The Economics of Imperfect Labor Markets

The Economics of Imperfect Labor Markets

The Economics of Imperfect Labor Markets

The Economics of Imperfect Labor Markets


Most labor economics textbooks pay little attention to actual labor markets, with the exception of the occasional reference to competitive labor markets like that of the United States. The Economics of Imperfect Labor Markets is the only textbook to focus on imperfectly competitive labor markets and to provide a systematic framework for analyzing how labor institutions function and interact in these markets.

The Economics of Imperfect Labor Markets examines the many institutions that affect the behavior of workers and employers in imperfect labor markets. These include minimum wages, employment protection legislation, unemployment benefits, active labor market policies, working time regulations, family policies, collective bargaining, early retirement programs, and education and migration policies. Written for advanced undergraduates and beginning graduate students, the book carefully defines and measures these institutions to accurately characterize their effects, and discusses how these institutions are today being changed by political and economic forces.

  • Unique focus on institutions in imperfect labor markets

  • Integrated framework and systematic coverage

  • A self-contained chapter on each of the most important labor market institutions

  • End-of-chapter review questions


Is it good for employment to increase the progressivity of taxation? Does it make sense to contrast “active” and “passive” labor market policies? Who gains and who loses from employment protection legislation? Why are minimum wages generally diversified by age? Is it better to have decentralized or centralized bargaining systems in monetary unions? Should migrants have access to welfare benefits? Should governments regulate working hours?

Current labor economics textbooks do not address these relevant policy issues. In spite of significant progress in analyzing the costs and benefits of labor market institutions, these books have a setup that relegates institutions to the last paragraph of chapters or to a final institutional chapter. Typically a book begins by characterizing labor supply (including human capital theory), labor demand, and the functioning of the labor market and subsequently addresses such topics as wage formation and unions, compensating wage differentials, discrimination, and unemployment. There is little information concerning labor market institutions and labor market policy. Usually labor market policies are mentioned only every now and then, and labor market institutions are often not treated in a systematic way. When attention is given to labor market institutions, reference is generally made to the U.S. institutional landscape and to competitive labor markets in which, by definition, any type of policy measure is distortional.

The novelty of this book is that from the start the focus is on labor market institutions operating in imperfect labor markets, that is, markets that depart from perfect competition. Imperfect markets are characterized by the presence of many labor market institutions, that is, systems of laws and programs that shape the behavior of individual workers and employers. Institutions result from a political process aimed at (1) increasing economic efficiency and (2) achieving some redistributive goal. Efficiency is achieved by remedying market imperfections, such as excessive monopsonistic power, informational aymmetries that give rise to moral hazard and adverse selection problems, and externalities associated with social customs or the job-matching process, as well as transaction costs and frictions that restrict the size of markets. Redistribution provides a rationale for these institutions even when there are no market imperfections. In imperfect markets redistribution sometimes can be achieved while pursuing efficiency, as in the case of institutions, such as . . .

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