Labor market truths – Insights from the global economic environment course
In the global economic environment course with Prof. Aymo Brunetti we had the chance to better understand notions of macroeconomic. In this blog, I will share some learnings1 about employment and unemployment. I will focus on three aspects that are quite uncontested from an economist perspective, but somehow often controversially discussed in politics and in the media. This will show how well intended market regulations like a minimum wage or extensive dismissal protection may not lead to the desired outcome, and how developments which – from an employment perspective – might seem at first threatening (like self-checkout in the supermarket instead of cashiers), aren’t necessarily bad news.
IS A HIGH MINIMUM WAGE BENEFICIAL FOR THE LABOR FORCE?
Economists say no. To ensure a certain income for workers, minimum wages are often set at a level that is above the equilibrium wage. The equilibrium wage is where the supply curve intersects the demand curve (with households representing labor supply and companies representing labor demand). Consequently – at this price (wage) – this results in a labor supply overhang and to a lower labor demand. Employers are not willing to hire all available worker at such (too high) price (wage), and the low labor demand leads to (involuntary) unemployment.
MORE EMPLOYMENT THANKS TO DISMISSAL PROTECTION?
Economists say no. Dismissal protection might at first seem beneficial, creating the impression of job security. However, such regulations can unintentionally hinder job creation and aggravate unemployment. When companies are aware that they cannot dismiss employees during economic downturns, they will be hesitant to hire even when things go well. During a recession, such regulations might mitigate unemployment on the short term (period of notice), but they backfire in the medium- and long run, resulting in fewer job opportunities (employers hire if they can fire!). This serves as a classic example of regulations failing to consider incentives, ultimately achieving the opposite of their intended effect.
LESS JOBS DUE TO TECHNOLOGICAL PROGRESS?
Economists say no. Take the example of supermarket cashiers and self-checkouts. While this technology reduces jobs in this specific function, it boosts productivity and generates additional income across the economy. This income benefits the labor force (higher wages thanks to increased productivity), business owners (increased profits) and consumers (lower prices). The extra income will increase demand for goods and services, which in turn requires additional labor, ultimately increasing employment. Layoffs easily grab the headlines, but we don’t often read about the consistent creation of new jobs.
Note: Technological progress contributes to job creation, but it also underscores the importance of education and training (e.g. of a person who used to work as a cashier). As technological changes demand new skills, the labor force must adapt to these new requirements. Consequently, unemployment support now increasingly focuses on providing various forms of training to help the unemployed gain the necessary qualifications.
In conclusion, to fully grasp labor market dynamics, it is essential to consider the broader impacts of policies and trends. Measures like minimum wage and extensive dismissal protections, while well-intentioned, can lead to unintended consequences such as higher unemployment. Similarly, technological advancements, though initially seeming threatening, can boost productivity and create new jobs. Ultimately, we must embrace foresight and adaptability. Crafting effective labor market strategies demands a keen understanding of the full picture to genuinely enhance employment opportunities and economic well-being.
1 From the course and from Prof. Aymo Brunetti’s book “Economics for Secondary Schools and Further Education in Switzerland”, hep Verlag; 2. edition (1 Feb. 2019).
