THE labor market is a distinct and unique market.
Nobel prize winner Amartya Sen asserts that “Work is a means to an end and an end in itself.” It involves the buying and selling of labor services that cannot be delinked from the human beings providing them. Labor market outcomes like employment and the wage rate are key factors for the attainment of human development.
Poverty situations often arise from continued unemployment or underemployment with very low earnings. Because of the complexity of the market i.e. where you need to match various types of workers with specific jobs and firms and where the market transaction continues for a long time during the employment co ntract, market failures abound especially in developing countries like the Philippines. Consequently, when the labor market fails to function properly and when it does not adequately respond to the requisites of humane existence, institutions like government and the trade unions intervene in its workings. Thus, it is not purely supply and demand that determine labor market outcomes but also the influence of these various institutions.
Asymmetric information problems also beset the labor market as firms are unable to determine the productivity of workers before and even right after they are hired. Thus, the role of education becomes important for firms as signals to the workers’ ability and future productivity as Michael Spence, another Nobel prize winner found in his paper. Aside from its “human capital” contribution, education serves as a relatively less costly screening mechanism for the firm. The same problem of information asymmetry gives rise to discrimination whether based on race, ethnic group, gender or age. For example, employers tend to favor male and relatively experienced workers because of stereotype notions on the female and young employees’ work habits whether based on fact or not. Informational problems also give rise to “internal labor markets” where firms formulate rules on hiring, firing, promotions, compensation and other incentives. In particular, firms choose to hire workers on the spot market for lower level or entry positions and prefer current employees to fill in posts at higher echelons. This occurs because they need to observe their worker’s productivity and work ethic over time before promoting them.
It is also possible that the “equilibrium” market wage for unskilled workers is so low that their survival becomes problematic. In other words, the market wage is way below the living wage. At the same time, an employment contract may also be onerous such that exploitation takes place. This happens because a labor contract cannot fully specify the responsibilities and corresponding remuneration of the worker under all situations. Thus, there can be two possible scenarios. First, the workers organize themselves and form collective organizations i.e. unions to voice out their demands and protect their interests. Secondly, the state may mandate a minimum wage level that they deem to be reasonable for both the workers and employers. Or the government may create rules legitimizing the right of workers to organize and bargain collectively. In addition, the state may facilitate the provision of other non-wage benefits and impose labor standards through legislation and executive orders. These may include paid leaves and holidays, death and sickness benefits, retirement, pensions, social security, etc. Aside from protecting the worker’s welfare, minimum labor standards are maintained because there can be productivity gains associated with a stable industrial relations climate and a fit workforce.
The labor market is replete with institutions that may facilitate or hinder employment, increase or decrease labor earnings, promote social protection, etc. Unions, the state, business organizations and the labor relations system itself play various roles in changing labor market outcomes either directly by affecting labor supply and demand or indirectly by influencing laws, policies and other rules. Such labor outcomes in turn are crucial in the attainment of human development. Unions historically were organized to protect the welfare of the working classes while government through the industrial relations system establish labor standards and social protection.
Thus, governance of institutions and organizations become a strategic issue in the labor market as institutional failure also exists especially in developing. For example, the fragmentation of the labor movement weakens its collective voice. Bad corporate governance e.g., nontransparent financial condition undermines industrial peace as workers become more militant while government corruption siphons resources that may be used for creating jobs and upgrading human capabilities and skills.
In a rapidly changing economic environment, markets and institutions need to operate smoothly not for efficiency alone but also to promote human development. This is especially relevant for the labor market as outcomes affect the quality of life of individuals participating in it. In turn, human development particularly a happy and healthy workforce contributes to further sustain economic development as individual productivity increases.
Fernando T. Aldaba is professor of Economics in the Ateneo de Manila University and Senior Fellow of Eagle Watch.