Wednesday, March 03, 2010

Labor Market Flexibility

Some mainstream economists claim that unemployment would be less if labor markets were more flexible and less rigid. In a 1998 paper arguing against this view, Bob Solow explains what this labor market rigidity that so many mainstream economists, especially "freshwater" economists, want to abolish is:
"My first observation is that 'labour-market rigidity' is never defined very precisely or directly in this context, but only be enumeration of tell-tale symptons. Thus a labour market is inflexible if the level of unemployment-insurance benefits is too high or their duration is too long, or if there are too many restrictions on the freedom of employers to fire and to hire, or if the permissible hours of work are too tightly regulated, or if excessively generous compensation for overtime work is mandated, or if trade unions have too much power to protect incumbent workers against competition and to control the flow of work at the site of production, or perhaps if statutory health and safety regulations are too stringent. It seems clear that those who point to labour-market rigidity as the source of high unemployment have something other than simple nominal or real wage rigidity in mind, or so shall I assume." -- Robert M. Solow, "What is Labour-Market Flexibility? What is it Good for?", Proceedings of the British Academy, V. 97
As I understand it, many of these "rigidities" were put in place in the United States context around the time of the New Deal with the cooperation and assistance of Institutionalist economists, a school with some sense of the real world.

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