Modern Labour Economics

The essay should start by explaining the different dimensions of labour force participation rates, the fact that these alter over the business cycle and that the workforce can be split into two categories – primary and secondary workers – according to whether they tend to remain in the labour force or move into and out of it. Married women, in particular, tend to fall into the second group, as many of them tend to leave the labour force periodically in order to raise a family. In turn, this points to the importance of analysing labour force participation decisions on the basis of family as opposed to individual criteria, within the context of a three-way allocation of time among market work, household production and leisure.

Reference could then be made to the results of different empirical studies based on an estimating equation, which generally explains participation in terms of family income, wife’s potential market earnings and a series of controls that generally include education, family size and location. From such an equation, it is possible to derive income and substitution effects, the relative size of which will determine which of the two hypotheses predominates. A diagrammatic exposition might facilitate the explanation here. This leads on naturally to defining and explaining the two competing hypotheses referred to in the question. Short-run deviations in family income and wages may be captured by using the unemployment rate as a proxy variable. Most empirical studies find, in fact, that the discouraged worker effect predominates rather than the additional worker effect. That is, as unemployment rises, more women leave the labour force than enter it, so that participation declines in the recession and increases in the recovery phase of the business cycle. This deals with the second part of the question. A number of arguments can be used to explain the dominance of the discouraged worker effect. For instance, jobs are hard to come by in recession periods and, even if some married women would like to supplement family income, they may find it hard to do so.

In a concluding paragraph, it might be pointed out that, despite all this, labour force participation has increased at the very time that family incomes have been going up. However, male participation rates have been declining, so that these results are not necessarily conflicting.

At the heart of this question is the fact that employees are generally faced with a standard work-week with respect to the hours that they work, though hours might be extended through the offer of overtime working or reduced through the offer of part-time work at least for some workers. Nonetheless, workers are quite likely to have heterogeneous tastes with respect to hours preferences and they will be constrained in their ability to maximise their utility. We can then define employees as either income or leisure preferrers, with the former likely to demand overtime working or to seek a second job if that is not available and the latter to request part-time work or absent him- or herself from work if that is not available. Even leisure preferrers may seek extra pay to compensate for the hours mismatch or even paradoxically work overtime as the additional pay can compensate them for the loss of leisure if the premium is set high enough. Therefore, we must be careful not to presume that overtime working is indicative of income preferences.

All of this may be presented in diagrammatic form in terms of offer curves which trace out a series of equilibrium points in relation to wage rates and hours. For a leisure preferrer, the offer curve will turn back on itself before reaching the standard number of hours, while, for the income preferrer, the offer curve cuts the vertical line representing standard hours.

One might then go on to explain why such arrangements might find favour with employers, regardless of the fact that their employees have heterogeneous tastes. Again a diagram might aid exposition. Reference might also be made to empirical work which has attempted to estimate the costs of hours mismatch and whether this leads to workers seeking new employment in order to obtain a better match.

The essay should begin by explaining the screening hypothesis, associated with Nobel prize winner Michael Spence, and which is based on the idea that education does not in itself raise productivity, but is simply used by employers as a means of identifying innately more productive individuals. An individual can signal his worth to a potential employer by acquiring more education. Since this imposes costs on the individual, it is assumed that signals are selected in such a way as to maximise the difference between offered wages and signalling costs. On the employers’ side, more highly educated individuals may require less training and supervision, making it worthwhile to hire them even at higher wage rates.

Next, the essay should outline the human capital model and show how it differs from the screening hypothesis. In particular, the human capital model suggests that education itself raises productivity and a sufficiently high return is required to make the investment worthwhile.

A key part of the question is how one can test which of these hypotheses holds, since they both suggest that there is a positive relationship between education and earnings. Thus, one suggestion is that one can use the self-employed as a case where there is no need to provide signals, since there is no employer to convince about an individual’s worth as an employee. Hence, one might compare those whose first and last jobs are in self-employment with comparable salaried employees. If the screening hypothesis is valid, salaried employees should, ceteris paribus, acquire more education than the self-employed. If there is no difference, this supports the human capital model. A second test is based on the proposition that screening is more likely to be found in non-competitive sectors of the economy where bureaucratic procedures, of which credentialism is one example, are more likely to flourish than in competitive sectors. Yet evidence for this is limited.

The essay should begin by examining the extent and nature of immigration, recognising that there are economic, political and social factors involved. Since the situation will vary from one country to another, it might be advisable to take one country as an example. Thus, in the UK, which has faced large-scale immigration from Eastern Europe, there is free mobility of labour within the European Union, so it is not possible to control all immigration. Different types of migration (e.g. economic and non-economic) will need to be considered separately.

Three main substantive issues will need to be addressed. First, how do migrants perform in the host country relative to the native population? Second, what impact do the migrants have on the employment opportunities of the indigenous population? Third, what sort of migration policy is feasible or most beneficial to the host country? In the case of the first question, relevant questions are the extent to which immigrants are a self-selected group, the degree of international skill transferability and the extent to which immigrants suffer from discrimination. In relation to the second question, there is surprisingly little evidence of damaging effects on local economies or local workers (see, for instance, Card 2005; Dustmann and Fabbri 2005; and Blanchflower and Shadforth 2009). To address the third question, any beneficial effects on the economy must be considered, but political and social issues should not be ignored. Should immigration be confined to skilled workers who are in short supply as is the case in several countries? Should there be quotas? Is there a need for better statistics before any new policies are introduced? These are the sorts of issues that need to be discussed.

The essay should begin by discussing the equilibrium conditions under different market structures. In perfect product and factor markets, the wage will equate with the marginal value product. If the product market is imperfect, the wage will equate with the marginal revenue product as the firm must lower price to induce the consumer to purchase more of the good. However, it is generally believed that most labour markets are imperfect and this gives rise to situations in which the wage will be lower than the marginal product. This will be the case under monopsony through monopsonistic exploitation of labour or under Manning’s concept of dynamic monopsony, which arises whenever there are frictions in the labour market caused by ignorance, heterogeneous preferences or mobility costs.

There are various empirical studies that are consistent with the wages being below the marginal product. Thus, Frank (1984) proposed that status considerations meant that the most productive in an occupation group would accept a lower wage than their productivity would imply and those at the bottom would require more because of their lower status. Examples were found in relation to car salesmen, estate agents and university professors. Similarly, a number of studies of professional team sports, where it is relatively straightforward to estimate marginal products, have found that superstars are underpaid. A good answer might refer to tournament theory, which suggests that top executives may be paid more than the marginal products would suggest in order to provide an incentive to those below to emulate them. This is in direct contrast to the above. Lazear’s (1979) pay back-loading model also suggests a divergence between pay and marginal product at any point in time, though wage may equal the marginal product over the working lifetime.

The essay should start by defining what is meant by the terms labour market mismatch and market failure. The former is normally defined as a situation in which the educational qualifications of workers do not match the normal job requirements. If a worker has more than the normal qualifications either to obtain or perform the job, he is said to be over-educated and, if less, to be under-educated. This is sometimes referred to as vertical mismatch, as opposed to horizontal mismatch, where the level of qualifications is appropriate but the type is not (such as a history graduate being employed as a financial analyst). Sometimes mismatch refers to the underutilisation of skills and abilities or perhaps the absence of skills that would help to undertake the work more effectively.

One might then briefly mention that it is not straightforward to obtain such information. There are three possibilities. First, one might compare the actual qualifications of an individual with the job requirements as defined by job analysts (the objective method). Second, one might survey individual workers and ask them if their qualifications were a requirement either to obtain the job they currently do or to undertake the work effectively (the subjective method). Third, where data are absent on either of these, one might compare the qualifications of the individual with the norm for that occupation (sometimes referred to as the empirical method). These can produce different results and it is not always clear whether one is superior to the others.

Market failure in this context implies that there is some loss either of output or of satisfaction whenever cases of mismatch occur. However, it is possible that different types of human capital can substitute for one another. Thus, those who are under-educated may have more experience than those who are properly matched. Alternatively, some of the currently over-educated may be acquiring experience that can later be put to use in a matched job. Another possibility is that some of the over-educated may be of lower ability than the majority of those with the same qualification (e.g. a poor class of degree), so that the market is in fact efficiently allocating workers to particular jobs. Further, some individuals may have chosen to be in a job that does not require the level of qualifications they possess, because the job offers compensating advantages, for example in terms of stress or location. Here, there may be a potential productivity loss to the economy, but no loss of job satisfaction to the individual.

Where an individual is mismatched and has lower wage income, but also a high level of job satisfaction, it would seem that the outcome is a result of individual choice. Where, in contrast, the individual is mismatched, has lower wages and a lower level of job satisfaction, we can say there is a loss of welfare. We should, therefore, always look at the evidence on wages and job satisfaction, using panel data wherever possible.

This question predominantly requires a technical exposition of the right-to-manage model where establishing a clear setup is crucial for a good answer. A short introduction to capture the essence of the model would provide a good lead in to the question as well as setting the scene for the pivotal point of the question that should be answered later. Thus, within the right-to-manage model, wages are bargained over and, once these have been determined, the employer chooses the employment level. This means that the final outcome will lie at some point on the labour demand curve.

Central to answering the question is highlighting the incentives that both sides to the bargaining process face. For the union, such information is captured by indifference curves showing the trade-off between wages and employment. For employers, iso-profit curves will determine optimal (i.e. profit-maximising) combinations of wages and employment. It is vital that the connection is drawn between profit-maximisation on the apex of iso-profit curves and the tracing out of the labour demand curve, and this will form an important part of the analysis that should follow.

With the basic setup described, the answer should proceed to bring the two sides of the analysis together. Thus, with conventionally shaped indifference curves and a downward-sloping labour demand curve, the highest possible indifference curve of the union will be tangential to the labour demand curve. However, the relevant iso-profit curve for the employer will intersect with the union indifference curve and creates the potential for a Pareto improvement. This means that it is possible to make one of the concerned parties, be that the union or employer, better off without making the other worse off. By extension, therefore, this will mean that any point on the labour demand curve will be Pareto inefficient and, given that the model is based around the assumption that the employer will choose employment (for a given bargained wage) on the labour demand schedule, all wage/employment outcomes identified by the right-to-manage model will be Pareto inefficient.

A good answer might well then finish with a commentary upon the plausibility of such an outcome. If there are such obvious gains to be had from further bargaining, might not we be sceptical about the assertion of the right-to-manage model that the final outcome will be set in relation to the employer’s labour demand schedule? While the competitive status seniority model is an attempt to resolve such a dilemma, and further models have been developed that suggest a Pareto efficient off the labour demand curve will be arrived at, such discussion is beyond what is required in this answer. However, raising such points would demonstrate a wider knowledge of the underlying models of union wage/employment behaviour.

This is a fairly routine, albeit lengthy, question that essentially requires students to run through the major theoretical models of strike incidence(/duration) covered in the chapter, focusing especially on the Pareto optimal class of models beginning with Hicks and his “paradox”. Extensions to the model, including the diagrammatic exposition by Mauro, and the emergence of “bargaining protocols” (Reder and Neumann 1980) or the endogenising of the bargaining period (Siebert and Addison 1981) in recognition of the joint strike costs involved in negotiation breakdown, and hence to reduce error and this risk of bargaining failure, would be key elements here.

Other classes of models are also germane to the extent that, in addition to offering competing explanations, they can also provide fresh perspectives on the accident story. Ashenfelter and Johnson (1969) and their “political” leader-member model is arguably the most important of these alternatives, with good answers identifying that, implicitly, union members make errors (accidents) in relation to their aspirations. The strike in this case leads to moderation of these aspirations as members come to share the realisation held at the outset by leaders that these are unattainable. Extensions to this model, in which bargaining reveals information about the other side’s position (e.g. Hayes 1984), should also be discussed.

From this discussion, together with consideration of relevant evidence along the lines in section 8.3.1 about the empirical applicability of the various models, students then need to consider whether the statement in the question is justified. More complete answers might also point to the role played by Acas in helping to improve communication among the parties and facilitate the flow of credible information so as to reduce the possibility of such “accidents”.

What underpins this answer is that students need to give a clear exposition of what lies behind each of the three models. Answers would be judged upon the depth with which the salient characteristics of each of these models was described. There would be little scope for introducing discussion of alternative models of labour market segmentation except possibly mentioning that the work of Doeringer and Piore was in itself influenced by the American Institutionalist School and describing in general terms what this encompassed.

The obvious starting point for the main body of this answer would be to describe the segmentation views of Doeringer and Piore, and central to this view is the existence of an internal labour market where rewards are set by administrative rules as opposed to competitive forces. The dual features of customary law and the desire to reduce labour turnover (and its associated costs) were forwarded as the drivers for the emergence of such internal labour markets. In this way, Doeringer and Piore classified the primary sector (with all of the positive associated attributes) as those jobs comprising a series of such internal labour markets and the secondary sector (with less desirable job and worker characteristics) as those jobs outside.

Next, the models of both Thurow (1971) and Okun (1981) would need to be contrasted with the views of Doeringer and Piore, with the emphasis on the fact that both Thurow and Okun accounted for the emergence of internal labour markets as a means of minimising costs. This would draw the distinction between these models and the theories put forward by Doeringer and Piore. However, detailed discussion of the models of Thurow and Okun would be needed to differentiate them from each other, in that, while Thurow emphasised on-the-job training, Okun also emphasised the desire to reduce labour turnover. While such discussion should not necessarily be technical, it would need to be in-depth.

The essay should start by explaining that payment by results (PBR) is a broad concept that can incorporate not only output, but also quality considerations, group- or plant-wide incentives and profit-sharing. The nature of output will clearly be an important determining factor and especially how easy or difficult it is to identify output and attribute it to individual or group performance. Clearly, if output depends predominantly on team performance, it would be inappropriate to have incentives based on the individual, but the larger the team or group, the greater the probability of shirking behaviour, free riding or moral hazard considerations. Without incentives, monitoring will be required, which itself may be costly and may not be totally efficient. This will be particularly acute where there is a substantial principal–agent problem with asymmetric information an important issue.

Potential benefits of PBR are that it can serve as an incentive to greater effort, attract or retain more able and productive individuals, and reduce the probability that the best employees will be enticed away by other firms.

Disadvantages may include errors in identifying the relative difficulty of different tasks or frequent changes in the productive process or disruptions outwith the control of individual workers. Quality may suffer if there is no allowance for quality and workers rush to finish particular tasks. Workers may conceal the ease or difficulty of particular tasks, so that management does not tighten up on the time allowed to complete them. There may also be a selection problem if workers are able to choose the types of tasks they perform. Thus, research scientists may specialise in easy research problems and avoid difficult ones in order to maximise returns.

Some discussion of profit-sharing could be included with reference to the work of Weitzman on the potential stabilising effects on the economy. A good answer will also review the results of various empirical studies on the effects of various incentive schemes.

The essay should start by explaining what is meant by the demographic challenge. Many countries are facing an ageing workforce and this has profound implications for the stability of the economy. According to Eurostat, the median age in the EU will increase from 39 in 2004 to 49 in 2030, with a possible decline in the total population. This is allied to a rise in life expectancy and the need for more income support for the elderly. As a consequence, the old age dependency ratio will rise, so that fewer employees will have to support more retirees.

A number of policy responses have been suggested or even already introduced. One approach is to discourage early retirement by increasing the state retirement age. It is, however, difficult to persuade employers to retain older workers where pay back-loading is the norm and some object that this reduces employment opportunities for younger workers, although younger and older workers may be imperfect substitutes. Further, the hollowing-out phenomenon may disproportionately affect older workers who have less education, but more experience, so that they are disproportionately found to be in middle-level jobs that are disappearing. They are also likely to be disproportionately affected by technological change and are less likely to be offered retraining because of the shorter pay-back period.

Increasing working hours could make some contribution to increasing the labour input, as could encouraging more part-timers to work full-time. A decline in the size of the workforce could be offset by increased immigration, though this may be politically unpopular and immigrants may lack the needed skills and experience. Thus, a range of measures may be called for if the problem is to be adequately addressed.