Question

Labor market analysis, as depicted in your textbook, is based on the metaphor that "the market behaves as if an impersonal auctioneer were present." Explain what that phrase means.

Answer 1

The concept of a labor market, responding to familiar underpinnings of supply and demand, completely colors thought on the relationship between employment, wages, and inflation, according to James K. Galbraith. However, he asserts, wages are determined not by such market forces, but by what he calls the job structure—a complex set of status and pay relationships involving individual qualifications, job characteristics, and industry patterns. What is the meaning of the job structure for policy? Notions of natural rates of unemployment and inflationary barriers to full employment fade away. Supply-side measures can no longer been seen as adequate to deal with problems of unemployment and inequality. Questions of distribution of income and adjustment of the wage structure are returned to the political context. The active pursuit of full employment is returned to the list of respectable, and essential, policy goals.

Much economic policy is based on the theory that a market for labor exists and that it is this labor market that determines employment and wage levels. Wages decline when there is an oversupply of labor and rise when there is an undersupply. Focusing on the supply of and demand for labor, many economists and policymakers believe that low-skill workers are poorly paid because there is an oversupply of (or lack of demand for) such workers. They conclude, accordingly, that the key to lifting low wages is to provide education and training programs so that workers can upgrade their skills and join the ranks of high-skill workers, who are in greater demand. Many economists and policymakers are reluctant to interfere with the workings of the market, although many feel that in addition to pursuing education policies, the government could also invest in infrastructure and technology. They believe such investments improve the long-term performance of the economy, which will generate higher average living standards that will “trickle down” to low-paid workers. James K. Galbraith challenges this theory. He argues that there is no such thing as a market for labor; rather, what exists is a job structure—a set of status and pay relationships in the economy within and between firms and within and across industries. The elements of the job structure are far more complex than simple supply and demand for labor hours. Wage levels are determined by a process of relevant comparisons involving such factors as workers’ skills, job history, and reputation; job characteristics; and occupation and industry. Neither workers nor jobs are close substitutes for one another, as the labor market theory argues. Therefore, one cannot make systematic statements about the effects of changes in supply and demand. If one accepts that what exists in the economy is a job structure rather than a labor market, then one can see that policies that focus solely on labor supply and demand will not be effective. Because there is no longer any reason to associate any particular value of unemployment with rising wages and hence with rising prices and inflation, theories regarding the natural rate of unemployment and other barriers to full employment disappear. The notions that full employment might lead to inflation or that unemployment is a means of controlling inflation do not hold under the job structure theory. Galbraith points out that once we discard the belief that wage levels are determined by the market, we are left facing the fact that questions regarding what people should be paid are political ones. What should be the distribution of income? How much should secretaries be paid relative to their bosses? How much should a chief executive officer be paid? These are not market questions. We cannot deal with these questions t h rough economic policies based on labor market theories. We must confront them head on and accept them for what they are—politically difficult questions that many would prefer not to address. The same is true of questions regarding education, infrastructure, and environmental protection. Advocates have attempted to use economics as a source of support for investment in these areas, asserting that such expenditures will lead to improved economic performance and competitiveness. Galbraith argues that while investment in education, infrastructure, and the environment is important, it is not important for economic reasons. Such investment is necessary and valuable for social and political reasons, for its contribution to society’s quality of life, but he finds little evidence that it will provide dramatic economic benefits. If our goal is to achieve a more equal society, to raise living standards, then we must focus directly on full employment and distributive issues involved in income differentials and adjustment, investment, interest rates, debt structure, and trade. We cannot be distracted by side issues and theories of a nonexistent market process.