Labor Economics: Theory, Institutions, and Public Policy

By Ray Marshall; Vernon M. Briggs Jr. | Go to book overview

CHAPTER 5
The Economic Analysis of Labor Markets

The study of economics deals with the problem of scarcity and with the means of allocating scarce goods and resources for the benefit of society. In a small and relatively simple society -- for example, a tribal community, a feudal fiefdom, or even a modern family -- the allocation of labor resources can be accomplished relatively efficiently by individual direction or fiat. The lord of the manor can decide which days laborers will sow or harvest and who will shoe the horses, mend the plow, milk the cows, or polish the armor. Similarly, a parent can establish an efficient system for getting the dishes done, the windows washed, and the garden weeded. These are examples of how labor can be allocated in simple economies.

An important mechanism for coordinating these decisions in more complex societies is the market system. The pricing system and free markets are a social invention for the solution of the literally hundreds of millions of allocation decisions necessary in an economy such as that of contemporary America. The focus of this book is on the labor market, and in this and the next several chapters we will study the pricing and allocation process as it occurs in the modern labor market. Our purpose is not merely to describe how these processes occur, but also to evaluate how well they are performed.

The principles that govern the operation of the labor market are not to be found in any statute books, nor are they likely to be uncovered simply by serious thinking about how the labor market ought to function, although the latter is not to be discouraged. The most valuable clues regarding the operation of the labor market are in the data collected regularly by government-sponsored and private researchers. From these data it is possible to make inferences and test hypotheses about the forces at work in the marketplace. Unfortunately, data do not "speak for themselves," as some people would have us believe. In fact, their message is often ambiguous. For example, consider the following. Suppose you learned that in 1988 money wages rose an average of 6 percent, and in 1989 price increases averaged 4 percent. Would you then be justified in concluding that the substantial wage increases paid in 1988 caused the higher prices in 1989? Clearly not. Several alternative explanations are consistent with this set of observations. For example, wages and prices may have been responding to a third force, such as rapid growth of the money supply that had the effect of pulling

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