labour economics

labour economics, study of the labour force as an element in the process of production. The labour force comprises all those who work for gain, whether as employees, employers, or as self-employed, and it includes the unemployed who are seeking work. Labour economics involves the study of the factors affecting the efficiency of these workers, their deployment between different industries and occupations, and the determination of their pay. In developing models for the study of these factors, this section deals with the labour force of contemporary industrialized economies.

The economist cannot study the capabilities, jobs, and earnings of men and women without taking account of psychology, social structures, cultures, and the activities of government. Indeed, these forces often play a more conspicuous part in the field of labour than do the market forces with which economic theory is mainly concerned. The most important reason for this arises from the peculiar nature of labour as a commodity. The act of hiring labour, unlike that of hiring a machine, is necessary but not sufficient for the completion of work. Employees have to be motivated to work to an acceptable standard, and the employment contract is, in effect, open-ended. This may be no problem when employees are weak and easily replaced, but the more skilled, organized, and indispensable they are, the more the care that must be given to creating an institutional setting that will win their compliance and meet their notions of fairness.

A second major reason for looking beyond straightforward labour market forces is the often highly imperfect nature of the industrialized labour market. The majority of jobs are occupied by the same employees for many years, and only a small minority of employees quits their jobs in order to move to a comparable job that is better paid. Studies in a number of countries have all revealed substantial variation in the level of pay offered for the same job by different firms in the same local labour market. This sluggishness of labour market response is particularly notable for more skilled labour and for labour employed by firms in strong product market positions. The main thrust of competition in many instances comes not through the labour market but through the product market, with an employee’s pay being determined less by what the job is than by who the employer is.

In discussing both market and nonmarket forces in labour economics, the following discussion poses them not as alternatives but as complementary explanations. The difference in pay between, for example, a craftsman and the labourer who works alongside him may be fixed by custom, an arbitrator, a job evaluation system, or a bargain with a trade union. In their different ways these are far from being merely passive agents through which market forces are transmitted into human behaviour. They may, for instance, shape the market by defining its categories of labour. Also, they may differ greatly in their speed and extent of response.

The comparative study of wage movements in different periods and countries does show many similarities and regularities that are more marked than the variety of their settings would lead one to expect. This evidence of the influence of persistent forces working within an equilibrating system is one justification for the economist’s speaking of a labour market. But there is much in labour that can be understood only with the aid of the psychologist, the sociologist, the historian, the labour lawyer, or the political scientist. Depending upon both the circumstances and the purpose for which the explanation is required, it is an empirical question how far the forces that these scientists study might interact with the market forces that are the special province of the economist.

The size of a country’s labour force, within a given total population, depends on two factors: the proportion of the total population that is of working age and the proportion of these who work for gain. The limits of working age are usually taken to be established by the minimum school-leaving age and the prevailing pensionable age. Allowance must then be made for those persons who continue to work for gain after attaining pensionable age. Typically, some two-thirds of the population of an industrial country lies within these limits.

The employed labour force may be characterized by particular activity rates. An activity rate is the proportion of the whole number in a given age and sex group—for example, females aged 30–34—who work for gain. Among males, activity rates in the earlier years of working age are as a rule low, because so many remain in education and training. Between the ages of 25 and 50, male activity rates approach 100 percent, but from age 50 onward they fall as men begin to retire. The pattern of female activity rates is very different and changed greatly in the second half of the 20th century. Formerly, female rates ran higher than male in the earlier years because fewer girls enjoyed extended education, but from the age of 20 onward they fell sharply as women married and withdrew to domestic duties. Women so occupied remain by far the largest contingent of persons of working age not in the labour force. Since World War II, however, it has been less usual for women to leave paid employment immediately on marriage. Marrying at a young age and having a small number of children has enabled many women to return to paid work in their 30s, and female activity rates have come to show a second peak between the mid-30s and the mid-40s, after which they decline more steeply than male rates. From these various activity rates there emerges an overall proportion of the gainfully occupied among all of working age that is typically in the region of two-thirds.

The quality of the labour force depends on education and training, physique, and health. There is evidence that physique has been greatly improved by increases in the standard of living in the 20th century. Because of the reduction in family size, this rise has been even more marked for children than for adults, and the effects have been seen in the greater height and weight attained by children at a given age. The beneficial effects of stronger physique on health have been enhanced by the advance of medical knowledge and the increased availability of medical services. Better health has raised productivity by a reduction in absenteeism and by a prolongation of the working life during which the economy reaps the benefit of the education and training the worker has received.

Education and training can be regarded as a kind of investment, and the rate of return it yields can be estimated. The amount of the investment is the value of the student’s use of resources—buildings, equipment, and instructors—together with the output that the economy would have enjoyed from work had the student been gainfully occupied rather than studying. The yield, in turn, is calculated by assuming that the average subsequent earnings of those who completed a given course of education, compared with the average earnings of those who stopped just short of it, provide a valuation of the increase in productivity that the course confers. From this difference in earnings there must be deducted the contributions to the sinking fund required to replace the amount of the investment by the end of the student’s working life. The net yield so calculated can then be expressed as a rate of return on the investment. Estimates suggest that this rate of return is not less than that generally obtained from investment in physical capital. They also indicate that a great part of the productive resources of the economy consists in the education and training embodied in its labour force.

Though estimates of this kind are subject to some objections in principle, they do serve a useful purpose in stressing the potential of education and technical training in raising productivity and the risk of investing too little in them relative to other forms of investment. There is no less a risk of underinvestment in training in industry. The great obstacle there is that the employer is not assured of retaining the services of workers in whose training he has invested. Employers generally follow one of two strategies. They may provide training in-house and seek to retain the employee by inducements such as the prospect of career progression, pension entitlements, and other devices designed to encourage loyalty and an “organizational orientation.” Or, alternatively, employers may combine to establish industrywide training arrangements, sometimes with statutory support, thereby permitting ample skilled employees for easy movement between firms and more of a “market orientation” in their work forces.