Employment Research Paper

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Employment measures the number of employees in a country, region, or sector. Employees are generally defined as persons on payrolls, that is people who are compensated for the work they perform. Depending on the particular definition, this may or may not include self-employed people, also called proprietors, who work for themselves. Along with unemployment, employment (including proprietors) constitutes the labor force. Including people working without pay, for example housewives, volunteers, and sometimes armed forces, one obtains the workforce. Finally, all the population capable of working constitutes the manpower.

Measurement

Measurement of employment is quite diverse across countries, which makes cross-country comparisons difficult. There can be variations in definitions, coverage, data collection methods, information sources, and estimation methods. For example, the United States publishes employment data from two different sources. The National Current Employment Statistics (the so-called establishment survey) from the Bureau of Labor Statistics does not cover agriculture, hunting, forestry, fishing, the armed forces, and private household services. Sick leaves, paid holidays, and employees on strike (but not the whole period) are counted. The Current Population survey (the so-called household survey), also from the Bureau of Labor Statistics, covers the civilian population sixteen years of age and older in all sectors, except armed forces. It counts as employees those who “(1) did any work at all as paid employees, worked in their own business or profession or on their own farm, or worked fifteen hours or more as unpaid workers in a family-operated enterprise; and (2) all those who did not work but had jobs or businesses from which they were temporarily absent due to illness, bad weather, vacation, childcare problems, labor dispute, maternity or paternity leave, or other family or personal obligations, whether or not they were paid by their employers for the time off and whether or not they were seeking other jobs.”

Intertemporal comparisons of employment are more reliable, although they can also be subject to changes in definition or coverage. For example, the introduction of child labor laws and mandatory schooling has increased the minimum age considered for employment statistics.

Most frequently, employment data is based on surveys, sometimes complemented by various techniques to increase precision or interpolate between data points. Employment may also be inferred from data provided by trade unions, trade associations, social security administration, or other government agencies.

Long-Term Trends

The sectoral composition of employment has changed considerably in human history. Because under a strict definition of employment self-employment is not considered, a labor market with an explicit exchange of work for payment evolved sometime during the last millennium, after both the introduction of money and the existence of surplus labor in agriculture. This surplus labor made the specialization of tasks possible, in particular for various manufacturing trades. Once production expands beyond the abilities of a family, external labor needs to be hired and a labor market is born. The extent of this labor market has been very limited, however, for a long time, in particular as slavery and servitude are not considered to be employment. It is the Industrial Revolution that allowed a significant take-off of employment, through the creation of factories where proprietors constituted a very small minority of workers and the preceding second agricultural revolution that created significant excess labor on farms. Even in the twenty-first century, employment measures typically exclude agriculture, as the latter is still considered to be largely the domain of proprietors.

In all industrialized economies, employment has thereafter gradually shifted toward services, which now typically constitute a larger share of employment than manufacturing. Employment also requires better skilled workers and has an ever-increasing share of female employees. Better skills are required to operate or monitor more sophisticated machinery, to provide more elaborate services, or to use computers. The increased female involvement in employment can be traced back to two main factors: (1) the emancipation of women breaking the traditional role of the housewife, along the decline of the wage gap with men; and (2) significant improvements in technology used in housekeeping (such as washing machines and vacuum cleaners) that made it possible to pursue paid work outside of the house.

One source of considerable controversy is whether technological progress has a positive impact on employment or not. As was the case with the Industrial Revolution, rapid technological progress can lead to a massive sectoral reallocation of employment, which does not necessarily mean a reduction in employment. For example, while the introduction of the steam engine rendered horses obsolete for most of their original tasks, such obsolescence is more difficult to reach for humans, given their versatility and their ability to adapt. But this still happens, in particular for workers close to retirement. On a more microeconomic level, technological progress simultaneously destroys and creates jobs. In this context, several kinds of technological progress can be identified, depending on how they alter the aggregate capital/labor ratio in the production progress; it is labor augmenting if progress reduces this ratio, labor saving otherwise, or nonbiased if it leaves the ratio unchanged. Over the long term, the capital/labor ratio has increased steadily, both through capital accumulation and through a reduction in the work hours. The labor income share, however, does not exhibit any particular trend and there is no conclusive relationship between the unemployment rate and various measures of the growth rate.

The last two decades of the twentieth century witnessed another important development: globalization. The wage pressure from developing or emerging countries influenced employment, in particular for low skill jobs in manufacturing, but also increasingly for higher skilled positions in services. There is, however, no agreement among scholars whether this impact has been significant at the macroeconomic level (it certainly was in some sectors of the economy), and whether it has been negative at all. Indeed, while some jobs were “exported,” the availability of intermediate goods at lower prices increased the productivity of some sectors that then expanded. It is, however, clear that lower skilled workers face reduced employment opportunities, a phenomenon that started even before globalization accelerated.

Informal Employment

One important distinction in the labor market is between formal and informal employment. There are many definitions of informal employment, the most common being employment that escapes taxation and regulation, and thus is not protected by the government: Various social programs do not apply to informal workers, such as unemployment insurance, social security, some labor laws (in particular the enforcement of contracts), or invalidity and accident coverage by the government. Informal employment is much more widespread in developing economies, where social programs are less common and tax authorities have less control. Yet informal employment is still present in developing economies; for instance in 2000 Friedrich Schneider and Dominik H. Enste estimated informal employment to reach around 10 percent of employment in the United States, higher in other countries, typically those with higher labor income tax rates or inefficient taxation.

As the informal sector escapes regulation, it is generally viewed that it should be limited. In many cases, however, it is a response to overregulation or corruption. Workers may migrate between formal and informal sectors as opportunities arise, the informal sector often being regarded as a stepping-stone in which skills are learned before being hired in the formal sector. Accordingly, wages are lower in the informal sector. Informal firms are typically family based and small, have low productivity, and have very low capital intensity. Workers are hired on a casual basis on arrangements of short duration.

Child Labor

One aspect of labor markets, especially in developing economies, is child labor. One commonly defines child labor as the participation of school-aged children on a regular basis in the labor force in order to earn a living for themselves (street children) or to supplement household income. The International Labour Organization (ILO) divides child labor into three categories: (1) labor that is performed by a child who is under the minimum age specified for that kind of work defined by national legislation, and that is likely to impede the child’s education and full development; (2) labor that jeopardizes the physical, mental, or moral well-being of a child, either because of its nature or because of the conditions in which it is carried out, known as hazardous work; (3) the unconditional worst forms of child labor, which are internationally defined as slavery, trafficking, debt bondage and other forms of forced labor, forced recruitment of children for use in armed conflict, prostitution and pornography, and illicit activities.

The national laws of most industrialized countries abolished child labor by the end of the nineteenth century. However, in 2000 Douglas Kruse and Douglas Mahony estimated that several hundred thousand children work illegally in the United States. Worldwide, the ILO estimated (with considerable uncertainty) that 218 million, or 16 percent of children aged five to eleven were working in 2004, 126 million in hazardous work.

The ILO pushes very hard to eliminate child labor where it is the most prevalent, in developing countries. While the strategy is generally to have governments ratify conventions and implement child labor laws, those methods are often insufficient. As long as schools are sufficiently effective in providing education (not a given), parents are very aware of the high returns to education. Yet they often send their children to work because their contribution is needed to sustain household income. As the children do not get an education, their income as adults will be too low to allow their offspring to go to school. Breaking these vicious circles is the key to eliminating child labor, as the implementation of child labor laws in North America or Europe has shown.

Business Cycles

All economies are subject to fluctuations and one important aspect of business cycles is the systematic changes in employment. Indeed, in most cycles and most economies, employment and gross domestic product (GDP) evolve in tune: GDP and the total number of hours worked typically reach their peaks or troughs at the same time and fluctuate about as much. Employment, however, tends to fluctuate (in percentage terms) less than GDP and tends to lag the movements of GDP by a few months. While these regularities can be observed across all economies, there are some striking differences. For example, fluctuations in total hours worked in some economies tend to happen on the intensive margin (hours per worker) rather than on the extensive margin (employment). In other words, there are more changes in overtime or undertime than hiring and firing. This is true for several European economies, but not for the United States, primarily because of the influence of labor laws, labor market traditions, and unions.

There are also clear patterns through the business cycles in terms of hiring and firing. Plant level studies have revealed that most of the fluctuations in employment can be explained by job destructions: These are high in a recession and low in booms. Job creations are, however, much more stable through the business cycle. It is also generally observed that employment fluctuates significantly more for less educated workers.

Policy

Many government policies affect employment, and it is impossible to review them all. One can distinguish between those that have an impact on the average level of employment, and those that try to mitigate employment fluctuations. Whenever policy is involved, some welfare criterion needs to be established if one is to determine whether policies are good or bad. In this respect, psychologists consider that it is good for people to be employed, as this improves their self-esteem. Sociologists would consider the negative impact on one’s standing in society due to unemployment. Employment of women is considered to be a necessary part of their empowerment. Economists consider the fact that people would not necessarily want to work: They appreciate leisure more than work, and one symptom of this is that they are paid to work, instead of paying for this privilege. However, employment is a way to obtain the income necessary for consumption and savings. There are also various frictions on the labor market, such as the transaction costs and the difficult matching process between vacancies and unemployed workers, which make full employment unattainable. Thus, high employment is preferable, but not at any cost. However, child employment should be reduced to a minimum. Also, given that households generally do not like fluctuations in income, as they imply fluctuations in consumption, policies that stabilize employment are considered preferable, as long as they do not reduce average employment too much.

Employment is influenced indirectly but sometimes significantly by various policies, such as provisions of the tax code. For example, high or increasing marginal tax rates are known to discourage the participation of spouses on the labor market. The so-called marriage penalty in some tax codes—whereby the incomes of two spouses are added to determine the tax rate instead of considering the incomes separately—has the same effect.

Employment policy is enacted to improve working conditions or facilitate the employment opportunities of some workers. Those categorized as active employment policies include job placement agencies, labor market training, and subsidized employment. Passive policies include unemployment insurance and early retirement programs. Scholars, including David Grubb and John Martin, debate the effectiveness of these policies, in particular in light of their costs, which lead to an indirect discouragement of employment through higher tax rates. Or a generous unemployment insurance system may also encourage unemployed workers to reject job offers in the search of better matches, thereby lowering employment and increasing the costs to fill vacancies.

Labor laws are put in place to prevent abuses and to organize the labor market. They may also have perverse effects on employment. For example, laws putting restrictions or making it more difficult to lay off workers may prevent them from being hired in the first place, especially in sectors where employment would exhibit stronger fluctuations or where workers may have private information about their qualifications. Finally, generous minimum wage laws are generally thought to have adverse effects on employment, as some employers would not open vacancies if wages have to be higher. While there is controversy in the literature about this, the employment effects of minimum wages may simply be small.

This discussion may give the impression that any intervention in the labor market has harmful effects. Labor markets have particular characteristics that make government intervention necessary, but without excess as negative indirect effects may outweigh positive direct effects. The right to unionize is enforced to counter the monopoly power that employers have in a very fragmented labor market. But too much union power leads to excessive negotiation power for employees, and then to high wages that prevent the hiring of additional workers.

Stabilization of employment through the business cycle is generally viewed through the lens of avoiding fluctuations in unemployment. Monetary policy has a long tradition of playing with the trade-off between (expected) inflation and the unemployment rate, the so-called Phillips curve. Monetary policy has, however, shifted from an active stance in the Keynesian tradition to a more passive stance seeking to stabilize inflation at rather low levels. It has been recognized that monetary policy can do little about (un)employment due to large delays and uncertainty about the impacts.

Fiscal policy has and is still being used for stabilization purposes in some countries, but again the tendency is toward a hands-off approach. Where it is applied, it is through public works programs, temporary tax breaks directed to firms to encourage hiring or to prevent layoffs, or income tax breaks to encourage consumption and economic activity in general. Again, such policies are not generally viewed to be advisable as delays in implementation or effectiveness are typically longer than a recession. However, they have a certain political appeal.

Bibliography:

  1. Bean, Charles, and Christopher Pissarides. 1993. Unemployment, Consumption and Growth. European Economic Review 37: 837–854.
  2. Daveri, Francesco, and Guido Tabellini. 2000. Unemployment, Growth and Taxation in Industrialized Countries. Economic Policy (April): 49–104.
  3. Davis, Steven J., John C. Haltiwanger, and Scott Schuh. 1998. Job Creation and Destruction. Cambridge, MA: MIT Press.
  4. Greenwood, Jeremy, Ananth Seshadri, and Mehmet Yorukoglu. 2005. Engines of Liberation. Review of Economic Studies 72 (1): 109–133.
  5. Grubb, David, and John Martin. 2001. What Works and for Whom: A Review of OECD Countries’ Experiences with Active Labor Market Policies. Swedish Economic Policy Review 8: 9–56.
  6. International Labor Organization. 2006. The End of Child Labor: Within Reach. Geneva: Author.
  7. Kennan, John. 1995. The Elusive Effects of Minimum Wages. Journal of Economic Literature 33 (4): 1950–1965.
  8. Kruse, Douglas, and Douglas Mahony. 2000. Illegal Child Labor in the United States: Prevalence and Characteristics. Industrial and Labor Relations Review 54 (1): 17–40.
  9. Lazear, Edward. 1990. Job Security Provisions and Employment. Quarterly Journal of Economics 105: 699–725.
  10. Nardinelli, Clark. 1990. Child Labor and the Industrial Revolution. Bloomington: Indiana University Press.
  11. Phillips, Alban W. 1958. The Relation between Unemployment and the Rate of Change of Money Wage in the United Kingdom, 1861–1957. Economica 25: 283–299.
  12. Schneider, Friedrich, and Dominik H. Enste. 2000. Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature 38 (1): 77–114.

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