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Module 1 introduction to labour markets & labour market institution


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  • The beginning of the workers movement was held in England 1833. The laws passed to prohibit that children under 9 cannot work, children age 9-13 can only work 8 hours a day, and children aged 14-18 can only work 12 hours a day. Subsequently, the worker movement to protect their own rights has been developed and progressively improved. Currently, the workers conditions in developing world in which the industrialization started recently has been issued in a same context but the government and industries focused on the economic growth and have passive to the topic.
  • During 20 th century, there was different forms of labour security has been achieved within society. With the depression and post-war conditions, employers have agreed to secure the employment and certain labour market institutions for workers protectionism in order to strengthen their business. And government was positive to guarantee the employment and creating jobs for workers with establishing the labour policy for workers.
  • With the neo-classical economic view, the labour market would be reached its equilibrium. In case of the increasing supply of the labour forces in the market will decrease the price of labour forces in the market and automatically result in the equilibrium ( the price and overall amounts of the labour forces in the market). In case of the increasing of demand of the labour, there will be shortage in the beginning, but in a short-time, the labour market automatically find the equilibrium which makes market run efficiently. Without any intervention or distortion (Externalities), there will be always the equilibrium helping the market find its balanced price and amounts of labour forces just like other commodities traded. And this is very hypothetical approach in comparison of the real labour market.
  • Declaration concerning the aims and purposes of the International Labour Organisation (DECLARATION OF PHILADELPHIA) The General Conference of the International Labour Organization, meeting in its Twenty-sixth Session in Philadelphia, hereby adopts, this tenth day of May in the year nineteen hundred and forty-four, the present Declaration of the aims and purposes of the International Labour Organization and of the principles which should inspire the policy of its Members. 1. The Conference reaffirms the fundamental principles on which the Organization is based and, in particular, that: (a) labour is not a commodity; (b) freedom of expression and of association are essential to sustained progress; (c) poverty anywhere constitutes a danger to prosperity everywhere; (d) the war against want requires to be carried on with unrelenting vigour within each nation, and by continuous and concerted international effort in which the representatives of workers and employers, enjoying equal status with those of governments, join with them in free discussion and democratic decision with a view to the promotion of the common welfare. -Conotinued...-
  • What is your opinion about labour forces? Do you agree with the Neo-classical economic view about the labour forces? If yes, could you specify the reason of your thought?
  • Unemployment rate by country, from figures at CIA world factbook, accessed 30 March 2006. Even though the data of some countries has been controversial about their update and methodology, this map would be valuable to see the regional differences of unemployment rate and the overall picture.
  • The labor force is defined as the number of individuals age 16 and over, excluding those in the military, who are either employed or actively looking for work The participation rate is the number of people in the labor force divided by the size of the adult civilian non-institutional population (or by the population of working age that is not institutionalised) The unemployment level is defined as the labour force minus the number of people currently employed The unemployment rate is defined as the level of unemployment divided by the labor force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age).
  • The development of labour market institutions has been derived from different routes. Some institutions has been inherent from the cultures and history, other might be initiated and adapted because of the international labour law/conventions and some has been achieved by the collective bargaining of workers. And these multiple source of the institution resulted in the distinction among the different labour market institutions. For example, the strong tendency of the anti-discrimination practices and laws in employment of U.S. has been shaped though the history of suffering of the African American slavery and segregation onto various immigrants. Contrast to U.S. there is weak anti-discrimination practices and laws in East Asia. Through the culture of the Confucianism, the different treatments between gender are accepted in the people’s mindset. Whereas, After modernization and feminism, the gender-discrimination has been improved and prohibited in structure, policies and legal level, there are still gender discrimination cases and not reported in practices.
  • The LMI are applied to customs and behaviour patterns of workers and employees as well as to particular formal organizations of government and public service. Once the institutions has been settled and matured in a process, the institutions which was the output of influences from the players (employees and workers, governments, employers’ association) start influencing toward the labour market and its players. “ labour institutions are determined by, and comprise of, social norms, national labour laws and policies, as well as the system of production. The three axes of the triangle affect, but also form part of, labour institutions. For example, trade unions and employers' associations are labour institutions. These institutions bargain over national labour laws and polices. How they bargain and what they bargain over will depend on underlying social norms as well as on the constraints or demands of the production system, as well as national labour laws on freedom of association and collective bargaining.” reference : In defence of labour market institutions , page 12,13
  • There are differences between the developed and developing countries. In Labour Market institutions has been diversified between the each individual countries in accordance with the different social, political and economical environments.
  • The accumulation of evidence on these polices led the world bank to modify its views in 1995. However, the majority from employers and investors-side have maintain this idea still and claim for the de-regulation and liberalism.
  • International Labour Review, Vol. 148 (2009) “ Lessons from Latin America’s neo-liberal experiment : An overview of labour and social policies since the 1980s”, The labour policy which has been undergone the neo-liberal reformation in the 1980s and 1990s didn’t produce big success in improving employment or other type of performance in labour market in case of 6 countries – Argentina, Bolivia, Brazil, Chile, Mexico and Uruguay. Figure 1 showing the unemployment rate of the 6 South American countries has not been improved after their reform in labour policy. The fluctuation between 1990 to 2003 resulted from the economic crises (Mexico’tequila’ in year 1994- 1995, Brazil in 1999, Ecuador in year 1999- 2000, Argentina in year 2001-2002, Uruguay in year 2002) and the graph has been rising in general through time-period. The average unemployment rate in 2003 among 6 countries was 11.4%. After year 2003, the reforming movement in Latin American countries has been skeptical and diminished.
  • In the globalization era, the consensus among the workers, employers and states is the pursuit of flexibility in the labour market and overall regulations. Even though a few researches has proven the relationship of the rigid labour market policy and unemployment rate and other economic growth, the majority of players in market agreed upon the necessity of flexibility. Workers party also understood the need of changes in workers protectionism within the current diversity markets. Workers protectionism should be more than just the security to maintain one’s job, but about equipping people with the skills that enable them to have more chances of employment.
  • The European commission is the main political promoter of flexicurity. Although it has been mentioned mainly at the European level, the concept to flexicurity has to be developed into concrete policies and regulations in the level of the member state. The uniqueness of the Flexicurity is not easy to establish its model for the every country and there could be the criticism about the respect of the autonomy of the member states. Flexicurity policies can be characterized as a form of coalescence and synchronisation of economic and social policy.
  • Danish Flexicurity Model could be explained by the low level of Employment protection, strong life-long learning programs (within active labour market policy and also national education policy) and comprehensive social safety net with Unemployment benefits. Figure 1 is explaining that the workers flow in Labour market is in this “Golden Triangle”. Thus, the workers in Flexible labour market inevitably unemployed and need to be given the generous welfare systems. If the longer duration of the unemployment or new trends in working environment making the workers to be re-trained or developed for new skills set. To maintain the flexible labour market, there are generous welfare system and active Labour Market Policy supporting the flexible market.
  • The Common Principles of Flexicurity by European Commission in the framework of the European Employment Strategy. (1) Flexicurity is a means to reinforce the implementation of the Lisbon Strategy, create more and better jobs, modernise labour markets, and promote good work through new forms of flexibility and security to increase adaptability, employment and social cohesion. (2) Flexicurity involves the deliberate combination of flexible and reliable contractual arrangements, comprehensive lifelong learning strategies, effective active labour market policies, and modern, adequate and sustainable social protection systems. (3) Flexicurity approaches are not about one single labour market or working life model, nor about a single policy strategy: they should be tailored to the specific circumstances of each Member State. Flexicurity implies a balance between rights and responsibilities of all concerned. Based on the common principles, each Member State should develop its own flexicurity arrangements. Progress should be effectively monitored. (4) Flexicurity should promote more open, responsive and inclusive labour markets overcoming segmentation. It concerns both those in work and those out of work. The inactive, the unemployed, those in undeclared work, in unstable employment, or at the margins of the labour market need to be provided with better opportunities, economic incentives and supportive measures for easier access to work or stepping-stones to assist progress into stable and legally secure employment. Support should be available to all those in employment to remain employable, progress and manage transitions both in work and between jobs. (5) Internal (within the enterprise) as well as external flexicurity are equally important and should be promoted. Sufficient contractual flexibility must be accompanied by secure transitions from job to job. Upward mobility needs to be facilitated, as well as between unemployment or inactivity and work. High-quality and productive workplaces, good organisation of work, and continuous upgrading of skills are also essential. Social protection should provide incentives and support for job transitions and for access to new employment. (6) Flexicurity should support gender equality, by promoting equal access to quality employment for women and men and offering measures to reconcile work, family and private life. (7) Flexicurity requires a climate of trust and broadly-based dialogue among all stakeholders, where all are prepared to take the responsibility for change with a view to socially balanced policies. While public authorities retain an overall responsibility, the involvement of social partners in the design and implementation of flexicurity policies through social dialogue and collective bargaining is of crucial importance. (8) Flexicurity requires a cost effective allocation of resources and should remain fully compatible with sound and financially sustainable public budgets. It should also aim at a fair distribution of costs and benefits, especially between businesses, public authorities and individuals, with particular attention to the specific situation of SMEs.
  • Transcript

    • 1. Introduction to labour markets & labour market institution
    • 2. Objective
      • To better understand conceptual issues about labour market and labour market institution
      • To highlight the concepts and history of labour protection and labour market institutions in the context of globalization
      • To present the current debates on labour market institutions and their impacts on employment and economic growth
      • To understand the concept of “flexicurity”
    • 3. Outline
      • Labour and labour markets
        • The history of labour and labour protection
        • ILO in labour history
        • Labour economic & classical definition
      • The labour market institutions
        • Examples
        • Labour market indicators
      • Debates on labour market rigidity and employment
        • The reason of the high-unemployment?
        • Is labour market rigidity really to blame?
        • Flexicurity : d efinition, policy, approaches of the EU
    • 4. Part 1 Labour and labour market Labour history and labour movement International Labour Organization Labour economy and labour market
    • 5. The history of labour protection
      • The history of labour is predominantly about the development of labour movements and the working class.
      • There has been changes in the concept of labour starting from the Industrial Revolution of the 18th century: Division of Labour, Mass production and Fordism in Western Europe and U.S.
      • Labour movement- claims for the rights of workers: Building of workers’ unions and demanding better wages and working conditions.
    • 6. The history of labour protection
      • During the 20th century, labour protection policies has been applied in many countries with the aims of economic development and social welfare.
      • “ Consensus between workers and employers about the protection of workers rights was made and governments also actively involved in the regulation of the labour protection policies after second world war with Keynesian view.”
      • Global Labour Flexibility, by Guy standing,
      • Chapter 3, the Pursuit of flexibility
    • 7. ILO in the history of labour
      • The International Labour Organization was created in 1919, by the Treaty of Versailles that ended World War I.
      • ILO establishment was founded upon the belief that universal and lasting peace can be accomplished only if it is based on social justice. The ILO later became incorporated into the United Nations.
      • The ILO is the principal international organization that promotes International Labour Standards, conventions, treaties and recommendations designed to eliminate unjust and inhumane labour practices.
      • Rules of Game, ILO, revised edition 2009
    • 8. ILO mission and objectives
      • “ The primary goal of the ILO today is to promote opportunities for women and men to obtain decent and productive work, in conditions of freedom, equity, security and human dignity.”
      • Juan Somavia, ILO Director-General
      • The four strategic objectives of ILO
        • Promote and realize standards and fundamental principles and rights at work ,
        • Create greater opportunities for women and men to secure decent employment and income ,
        • Enhance the coverage and effectiveness of social protection for all ,
        • Strengthen tripartism and social dialogue
    • 9. Labour economic & labour markets
    • 10. Labour economic
      • “ Labour economics looks at the suppliers of labour services (workers), the demanders of labor services (employers), and attempts to understand the functioning of labour markets and the resulting pattern of wages, employment, and income.”
      • (Handbook of Labor Economics, Ashenfelter and Card. 1999)
      • There are micro and macro dimensions in Labour Economics. In macro, the focus is on inflation aggregated unemployment debate. In, vise versa, micro focuses on role of individuals and firms in the labour market.
    • 11.
      • Classical labour economic studies about the exchange of labour on markets. This purely-market based features of labour is centered in the “merchandise” of commodities.
      • In Labour Market, what is been exchanged is workers’ ability to offer services and not workers themselves .
      • Labour is not a commodity because of the mental and intellectual aspect of labour.
      Labour economic distinctions
    • 12. The definition of labour market with neo-classical economics view
      • The classical economics approach to the Labour market;
      • “ Labour is a means of production, ‘factor of production’ (with capital and land).”
      • If wages are fully flexible, labour market equilibrium will be attained (i.e. quantity of supply and demand of labour would be matched). Hence there will be the clearing of market effect.
      • (Graphically explained in the next slide)
    • 13. The labour market assumption of neo-classical economics
      • Assumptions
      • (in simple supply/demand model):
        • Demand curve in downward sloping, supply curve in upward, equlibrium (wage) at intersection
        • income-leisure trade off
        • Indifference curves
        • Perfect competition (perfect, symmetric information, no transaction costs)
        • Homogeneous workers
      wages Quantity supply demand Equilibrium of labour 0
    • 14. The ILO definition of labour
      • ILO Constitution and the Philadelphia Declaration of 1944
      • “ Labour is not a commodity.”
      • Workers should not be subject to ‘market forces’ in the same way as oranges and lemons, and they have the rights and need for security and social protection.
    • 15. The critics against neo-classical economics view
      • There are always unemployment which cannot be explained by the classical theory. (
      • Labour markets function differently from the markets for commodity. And labour demand and supply do not respond in the same way as commodity market does for the price changes.
    • 16. The critics against neo-classical economics view
      • Newer Labour economics tried to figure out the constant problems in labour markets and their variables.
      • Labour markets failures that are often ignored by theoretical/classical approach such as, information asymmetries, heterogeneous workers, transaction costs, monopoly (only one seller), and monopsony (only one buyer), oligopoly, oligopsony (a limited number of the above)
    • 17. Unemployment rate map Unemployment rate by country, from figures at CIA world factbook, 2006
    • 18. Labour markets indicators
      • To understand the functioning and dynamics of the Labour market, there are several key indicators about the labour markets of one specific regions or country.
      • The labour force
      • The participation rate
      • The unemployment level
      • The unemployment rate
      • The employment rate
      • Others…
    • 19. Part 2 The labour market institution The definition of labour market institution Examples of labour market institution Determinants of labour market institutions
    • 20. The labour market institution
      • What is labour market institutions?
      • “ I know it when I saw it”
      • Judge Potter Stewart in US Supreme Court
      • The definition of Labour Market institutions could be very broader and obscure to categorize. The phrase “I know it when I saw it” would be very useful appropriation of the definition.
      • The phrase "I know it when I see it" is expression by which the user attempts to categorize an observable fact or event, although the category is subjective or lacks clearly-defined parameters. The phrase notably appeared in Jacobellis v. Ohio (1964), decided by the United States Supreme Court.
    • 21. The labour market institution
      • Maybe defined as the rules, practices and polices related to the labour markets and its participants. (formal or informal, written or unwritten, universal or particular by the location or region, all of which affect how the labour market works
      • In other words, the labour market institutions shows the systems, dynamics and structures within labour markets and their constituents and systematically cooperate together to maintain the structures, mechanisms or orders, and cooperation governing the behaviours of the constituents (workers, employees, government, policy maker)
    • 22. The labour market institution
      • Labour market institutions reflect on the different level of societies’ norms, values, cultures and legal policies, etc.
      • LMI could be explicit and long-standing as certain labour laws that are considered as universal rights, and also could be the informal and periodic practices that reflect the views of society for certain time phrase.
    • 23. Some examples of labour market institutions
      • Employment protection legislation (EPL)
      • Collective bargaining
      • Career placement center
      • The minimum wage
      • Unemployment benefit
      • Wage determination policy
      • Training and skill institutions
      • Social security and income guarantee system
      • Non-discrimination policy and regulation for women and disabled
      • The payroll taxes
    • 24. Determinants of labour market institutions Labour i nstitution National Labour laws Production System Social Norm ILO Standard ** In defence of labour market institutions, Janine Berg and David Kucera
    • 25. Key characteristics of LMI in developing countries
      • Dual labour markets (formal/informal)
      • Lage share of agriculture and rural labour
      • Non-wage labour (self employment and unpaid family workers) more important
      • Labour force growth higher
      • Labour force participation rates among the 15-64 are higher (because of lower school enrollment rates and pervasive poverty)
      • Human capital investments are lower
      • Non-labour poduction inputs per worker are much smaller
    • 26. Part 3 Debates on Labour Market Rigidity and employment The reason of the high-unemployment? Is Labour Market Rigidity really to blame? Flexicurity : Definition, Policy, Approaches of the EU
    • 27. Current debate s
      • Is Labour Market Rigidity really to blame for unemployment and lagging economic growth rates?
      • How can one pursue the distributive justice with flexible labour markets and globalisation?
    • 28. Employment protection measures (EPM) and unemployment
      • Question : Is rigid labour market institutions to be blame for the high unemployment rates and difficulty of the economic growth?
      • Answer 1 : Yes! The strong employment protection measures and other social policy protecting workers create difficulty for the employers to deal in highly competitive market.
      • Answer 2 : No! there is no strong relationship or any statistical data proving the linkage between EPM and high unemployment rates or any other less-efficiency in the markets.
    • 29. EPM and unemployment - Answer 1 : Yes!
      • “ Labour market policies like minimum wages, job security regulation, and social security are usually intended to raise welfare, or reduce exploitation. But they actually work to raise the cost of labour in the formal sector and reduce labour demand… increase the supply of labour to the rural and urban informal sectors, and thus depress labour incomes where most of the poor are found…”
      • World Bank, 1990. p63
    • 30. EPM and unemployment - Answer 1 : Yes!
      • The excessively strict EPM : important contributor to the persistently higher and long-duration unemployment experienced in many countries since the early 1980s.
      • Reduce scope for flexibility for gaining competitive edge in markets
      • Increase costs to the employers, make difficult dismissals of workers ,makes industries hesitate to hire new workers, hence, less incentive for job creation.
    • 31. EPM and unemployment - Answer 2 : NO!
      • “ The OECD has been previously reviewed this issues several times [OECD (1993, 1994a, 1997a)]. Robust estimates of the impact of EPL (Employment protection legislation) on employment and unemployment have proven elusive, but the international comparisons presented in these and related studies have documented statistical associations between stricter EPL and several measures of labour market performance, including greater prevalence of long-duration unemployment and temporary jobs. … but an overall assessment of the resulting shifts in EPL strictness and their impact on labour market performance has been lacking to date.”
      • OECD Employment outlook (1999), Chapter 2,
      • Employment protection and labour market performance.
    • 32. EPM and unemployment - Answer 2 : NO!
      • “ There is only weak evidence for the negative impacts of labour market regulations. Moreover, labour laws and labour market policies are needed to ensure social justice for workers in developing countries. In labour markets where labour is in surplus, there must be a minimum statutory protection for workers.”
      • In defence of Labour Market Institutions,
      • Janine Berg and David Kucera,
      • Chapter 1.1 The Labour Market flexibility debate
    • 33. The case of Latin America
      • Reform of labour market regulation: the labour policy which has been undergone the neo-liberal reformation in the 1980s and 1990s didn’t produce big success in improving employment or other type of performance in labour market in case of 6 countries – Argentina, Bolivia, Brazil, Chile, Mexico and Uruguay.
      • (Fraile, L. 2009. International Labour Review, Vol. 148)
      • This shows that flexible labour market institutions are not panacea for labour market problems.
    • 34. The case of Latin America Average urban unemployment rate 7.1%,1990s Average urban unemployment rate 11.4%, 2003 Economic growth due to commodity boom & low interest rates
    • 35. The flexicurity debate
      • The concept refers to combining labour market flexibility with security for workers.
      • The beginning of flexicurity : The concept of flexicurity has been initiated and formulated within the European Union related to discussions on globalization and employment.
      • The concept shows the need for delicate balance between the need for sufficiently flexible labour market and the need for protecting labour market security.
    • 36. EU focusing on Flexicurity
      • ‘ The key issue for employees, management, the social partners and policy makers alike is to strike the right balance between flexibility and security” Green paper, EU, 1997
      • The European commission is the main political promoter of flexicurity. Although it has been mentioned mainly at the European level, the concept to flexicurity has to be developed into concrete policies and regulations in the level of the member state.
    • 37. Danish Flexicurity Model
      • Danish labour market recorded the lowest unemployment rate since 1975 and highest employment rate in European Union. (3.8% unemployment rate,2006)
      • OECD has pointed out the Danish combination of a flexible labour market and high social security is an ideal model for other European countries.
      • (OECD, 2004)
      Figure : The “Golden Triangle” of flexicurity (Arbejdsministeriet, 1999) Flexible Labour Market Generous welfare systems Active LMP
    • 38. Flexicurity policy
      • Flexible and reliable contractual arrangements through the modern labour law, collective agreements with workers organization.
      • Comprehensive lifelong learning (LLL) :
      • Continual training opportunity for adaptability and employability of workers and specially for the most vulnerable.
      • Effective active labour market policy (ALMP) :
      • Helps people to cope with rapid changes. Reduce the unemployment duration and ease difficulty of transition to new jobs
      • Modern social security system:
      • Provides adequate income support, encourages employment, and facilitates labour market mobility and broad coverage of social protection provision.
    • 39. Reflection points
      • The recent trend s in Labour market policy in your countries?
      • Do you think the model of flexicurity is ideal for your country?
      • What do you think are priority areas for improving labour market institutions in your country?
      • How persuasive are labour market failures in your country?
    • 40.
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