Labor Economics: Problems in Analyzing Labor Markets

306 Pages·1993·3.637 MB·English

by  William Darity Jr. (auth.), William Darity Jr. (eds.)

Labor Economics: Problems in
Analyzing Labor Markets
Recent Economic Thought Series
Editor:
Warren G. Samuels
Michigan State University
East Lansing, Michigan, U.S.A.
Other books in the series:
Feiwel, G., Samuelson and Neoclassical Economics
Wade, L., Political Economy: Modern Views
Zimbalist, A., Comparative Economic Systems: Recent Views
Darity, W., Labor Economics: Modern Views
Jarsulic, M., Money and Macro Policy
Samuelson, L., Microeconomic Theory
Bromley, D., Natural Resource Economics: Policy Problems and Contemporary
Analysis
Mirowski, P., The Reconstruction of Economic Theory
Field, A., The Future of Economic History
Lowry, S., Pre-Classical Economic Thought
Officer, L., International Economics
Asimakopulos, A., Theories of Income Distribution
Earl, P., Psychological Economics; Development, Tensions, Prospects
Thweatt, W., Classical Political Economy
Peterson, W., Market Power and the Economy
DeGregori, T., Development Economics
Nowotny, K., Public Utility Regulation
Horowitz, I., Decision Theory
Mercuro, N., Law and Economics
Hennings, K. and Samuels, W., Neoclassical Economic Theory, 1870 to 1930
Samuels, W., Economics as Discourse
Lutz, M., Social Economics
Weimer, D., Policy Analysis and Economics
Bromley, D. and Segerson, K., The Social Response to Environmental Risk
Roberts, B. and Feiner, S., Radical Economics
Mercuro, N., Taking Property and Just Compensation
de Marchi, N., Post-Popperian Methodology of Economics
Gapinski, J., The Economics of Saving
labor Economics: Problems in
Analyzi n9 labor Markets
edited by
William Darity, Jr.
Cary C. Boshamer Professor of Economics
University of North Carolina at Chapel Hill
....
"
Springer Science+Business Media, LLC
Library of Congress Cataloging-in-Publication Data
Labar economics: problems in analyzing labor markets I edited by
William Darity, Jr.
p. cm. - (Recent economic thought series)
Includes bibliographical references and index.
ISBN 978-94-010-5305-1 ISBN 978-94-011-2938-1 (eBook)
DOI 10.1007/978-94-011-2938-1
1. Labor economics. 2. Labar market. 1. Darity, William A.,
1953- II. Series.
HD4901.L133 1992
331.12-dc20 92-18985
CIP
Copyright © 1993 by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 1993
Softcover reprint ofthe hardcover Ist edition 1993
AII nghts reserved. No part of this publicat ion may be reproduced,
stared in a retrieval system ar transmitted in any form or by any
means, mechanical, photo-copying, recording, or otherwise, without the
prior written permisslon of the publisher, Splinger Science+Business Media, LLC
Contents
Introduction
I. Unemployment 9
Chapter 1: Keynes, Cambridge, and the New Keynesian
Economics 11
by Michael Syron Lawlor
Chapter 2: Labor Economics and Unemployment: An Historian's
Perspective 59
by Alexander Keyssar
II. How Labor Markets Really Work 75
Chapter 3: The Impact of Formal On-the-Job Training on
Unemployment and the Influence of Gender, Race,
and Working Lifecycle Position on Accessibility to
On-the-Job Training 77
by Alfred J. Field and Arthur H. Goldsmith
Chapter 4: Empirical Tests of Labor Market Equilibrium: An
Evaluation 117
by James Heckman and Thomas MaCurdy
Chapter 5: Labor Market Segmentation Theory: Reconsidering the
Evidence 141
by William T. Dickens and Kevin Lang
III. Race, Discrimination, and Competiton 181
Chapter 6: Labor Markets and Racial Inequality 183
by Jeremiah Cotton
Chapter 7: Racial Inequality and Racial Conflict: Recent
Developments in Radical Theory 209
by Rhonda M. Williams
IV. Culture, Ethnicity, and Poverty 237
Chapter 8: Culture and Human Capital: Theory and Evidence or
Theory Versus Evidence? 239
by Stephen A. Woodbury
Chapter 9: Labor Economics and Public Policy: Dominance of
Constraints or Preferences? 269
by E. Michael Foster
Contributing Authors 295
Index 299
Labor Economics: Problems in
Analyzing Labor Markets
INTRODUCTION
William Darity, Jr.
In 1984 the Kluwer series in Modern Economic Thought, under the editorial
direction of Warren Samuels, brought out a book under my editorship
entitled Labor Economics: Modern Views. It consisted of a series of essays
and commentaries that sought, in a critical fashion, to assess the state of
the art in the field of labor economics with respect to several themes. These
included methodology versus practice, the analysis of discrimination by
gender and race, the phenomenon of persistent racial differences in un
employment exposure, occupational safety and health regulation, dual
versus segmented labor markets, and the remnants of the Phillips curve
trade-off between unemployment and inflation.
Nearly a decade later I was approached by Warren Samuels and Kluwer
about editing a new book that would again address where things stand
in labor economics. In proceeding with the development of this current
book I was a struck by the extent to which the research thrust that was
apparent in the early 1980s remains intact as we move toward the 21st
century. The vast majority of scholarship in the labor subfield is dominated
by the methodological orientation of applied neoclassical microeconomics,
supplemented by incursions from the themes that occupy the so-called
"pure theorists," particularly of the game theoretic variety. But there also
2 LABOR ECONOMICS
is a lively body of work lying outside the mainstream that contests ortho
doxy at the most fundamental levels-on grounds oflogical consistency and
empirical accuracy. I view the current book as a potpourri of perspectives
on the status of labor economics both from those who work in the subfield
within the terms of applied neoclassical microeconomics and those who
work within the terms of alternative modes of thought.
Despite common attachment to a singular conception of how one does
economic analysis-the starting point always is with the individual and
individual-optimizing behavior-there is substantial dissent among labor
economists. Indeed, mainstream labor economists remain in perpetual con
flict over the issue of how real-world markets, especially those for
employment, actually work. Does the labor market in the aggregate or do
sectoral markets behave as contract markets, with comparatively inflexible
wages, or as auction markets, with a high degree of wage flexibility? From
the mainstream perspective, if the former is the case, there is a basis for
explaining the occurence and persistence of unemployment; if the latter is
the case, then either unemployment does not really occur or it is at worst
a temporary and ephemeral phenomenon.
The fact that economists would even engage in debate over the theore
tical existence of unemployment is bewildering to the historian Alexander
Keyssar. Keyssar (1986), author of an important study of the origins of
unemployment as a socially recognized phenomenon of concern to policy
makers in the state of Massachusetts, sees the incidence of joblessness as
so palpable, real, and devastating that he views the debate among econo
mists as a descent into the theatre of the absurd. He says as much in his
contribution in the first section of the current book.
Also in the first section Michael Syron Lawlor provides a remarkable
study of the emergence of the theory of aggregate unemployment in
Cambridge, England, in the 1930s. Lawlor argues that the fixprice versus
flexprice view of labor markets had been a long discussed issue in
Cambridge, dating at least from Alfred Marshall's lectures to the genera
tion of dons that were to rise to prominence during the interwar years.
Moreover, by making careful use of the Keynes Papers at Kings College at
Cambridge University, Lawlor demonstrates that the fixprice view of labor
markets and the panoply of arguments for wage rigidity utilized by the con
temporary "New Keynesian" economists were well developed by Keynes's
favorite whipping boy, A.C. Pigou, well before the publication of The
General Theory. Thus, Lawlor doubts that the attribution of rigid wage
economics to Keynes is an accurate account of his theory of unemployment
and suggests that the contract versus auction market debate has no rele
vance to the legitimacy of Keynes's theory of less than full employment
INTRODUCTION 3
equilibrium. But since the New Keynesians have a broadly dismissive atti
tude toward doctrinal history-their major organ, The Quarterly Journal
oj Economics, has an active policy of refusing to consider papers in the
history of economic thought-I suspect that Lawlor's chapter will not
be addressed by any of the principals. Hopefully, others will read his
chapter and be inspired to think more deeply about the limitations of how
economists have come to conceive of unemployment.
The exploration of the question of how labor markets really work is
pursued in a trio of essays that occupy the second section of this book. The
timbre of the discussions here indicate ways in which the conventional
procedures of mainstream economics can be modified or amended to
accommodate potential trouble spots, rather than proposing overturning
orthodoxy altogether.
The first of the three, by Alfred Field and Arthur Goldsmith, asks a
seemingly narrow question that has wide ramifications for the usual em
pirical work performed by labor economists. Field and Goldsmith are
concerned with an omitted variable from traditional studies of earnings and
occupational status, formal on-the-job training. But the scope of their inves
tigation suggests how far wrong previous empirical research could have gone
by leaving out this variable. Utilizing the Bureau of Labor Statistics' January
1984 Job Training Survey as a supplement to the January 1984 Bureau of
the Census Current Population Survey, they are able to demonstrate how
dramatically employment and lay-off probability regression equations will
be altered when formal on-the-job training is taken into account. The Field
Goldsmith investigation also suggests how poorly on-the-job training,
whether formal or informal, has been incorporated into empirical labor
economics, despite the importance ascribed to such training in theoretical
work on human capital accumulation.
In the second essay in this group, James Heckman and Thomas MaCurdy
undertake an examination of the evidence on whether labor markets are best
characterized by equilibrium (in the sense of market clearing) or disequi
librium (in the sense of nonmarket clearing) modes of thought. This is the
same issue that Goldsmith with an earlier coauthor, Thomas Kniesner,
sought to evaluate in a major survey article that appeared in the Journal
ojE conomic Literature in 1987. Both articles conclude that the issue cannot
be resolved unequivocally on the basis of data available on labor market
dynamics or on the basis of existing tests of whether labor markets tend
to clear or not to clear.
In a related vein, William Dickens and Kevin Lang reexamine the evidence
on whether labor markets should be characterized as segmented or singular.
In the mid-1980s they first introduced a procedure for testing for the
4 LABOR ECONOMICS
existence of dualism in the U.S. labor market (Dickens and Lang 1985).
Their procedure, which they argued established that the structure of markets
for employment in the United States is, indeed, segmented, spawned a body
of research both supportive and critical of their findings. Probably the most
negative assessment came from Heckman in collaboration with Joseph Hotz
in an article focusing on dualism in the labor market in Panama, where
Heckman and Hotz (1986) challenged the Dickens and Lang procedure
(rather than necessarily disputing the Dickens and Lang conclusion).
Dickens and Lang use the current essay as an opport1l;nity to reply to
Heckman and Hotz as well as other critics.
While Dickens and Lang see inadequacies in the conventional treatment
of labor markets as a continuum of opportunities potentially open to all
comers with the requisite skills regardless of ascriptive characteristics, they
want to explain the workings of segmented markets in a manner consistent
with individual optimizing behavior. Labor markets are segmented, hence
imperfect, and there is nothing anyone can do about that; for Dickens and
Lang it is a virtual state of nature. But given that fact, individuals then
behave in an optimal fashion. Therefore, they see a convergence between
the empirical observation that labor markets are segmented and the body
of theory that invokes informational asymmetries, efficiency wage doctrine,
adverse selection and the like-arguments that have individuals behaving
optimally in the face of an immutable imperfection (although precisely why
the grand imperfection is immutable is rarely, if ever, explained).'
Dickens and Lang view segmented labor market theory as an alternative
to human capital-based explanations for wage differentials. But if seg
mentation exists-and their evidence seems to be reasonably persuasive that
it does-the key question is why some persons or groups have a greater
likelihood of being present in one segment rather than another. Is it because
they are steered there, independent of their capacity to perform, or is it
because their individual abilities best suit them for a particular sector? To
be more direct: are black workers disproportionately found in the low-wage
segment of the labor market because of discrimination or because of lower
levels of human capital accumulation? Obviously, the resolution of this
question lies at the heart of how mainstream economists think about the
determination of income distribution and the "fairness" with which the
market system treats participants .
. The fairness of a putatively capitalistic marketplace is the issue that
provokes Jeremiah Cotton's inquiry in the section of the book entitled
"Race, Discrimination, and Inequality." Cotton contributes an essay that
reasserts the real world significance of labor market discrimination while
simultaneously establishing the deep range of anomalies the persistence of