’ when there are no obvious vacancies available and drop out of the labour force (i.e. the participation rate varies). Since the concept of unemployment may not be well defined labour economists sometimes use the concept of employment-population ratios (or the not-employed to population ratio).

The present paper compares estimates of the social rate of return to education for Indigenous Australians with those for non-Indigenous Australians. The social rate of return measures the net benefits to society of educating its citizens. If education is treated as an investment by society in its people, then Australian society will be made better off by an increase in educational investment as long as the social rate of return is higher than that for other public investments. This paper provides a discussion of the concept of the social rate of return to education and some estimates for Indigenous Australians.

The paper argues that the British youth labour market is in a crisis with employment falling, unemployment and long-term unemployment rising rapidly. In section one the paper reviews the evidence and, in particular, looks at alternative measures of unemployment duration. Section two discusses various explanations for the growth of youth unemployment and dismisses the view that it is due to the increase in relative wages of young people. It is argued that the youth labour market has several distinctive features that make it more sensitive to cyclical fluctuations. Section three takes a brief look at various policies to alleviate the problem. Section four concludes the paper stressing that a reflation of the economy is necessary to make a significant impact on youth unemployment.

The dramatic rise of youth unemployment in recent years in most OECD countries has led to the introduction of various policies targetted at youths. Although there are competing explanations of this phenomenon (as of aggregate unemployment), the British government (in particular) has been seduced by the explanation that the growth in youth unemployment is due to a rise in the relative wages of youths. The Prime Minister stated in Parliament (Hansard 27 July 1981, Cols 835–6) ‘[b]ecause the wages of young people are often too high in relation to those of experienced adults, employers cannot afford to take them on’. The Department of Employment produced a research paper (Wells, 1983) allegedly providing econometric evidence for this view. The Times gave this favourable publicity, and entitled an article ‘Pay Cuts Would Create Jobs for Young People’ (20 December 1983). In this chapter we review some of the evidence on the relationship between relative wages and youth (unemployment in Great Britain and then estimate a disequilibrium model of the youth labour market.

The aim of this chapter is to discuss some of the issues involved in assessing the evidence presented in empirical studies of the youth labour market (YLM). The main theme of this chapter is to emphasise the fragile nature of most of the evidence on YLMs. There have been numerous studies carried out in the USA and UK, and relatively few in Australia, which purport to show that youth unemployment is caused by the relatively high wages of youths relative to adults. However, most of these studies are based on poorly specified models, inadequate data, and inappropriate econometric techniques. Some of the evidence is based on anecdotes, some on text-book elementary competitive economy models (the fables of the title), and some eclectic models that attempt to take account of the very peculiar nature of the youth labour market. Section 2 discusses some general aspects of the youth labour market. Section 3 of the chapter discusses the different methods employed by economists to determine various aspects of the YLMs. Section 4 evaluates some of the existing research on the role of wages in influencing youth employment. Section 5 provides a critique of the Productivity Commission Report authored by Daly et al. (1998). Section 6 sets up a simple model of youth employment and provides estimates using data disaggregated by age, gender, and by industry. A critical question in the empirical evidence is to do with the elasticity of demand for youths with respect to wage rates. To give a preview of the main results, we find that in most cases the relative wage elasticity is statistically insignificant. Section 7 concludes the chapter with suggestions for future research.

In this paper we focus on recurrent unemployment using the Australian Longitudinal Surveys. Earlier studies on recurrent unemployment include Heckman and Borjas (1980), OECD (1985), Hui (1986a,b), Corcoran and Hill (1985), Stern (1986), Trivedi and Alexander (1986, 1989), and Adena (1989). The aim of this paper is to determine whether there are some people who are more likely to face recurrent spells (defined as those people who have more than one spell in a calendar year) and whether they are more likely to have had prior spells of unemployment, i.e. whether there is occurrence dependence, or scarring. We study whether people who come from poor socio-economic and poor educational backgrounds enter into secondary labour markets with low wages and insecure employment and hence face recurrent unemployment or spells in the not-in-the-labour-force (NILF) category. Our results show that there is clearly a problem of recurrent unemployment faced by a sub-set of the youth labour market and that there some is evidence for occurrence dependence. Those people who have recurrent spells account for a large proportion of the total weeks of unemployment experience, as well as facing a cumulatively large number of weeks of unemployment. Section 2 briefly outlines some theories; Section 3 describes the data we have used from the Australian Longitudinal Surveys, the methods used, and some results; and Section 4 concludes the paper.

Australia was one of the few OECD countries to emerge from the Global Financial Crisis (GFC) without facing a recession, usually defined as negative GDP growth for two consecutive quarters. However, the (overall) unemployment rate did increase following the GFC and has still not returned to pre-GFC levels. Unemployment rates for young people went up much more dramatically and remain high. This article investigates the impact of the GFC on youth unemployment and long-term unemployment. To anticipate our results, we find that the youth unemployment rates increased significantly owing to a fall in aggregate demand, although youth wages had been falling relative to adult wages. These findings do not support the commonly heard claim that youth wages are pricing young people out of the market.

This paper examines structure and change in unemployment in Indonesia from the 1970s through to 1996 The analysis focuses on high unemployment rates among urban youth, set in the context of similar problems experienced in other developing countries It also deals with some of the conceptual and measurement issues It is concluded that high youth unemployment is partly a queuing phenomenon among middle class families, related to processes of job search and wage structure. But rates of under-utilisation are also high among children of poorer households in the working age population Over time, the paper finds considerable stability in the structure of unemployment, with some tendency for overall rates to increase Some rises in unemployment were experienced by youth with either low educational status or tertiary qualifications, and by women Explanations include increased minimum wages and a slowdown in manufacturing activity, although changing definitions have also played a part

In this paper we attempt to explain the inflows onto and the outflows from the unemployment stock. In spite of great interest in explaining unemployment, very little work has been done using time series data on flows.¹ It is useful to think of the labour market as being in a perpetual state of flux with people moving from job to job, from jobs to unemployment and from unemployment to jobs. An analysis of flows allows us to study the dynamics of the labour market and provides us with useful insights which may be clouded by studying unemployment stocks. Our model explaining the flows is based on cost-minimising firms and individuals searching for jobs.2 We postulate an economy consisting of two types of firms: expanding firms that hire and declining firms that fire. Changes in aggregate demand, tastes and technology lead to changes in the distribution of firms and hence to the flows. Section I considers the empirical specification and discusses the results for Great Britain for the period 1967 (III) to 1980(II). To anticipate our results we find that inadequate aggregate demand is a crucial determinant of the growth of unemployment in Britain.

The 1980s stand out in Australian post-World War II economic history as the decade of high unemployment. Unemployment rates have risen over the last forty years, averaging less than 2 per cent in the 1950s and 1960s, 3.7 per cent in the 1970s and 7.3 per cent over the 1980s. The consistent ratchetting up of unemployment rates since the early 1970s has only been reversed to any substantial extent in the period since 1983 (see Figure 4.3.1).1 The causes and implications of this recent experience constitute the subject of this paper.

Aboriginal people face an exceedingly harsh climate¹ in the Australian labour market. They have lower employment rates, lower participation rates, and massively higher unemployment rates than non-Aboriginals. They have lower earnings, are employed in mainly unskilled manual occupations, in short-term dead-end jobs (except in the public service), often in seasonal work, and with no career structure. Life for Aboriginal people in Australia is, in Hobbes’ eloquent phrase, “nasty, brutish, and short”. Aboriginals have poorer health, higher mortality rates,² less education, less training, poor housing and living conditions.

The aim of this paper is to discuss the problem of unemployment and long term unemployment in Australia. We shall discuss the causes of unemployment, the policies introduced by different governments to alleviate the problem, and the consequences of high unemployment. Some economists believe that unemployment is caused by a lack of aggregate demand, and the impact of structural and technological change on the labour market. The popular myths are that unemployment is caused by: high wages, inflexible labour markets, “generous” unemployment benefits, “unfair” competition from Asian low wage economies. However, unemployment rates in most OECD countries follow similar paths even though they have different institutional and policy frameworks. This suggests that unemployment is still a mystery to be explained. Finally, the paper discusses the serious consequences of unemployment for the unemployed, the families of the unemployed, and for the employed: mental and physical illness, increased crime and social problems, and loss of income. Given these high economic and social costs, why do governments allow unemployment to remain at such high levels?

A spectre hangs over the OECD: it is the spectre of mass (and continuing) long term unemployment.

This paper investigates the possibility of using wage cuts to lower unemployment. The paper first discusses the role of wages in various economic models (neoclassical, models with imperfect competition, efficiency wage models, insider-outsider models). It argues that in many of these models it is not rational for firms to cut wages as it would decrease their profits, while in some models wages are endogenous. It then considers how a government can cut wages in a market economy and argues that it is not feasible for the government to cut wages. The next section discusses the evidence on labour market flexibility and unemployment. The paper concludes with the argument that wage cuts do not lead to a decrease in unemployment.

“When the rich argue that tax cuts for the rich and wage or social benefit cuts for workers are the only way to cure unemployment about which the rich care deeply, every economist’s eyebrows should rise.” (Freeman, 1998, p. 15)

The British economy has been going through one of the deepest recessions in its history. The Government’s restrictive policies are hitting the economy at the same time as an international recession. At the same time, there are long-term structural changes taking place in the economy: the so-called deindustralisation of Britain. Unemployment (including school leavers) in the UK has exceeded three million for some time: in January 1984 it was 3.1997 million (13.4 per cent.). Over 35 per cent, of the unemployed (in January 1984) have been unemployed for more than a year. Almost all forecasters (with the exception of maverick forecasts by Patrick Minford) agree that unemployment is unlikely to fall significantly in the next two years: it is expected to hover around three million. The post-war commitment to full employment has been abandoned (first by Callaghan in 19761 and then by the present Government) in its single-minded pursuit of “conquering” inflation. The present Government in fact, in espousing the New Classical/Monetarist ideas, claims that it cannot control or affect the level of unemployment.

Australia now has a considerable unemployment problem. One of the most important and least visible consequences of a deep recession is a large and expanding pool of people who have been unemployed for a long period of time. This is a crucial issue which has in the past been accorded less weight in policy discussion than is warranted.

After several months of research and consultation, the Labor government introduced, in May 1994, with its publication of Working Nation, a set of labour market programmes targeted at the long-term unemployed. With the new Coalition government taking office in March 1996, we saw the end of Working Nation. Did Working Nation labour market programmes lead to a reduction in general unemployment and a decline in long-term unemployment? This paper attempts to evaluate this particular aspect of its success by applying econometric method to macroeconomic data. Our results suggest that although Working Nation had a very short life, it succeeded in helping’ the long-term unemployed: it was a valuable social and economic experiment.

In the past few years unemployment has grown rapidly and reached postwar record levels in the European Community (EC). The total registered unemployment in the EC in February 1988 was 16.6 million while the total in the ‘big four’ (France, Germany, Italy and the United Kingdom) was 11.5 million. An especially worrying feature has been the growth of youth unemployment as well as the increase in long-term unemployment. Table 6.1.1 gives a summary picture of these trends:

The authors wish to thank the participants of the seminar at the Office of Economic Planning Advisory Council for helpful comments and discussions on an earlier version of this paper. The paper has also benefited from comments provided by participants at the Annual Conference of Economists held at the University of Melbourne, and at the Economics seminar at the Research School of Social Sciences, ANU. We thank Bill Mudd for providing excellent research assistance. This research was supported by the Office of Economic Planning Advisory Council. The views expressed are those of the authors and not those of the Office of EPAC.