The Theory of Labour Market Intervention

The purpose of this paper is to investigate the conditions under which the government of an advanced country should intervene directly in the workings of the labour market. This is a very broad question, and I will concentrate on the potential effects of alternative long-term policies intended to ameliorate problems caused by various structural imperfections in the labour market. These structural imperfections are of two types. First, the wage structure may for a variety of reasons be unable to adjust sufficiently for the effective supplies of and demands for some classes of labour to be equated. Legal or social minimum wage practices can prevent the wage rates of jobs associated with very low levels of human capital from reaching their market-clearing levels; trade union power can do the same for the wage rates for many middle-skill jobs. The second type of imperfection is a secondary consequence of income transfer programmes that provide a subsidy to individuals for periods in which they do not work. Although these programmes transfer income to those who cannot earn an income that is considered sufficient by society, they also reduce the work effort of those eligible for the transfer. One obvious way for society to combat these structural imperfections is to attack them directly: repeal minimum wage laws, bash the unions, and eliminate income transfer programmes. In this paper, however, I assume that the direct approach either is not politically feasible or is socially undesirable. Instead, I take these imperfections as given and investigate the impact of indirect policies to make the labour market work better. There are two major types of labour market programmes that have been pursued by governments in virtually all advanced economies.' The first of these is the payment of subsidies to employers to hire specific categories of workers or to individuals in these categories as a supplement to their earnings. The second is the removal of individuals from problem labour markets through the provision of training, relocation allowances and the like. The remainder of the paper is concerned with modelling the effects of various forms of labour market intervention on employment, output and the distribution of net income. I do not attempt to provide the answer to the question of when and how the government should intervene under the alternative specifications of the source of the structural imperfection. In practice social programmes are subject to an almost unbounded set of evaluation criteria. The representatives of the groups that decide whether or not programmes will be introduced, continued, modified or cancelled first ask: How much do we get from this programme? If faced with the constraint of introducing some combination of policies that will achieve a certain objective (like reducing the non-inflationary unemployment rate by a specified amount, or increasing the average real income of a specific segment of the population to some target level), each special interest group pushes for those programmes that it perceives will hurt it the least (gain for it the most). As a consequence of this view of the way governments work,2 it is useful to derive benefit-cost ratios for individual programmes from the point of view of each of the

Economic interventionism · Economics · Government (linguistics) · Intervention (counseling) · Labour economics · Market economy · Minimum wage · Politics · Repeal · Subsidy · Wage · Work (physics) · Economic Theory and Policy · Housing, Finance, and Neoliberalism · Labor market dynamics and wage inequality

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