This response is years tardy, but “what is labor economics” is a fundamentally important question that requires more careful attention than it has received here. If the question refers to mainstream thinking, WEECONOMIST got it right. Labor economics is a subset of Applied Micro. Rational workers organized by general market equilibrium produce confident conclusions about wages, jobs, productivity, factor-income distribution, etc., often accompanied by some less-certain speculation about assumed wage stickiness and layoffs. Two variations of mainstream question are much more enlightening. What should labor economics be? What did labor economics used to be?
What should labor economics be?
Labor economics should explain important (largely identified by micro/macro policy relevance) outcomes of worker behavior, focusing on rational interaction with current and prospective employers. The latter (“prospective”) occurs in the marketplace and has received almost all modern economist attention. The former (“current”) occurs inside the firm, i.e., the workplace, and has much greater incidence in actual economies. Workplace analysis crucially turns on the nature of employer oversight of employee on-the-job behavior. If cost-effective, labor outcomes default to the marketplace. If not, a failure typically caused by asymmetric workplace information, labor outcomes are determined inside the firm and differ from market solutions. Specialized human-resource departments are tasked with this profit-seeking responsibility. Nonmarket subjects of interest include wage setting, employment and hours, working conditions, good and bad jobs, rationed good jobs and the hours on them, involuntary job loss in response to adverse nominal-demand disturbances (both layoffs and job downsizing), factor-income distribution, and pure profit (the firm’s residual revenue once all inputs to production are paid). The critical message is that market-centric analysis is only part, and frequently the less interesting part, of labor economics. It is telling that the most over-promised research in labor economics has long been search/match modeling that attempts to use voluntary joblessness to explain cyclical unemployment.
Since The General Theory, the most consequential labor research has been theorists’ quest for rational foundations for market wage rigidity, manifest in both downward nominal labor-price rigidity over stationary business cycles and chronic wage rent paid to a substantial share of the labor force. Those powerful rigidities have been shown to be optimal in workplaces that are restricted by employer-employee information asymmetry and are crucial to understanding macro stabilization mechanics after the Second Industrial Revolution. (See the GEM Project,
https://gemproj.info.)
What did labor economics used to be?
The useful explanation of keystone wage rigidities was provided by middle 20th-century research of a loosely organized school of labor economists named by Clark Kerr “Neoclassical Revisionists”. For an introduction to the NR literature, see Kerr (1988), “The Neoclassical Revisionists in Labor Economics (1940-1960) – R.I.P.,” in Bruce Kaufman (editor), How Labor Markets Work; Richard Lester (1951), Labor and Industrial Relations: A General Analysis; and Lloyd Reynolds (1951), Labor Economics and Labor Relations. Other key NR players included John Dunlop, Frederick Harbison, Charles Myers, George Shultz, and Arthur Ross.
NR theorists pioneered the economic analysis of labor-management interaction in large, highly specialized firms that became ubiquitous after the Second Industrial Revolution. Informed by their on-site investigations, Kerr et al. descriptively modeled labor pricing and use in workplaces restricted by inherently limited OJB oversight. Their treatment of worker preferences, with emphasis on fair treatment, is especially insightful. NR analysis, while falling short of microfounding information-challenged workplaces, remains fundamental to making sense of intra-firm behavior, wage rigidities, and highly specialized economies.
Modern theorists’ progress toward more evidence-consistent labor economics is facilitated by recognizing that the NR literature exists and is not some obscure effort that never saw the light of day. Quite the contrary, Neoclassical Revisionists dominated middle 20th century labor economics in the United States. NR theory has deep roots in the multidisciplinary study of actual behavior in large, highly specialized firms that became ubiquitous after the Second Industrial Revolution. Without attention paid to what goes on in complex workplaces, labor economists are doomed to playing with half a deck.
Another relevant aspect of economic theory makes the revival of NR analysis long overdue. Economists learn early in their careers that rational pricing in the context of unbalanced buyer-seller information is deeply problematic in market-centric modeling. Modern labor economics has been badly impacted by that dictum having become a paradox, both indisputable and typically ignored. Generalizing rational exchange from the marketplace to information-challenged workplaces, surely an intuitive innovation, responds to that damaging negligence. Commonplace market-centric answers to user_6ty99z question are among the most daunting obstacles to evidence-consistent, policy-relevant macroeconomics.
