In this course we have examined a number of explanations for why labour market disadvantage, such as low pay, unemployment, and so on, falls disproportionately on certain groups within the labour market. We have shown that these explanations basically fall into two broad schools of thought, the orthodox or neoclassical approach and institutional models of labour market segmentation. The former attempts to explain the distribution of disadvantage in terms of human capital theory and utility maximisation. Human capital theory simply says that some people earn less than others and fare worse in the labour market because they invest less in education and skills and because they show less commitment to the labour market. In a sense, we are explaining labour market inequality in terms of factors found to be closely linked to labour market outcomes.
The neoclassical approach also recognises that discrimination exists in the labour market. Indeed, the approach adopted by orthodox economists (based upon the early work of Gary Becker) has been used to estimate how much discrimination does exist. These estimates show how much of, say, the earnings differential between men and women reflects differences in productivity-related characteristics and how much is due to discrimination. The problem that proponents of this approach face is why does discrimination take place in the first place? Or, using the concepts employed by these economists, where does the ‘taste’ for discrimination come from? This is especially puzzling when, as you have seen, to discriminate actually imposes a cost on the economic agents who choose to discriminate.
The alternative approach, the segmentation theory, develops an explanation of discrimination and labour market disadvantage based on the premise that the labour market comprises non-competing groups of workers, some of whom have access to ‘good’ jobs and others who only have access to ‘bad’ jobs. The allocation to the low wage, secondary segment is not based on education or training but on the self-interest of dominant groups within the labour market. This approach, which seems to provide an analysis that derives more closely from the actual experiences of those who are discriminated against and marginalised in the labour market, does not perform well when subject to empirical scrutiny. Whether this reflects the nature of the tests employed to date by labour economists is an important question beyond the scope of this course.
Finally, we have touched upon a number of policy issues. The two approaches we have examined offer very different prescriptions. At one extreme, neoclassical economists support laissez-faire policies which promote competition in the labour market. At the other, segmentation labour economists see the need for intervention in the labour market to promote the interests of marginal workers. Many labour economists who see themselves as orthodox would, however, not disagree with the need for some form of intervention but would focus this on enabling disadvantaged groups to get access to better education and to training, and in the provision of such services as childcare facilities which can improve women's involvement in the labour market.
You now have the opportunity to solve the questions we prepared in the following activities. Answers can be revealed by clicking on the link provided.