The Economics of Education and Training: Competing Theories
The analysis in Chapters 6 and 7 forms the basis of the neoclassical or orthodox theory of the labor market. An important characteristic of our previous analysis is its assumption that the labor force is made up of individuals with homogeneous skills. Accordingly, it makes sense to speak of the wage level and the level of employment, because if all persons are alike only one wage can prevail in the labor market if workers are mobile, and there is no reason to consider which workers may be unemployed, because they are each interchangeable. Given the simplified nature of the labor market the theory considers, there is relatively little for supply and demand analysis to explain, and therefore it need not be very complex.
But of course the labor market is not simple; and for a theory to ignore its diversity means that it cannot address such questions as how labor market outcomes differ between men and women, blacks and whites, or those with more or less education. To many labor economists, these questions are among the most significant that can be raised about the functioning of the labor market. It is reasonable, therefore, to judge a theory in terms of whether it can enlighten us on these issues. By this criterion, the competitive model of Chapters 6 and 7 fares quite poorly.
Because the deficiencies of the simple model are widely recognized, the relevant problem is how to construct a theory that has the potential to answer questions that the highly simplified theory ignores. An influential view is that the competitive framework needs only relatively minor modification to remain serviceable for labor market analysis. The major assumption underlying this position is that skill is the principal characteristic that differentiates members of the labor force from each other. Once it is made clear how the demand for and supply of skills are determined, these economists believe many of the labor market puzzles that elude the simplified theory will be easily understood.
Because our theoretical framework has evolved from classical supply and demand analysis, it is often referred to as the "neoclassical" theory. Alternately, because it