The key characteristics of the neoclassical paradigm of the labor market
The neoclassical paradigm of the labor market includes the concepts, theories and models of a free market emphasizing on its fairness, flexibility, self-regulating constancy and dynamism. Here, the labor market inflexibilities undermine flexibility as imposed through the interventionist policies and legislations. After analyzing the neoclassical paradigm of the labor market we find that all external inflexibilities are removed here. Here labor is a subordinate to the various laws of a market and is thus, treated as if it were a commodity. Since neoclassical paradigm of the labor market mainly revolves about the role played by markets in our economy, it believes that economies can prosper only when markets work liberally and there exists nothing preventing their quick clearing. The general view given by the neoclassical paradigm is that markets, consumers and labors make rational calculations taking into account what is better for their own wellbeing (Mangum & Philips, 1998).
Neoclassical paradigm of the labor market uses the free market theory to justify its views. The neoclassical paradigm assumes that if economy, and market, is left to itself then a situation tending to full employment equilibrium can be attained. According to the free market paradigm, development of the markets become more likely to take place when the government or state abstains from largely intervening in the maters of the industry and trade directives, but rather they permit the free market to govern itself. The neoclassical paradigm of the labor market recommends that a boom in the market is only possible if the government is absent from any economic intervention and if it passively facilitates the natural allocations of a free market (Peck & Yeung, 1999). Thus, growth can only be possible if the free market is allowed to exploit the potency of international markets along with the advantages of their domestic production, specifically cheap labor. Thus governments, instead of trying to regularize and restrict such an informal sector, need to concentrate on the creation of an enabling environment for free trade. But this can happen only when the labor market works properly. But if unemployment occurs then one of the following situations will take place:
- Creation of surplus of labor in the market due to unemployment
- Decrease of wages
- Increase in the demand for labor, or Restoration of equilibrium by full employment (Mangum & Philips, 1998).
Due to such rigidity of the neoclassical paradigm of the labor market certain problems arise. There is too much of solidarity in the market since the workers are treated differently. The wages received by the workers, which were initially excessively high, tend to become very low even though we know that flexibility of wages is a key factor in balancing supply and demand. However, the neoclassical model sometimes implies apparent movement in the direction of the level of similar wage all through the labor market. The autonomy of the firms get undermine as they focus on pursuing flexibility in our modern age of worldwide competition. As a result, even though the neoclassical paradigm of the labor market has a tendency for full employment, frictional unemployment is generated. Some laborers voluntarily choose to stay out of work and the labor force, because of the presently low wage rate, to enjoy leisure time, while others are unable to work (Bumas, 1996).
Neoclassical paradigm of the labor market and free trade is considered to be the dominant paradigm of global trade. This paradigm acknowledges the existence of market failures and also that the free market has certain imperfections. But they do not believe that these failures and imperfections can be corrected through government interventions. They assume that since the individual economic mediators are rational, they will try and capitalize for their own benefits. Thus, international trade, and not impoverishment acts as the basis of enrichment. Not only does it explain the commodity compositions but also the appropriate course of trade with respect to the law of comparative advantage. The neoclassical paradigm further argues that economic growth can be raised by promoting competition among the companies rather than through legislative interventions, which have very little effect, and competition laws. However, such a type of specialization of trading relations may allow some of the larger economies to extract surplus valuation from those who are less powerful and thus, due to free trade a situation may arise where the rich become richer at the cost of the poorer. According to the center periphery dichotomy, the benefits from free trade get directed towards the center due to which a dependency is created on the economies of the periphery (Mangum & Philips, 1998).
The neoclassical paradigm systemized the idea of supply and demand since it believes that they are the joint determinants of quantity and price that are necessary to maintain an equilibrium in the market and also that these two concepts affect the allocation of income and the distribution of output. The neoclassical paradigm advocates that developing economies should devaluate their currency. They should remove the grants for the fundamental commodities and reduce government expenditures for social, educational and health protections. There should be reductions in trade protections and in employments of the public sector. Also the paradigm demands that reforms in the labor markets should increase the mobility and inflexibility of the formal sector (Peck & Yeung, 1999).
The key characteristics of the Marxist paradigm of the labor market
The Marxist paradigm of the labor market actually descends from the classical paradigm of the labor market. This paradigm mainly focuses on the labor theory of value and how capital exploits labor. According to the labor theory of value, the value of certain objects can be determined by the amount of labor that has gone into producing it. Thus, it seems that the Marxist paradigm does not allow any room for markets. Marxist paradigm of the labor market believes in a transformation of nature. According to this paradigm the process of transformation can be termed as labor, while the ability to transform can be termed as labor power (Grantham & MacKinnon, 2002). The key element of the Marxist paradigm of the labor market revolves around the mode of production including the forces or means of production and relations of productions. While the former refers to certain things that are necessary for the production of material goods, the latter refers to the social relations, which individuals commit into by obtaining and utilizing the forces or means of production. Apart from the above the other key characteristics include the state, politics, regulation and superstructures. According to the Marxist paradigm, the key social relationship involving the capitalist mode of production is the exchange of time for labor between capital and labor. Those capitalists who have obtained and own the various forces of production can buy labor time by offering optimal wages to the laborers. (Bumas, 1996). However, the labor time given by the laborers, or value of labor power, is worth a lot more than the equivalent wage given to them. The Marxist paradigm says that this surplus, in the form of labor power, can be further invested in newer forces of productions. However, sometimes the capitalist owners exploit the situation by using the surplus for their own benefits. The laborers are almost totally dependent on the capitalist owners who have accumulated productive forces and thus, have to work for them in order to survive. This, according to the Marxist paradigm of the labor market, is “subordination of labor to capital”. (Jones, 2001). The Marxist paradigm is sometimes also said to be one sided since it included the logical system of capital but leaves out wage labor.
The Marxist paradigm of the labor market holds that people were divided by capitalism into two major classes. At first there were the capitalists who were the owners of factories and machineries, i.e. the forces of production, and the proletariat comprising the wage earners who could only sell their labor and thus, did manual labor for wages. The capitalists were continuously able to exploit the proletariat since the state along with its numerous coercive institutions, like courts and police, supported the capitalists, keeping them in power as the ruling class. The Marxist paradigm of labor market wanted the abolition of private property so that a radical egalitarian economy could be established. This paradigm believed that all through our human history we have seen the different social classes struggle with each other for power. (Grantham & MacKinnon, 2002) But, the future of our economy and market lay in the hands of the working classes since history has proved that capitalism will ultimately come to a halt with inexorable grind. Diminishing profit, crisis due to overproduction and under-consumption will undeniably undermine the foundation of capitalism. The Marxist paradigm of the labor market is extremely anti-democratic since it demands genuine communism. Due to the Marxist paradigm a feeling of despair and powerlessness is created among those who explicitly seek to form a new economy or society since it makes us feel that a huge number of people are completely against us and do not wish to share the same goals as us. However, the Marxist paradigm attempts to remediate the evils created by capitalism which exploited the masses through the organization of the economic system (Jones, 2001).
The Marxist paradigm of the labor market is based on two theories, the first being the labor theory of value, as stated earlier, and the second a firm belief in the potentiality and perfectibility of our basic human nature. While the first hypothesis asserted that the actual value of an object or thing should be directly related with the labor which has gone into producing it, the second hypothesis asserts that human beings can naturally be good if there are provided with the ideal atmosphere. However, the flaws lie in the facts that, for the fist hypothesis, if an object or thing is not wanted by anyone then its mere production cannot make it valuable just because a lot of effort was put into producing it. Labor, in itself cannot be the sole cause determining the value of an object, even though value is somewhat proportional to labor. Value and labor are interrelated since the value of a thing includes the labor that a person is ready to put in for acquiring it. The Marxist paradigm of the labor market does not allow for any mechanism that could be used for determining the direction of productions. Thus, instead of the markets managing the production process, it is the bureaucrats and the community who manage the process. The second hypothesis has even more flaws. For example, in order to create a perfect society where people are naturally good, the only humans that are available are the imperfect individuals who make up our existing society, but a perfect society cannot be made up of imperfect people (Grantham & MacKinnon, 2002).
Key differences between the neoclassical and Marxist paradigms
While the neoclassical paradigm believed in the free market, the Marxist paradigm favored the concept of transformation of nature. Since these two paradigms had different perspectives about the definition of labor and labor market, a divergence in their views became apparent. The neoclassical paradigm viewed the world to be full of selfish and atomistic individuals. In such a world any good or service that is produced by any type of labor force is taken to be productive if utilities for everyone are produced out of it. On the other hand, the Marxist paradigm, even though it does not completely reject the above given broad relationship among utility and labor force, does deny the fact that all those activities which create utility are also productive.
The Marxist paradigm insists that by grouping individual members into social classes labor becomes productive but only when they contribute to the overall development of the various dominant forces of production. Labor can be considered productive only when it can generate profit for the ruling capitalists. Thus, we can see that the above given viewpoints of the neoclassical paradigm and Marxist paradigm are not entirely contradictory to each other, rather complement one another as they are relative and conditional. (Jones, 2001) Furthemore, we see that the neoclassical paradigm of the labor market has the opinion that value of an object or thing should be fixed by what an individual is willing to pay in order to obtain it. But the Marxist paradigm says that the value of an object or thing should be decided by the value of the labor that goes into producing that object or thing (Peck & Yeung, 1999). Also while the Marxist paradigm of the labor market emphasizes more on production, the neoclassical paradigm emphasizes on circulation, rather than both on production and circulation.
In conclusion, the neoclassical paradigm considers capital accumulation to be a mere side effect to a collection of all the equivalent exchanges that take place between different individuals. (Grantham & MacKinnon, 2002). On the other hand, the Marxist paradigm of the labor market focuses on the centrality involving the procedure of capital accumulation. It has also been seen that the neoclassical paradigm of the labor market dispenses with that of the labor theory of value, which has been inherited from the classical theory and is among the theories on which the Marxist paradigm of the labor market is based. On the demand area, the neoclassical paradigm favors the marginal utility labor theory of value and on the supply area it favors the general labor theory of cost.
- Bumas, L. O. (1996). Intermediate microeconomics: neoclassical and factually-oriented models. London: M.E. Sharpe
- Grantham, G. & MacKinnon, M. (2002). Labour market evolution: the economic history of market integration, wage flexibility, and the employment relation. NY: Routledge.
- Jones, M. T. (2001). Mainstream and radical theories of the multinational enterprise: Complementary approaches? The International Executive, 35(4), 339-356.
- Mangum, G. L. & Philips, P. (1998). Three worlds of labor economics. London: M.E. Sharpe.
- Peck, J. & Yeung, H. W. (1999). Remaking the global economy: economic-geographical perspectives. London: SAGE.