What Is Labor Economics?

I occasionally dip into EconSpark, an interactive blog sponsored by the American Economic Association. Recently I noticed that a participant posed the question: What is labor economics? That query is important and goes to the heart of the GEM Project. The responses posted, however, were pedestrian:

>”The study of economic behavior of employers and employees in response to changing prices, profits, wages, and working conditions. I would also add – the changing legal and other institutional structures that influence outcomes in labor markets.” by kchrist52

>”In practice ‘Labor economics’ in top-US departments is now applied micro. Some of them have “public economics” as well, which is often pretty similar, but generally both are broad applied micro. Not to say other seminars don’t have applied – e.g. development, IO etc. – but labor seems to be Applied Micro NEC.” by WEECONOMIST

>”My usual answer to this is that labor economists study everything that goes into whether someone has a job, and what that job entails. I then give a few non-exclusive examples such as working conditions, task content, wages, hours, education, training.” by ABIGAIL_WOZNIAK

>”… there are a lot of fields that are tweeners that could be labor, could be public, could be law and econ.  Take for instance crime.  Based on Becker’s model, crime is a labor supply choice.  However, enforcement is a local public good problem, and sanctions and courts are part of law and economics.  So there are a ton of things that go into labor supply choices given that labor, leisure, and consumption are the fundamental choices we make every day of our lives.” BenHansen451

>”Minimum wages and the social cost of labor are an important part of labor economics. I can recommend these papers by Bruce Kaufman.” by Edward_Lambert

What is mainstream labor economics?

If that is the proper question, WEECONOMIST got it right. Labor economics has become a subset of Applied Micro. Rational worker behavior organized by general market equilibrium produces confident conclusions about wages, jobs, productivity, factor-income distribution, etc., usually with afterwords about assumed wage stickiness and cyclical layoffs. Top of FormTwo related questions are much more interesting:

What should labor economics be?

Begin with a fundamental proposition of the GEM Project. The most useful labor economics is done in the context of rationality and general decision-rule equilibrium – longstanding tenets of economic theory. Labor economics should then explain important (identified by micro and macro public policy relevance) outcomes of worker behavior, with emphasis on employee interaction with current and prospective employers. The latter (prospective) occurs in the marketplace and has received almost all modern economists’ attention.  The former (current) occurs inside the firm, i.e., the workplace, and has much greater incidence in the labor force. Workplace analysis crucially turns on the nature of employer-employee information. If symmetric, labor outcomes default to the marketplace. If asymmetric, the typical circumstance in large, highly specialized firms, labor outcomes are determined inside the firm and differ from market solutions. Specialized human resource departments are tasked with this profit-seeking responsibility.

Nonmarket subjects of interest include wage determination, employment and hours, good and bad jobs, rationed good jobs and the hours on them, involuntary job loss in response to adverse disturbances in nominal demand (both layoffs and job downsizing), factor income distribution, and pure profit (the firm’s residual revenue once all inputs to production are paid). A critical message here is that market-centric analysis is only part, and frequently the less interesting part, of the evidence-based labor story. It is telling that the most over-promised research in labor economics is search/match modeling that attempts to use voluntary joblessness to explain cyclical unemployment.

Since the General Theory, the most consequential labor research has been theorists’ quest for rational wage-rigidity foundations, manifest in both downward nominal labor-price rigidity over stationary business cycles and chronic wage rent. The Project has demonstrated that those powerful rigidities optimally occur in workplaces that are restricted by information asymmetry and routinized jobs and are crucial to stabilization mechanics after the Second Industrial Revolution.

What did labor economics used to be?

The most useful explanation of the nature and location of keystone wage rigidities was provided by middle 20^th-century research of a loosely organized school of labor economists, named by Clark Kerr “Neoclassical Revisionists”. NR theorists pioneered the economic analysis of the actual interaction of labor and management in large, highly specialized firms that became ubiquitous after the Second Industrial Revolution. Informed by their on-site investigations, Kerr et al. descriptively modeled labor pricing and use in workplaces characterized by inherently limited OJB oversight. Their work, while falling short of microfounding information-challenged workplace behavior, remains fundamental to making sense of intra-firm behavior, wage rigidities, and highly specialized economies.

It would be helpful if modern labor theorists recognized that the NR literature is not some obscure effort that never saw the light of day. Quite the contrary, NR workplace (plus labor market) modeling dominated middle 20^th century labor economics in the United States. NR theory has deep roots in the close study of actual behavior in large, highly specialized firms that became ubiquitous after the Second Industrial Revolution. Without attention paid to what goes on inside firms, labor economists are doomed to playing with half a deck.

Don’t we know, at least deep down, that reviving NR analysis is long overdue? Economists learn early in their careers that rational pricing in the context of unbalanced buyer-seller information is deeply problematic in market-centric modeling. Modern labor economics is defined by that dictum becoming an unhappy paradox, both indisputable and typically ignored. Generalizing rational exchange from the marketplace to information-challenged workplaces responds to that damaging negligence.

Blog Type: New Keynesians