To this point we aimed to gain, mostly theoretical, knowledge and formulate a view about what the market exactly is, and how it works. As I understand, now, armoured with this new body of knowledge, we take on the parts of the system. The first one is the labour market. My thoughts about the labour market, before I read the pieces, were quite straightforward. Market solves it all, rigidities and distortions are bad for efficiency, growth and employment. Needless to say, my view has been challenged.
Baldwin and Wyplosz presented the basics, the labour market economics 101. But one of their points is exceptionally important: “Labour markets are very special, people’s time, talent and effort is what exchanged, which are not standard goods.” (Baldwin, Wyplosz, 2009). This view is substantially and explicitly reflected in the humanist pieces of Kwon Dae-Bong and Amartya Sen. While Sen is more theoretical and philosophical about the question, differentiating between the human capital and human capability, and tracing back his analysis to Adam Smith’s work. On the other hand, Kwon Dae-Bong’s is more operational and practical, but builds on the same, not so, underlying argument that humans are not mere factors of production, but strive to live lives they have reason to value. Both authors emphasize the importance of broader organizations and institutions (education, healthcare), in addition to economic growth to develop human capability, and therefore to live a fuller, freer life. An interesting picture emerges here from the arguments. If we consider what Sen writes: “Human beings are not merely means of production but also the end of the exercise.” (Sen, 1997), we realize that the system is interdependent. This interdependence is present not just between the narrow notion of human capital and economic growth, but in the broader sense between human capability and institutions/organizations and consequently between the social order. By getting back to the cited statement from Baldwin and Wyplosz, we understand, that this interdependent complexity is what makes the labour markets very special.
While the previous paragraph, in this reading blog, concerns an attribute of the labour market, and the questions, what is the labour markets main purpose and why is it complex. This paragraph, and the last two pieces by Kuttner and Freeman aim to tackle the issue that how should it be governed. Trying to answer the how question results in the authors discussing more specific labour market institutions, rather than the broad societal ones (education, healthcare).
Kuttner argues, in a more ideologically laden, but scientific way, that full employment is a desirable, but in today’s world not necessarily attainable, goal for a society. He argues that welfare capitalists got the whole picture wrong when they assumed that it’s possible to put together a system without full employment, which will be just and equal. So, his conclusion is that a welfare state with full employment solves the centuries old dilemma of equality or efficiency, which inarguably has to be solved. Through this view he establishes a strong relation to Keynes, Sen and the second paragraph of this writing.
Freemans more evidence based approach yields a less radical answer to the how question. Based on a methodological study of the literature on the matter, he argues that labour market institutions do have distributional effect. The country with more labour market institutions has higher income equality. On the other hand, he argues that the presence of labour market institutions can’t be directly linked to the aggregate performance of the economy.
In conclusion, my view has changed. Now I see the labour market as a more complex and interdependent system, where the market approach should not be trivial and where the labour market and broader societal institutions are key to a great performance. By great performance I mean economic growth and well-being of citizens.
- Baldwin and Wyplosz – The Economics of the European Integration, 2009
- Dae Bong Kwon – Human Capital and its Measurement, 2009
- Amartya Sen – Editorial: Human Capital and Human Capability, 1997
- Robert Kuttner – The Economic Illusion: False Choices between Prosperity and Social Justice, 1984
- R. Freeman – Labor Market Institutions around the World, 2007