Labor markets, gender, and macroeconomics
James Heintz
Informal write-up of presentation (SOAS workshop & consultation on women's economic
empowerment, Jan 26-27, 2012)
6 Feb 2012
The functioning of labor markets shapes the performance of the economy as a whole along a
number of dimensions: macroeconomic adjustments, long-term structural change, the process of
human development, and the realization of collective well-being. However, the models and theories
frequently used to explain labor market dynamics, and from these explanations draw policy conclusions,
fail to reflect the actual functioning of labor markets. This failure is particularly acute in developing
countries, in which a wide variety of institutions, market transactions, and power relationships mediate
the exchange of labor, yet the theories and standard empirical approaches used to characterize these
dynamics bear a poor resemblance to what is taking place in reality. There is a need to consider 'real
labor markets' - the actual ways in which labor is exchanged, including how choices regarding allocation
of labor are facilitated or constrained and the full set of conditions under which returns to labor are
realized.
These issues are of critical importance. The vast majority of the world's population - in
developed and developing economies - earn the income they need to support themselves and their
families through their labor. Choices around the allocation of this labor, including between market and
non-market activities, and the factors determining the returns to labor are therefore of paramount
importance. These issues are particularly critical for vulnerable populations for whom their own labor
frequently represents their most abundant, and most valuable, resource. Those individuals who are
constrained in their ability to exchange labor - due to age (either very young or very old), restricted
physical capacity, or disability - depend on the labor of others, particularly when the social policies that
exist to protect those unable to participate in labor markets are not enough. For many women,
specialization in unpaid work affects current and future labor market choices and control over time and
money in the household. For these reasons, issues of labor markets and employment therefore must
feature as core elements of any discussion of 'inclusive growth.'
But the functioning of labor markets not only makes growth more or less inclusive, it also
directly affects the process of growth itself. Labor markets determine the allocation of human resources
in an economy, and thereby affect growth and long-run economic performance. A reallocation of labor
from low-productivity to high-productivity activities will raise aggregate productive performance - which
is necessary, but not sufficient, for improving the average quality of employment. Similarly, the ways in
which labor is allocated to unpaid care work has significant implications for the level of investment in
human beings and, hence, long-run growth. Such investments improve the well-being of individuals, but
they also have implications for the economy as a whole.
Approaches within the discipline of economics to explain and analyze labor markets are overly
narrow. They focus on the productive characteristics of individuals or isolated firms. They frame labor
supply decisions as individual trade-offs between work and leisure. They primarily approach labor
demand through the lens of labor costs and the optimizing behavior of employers. These factors are
important and need to be taken into account. However, by only focusing on a relatively narrow set of
variables to describe labor market dynamics, much of what makes labor markets tick gets lost.
Moreover, those parts of the larger picture which are jettisoned may turn out to be more important for
understanding how labor is exchanged than the core variables and techniques that tend to define
standard labor economics.
One tension exists in the bifurcation of labor markets between enterprises (self-employment)
and wage employment. For example, enterprise-based approaches emphasize the endowments of
factors of production and the productive relationships between these endowments for determining the
returns to labor and capital. However, this approach misses important aspects of how very small
household enterprises function in low-income countries. The endowments of fixed assets in these
household enterprises are typically extremely small and are particularly small for enterprises operated
by women. Those individuals who are self-employed in household enterprises are primarily dependent
on the returns to their labor, not their assets, and are effectively selling their labor to generate income.
The realization of the returns to their labor are mediated by other markets and institutional dynamics,
not the typical interaction between employers and employees characteristic of the standard labor
market models. In additions, individuals may be engaged in multiple employment activities
simultaneously (including both self- and wage employment) and, from what little longitudinal evidence
we have available, it appears that individuals move between different employment activities - including
between formal and informal employment.
Therefore, separating self-employment from wage employment and using different models and
analytical techniques to understand what is going with regard to employment, livelihoods, and labor
markets provides a fractured framework for understanding how real labor markets operate. What is
needed is a broader, more inclusive conceptualization of labor markets - one that sees 'labor markets' as
the collection of all institutions through which labor is allocated and exchanged. While this alternative
does not spurn the usefulness of standard wage labor or enterprise based methods for specific research
questions, it does recognize that such approaches are incomplete and, at times, inappropriate. A
broader notion of what labor markets really are requires new levels of analysis. Labor supply is not
simply the outcome of atomistic decisions made by optimizing individuals, but rather determined in the
context of households, with multiple interdependent agents motivated variously by self-interest,
commitment, reciprocity, and love. The supply-chain is often a more important unit of analysis than the
enterprise for understanding market structures and power dynamics. The relationship between a street
trader and her supplier (or a waste collector and her buyer) may have a more significant impact on her
returns to labor than her productive endowments.
Within the enterprises of the self-employed, the role of assets (capital) needs to be interrogated
more thoroughly in the context of understanding labor markets and the factors affecting returns to
labor. For many very small enterprises, working capital (e.g. cash on hand) is frequently as critical as
fixed capital (e.g. equipment) in day-to-day operations. Women processing rice in northern Ghana
benefit from being able to buy rice when the prices are lowest, but to do so requires access to money at
the right time. This represents a distinct role for particular types of capital assets - not as a productive
factor, but rather affecting the terms under which labor is ultimately exchanged.
Because of the focus on individual characteristics, analysis of labor markets tends to favor the
supply-side rather than the demand-side, explaining earnings using age, education, experience, sex, and
other demographic variables. The supply-side is important. The invariably strong estimates of the effect
of education on labor market outcomes testifies to this. However, there is a risk to reducing the
explanation of labor market outcomes to a collection of core individual attributes with gender dynamics
being whittled down to a significant coefficient on a dummy variable. Equally critically, the demand-side
may receive scant attention. This is problematic. A lack of sufficient labor demand contributes to high
levels of part-time and contingent work, unemployment and underemployment of various kinds, and
growing informality as formal opportunities are rationed. Due to segregation of activities, a lack of labor
demand has different consequences for women and men, producing more demand pressures for
women's market labor relative to men's. Women are frequently crowded into activities in which labor
demand may be 'saturated', putting downward pressure on the returns to women’s remunerative labor.
The standard wage labor model does address labor demand, but often by focusing on labor
costs and sidestepping other factors which may influence the demand for labor. Labor demand curves
are downward sloping - weak demand is explained by high costs. Of course, labor costs are important
and cannot be ignored. However, other factors, for which there may be greater policy leverage, affect
labor demand. Within the metaphor of the standard model of demand for wage labor, there is a need to
pay attention to factors which shift the labor demand curve, instead simply trying to slide down it.
Constrained access to markets, insufficient accumulation of productive capital, limited complementary
public investment (e.g. infrastructure), and lack of reliable information can all affect labor demand. The
recent global economic crisis provided a clear and devastating reminder that the macroeconomic
environment has a far-reaching impact on the demand for labor. Moreover, the standard model has
nothing to say about the demand for the labor of the self-employed. It is critical to keep in mind that
labor demand is frequently derived demand, flowing from the dynamics of markets other than a
narrowly defined labor market.
When looking at how labor markets function, it becomes clear that the exchange of labor
deviates significantly from the textbook ideal - labor markets are rife with market imperfections. The
extent and nature of these imperfections have been theorized and documented at length: information
asymmetries, the existence of transactions costs to labor force participation, segmentation and barriers
to perfect mobility, market power, gender dynamics, and the role of social norms (e.g. norms of
fairness), among others. It has been noted that labor is the one commodity which can contest the
conditions under which it is exchanged, embedding the exchange of labor in social relationships which
are far more complex than relatively anonymous one-shot market transactions. Despite these deviations
from the abstract market clearing relationships of standard labor economics, labor market policy is often
formulated to try to get labor markets to behave as much like the perfectly competitive ideal as
possible. Such a task is sisyphean, unless at some point it becomes possible to take the human beings
out of labor markets. Labor markets, broadly defined, are inherently messy, complex, and indeed
imperfect. The challenge is to make labor markets work better, not to try to force them to conform to
an imagined ideal.
Since Keynes' General Theory, it has been recognized that the functioning of labor markets has
important implications for macroeconomic outcomes. Robert Solow, whose name is closely linked to the
development of the neoclassical model of economic growth, recognized this fact in The Labor Market as
a Social Institution(1990), in which he argues that the social character of labor markets affects
macroeconomic adjustment and equilibrium. Akerlof and Yellen (1985a, 1985b) show how small
deviations from rational behavior and perfect market outcomes, including in labor markets, can have
large effects on macroeconomic outcomes; the macro consequences outweigh the costs at the micro
level. The lesson is clear: routine imperfections in labor markets not only affect interactions at the
individual level, but also have economy-wide implications and affect general social welfare. In addition,
we have already stressed that the allocation of labor alters overall economic performance and
influences the path of growth and structural change.
Perhaps the most significant channel through which labor affects the macro-economy is also the
one which is most frequently brushed aside: the recognition that labor is a produced factor of
production. Labor is not simply exchanged; it is also produced. Yet, labor often appears as an exogenous
variable in growth models, with the growth rate of the population and the workforce taken as given.
There are exceptions - for example, in the article by Robert Barro and Gary Becker (1989) “Fertility
choice in a model of economic growth”. In Barro and Becker's model, parents make costly investments
in children - represented equivalently by either less disposable income after paying for social
reproduction or fewer hours dedicated to market work. Such investments ensure that labor is available
for productive activities in future periods. Altruism at the household level provides the motivating force
for making investments in human beings. Indeed, altruism plays a critical role in sustaining growth in
Barro and Becker's model - set altruism equal to zero and future growth collapses.
The assumptions of Barro and Becker's model can be criticized on a number of fronts - e.g.
households do not have a single utility function, altruism does not characterize all intra-household or
inter-generational dynamics, gender relations shape how investments in children are made, etc.
However, putting these general critiques of Becker's approach to household economics aside, it is
interesting that behavior other than individualistic self-interested optimizing decisions is central to
guaranteeing future growth. Non-market institutions, various interactions and a wider range of human
motivations become central to growth when we consider labor as a produced factor of production.
Markets alone are not enough to secure long-run growth, let alone inclusive growth. As has been long
recognized by feminist economists, how labor and other resources are allocated to produce the human
resources on which an economy depends is of the upmost importance, and yet this central part of the
growth story is frequently overlooked.
These issues have important implications for understanding how labor markets really work and
how they affect growth, development, and social welfare. It is not sufficient to consider how labor
markets, broadly defined, allocate labor between market activities (e.g. various forms of wage
employment and self-employment), how this allocation affects economic growth and structural change,
and how the allocation ultimately shapes social well-being. We also need to consider, in the analysis of
real labor markets, how labor is allocated to the production of labor itself - in the household, through
the state, and in markets. Gender dynamics feature prominently. The question of women's economic
empowerment cannot be boiled down to making markets work for women, since there is a risk of sidestepping the importance of non-market spaces and institutions. Markets in general, and labor markets in
particular, depend on non-market institutions in order to function. It is this constellation of institutional
forms and dynamics which needs to be considered if we are to understand how real labor markets work.
Refs.
Akerlof, George and Yellen, Janet. 1985a. "Can small deviations from rationality make significant
differences to economic equilibria?" American Economic Review 75(4): 708-20.
Akerlof, George and Yellen, Janet. 1985b. "A near-rational model of the business cycle with wage and
price inertia" Quarterly Journal of Economics 100: 823-38.
Barro, Robert and Becker, Gary. 1989. “Fertility choice in a model of economic growth” Econometrica
57(2): 481-501.
Folbre, Nancy. 2008. Valuing Children: Rethinking the Economics of the Family. Cambridge, MA: Harvard
University Press.
Keynes, John Maynard. 1964. The General Theory of Employment, Interest, and Money. Harcourt Brace.
Solow, Robert. 1990. The Labor Market as a Social Institution. Cambridge, MA: Blackwell.