Labor Market Theories: Wages, Unemployment, and Economic Policies

Labor Market Theories

Other Visions: Implicit Contracts: This theory suggests that companies guarantee stable worker salaries, regardless of the economic situation. During a recession, companies maintain higher wages than the market rate, preventing wage decreases and low production. This contrasts with market pressures that would push for lower wages and reduced output.

The Inside and Outside: This theory differentiates between employees within a company and those outside. It recognizes that internal workers possess company-specific training and knowledge, making them difficult to replace. External hiring involves rotation costs, including learning, training, and the expense of firing existing staff.

Efficiency Wages: This concept links worker performance to wages. Companies pay higher-than-market wages to motivate increased productivity, attract better workers, and reduce employee turnover.

Consequences of Unemployment

Personal and Social: Unemployment leads to demoralization, decreased self-esteem, reduced social cohesion, increased social exclusion, and a higher risk of crime, adding uncertainty to society.

Economic: Unemployment reduces production potential, consequently decreasing income and wealth creation. It also leads to lower consumption, increased income inequality, and higher taxes for the working population to maintain public services and unemployment benefits.

Economic Policies

Governments adopt different economic policies based on their ideology. Neoliberals favor deregulated labor markets, while Keynesians advocate for aggregate demand stimulation. Both aim to create jobs and minimize unemployment.

Macroeconomic Policy (Keynesian View)

1. Expansionary Fiscal Policy: Public investment and the multiplier effect stimulate demand, increasing employment and production.

2. Expansionary Monetary Policy: Lowering interest rates increases consumption and investment, boosting demand, production, and employment. (However, these policies may increase prices if production capacity cannot keep up with demand, which may not be favored by employers.)

Microeconomic Policies (Neoclassical View)

1. Labor Market Flexibility: Companies should be able to hire and dismiss workers more easily. Unions often oppose this, as they advocate for both employers and workers, and it is not clear if this increases employment.

2. Temporary or Part-Time Contracts: Companies needing workers for specific periods can hire them under these conditions. Lower fixed costs allow companies to increase competition and respond faster to changes in demand.

3. Variable Remuneration: Rewarding employees based on performance reduces fixed costs and makes wages variable.

4. Reduction of Minimum Wage and Benefits: Lowering these costs encourages employment and reduces unemployment. The state can also subsidize companies to create new jobs for the unemployed. Unemployment benefits (passive policies) provide income to unemployed workers while they seek work. However, some business organizations believe these measures prolong unemployment and prevent wages from being flexible enough. Active policies, such as training schools and workshops, are also implemented.