Relationship Between Labor Market, Unemployment and Microeconomics Term Paper

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[. . .] The people in the primary labor market refuse to work in the secondary labor market, leading to unemployment (Blundell and MaCurdy, 2008).

The theory of Insiders-Outsiders is another way to look at the twofold nature of the labor market. People who are already in the labor market (insiders) make it impossible for those individuals who happen to be outside the labor market (outsiders) to work by attaining and defending high wages via their unions (Blundell and MaCurdy, 2008).

In line with the traditional neoclassical theory, the main reason for unemployment is the absence of perfect competition within the labor market. This theory interprets unemployment as an independent occurrence, which is not dependent on growth and development. The theory suggests that unemployment is owing to external factors such as failure to cut down salaries or flaws in the labor market. The concept of flexibility could solve all the issues in the labor market. According to this theory, if flexibility is achieved in the labor market, and perfect competition is achieved, then the issues involving can be solved (Blundell and MaCurdy, 2008).

The neoclassical theory's employment strategy

The neoclassical theory did not tackle the employment policy in depth because it was of the opinion that unemployment had been a short-lived situation that would somehow resolve on its own without any involvement from external forces. The neoclassical economists believed that the solution for unemployment should be sought in market forces. The neoclassical approach deemed it more important to handle the issue of inflation via the government intervening to resolve it. If inflation was handled, they believed that the economy would stabilize and the issues related to unemployment would resolve automatically. The neoclassical approach does not offer solutions for the problem of unemployment since it views unemployment as being a less important issue which does not require direct intervention from the government (Head, 2005).

The neoclassical theory refuses to accept any support of the unemployed from the government in way of finances because it considers such a move as damaging. This refusal is in line with the theory's view of the role of the state in relation to the economic and the non-economic. Because the economic (allotment of labor factor to the labor market and production process) is not related to the non-economic it means that the state's efforts should only be directed to the economic. Any other involvement would be wasteful (Head, 2005).

Critique of neoclassical theory's employment strategy

The neoclassical theory views unemployment as an occurrence that is not related in any way to development. The theory suggests that unemployment occurs because of external factors such as failure to reduce salaries and the presence of flaws in the labor market. According to this theory, if conditions of perfect competition are created in the labor market, the problem of unemployment would be eliminated. However, the labor market is different from any other market since the product being exchanged is the labor force which is unique and superior to any other goods because it involves the efforts of human beings. The value of labor power cannot be valued merely through a salary. A salary paid to workers cannot be viewed in the same way that a price for any other commodity in all the other markets which can be lowered at will, sometimes to amounts which cannot sustain a decent living merely based on demand and supply (Head, 2005).

Unemployment levels being calculated by the salary as suggested by the neoclassical theory has been rejected by both the Keynesian and the modern economist meta-Keynesians. When a company sets out to establish the number of workers required at any given point in time, the numbers who are employed are driven by the anticipated demand for the goods and the technical circumstances of production, and not the salary or wages. Looking for ways to raise the demand for products could lead to reduction of the rate of unemployment as opposed to reducing wages because this way, more workers will be employed in order to produce the number of goods that satisfy the newly created demand (Head, 2005).

Using the level of wages alone to explain the constantly high levels of unemployment is an inadequate explanation for the phenomenon. There are other factors in the production process which have to be focused upon; this includes the link between salaries and production, the level of current costs and so on (Head, 2005).

Regarding unemployment as an occurrence which is a result of imperfections in the labor market such as lack of perfect competition does not explain why there is a constant increase in unemployment. The neoclassical theory fails to explain the way the production process is organized, or how the organization affects the ratio of employment and unemployment. New ways of organizing production based on flexibility impact the level of employment and unemployment. Flexibility here refers to two aspects of the method of production. One aspect is the ability of the manufacturing structure to adapt, which is made easier through the novel kinds of automation. The other aspect is the level and ability to move from one task to another task, in the context of workplace conditions and specialization (Arestis 1986:84). The neoclassical employment policy aims to rectify proper operation of the market, it does not employ proper tools to comprehend the constantly changing productive system as well as the labor market.

The neoclassical theory ignores another important element; industrial relations. The theory understands industrial relations only from the lawful aspect of employment. However, industrial relations cover more than that. It also includes a complex system of organizations that govern the manufacturing as well as the reproduction procedures. The analysis that looks at industrial relations from those two angles is critical since the procedures involving industrial relations decide the precise accumulation position (Head, 2005).

The constant changes occurring today in the labor market cannot be analyzed scientifically through the concept of flexibility which is utilized by the neoclassical philosophy. The theorists belonging to the school of 'Regulation' use the concept of flexibility in the labor market in a useful and systematic way to assess the idea of socialization through work. These theorists explain the process of development via the relationships between the accumulation regime and the best way to regulate them. The tenant association is classified as the set of provisions which govern the use of and reproduction of the labor power. They include the method of the labor process, mobility related to the workforce, and formation as well as method of using employees' income. Any status of accumulation has a specific form of employment association to which it corresponds. The status of meta-fordism corresponds to a modern type of employment relationship called the accommodating tenant association (Head, 2005).

The current era is distinguished by accumulation status which has not been in existence in the past, and a difference between new ways of organizing the manufacturing process which are viewed in the problem of unemployment. The employment policy suggested by the neoclassical approach cannot be achieved if it does not take into consideration the changes that mark the current era (Head, 2005).

In summing up, both the current and the projected employment policies are linked with a perception of the factors that lead to unemployment. Therefore, while trying to understand both active as well as passive employment strategies, this association should be considered (Head, 2005).

Both the Keynesian and the neoclassical theory propose that the employment policy is linked to the best possible allocation of productive assets, particularly that of labor. On the one hand the neoclassical approach proposes that the employment policy has to deal with and correct the flaws in the labor market, such as the lack of perfect competition. On the other hand, the Keynesian theory assumes that the labor market is already imperfect; therefore it contemplates that the employment policy is a direct consequence of this malfunction of the market. The state acts as an outside player, getting involved to aid attainment of the best possible distribution of labor. Both functioning and inert labor policies endeavor to better distribute labor within the labor market (Head, 2005).

The neoclassical as well as the Keynesian theories lead to a conclusion that the notion of full employment can be achieved through the best possible allocation of work in the labor marketplace. The most fundamental query that can be asked about the employment policy is if the policy is one related to the constituents of social change or this demarcation is insincere in so far as a harmonized policy relevant to humans exists (Head, 2005).


Acocella, N., Bartolomeo, D., and Hibbs, DA., (2008), Labor market regimes and the effects of monetary policy, in: Journal of Macroeconomics, 30: 134-56.

Arestis, P., (1986), Wages and Prices in the UK: the post Keynesian view, Journal of Post Keynesian Economics, 8, 3, p339

Azariadis, C., (1975), Implicit contracts and unemployment equilibria, Journal of Political Economy 83, 6, 1183-1202.

Barlevi, G.,… [END OF PREVIEW]

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Relationship Between Labor Market, Unemployment and Microeconomics.  (2014, April 30).  Retrieved February 23, 2019, from

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