Labour Markets

This Mini Lecture discusses issues of labour productivity, low-wage work and economic growth of emerging markets with direct quotes by Laureates Christopher Pissarides, Peter Diamond, Robert Solow and James Mirrlees.

In today’s world we trade almost everything we own in a marketplace even ourselves in the labour market. And as in every other market the price or in this case payment depends on supply and demand. In principle, this means that if there are fewer job seekers but a lot of vacancies, companies are willing to pay higher wages. But conversely if there are fewer jobs available but a lot of job hunters on the market, then wages fall. The labour market coordinates the forces of supply and demand. The labour market is a unique market. That’s because no physical goods are traded. What’s at play here is human beings or rather their capacity to work. That said the protection of workers health and safety has to be more important than the price of their labour. To ensure that this principle is followed many countries regulate their labour markets for instance with limits on working hours, protection against unfair dismissal and on the job safety. Whether it’s legal regulations or economic cycles the labour market is a very complex system that depends on many different influences, national as well as international. One such influence is labour market productivity. Since the mid 1990s it’s been slowing down in Europe whereas it’s been accelerating in the United States. This partly stems from the countries buoyant information and communication sectors as well as job creation in the area of marketization. Here we’re talking about services generated privately and offered to the public on the open market for example childcare or care for the elderly. In terms of our targets that we set in Europe we’re still lagging behind America. Had we done the same as America, we would have satisfied our targets. It seems that taxational regulation, especially at the lower end of the jobs market is affecting the job creation. I should say though that most of the recent research on those has focused on the market home substitution between Europe and America. Let me tell you an example that I mentioned. But that accounts maybe for about a third of the gap. We really need new models of employment in business services. You know, whether you provide the business service internally or externally and why and what’s the difference and how does regulation affect this job creation in the business sector. Then we’d be able to account for the second third in our failures in job creation over here. And finally... I shouldn’t say too much about that because we’re going to talk about it after lunch. But finally the final third in the gap is the sectors where in Europe we rely a lot on state finance. We’ve got a lot of debt as well and we have to come to terms on how are we going to move forward in those sectors. According to Christopher Pissarides the main reason for the differences between the US and Europe on labour market developments can be found in the higher taxes on services, stricter market regulations and big state owned entities in the EU. This has led to individuals themselves providing services of their own accord in Europe. Setting up new companies is generally tough and in state run sectors job creation simply is very expensive. With its Europe 2020 political strategy the EU wants to boost economic output and with that labour productivity. As part of the programme three quarters of all people aged between 20 and 64 are expected to be in a job by 2020. and to support the market for internet based services. But even in 2014 these goals are still some way off. That’s because Europe still has fewer people in employment than before the financial crisis. As with every market the labour market is one driven by competition and so there are winners and losers. This of course is a strong incentive for enhancing economic performance. But it can also lead to the emergence of huge differences in prosperity and consequently social status. That’s why one aim of labour market policy is to achieve a drop in joblessness. As laureate Peter Diamond points out, in meeting that goal it’s not only important to look at the unemployment numbers, we also have to take into account the interrelations between job creation and job cuts. And as you can see there’s almost as large a rate of job destruction as there is of job creation. So the change in total employment is the small difference between 2 large numbers. And if we want to think about various policies or want to think about various positive issues, then it seems to me you’ve got to focus on the determinants of these big numbers and how they interact to produce the small number which is the difference between them. A large swathe of gainful employment is low wage especially in the service sector. In effect this means that workers are only paid two thirds or less of the national median hourly wage for full time workers. In the US as well as in Europe job creation over the recovery period of the latest recession has been primarily in low wage jobs. The social groups most affected by this kind of work are young people, poorly qualified people, women and immigrants. By 2013 21 of the EU’s 28 member states had implemented a statutory minimum wage. But debates on the issue continue. Opponents fear that the introduction of a minimum wage will lead to job cuts and a weakening of a countries overall economic competitiveness. Instead they advocate pay negotiations between employers associations and trade unions. They often point to Scandinavia as an example to be emulated. The Scandinavian economies boast relatively low social inequality, high wages and comparatively little unemployment. But Laureate Robert Solow challenges those fears. It is simply not true in general that when you look across these countries the ones that pay relatively high wages to low wage workers, relatively, relative to the median, show very low employment of low wage workers. And the ones that pay low wages relatively speaking to the bottom end, to the un-skilled workers, have relatively high employment of unskilled workers. There are exceptions to this. France, as will come up again, France has a very high legal minimum wage and you can see a job gap in France. You can see that there are jobs which appear in other countries that do not appear in France and are presumably priced out of existence by that high minimum wage. But France is an outlier in this story. And if you look at the other countries, the only one sentence generalisation that makes sense is the sentence that I gave you: That there is little or no correlation between the status of low wage workers and the employment rates of low wage workers. Growing disparities among wage groups continue to exacerbate social inequality around the world. But even though there exists a lot of insecurity on global labour markets, the past 15 years have seen the actual number of people living below the poverty line drop substantially. That means that people have more than $1.25 a day to live on. China is one example that shows the impressive effects that drastic structural changes can have on economic development. Above all, technical improvements in agriculture have played a key role in boosting economic growth and fighting poverty playing no small role in making China the second biggest economy in the world. When you look at the various inputs into agriculture: labour input not being increasing, irrigated land had gone up by about 50% in this period and fertiliser use had rocketed up. And it looks very clear that this is the green revolution at work, the coming of the new varieties which even began in the early ‘60s, late ‘50s but really exploded in China in this period and allow crops to use very large quantities of chemical fertilisers which of course are industrial products. So it’s very important that they were available and there were fertiliser subsidies that encouraged their use. And there were considerable improvements in transportation facilities which mean that cash crops could be more useful and get a better price. The development of economic cycles and markets is very hard to predict because there are simply too many players in the game. And so key questions remain. Will China manage the great transition towards becoming a service based economy? Will there continue to be people who have to live below the poverty line? And will Europe be able to achieve its employment goals by 2020?