IN THE NAME OF ALLAH, THE MOST GRACIOUS, THE MOST MERCIFUL

THE ECONOMICS AND

FINANCING OF EDUCATION
© Khurram Shahzad

(M.A. E.P.M. 505)

(CODE # 6566)
UNIT 7: EDUCATION AND
THE LABOUR MARKET
Made by Khurram Shahzad
BN524244
 Education & the Labour Market

 Education is frequently seen as a crucial policy instrument

in the fight against poverty as it may help individuals to
access better jobs that raise their labour earnings and
thus contribute to the improvement of their lives.
© Khurram Shahzad

 On the labour market, education provides both productive

capacities to individuals and their signals to potential
employers – hence, attained qualifications are a main asset
in worker competition for jobs available on the labour
market (Gangl, 2000, p. 3).
 Mechanisms by which education affects
labour market outcomes:
 Pathways through which education operates
when affecting individuals’ outcomes on
© Khurram Shahzad

labour market are numerous and diverse:

years of schooling; educational level
attained; attainment of a particular
credential; educational system; investments
in education; schooling quality; individual’s
educational track; parents’ educational
track; curriculum type; and sector of
activity.
 Labour market outcomes impacted by
education:
 According to empirical evidence from
literature (for example, Soloman and
© Khurram Shahzad

Fagano, 1997; Gangl, 2000,2001; Margolis

and Simonnet, 2003; Goldberg and Smith,
2007; Stiglitz et al., 2009; Edgerton et
al., 2012),they usually refer to: wages and
earnings; the time to the first stable job;
employment/ unemployment; worker
productivity; hours worked; nature of work;
worker’s health; and fringe benefits.
 Education & the Labour Market Theories:
INTERNAL AND EXTERNAL LABOUR MARKET
 The internal labour market represents a
heterogeneous collection of compensation and
HR management policies that effect the growth
© Khurram Shahzad

possibilities of the employee in the current

organisation
 ILM are basically long-term contractual
agreements; the rules are characterised by
match-specific investments, asymmetric
information, risk aversion and transaction-costs.
The agreement includes wages, hours of work,
promotion opportunities and grievance
procedures.
 These agreements, however long-term in nature
are incomplete and could be affected by
exogenous future events
 Education & the Labour Market Theories:
INTERNAL AND EXTERNAL LABOUR MARKET
The external labour market represents a
collection of heterogeneous employment
© Khurram Shahzad

opportunities available to an individual as an

alternative given the person’s current job status.
 Thus external labour market signifies the returns
to human capital and search costs involved
among potential employers; it implies fluidity in
worker movement across firms and wages being
decided by an aggregate process
 The existence of the external market implies that
hiring patterns are influenced by external forces,
i.e. worker mobility, wage bargaining power of
the labour outside the firm and market structure
 Education & the Labour Market Theories:
NEOCLASSICAL THEORY
 This Neoclassical theory encompasses and is fundamentally
guided by assumptions including the view that individuals
© Khurram Shahzad

through their rationalization of preferences among various

outcomes maximize utility while firms endeavour to maximize
their profits; and that people’s actions are based on their
consideration of relevant information, all occurring in a
circular flow in a closed market (Gintis 1987). Workers in this
theory balance gains from the offer of the marginal unit of
their contribution (their wage), with their loss of leisure, a
disutility, while firms in their hiring of employees balance the
resultant cost with the value output of the additional
employee (Kessler 2007).
 Education & the Labour Market Theories:
NEOCLASSICAL THEORY
 This theory makes the assumption that each worker has
ordered preferences over the jobs in the labour
© Khurram Shahzad

market/economy with a capacity of performing at higher or

lower productivity levels in each of them, treating labour just
as a factor of production (a commodity) and blurring the
distinction between labour, the entity that gets into the
production process, the concrete, active process in the
worker’s contribution expressed by labour power and its
capacity for capitalist exploitation; and the labour power, the
commodity with attributes including the capacity for the
performance of some productive activity of varying types and
intensities. This commodity is exchanged in the market,
valued and tagged with a price (wage) (Gintis 1987).
 Education & the Labour Market Theories:
NEOCLASSICAL THEORY
 The limitations of the Neoclassical theory of pay include its
lack of capacity in explaining the existence of pay
© Khurram Shahzad

differentials as wage scales generally deviate from its analysis

of demand and supply (Glen 1976). Wage scales and their
manipulation are often instruments used in an enterprise’s
labour exchange to ensure integrity, an internal labour market
that develops along with the labour market as traditionally
perceived but having a fundamental qualitative difference in
the exchange, and is also an instrument through which the
state controls and manages its microeconomic environment
(CIPD 2008).
 Education & the Labour Market Theories:
ALTERNATIVE THEORIES:
© Khurram Shahzad
 Education & the Labour Market Theories:
THE RADICAL THEORY OF SEGMENTATION:
The classical and neoclassical theory determines the
equilibrium wage rate on the basis of external labour
© Khurram Shahzad

supply-market and an internal firm demand. The

drawback with this analysis was that it didn’t consider
employee-employer relations; there wasn’t any unification
of the supply and demand side models of compensation
and employment.
It was in 1986 that a detailed analysis of matched
employee-employer data was recognized.
 Education & the Labour Market Theories:
THE RADICAL THEORY OF SEGMENTATION:
Both the schools of thought leave many major labour
market policy issues- wage dispersion, income
© Khurram Shahzad

distribution, unemployment unexplained.

 The thrust area of classical economics was on profit
maximization behaviour of both the individual and the
firm; workers maximise utility by bargaining for higher
wages and firms maximise profits by keeping labor costs
constant
 This orthodoxy was challenged on the grounds that it
ignored the institutional structure and social influences
 Education & the Labour Market Theories:
THE RADICAL THEORY OF SEGMENTATION:
THE DUALIST THEORY
 The dual labor market theory depicted a primary market
© Khurram Shahzad

of unionized jobs with higher pay and a secondary

market of the low-paying jobs characterized by jobinstability;
 This ‘dualisation’ argument to neo-classical school was
developed in US labor market research. This division of
labor market corresponds to the empirical observed
structural wage differences unaffected by demand and
supply conditions
 Education & the Labour Market Theories:
THE RADICAL THEORY OF SEGMENTATION:
The distinguish between primary and secondary labour
market lies in the market regulation and its feedback
© Khurram Shahzad

mechanism-
 Primary labour market- characterized by long-term
employment contracts, career growth patterns, limited
affect of market fluctuations; in effect it does not behave
as a market
 Secondary labor market-wage level fluctuations,
manpower requirements, employment decisions effect
performance and pay scales
 Thus market regulatives are mostly operative in the
secondary sector; this gives rise to segmentation
 Education & the Labour Market Theories:
THE RADICAL THEORY OF SEGMENTATION:
The radical approach of DUALISM to labor market theory
has been based on observed empirics of American
© Khurram Shahzad

capitalism; i.e. political and economic forces in the

monopoly capitalist structure have given rise
segmentations(primary internal and secondary external)
and the sources of these segmentation are internal to the
economic system
 We thus define labour market segmentation as historical
processes of political and economic forces that have
brought about segregation into separate sub segments,
distinguished by behavioral rules and labour
characteristics
 Education & the Labour Market Theories:
THE RADICAL THEORY OF SEGMENTATION:
Thus in the SLM theory, we talk about the
existence of direct linkages between the
productive capacities of a worker and wages, job
© Khurram Shahzad

allocation across firms depending on the human

capital and information structure between
employee and organization
 As pointed out earlier, the segmentation
stemmed from the capitalist conduct of firms in
the 1970s, SLM theory lays emphasis on the
development of institutional constraints on firms’
behavior, and the systems of labour market
regulations
We deal with the institutional rules that define the
segments and not individual skills that were
considered in the orthodox theory as the factor
for wage differences.