Module 1 introduction to labour markets & labour market institution

Module 1_Introduction to Labour Markets & Labour market institutionIn

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Introduction to labour markets & Introduction to labour markets & labour market institutionlabour market institution


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ObjectiveObjective

To better understand conceptual issues about labour market and labour market institution

To highlight the concepts and history of labour protection and labour market institutions in the context of globalization

To present the current debates on labour market institutions and their impacts on employment and economic growth

To understand the concept of “flexicurity”


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OutlineOutline Labour and labour markets

– The history of labour and labour protection– ILO in labour history– Labour economic & classical definition

The labour market institutions– Examples – Labour market indicators

Debates on labour market rigidity and employment– The reason of the high-unemployment?– Is labour market rigidity really to blame?– Flexicurity: definition, policy, approaches of the EU


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Part 1Part 1Labour and labour marketLabour and labour market

Labour history and labour movementLabour history and labour movementInternational Labour OrganizationInternational Labour OrganizationLabour economy and labour market Labour economy and labour market


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The history of labour protectionThe history of labour protection The history of labour is predominantly about the

development of labour movements and the working class.

There has been changes in the concept of labour starting from the Industrial Revolution of the 18th century: Division of Labour, Mass production and Fordism in Western Europe and U.S.

Labour movement- claims for the rights of workers: Building of workers’ unions and demanding better wages and working conditions.


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The history of labour protectionThe history of labour protection During the 20th century, labour protection

policies has been applied in many countries with the aims of economic development and social welfare.

“Consensus between workers and employers about the protection of workers rights was made and governments also actively involved in the regulation of the labour protection policies after second world war with Keynesian view.”Global Labour Flexibility, by Guy standing, Chapter 3, the Pursuit of flexibility


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ILO in the history of labourILO in the history of labour The International Labour Organization was created

in 1919, by the Treaty of Versailles that ended World War I.

ILO establishment was founded upon the belief that universal and lasting peace can be accomplished only if it is based on social justice. The ILO later became incorporated into the United Nations.

The ILO is the principal international organization that promotes International Labour Standards, conventions, treaties and recommendations designed to eliminate unjust and inhumane labour practices. Rules of Game, ILO, revised edition 2009


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ILO mission and objectivesILO mission and objectives “The primary goal of the ILO today is to promote opportunities for women and men to obtain decent and productive work, in conditions of freedom, equity, security and human dignity.”

Juan Somavia, ILO Director-General

The four strategic objectives of ILO Promote and realize standards and fundamental principles and rights at work, Create greater opportunities for women and men to secure decent employment and income, Enhance the coverage and effectiveness of social protection for all, Strengthen tripartism and social dialogue


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Labour economic & labour markets


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Labour economicLabour economic “Labour economics looks at the suppliers of labour

services (workers), the demanders of labor services (employers), and attempts to understand the functioning of labour markets and the resulting pattern of wages, employment, and income.”

(Handbook of Labor Economics, Ashenfelter and Card. 1999)

There are micro and macro dimensions in Labour Economics. In macro, the focus is on inflation aggregated unemployment debate. In, vise versa, micro focuses on role of individuals and firms in the labour market.


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Classical labour economic studies about the exchange of labour on markets. This purely-market based features of labour is centered in the “merchandise” of commodities.

In Labour Market, what is been exchanged is workers’ ability to offer services and not workers themselves .

Labour is not a commodity because of the mental and intellectual aspect of labour.

Labour economic distinctionsLabour economic distinctions


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The definition of labour marketThe definition of labour marketwith with neo-classical economicsneo-classical economics view view

The classical economics approach to the Labour market;

“Labour is a means of production, ‘factor of production’ (with capital and land).”

If wages are fully flexible, labour market equilibrium will be attained (i.e. quantity of supply and demand of labour would be matched). Hence there will be the clearing of market effect. (Graphically explained in the next slide)


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The labour market assumption of The labour market assumption of neo-classical economicsneo-classical economics

Assumptions (in simple supply/demand model): – Demand curve in downward

sloping, supply curve in upward, equlibrium (wage) at intersection

– income-leisure trade off – Indifference curves– Perfect competition (perfect,

symmetric information, no transaction costs)

– Homogeneous workers

wages

Quantity

supply

demand

Equilibrium of labour

0


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The ILO definition of labour The ILO definition of labour

ILO Constitution and the Philadelphia Declaration of 1944

“Labour is not a commodity.”

Workers should not be subject to ‘market forces’ in the same way as oranges and lemons, and they have the rights and need for security and social protection.

http://www.ilo.org/ilolex/english/iloconst.htm


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The critics against The critics against neo-classical neo-classical economics vieweconomics view There are always unemployment which cannot be explained by the classical theory. (

Labour markets function differently from the markets for commodity. And labour demand and supply do not respond in the same way as commodity market does for the price changes.


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The critics against The critics against neo-classical neo-classical economics vieweconomics view

Newer Labour economics tried to figure out the constant problems in labour markets and their variables.

Labour markets failures that are often ignored by theoretical/classical approach such as, information asymmetries, heterogeneous workers, transaction costs, monopoly (only one seller), and monopsony (only one buyer), oligopoly, oligopsony (a limited number of the above)


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Unemployment rate mapUnemployment rate map

Unemployment rate by country, from figures at CIA world factbook, 2006


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Labour markets indicatorsLabour markets indicators

To understand the functioning and dynamics of the Labour market, there are several key indicators about the labour markets of one specific regions or country.

The labour force

The participation rate

The unemployment level

The unemployment rate

The employment rate

Others…


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Part 2Part 2The labour market institutionThe labour market institution

The definition of labour market institutionThe definition of labour market institutionExamples of labour market institutionExamples of labour market institutionDeterminants of labour market Determinants of labour market

institutionsinstitutions


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The labour market institutionThe labour market institution

What is labour market institutions?“I know it when I saw it” Judge Potter Stewart in US Supreme Court

The definition of Labour Market institutions could be very broader and obscure to categorize. The phrase “I know it when I saw it” would be very useful appropriation of the definition.

The phrase "I know it when I see it" is expression by which the user attempts to categorize an observable fact or event, although the category is subjective or lacks clearly-defined parameters. The phrase notably appeared in Jacobellis v. Ohio (1964), decided by the United States Supreme Court.


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Maybe defined as the rules, practices and polices related to the labour markets and its participants. (formal or informal, written or unwritten, universal or particular by the location or region, all of which affect how the labour market works

In other words, the labour market institutions shows the systems, dynamics and structures within labour markets and their constituents and systematically cooperate together to maintain the structures, mechanisms or orders, and cooperation governing the behaviours of the constituents (workers, employees, government, policy maker)


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Labour market institutions reflect on the different level of societies’ norms, values, cultures and legal policies, etc.

LMI could be explicit and long-standing as certain labour laws that are considered as universal rights, and also could be the informal and periodic practices that reflect the views of society for certain time phrase.


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Some examples of labour market Some examples of labour market institutionsinstitutions

Employment protection legislation (EPL)Collective bargaining Career placement center The minimum wageUnemployment benefit Wage determination policyTraining and skill institutionsSocial security and income guarantee systemNon-discrimination policy and regulation for women

and disabledThe payroll taxes


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Determinants of labour market Determinants of labour market institutionsinstitutions

Labour institution

National Labour laws

ProductionSystem

Social Norm

ILO Standard

** In defence of labour market institutions, Janine Berg and David Kucera


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Key characteristics of LMI in developing Key characteristics of LMI in developing countriescountries

Dual labour markets (formal/informal) Lage share of agriculture and rural labour Non-wage labour (self employment and unpaid family

workers) more important Labour force growth higher Labour force participation rates among the 15-64 are

higher (because of lower school enrollment rates and pervasive poverty)

Human capital investments are lower Non-labour poduction inputs per worker are much

smaller


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Part 3Part 3Debates on Labour Market Debates on Labour Market Rigidity and employmentRigidity and employment

The reason of the high-unemployment?The reason of the high-unemployment?Is Labour Market Rigidity really to blame?Is Labour Market Rigidity really to blame?FlexicurityFlexicurity: : Definition, Policy, Approaches of the EUDefinition, Policy, Approaches of the EU


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Current debateCurrent debatess

Is Labour Market Rigidity really to blame for unemployment and lagging economic growth rates?

How can one pursue the distributive justice with flexible labour markets and globalisation?


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Employment protection measures Employment protection measures (EPM) and unemployment(EPM) and unemployment Question : Is rigid labour market institutions to be

blame for the high unemployment rates and difficulty of the economic growth?

Answer 1 : Yes! The strong employment protection measures and other social policy protecting workers create difficulty for the employers to deal in highly competitive market.

Answer 2 : No! there is no strong relationship or any statistical data proving the linkage between EPM and high unemployment rates or any other less-efficiency in the markets.


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EPM and unemployment - EPM and unemployment - Answer 1 Answer 1 : : Yes!Yes!

“Labour market policies like minimum wages, job security regulation, and social security are usually intended to raise welfare, or reduce exploitation. But they actually work to raise the cost of labour in the formal sector and reduce labour demand… increase the supply of labour to the rural and urban informal sectors, and thus depress labour incomes where most of the poor are found…”

World Bank, 1990. p63


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EPM and unemployment - EPM and unemployment - Answer 1 Answer 1 : : Yes!Yes! The excessively strict EPM : important contributor to the

persistently higher and long-duration unemployment experienced in many countries since the early 1980s.

Reduce scope for flexibility for gaining competitive edge in markets

Increase costs to the employers, make difficult dismissals of workers ,makes industries hesitate to hire new workers, hence, less incentive for job creation.


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EPM and unemployment - EPM and unemployment - Answer 2 Answer 2 : : NO!NO! “The OECD has been previously reviewed this issues several times

[OECD (1993, 1994a, 1997a)]. Robust estimates of the impact of EPL (Employment protection legislation) on employment and unemployment have proven elusive, but the international comparisons presented in these and related studies have documented statistical associations between stricter EPL and several measures of labour market performance, including greater prevalence of long-duration unemployment and temporary jobs. … but an overall assessment of the resulting shifts in EPL strictness and their impact on labour market performance has been lacking to date.”

OECD Employment outlook (1999), Chapter 2, Employment protection and labour market performance.http://www.oecd.org/dataoecd/9/46/2079974.pdf


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EPM and unemployment - EPM and unemployment - Answer 2 Answer 2 : : NO!NO!

“There is only weak evidence for the negative impacts of labour market regulations. Moreover, labour laws and labour market policies are needed to ensure social justice for workers in developing countries. In labour markets where labour is in surplus, there must be a minimum statutory protection for workers.”

In defence of Labour Market Institutions,Janine Berg and David Kucera,Chapter 1.1 The Labour Market flexibility debate


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The case of Latin AmericaThe case of Latin America

Reform of labour market regulation: the labour policy which has been undergone the neo-liberal reformation in the 1980s and 1990s didn’t produce big success in improving employment or other type of performance in labour market in case of 6 countries – Argentina, Bolivia, Brazil, Chile, Mexico and Uruguay.(Fraile, L. 2009. International Labour Review, Vol. 148)

This shows that flexible labour market institutions are not panacea for labour market problems.

http://www.ilo.org/public/english/revue/sommaire/148-3.htm


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The case of Latin AmericaThe case of Latin America

Average urban unemployment rate 7.1%,1990s

Average urban unemployment rate 11.4%, 2003

Economic growth due to commodity boom & low interest rates


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The flexicurity debateThe flexicurity debate

The concept refers to combining labour market flexibility with security for workers.

The beginning of flexicurity : The concept of flexicurity has been initiated and formulated within the European Union related to discussions on globalization and employment.

The concept shows the need for delicate balance between the need for sufficiently flexible labour market and the need for protecting labour market security.


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EU focusing on FlexicurityEU focusing on Flexicurity

‘The key issue for employees, management, the social partners and policy makers alike is to strike the right balance between flexibility and security” Green paper, EU, 1997

The European commission is the main political promoter of flexicurity. Although it has been mentioned mainly at the European level, the concept to flexicurity has to be developed into concrete policies and regulations in the level of the member state.


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Danish Flexicurity ModelDanish Flexicurity Model Danish labour market

recorded the lowest unemployment rate since 1975 and highest employment rate in European Union. (3.8% unemployment rate,2006)

OECD has pointed out the Danish combination of a flexible labour market and high social security is an ideal model for other European countries. (OECD, 2004)

Flexible Labour Market

Generous welfare systems

Active LMP

Figure : The “Golden Triangle” of flexicurity

(Arbejdsministeriet, 1999)


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Flexicurity policyFlexicurity policy Flexible and reliable contractual arrangements through

the modern labour law, collective agreements with workers organization.

Comprehensive lifelong learning (LLL): Continual training opportunity for adaptability and employability of workers and specially for the most vulnerable.

Effective active labour market policy (ALMP): Helps people to cope with rapid changes. Reduce the unemployment duration and ease difficulty of transition to new jobs

Modern social security system: Provides adequate income support, encourages employment, and facilitates labour market mobility and broad coverage of social protection provision.


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Reflection pointsReflection points

The recent trends in Labour market policy in your countries?

Do you think the model of flexicurity is ideal for your country?

What do you think are priority areas for improving labour market institutions in your country?

How persuasive are labour market failures in your country?


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Documents

Module 1 introduction to labour markets & labour market institution