Can We Use the Logic of Supply and Demand to Analyse Labour Relations?

I just completed reading the ESRI publication ‘Recovery Scenarios for Ireland’. What struck me most about the analysis is the complete over reliance upon ‘logical assumptions’ to make economic arguments. Some of the assumptions are so hypothetical that it would be an exaggeration to call parts of the paper ’empirical social science’. This is particularly the case when the authors refer to labour markets, labour costs and competitiveness. I enjoy logic, it reminds me of studying philosophy. Deductive assumptions have their place in the world of intellectual theorising. But, it is a weak replacement for empirical observations when making ‘policy recommendations’ in our current economic crisis. Granted I prefer using ‘institutional’ analysis when examining the labour process and different modes of capital accumulation. Thus, I do not take the logic of supply and demand in ‘perfect markets’ for granted. It is fiction. Thus, here are three quick reflections after reading the paper.

1. You cannot make broad sweeping statements/predictions based on assumptions that have no empirical grounding. This papers assumes more than it illustrates. It is a coherent argument but lacks evidence. The model is presented as the underpinning rationale for the conclusive remarks but the model is a weak logical construct.

2. The underlying assumptions are greatly exaggerated and most of them are left implicit in an unexplained model. More importantly, the authors do not explain what is meant by ‘competitiveness’. The reader is simply expected to believe that unit labour costs are the primary measure of competitiveness. If this is the case why do Nordic countries, with the highest unit labour costs in the western world, always score highest on global competitive indicators? It is simply illogical to adopt a position of national competitiveness based on labour costs whilst arguing for high quality export led growth. If consumers are going to buy high quality products then an economy requires high paid workers. The same applies to services. The logical conclusion of the ESRI argument is that other economies need high paid workers to buy our exports but we need low paid workers to produce the goods. Is this the type of economy we want for Ireland in 2015?

3. The authors state ‘this is not a normative statement’ (re – allocation of spending cuts) and then go on to say ‘labour markets operate according to a model of supply and demand, recent measures have been an ‘intervention’. The assumption that labour markets operate according to the functional and efficient equilibrium of supply and demand is not ‘non-normative’. Labour markets are the most regulated of all market transactions. One would be hard pressed to find any empirical evidence where labour markets operate according to the logic of supply and demand? Even in the US, wage rates are set at firm level and usually involve some level of negotiation and bargaining. It may not be at the collective level but it still takes place. Thus, there is no such thing as an automatic market driven response to economic crisis in institution rich labour markets (Hassel, 2009).

Basing economic policy advise on logical but non-empirical assumptions is not evidence based policy.

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