Current Issues in Labour Economics.

This book tries to capture the leading research issues in labor. The issues can be classified under these subgroups: labor supply and demand, labor contracts (with the recognized significance of information economics), the labor market and trade unions (with game-theoretic approaches), non-homogeneous labor, and of course the macroeconomic aspects of present theoretical and empirical concerns of labor economics.

Presently, the disparity of knowledge and research in favor of labor demand over labor supply is becoming a thing of the past. This is exemplified by A. Cigno where he extends Becker's labor supply/household model. He explores its implications especially on the allocation of time in multi-person households and of different responses to wage changes by persons of different sex. After Pissarides' 1985 article where he concluded that search is essentially a capital and investment theoretic problem, search theory has gotten more and more recognition as an indispensable tool. In this book, Manning assess the extent to which implicit-contract theory has proved successful in explaining the observed behavior of wages and employment. A few pages are devoted to the more recent incorporation of asymmetric information in a simple theoretical model where uncertainty promotes rigid wages and unemployment as the ex-post inefficient outcomes. However, important considerations like variable employment and concave production functions cannot be tested in this model. Also the author does not discuss the more important issue of whether these contracts actually lead to involuntary unemployment. This is dealt with instead in a theoretical discussion of the escape rate--the product of the probabilities of locating a vacancy and accepting a job offer from it and the replacement ratio. As for the latter, Nickel |2~ has divided the "disincentive" effects of benefits between younger people which are more marked than for older and long-term (generally in excess of 1 year) unemployment. That the escape rate displays negative time-dependence suggests that the effect of any downward movement of the reservation wage is swamped by other factors due to discouragement. The model however does not tackle the question of whether reduced search-intensity is a reaction to a liberal benefit system or just pure discouragement which is a clarifying conclusion. Manning does not expound on this however.

The study of labor unions is backed by a rich institutional literature. Alistair and Ulph give a review of recent analytical changes (e.g., theories on bargaining process in the context of wage determination) and empirical developments. They present a model where firms can play one union against another where unions are better or worse off depending on the substitutability and complementarity of workers between labor unions. Capital accumulation by the firm was incorporated neatly. The authors mention the weakness of the standard models (like the "bigger is always better" notions with regard to the size of labor unions) and propose that incorporation of or more emphasis on product markets will make the research more empirically viable instead of assuming employer surplus as given. The models presented were surprisingly simple but they caution researchers that identifying the relative gains to different parties do not in itself explain which bargaining structure will emerge. The frontier of the research is actually on multiple firm, multiple union bargaining but is unfortunately not covered here.

David Sapsford discusses the extensions as well as disagreements with the basic A--J-type approach to strikes. The Mauro |1~ model which is an extension of Hicks's argument on the importance of information in preventing strikes is discussed. One criticism is the stubbornness of either parties in continuing to use different information in estimating the slope and position of the other party's curve from that actually used by the latter. Mentioned is the Tracy model where strikes are restrictively assumed as the mechanism which brings about eventual settlement |3~. In this model, a strike occurs when rounds of bargaining which is used by the union to increase its information goes beyond the last contract period. At the early rounds of negotiation, the union gradually truncates the upper distribution of the range of reservation wage. This however may not be a learning procedure that brings the union closer to knowing the firm's profits.

Non-homogeneous labor is studied by McNabb and Ryan by mentioning various proposed alternative segmentation models (instead of just primary-secondary). The empirical evidence is also given a detailed evaluation. The effectiveness of equal opportunity policies are again considered in chapter 8 where the rapidly expanding field of economics of discrimination is dealt with. However discrimination still has to be more than just an assumption to enable theory to explain the long-run persistence of differentials.

The final two chapters look at the latest in labor macroecomics. Alogoskoufis examines the interrelationships which exist between wage rigidities, international competitiveness and macro policy. He takes into serious consideration the theories of proponents of consumption-wage rigidity. Estrin and Wadhani discuss in detail the theoretical arguments underlying the call for a system of economy-wide profit sharing instead of the fixed-wage system. It is supposed to stimulate the labor market into a permanent state of excess demand (which the authors classify as hard-boiled justification. The soft-boiled argument is the increase in labor effort while wage flexibility is the medium argument). The authors hastily criticize Weitzman |4~ on his vagueness about the short run and long run underpinnings. They claim through casual empiricism that the only solution to the unemployment problem involves directly weakening the power of insiders using a simplistic model for proof. I feel that this argument is still debatable.

Overall this book is not only a discussion in current issues but can also serve as a labor economics handbook with the current issues appearing to be simplified which may disappoint impatient labor economists but make economists not too familiar with the field happy.

References

1. Mauro, M. J., "Strikes as a Result of Imperfect Information." Industrial and Labor Relations Review, July 1982, 522-38.

2. Nickel, S., "The Effect of Unemployment and Related Benefits on the Duration of Unemployment." Economic Journal. April 1979, 34-49.

3. Tracy, J. S., "An Empirical Test of an Asymmetric Information Model of Strikes." Journal of Labor Economics, April 1987, 149-73.

4. Weitzman, M. The Share Economy. Cambridge: Harvard University Press, 1984, p. 167.