A key issue in labour market economics is whether the labour market is so different from other markets that the basic tools of economics, especially the supply and demand model described earlier, do not apply. The following discussion illustrates some of these peculiarities and their implications for labour markets.
Various Actors with a Variety of Goals
As discussed previously, the labour market has three main actors or stakeholders—labour, management, and government—each with different subgroups and objectives or agendas. For example, within labour there is union labour and nonunion labour, and within orga- nized labour there are different types of unions (e.g., craft or industrial and professional associations) as well as possible differences between the leadership and the rank-and-file membership. Within management, the goals of stockholders may differ from the goals of chief executive officers, which in turn may differ from the goals of middle management. With increased emphasis on employee participation, the distinction between middle management and workers may be blurred. Within the catchall of government there are federal, provincial, and local levels. As well, there are often differences in the units that make the laws (e.g., leg- islators and regulators), that enforce the laws (e.g., courts, administrative agencies, and tribu- nals), and that design the laws and operate particular government programs (e.g., policy units and bureaucrats). As well, the distinction between making, designing, and administering the
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2See Riddell (1999) for a more detailed overview of the Canadian labour market and a discussion of the related policy issues.
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law and policies often becomes blurred in practice. For example, the jurisprudence and case law of the courts and administrative tribunals can shape the interpretation of the law to such an extent that it can be more important than establishing new laws.
Sociological, Institutional, and Legislative Constraints
More so than most markets, the labour market is riddled with sociological, institutional, legis- lative, and other constraints. In the sociological area, for example, family and community ties and roles can affect labour mobility, the role of women in the labour market and the house- hold, and the career and educational choices of women. Social norms may also influence what are considered appropriate wage structures and who should do certain jobs.
Institutions are also important in labour markets. This is most obvious with respect to unions, especially in Canada where about a third of the work force is unionized. An increasingly large fraction of the workforce is also covered by various forms of licensing requirements. As is well known, workers in traditional professions like medicine, law, or accounting need to obtain a professional license before they are allowed to practice in a given jurisdiction. Over the years, these requirements have increasingly covered a larger and larger number of occupations, such as servers in licensed establishments, cosmetologists, cooks, and so on. Note that earlier per- spectives on labour economics were characterized as “institutional,” emphasizing the impor- tance of institutions and institutional arrangements in understanding labour market behaviour.
Legislative constraints are also crucial in labour markets. Employment standards laws set minimal or “community” standards with respect to such things as minimum wages, hours of work and overtime, statutory holidays, parental leave, and severance pay and advance notice requirements. Human rights and antidiscrimination legislation are important, as are laws on health and safety and workers’ compensation. Labour relations laws also establish the frame- work for the formation of unions and the conduct of collective bargaining. Separate statutes often exist for workers in the public sector, sometimes circumscribing the right to strike and providing alternative dispute resolution procedures, including binding wage arbitration. The labour market may also be affected by other laws and regulations, such as those that affect immigration, free trade, unemployment insurance, pensions, training and education, and even environmental protection.
Market Imperfections
The labour market, more so than most other markets, is subject to market imperfections and other constraints. For example, imperfect information may make it difficult to decide which type of education to undertake or whether to make a geographic or occupational move. Asym- metric information (e.g., the employer has information not available to workers) may make it difficult to demand compensating wage premiums for workplace hazards or to agree to wage concessions in return for employment security. Transactions costs may make it difficult to finance human capital investments in areas like education, training, or mobility. Uncer- tainty and risk may make it difficult to make occupational-choice decisions that are affected by uncertain future demand and supply conditions.
Complex Price, Serving a Variety of Functions
The essential price that gets determined in the labour market—the price of labour services, or the wage rate—is a complex price that is called upon to serve a variety of functions. It reflects a variety of factors: the returns to investments in education, training, or mobility; compensa- tion for risk or undesirable working conditions; a “rent” or surplus for being a member of a union or professional association or perhaps being employed in a particular industry; dis- crimination; and supply and demand decisions on the part of other participants in the labour market. As well, the wage rate is only one component of total compensation, with fringe ben- efits making up an increasingly larger share.
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CHAPTER 1: Introduction to Labour Market Economics
The wage rate is also called upon to perform a variety of functions. It allocates labour to its efficient uses; that is, to particular occupations, industries, and regions. It encourages opti- mal investments in human capital, like education, training, labour market information, job search, and mobility. It is used to enhance performance, work effort, and productivity. It is also called upon to provide an adequate standard of living and family income, and to alleviate poverty and the manifestations of discrimination. In the labour market, issues of efficiency and equity and fairness are intricately related.
In part for these reasons, there are often strong moral overtones to labour market issues and the resultant wage that emerges. This is compounded by the fact that even though the wage is the price of labour services, the labour services and the labourer are inseparable. Dignity, perceptions of self-worth, and social attitudes are tied to the wage. Hence, phrases like a decent wage, a living wage, the social wage, a just wage, and equal pay for work of equal value are common expressions in labour economics.
Clearly, the labour market has a number of characteristics that differentiate it from many other markets. This raises the issue of whether the basic tools of economics apply in a market with such a complex array of participants and goals; a variety of sociological, legal, and insti- tutional constraints; market imperfections; and a complex price that is called upon to serve a variety of functions.
Our perception is that these are differences in degree and not in kind; other markets have some of these peculiarities, as well as others of their own. Moreover, these differences make the basic tools of economics more relevant, not less relevant, to understanding labour market behaviour and the impact of these peculiarities of the labour market. Economic analysis deals with decision making and trade-offs under risk, uncertainty, transaction costs, information problems, and market imperfections. It deals with the interplay among various market par- ticipants, often with conflicting objectives. It deals with the impact of legal, institutional, and even sociological constraints—after all, the methodology of economics is a matter of optimiz- ing subject to the constraints.
Economics has even proven useful in understanding why many of these constraints and insti- tutional arrangements arise in the first place. As illustrated later in the text, economic efficiency rationales can be given to explain the existence of a variety of phenomena that may appear to be “irrational” or inefficient: pure seniority-based wage increases, the simultaneous existence of moonlighting and overtime, wages that appear “excessive” relative to what is necessary to recruit and retain workers, strikes that appear “irrational,” an unwillingness to accept wage concessions in spite of high unemployment, the provision of job security in the public sector, payment through fringe benefits rather than cash compensation, and the existence of personnel practices like man- datory retirement. In some cases, these phenomena may be the result of mistakes or bargaining power, but in other cases they may be the efficient institutional arrangement to deal with other problems in labour markets. Economics can shed light on why these arrangements arise in the first place, as well as indicate their impact on the labour market. This often requires an interdisci- plinary understanding that blends labour economics with other areas such as industrial relations, personnel and human resource management, labour law, sociology, psychology, and history.