Wednesday, January 21, 2009

Labor Markets, Incentives and Development

This post incorporates the following Keystone Economic Principles:

4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
8. Quantity and quality of available resources impact living standards.

First of all, I want to give a HT to the folks at Izzit for making this post possible. It's a good resource if you want to be able to integrate current events into your teaching.

There have been a couple stories featured on Izzit recently that can be put together for an interesting discussion on labor markets, incentives and economic development. The stories basically illustrate extreme situations in labor markets - but by illustrating the extremes, it becomes your students can discover that the desired effect is somewhere in the middle. The question to your students then becomes "where?"

The first story to grab my eye was actually from The Wall Street Journal, and addressed the idea of employee absenteeism in Belgian businesses. It seems the government mandates unlimited sick leave for employees and the standards for what constitutes sick are quite lenient. Consequently, a lot of employees take a lot of time off for situations that others might not think would qualify under a less generous system. Essentially, the system sets up incentives and people respond in predictable ways. The fact that employees (a resource) are often not available has an impact on living standards - a fairly high tax rate if the example given is representative.

The second story is actually an opinion piece from The New York Times by Nicholas Kristof. In the piece, Kristof discusses the idea of imposing labor standards on underdeveloped economies such as Cambodia. The idea is to eliminate sweatshops. But the question he raises is whether by imposing higher standards than the economy can support, we are hurting rather than helping the poor of Cambodia? (By the way, I strongly recommend watching the video if you can.) Again, systems create incentives - people (investors? employers? employees?) respond to incentives - and the standard of living is impacted by the quantity and quality of resources (investment capital in this case).

One would expect that the ideal is somewhere in between. Should industrial labor standards come before industrialization? Or are they a result of industrialization? If the former, does it create an unnecessary or insurmountable hurdle? If the latter, at what point should it be expected? And finally, since people respond to incentives, what are the incentives of the people and or groups that advocate the extreme positions? What are the incentives for people outside the system to advocate or block change? What are the incentives for people inside the system to advocate or block change?

I look forward to your comments.

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