There are several external influences on the labor market, with differing objectives, leading to economy-wide consequences. Providing job security is one such objective which is intended to curtail unemployment, but in reality its effects are quite opposite.
Job mobility (ability to switch jobs) and deemed essential for progress are two conceptual grounds that are obstructed by job security that is further influenced by the cost of hiring workers on costly rates. Moreover, there is increased capital substitution to preserve the current workforce, hence resulting in increased unemployment.
Next follows minimum wage laws. These laws result in a labor surplus, attributing wages to workers that may be well below their productivity. Unemployment is a direct consequence. The increased opportunity cost of the wage that workers could have earned, if they had been employed at a lower rate, as opposed to being unemployed, is another critical factor.
Similarly, the ‘living wage’ notion has caused the poorest to enter unemployment lines since the majority of the minimum wage workers do not, and should not, support families, because most are in the 16-34 age bracket. Most empirical studies hence point in a similar direction indicating a positive relation between minimum wage laws and unemployment, especially amongst the young, less experienced, low skilled workers.
In the case of informal minimum wage, that are imposed by custom, labor unions, or international institutions, the effects are similar as the wages and barriers to entry both remain high in the developing economies, causing unemployment. Workers already employed benefit, while those willing to be employed lose out.
Overall there is a net loss to the society, especially when considering the potential commodities that could have been produced. Surplus of labor also entails more selective criteria on part of the employers, increasing job qualification requirements, causing some workers that could have been employed to be unemployed. To observe the differential impact of minimum wage laws, their adverse impact on racial and ethnic minorities is also worth noting, as illustrated in various countries over time.
We now turn our attention to the economic consequences of collective bargaining, may it be in the form of employer or employee organizations. Both attempt to artificially set the wage rate, distorting the basic economic principal of efficiency, as workers are forced to move to jobs where they are not as productive.
Hence resources are not optimally utilized. However, the incentive to cheat in employer formed cartels provides a limit to the power they can exercise. Labor unions, on the other hand, though ensured higher wages, also caused unemployment as lesser workers were demanded at higher wages, especially in the private sector. In the public sector, however, money spent on workers was tax-payers money hence there was little resistance to union claims.
Both these organizations, in their multi-faceted agendas also aim for better working conditions. Since better working conditions are costly to the employer, it almost always results in lower wages.
It might also entail unemployment since in a recession, for instance, employers would find it feasible to make current workers work overtime rather than hire new workers and offer them the increased benefits/better working conditions. Working conditions can be further broken into safety laws, child labor laws and hours of work. The first two are deemed essential for society’s welfare.
The last one’s effects are debatable as some argue that lesser hours mean lesser contribution to GDP, while others contend that lesser hours with similar wages, mean more unemployment. Finally, working conditions in Third World Countries draw immense attention. Though Multi National Corporations might be accused for providing terrible working conditions, these companies still provide relatively better conditions and relatively better wages, making them attractive to the local workers.
Works Cited
Sowell, T. (2011). Basic Economics: A Common Sense Guide to the Economy. New York: Basic Books.