Academic journal article The American Journal of Economics and Sociology

Labor Market Underpinnings of a Caste Economy: Foiling the Coase Theorem

Academic journal article The American Journal of Economics and Sociology

Labor Market Underpinnings of a Caste Economy: Foiling the Coase Theorem

Article excerpt

I

Past Modellings of Labor Market Structures, Including Caste

A caste system of human resource allocation as one alternative to reliance on market mechanisms is usually mentioned in basic economics texts' chapters on labor markets. Beyond this, however, economic theorists have paid very little attention to the importance or role of caste, although they have looked at other labor market institutions and structures.

Several contemporary streams of research have focused on labor market phenomena which can produce discriminatory patterns based on ascriptive factors such as age, race, or sex. Following Gary Becker (1962), human capital models look to the supply side of the labor market and find patterns based on differential access to education, training, or funds to support these. Labor market segmentation models, recently reviewed by James Rebitzer (1993), stress the demand side. They look at the nature of technology (from a monitoring point of view) or the employer's human resource management strategy (close supervision vs. incentives), coupled with the practice of statistical discrimination, and find in these the sources of strong ascriptive structures in employment. Research on monopsonistic discrimination by employers (exemplified by Michael Ransom's 1993 study of the effect of moving costs on faculty salaries by seniority) also shows how the operation of labor markets can result in wage and employment patterns based on age, gender, and marital status.

Yet, for all their differences, these lines of research are similarly based on relatively competitive labor markets resulting in contractual employment relationships. None of these approaches deals with the situation where strongly non-competitive labor market institutions have long prevailed, a caste system whose occupations are hereditary, compulsory, and endogamous. When our attention is turned to economic models, specifically of caste, two treatments by George Akerlof appear to constitute most of the modern theoretical literature. Of the two, his first paper (Akerlof, 1976) seems the more important and substantial. There, Akerlof wanted to show how the sanctions of a caste system could prevent the normal workings of competition from destroying it by undercutting its costly restrictions. A violator, Akerlof concludes, does "not gain the profits of the successful arbitrageur but instead suffers the stigma of the outcaste."(1)

As a general result, this conclusion seems correct, but he had, however, to make several odd or troubling assumptions in order to reach it. 1) It is assumed that workers can work on the production of only one product:(2) this is both artificial and dramatically counterfactual. 2) An exploration of Akerlof's third equation(3) reveals that the "maximum utility for any one good" must be less than, or equal to, the (fixed) output per head of unskilled labor and much less than the (fixed) output per head of skilled labor. The meaning of this implicit assumption is very unclear. What, for example, are its possible implications with respect to the size of the earnings differential between skilled and unskilled labor? 3) The number of goods in the economy must exceed the ratio of skilled worker productivity divided by the maximum utility of any one good? Even if the assumption may be plausible, though not intuitively obvious, since it looks at first glance like a case of apples divided by oranges, what does it imply? Taken together, these three assumptions constitute at best a shaky basis for short-run, static equilibrium in a model of caste. Furthermore, there is nothing in Akerlof's 1976 modelling to help us understand how a caste system maintains its immunities to erosion by competitive forces over the long run.

Akerlof's later (1980) article is of less interest, as it is generally about the maintenance of social custom and not specifically about caste. Moreover, the argument comes close to assuming the answer sought by including a person's reputation as an argument in his/her utility function. …

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