(This is just a sketch of some issues that are on my mind now, rambling style. Bear with me.)
In Finland and many European countries, there have been discussions about labour market flexibily, especially in the context of the current Eurocrisis and how to get out of it. One of the arguments is that there are structural issues in the labour market which makes unemployment worse. The solution is then to make the labour market more flexible.
What does this mean? Usually economist refer to collective agreements, minimum wages and social benefits as factors which make the labour market “rigid”. These barriers to true flexibility exist in the context of economic models of labour supply and demand, where collective agreements etc ensure that the market doesn’t clear, i.e. that there remain people unemployed. Others have written about how unrealistic and unhelpful these models are, which I will thus not repeat here.
Rather, my concern is how far economics as a science is from the reality of real humans. Regardless of attempts of modelling labour markets in more detail, not even search theory in microeconomics does not really get at what work is, why people work and what choices they make there. Economics is to a large extent an a-historical science, which is its weak point in contributing to understanding of society. Some people do actually move all over the place to find the next job, but not everybody can, nor does everybody want that, because of their social roots in the community they live in. (it may also work the other way around: that after working somewhere for a long time you discover that you have rooted there, through social networks, even though you came for the work in the first place).
The point is that, as Lars Syll like to point out, reality is actually uncertain, not uncertain as defined by stochastic processes. Therefore, is really matters what people actually do (and feel and think) and what is their history – and how they move in or between networks (see also Richard Sennett’s The Corrosion of Character). If you take into account all the various characteristics and histories of people, then it is clear that economic modelling of the labour market doesn’t make any sense at all – it is a crude reduction of some aspects. These aspects do have relevance! If we talk about wages and labour shortages, we also talk about entrepreneurs that operate in competitve markets and may not find the suitable person they need.
But: then we are actually not talking about economics (or economic modelling of the labour market), but about legal issues. Crudely put, labour markets are essentially just a bunch of unwritten labour contracts. After all – what is it that binds the employer to paying the employee wage X? Right, the contract. In many European countries some minimum terms for these contracts are laid down in collective agreements (which are agreements between employers’ federations and labour unions, usually).
So, people who work have a contract (either permanent or fixed-term) with specific terms for the job. The unemployed are the ones without contract. Is it really so, that to make the labour market flexible, labour contracts (and the agreements/laws they’re based on) must be weakened? In a legal sense, labour contracts are contract like any, but the problem of course with our current complicated work is that it is rather difficult to ascertain whether or not the employee has worked in accordance to the contract – this is an issue which involves trust, because it is not possible to write everything an employee must do in the context of the labour contract. The French do try, but this doesn’t exactly make labour relations more smooth. Furthermore, it leads to a process about interpretation and contestation, which already could be seen in the early part of the last century in e.g. GM or Ford factories.
When politicians talk about making the labour market more flexible, do they talk about the labour contract? ( of course wages may be a good starting point for the negotiation of a labour contract). Not very often – they usually talk about measures that actually suspend the normal contractual force of labour contracts, e.g. extended trial periods, wageless work, longer working hours. In other words, they talk a lot about time, or rather time that should not be convered by standard contractual relations (and their rights and duties). All of this is not exactly new: the idea that labour is not a commodity that can actually be sold is straight from Marx of course. Also the idea of labour markets as a collection of potential labour contracts should also not be new – even for a single job opening the situation doesn’t simply recall much of a market situation – because it has to be contractually agreed what the deal is. The content of the transaction is something that continues to be defined (and often negotiated) throughout the duration of the contract.
My point simply is: when talking about labour market flexibility, there are many things economists cannot account for in their models. Rootedness in communities is perhaps the field of sociologists, but since for work the labour contract is extremely important it would be nice to see more labour lawyers talk about the possibilities of flexibilization. Otherwise we may see that flexibilization is just another way of talking about lowering wages – because companies are always free to pay more.