Unit 6 The firm and its employees

6.4 Finding jobs and filling vacancies

How will you find work when you leave college? Would you consider the following method, used by some workers in the US, Japan, India, Pakistan, and many other countries?

You could get up early in the morning, and join a group of people gathering on a street corner, or in a hiring hall, waiting for someone to turn up who wants to hire ‘day labourers’. If you are lucky enough to be picked out at random from the group—or perhaps if you are willing to work for a lower hourly wage than others—you may obtain work for a few hours, or a day. You might work on a construction site, or loading and unloading goods at a warehouse, or cleaning. And probably (although you may be unlucky) you will be paid at the end of the day. If there is nothing for you today, perhaps you will decide to arrive an hour earlier (at 4 a.m.) tomorrow.

The market for ‘day labour’ services resembles markets for consumption goods, where buyers and sellers meet, and a loaf of bread, T-shirt, or can of Coke is handed over in return for a sum of money. In these markets, buyers do not care about who produced the good they buy, and sellers are similarly not concerned about who is buying, as long as someone buys their products.

But when the good is labour services, such a market is not satisfactory either for buyers (employers) or sellers (workers). Although millions of workers around the world rely on this kind of precarious short-term work, it is usually because they have no alternative. Typically, they have little education; some are migrant workers, many are from disadvantaged groups. Employers may be able to benefit from low wages and poor working conditions, but the productivity of the ‘match’ between the employer, the job, and the worker is likely to be low. Workers are often assigned to work unsuited to their skills, and for which they have no experience. They have no time to learn the job and get to know their co-workers so that they can work effectively, before moving on to something different. They have little incentive to work hard, beyond what is required to be paid at the end of the day, so they need to be closely monitored.

The importance of finding a good match between worker and job, and the costs for workers and employers of turnover (changing from one match to another), explain why most labour markets are very different from consumer goods markets. Both sides benefit from forming long-term relationships.

One reason is the differences between workers, and between firms. People who do similar work nevertheless differ in their skills and abilities, and their evaluation of a particular job; their employers differ in location, and the hours, working conditions, and non-wage benefits that they offer. When both sides find a match that suits them, they will want to maintain it.

Secondly, as the employment relationship progresses, the worker or manager can develop the skills needed to do the job well—learning by doing—and build good working relationships with colleagues (and in some cases, customers). The manager learns more about the worker’s strengths and weaknesses, and can assign them to appropriate tasks and teams. Social relationships develop too: some of our workmates will become our friends.

relationship-specific asset
An asset is something that is owned, and has value. It is relationship-specific if it is only of value within an economic relationship (e.g. a contract for one firm to supply another). Relationship-specific assets include any knowledge or skills that are only valuable while a person remains employed in a particular firm. See also: firm-specific asset.
firm-specific asset
An asset is something that is owned, and has value. It is firm-specific if it is only of value within a particular firm. Firm-specific assets include any knowledge or skills that are only valuable while a person remains employed in a particular firm. See also: relationship-specific asset.

The economist, Oliver Williamson, termed these skills, networks, and friendships relationship-specific or firm-specific assets because they are valuable only while an employee remains in a particular firm. When the relationship ends, their value is lost to both sides. Retaining workers and managers matters to the firm: when someone leaves, it incurs costs of recruiting a suitable replacement and discovering their abilities, providing induction and training in specific aspects of the job, and lost productivity until the new employee becomes as productive as the old one.

Likewise, the worker may have a lot to lose. Imagine first how your life as a shopper changes if your local grocery store closes tomorrow. You would have to find a new place to shop, and it might take you a few minutes to learn where the items you need are on display. But if the firm where you work goes out of business tomorrow, you would lose your network of work associates and workplace friendships, and your firm-specific social and technical skills would suddenly become useless to you. It might be months before you find a new job. You might have to move to a new town. Then your children would lose contact with their friends, too.

matching market
A market for interactions between two distinct groups, in which the members have different characteristics from other members of their own group, and would benefit from matching with particular members of the other group. For example, firms and workers in the labour market, men and women in what is sometimes called the marriage market. Also known as a two-sided market.

The labour market is a matching market: people on either side of the market care about who they match with on the other side. This differs from other markets, like the market for bread. The baker does not care about exactly who buys their bread; and the customer does not care about where they purchase the bread. But in the labour market, employers are not just interested in hiring ‘a worker’ and prospective employees are not just searching for ‘a job’. The particular characteristics of workers and jobs matter to both sides of the market. People sometimes refer to the ‘marriage market’ as a similar case. Most of us do not get married in the way that we get a carton of milk in the grocery market. The marriage market is about getting married to a particular person with the combination of characteristics that you find most desirable in a spouse, and you expect—or hope—that the relationship will last.

Employment flows: Match creation and destruction

Since both workers and firms differ, searching for potential matches and deciding whether they are suitable takes time and effort. Before entering into a long-term contract, both parties want to find out as much as they can about the other. Is the match good enough, or should they spend more time searching for a better one?

Figure 6.3 illustrates the flows that take place in the labour market as matches are created, and later destroyed.

There are V vacant jobs and U unemployed workers. After recruitment, there are N employed workers and N filled jobs. Workers can move between jobs so that there are still N employed workers and N filled jobs. Workers can also leave the labour market, or jobs can be destroyed. When quits and layoffs happen, there are vacant jobs and unemployed workers. There can also be vacant jobs because new jobs are created, and unemployed workers because new workers enter the labour market.

Figure 6.3 Labour market flows: workers and jobs.

If an unemployed worker (in the pool on the right-hand side of the figure) meets a firm with a vacant job, and each is satisfied with the other and the terms of employment, recruitment occurs: a match is created. They enter the pool of employed workers and corresponding filled jobs. The match continues until one or other party terminates the contract. The worker may find a different job (in which case the current number of filled jobs stays the same), or quit to search for one, or leave the labour market altogether. The firm may terminate the contract if performance is unsatisfactory, or the job may be destroyed if the firm no longer needs workers for these tasks, or goes out of business. Workers and firms who lose their current match may re-enter the unemployment and vacancy pools respectively, to search for a new partner.

The labour force

The labour force consists of two groups:

  • people in employment (including self-employment)
  • unemployed people: working-age individuals who are not employed, but are actively searching for work.

Those outside of these two groups are classified as ‘economically inactive’, or ‘out of the labour force’.

Figure 6.4 shows flows of workers in the European Union between the last quarter of 2021 and the first quarter of 2022. 65% of the working-age population were in the labour force at the end of 2021. Most were employed, but 3.6% of them were unemployed and searching for a job. Three months later, millions of workers had changed their labour market status. Some 7 million were no longer employed: some were now unemployed, and others had left the labour force. At the same time, 9 million people who were previously unemployed or inactive had entered employment.

In the EU, between 2021 quarter 4 and 2022 quarter 1, of the population aged 15-74, 192.5 million were employed, 7.2 million were unemployed, and 109 million were inactive. 2.3 million employed became unemployed. 3.3 million unemployed became inactive. 5.4 million inactive became employed. 4.7 million employed became inactive. 3.8 million inactive became unemployed. 3.6 million unemployed became employed.

Figure 6.4 Labour market flows in the EU, 2021(Q4) to 2022(Q1).

Question 6.5 Choose the correct answer(s)

Read the following statements about the labour market and choose the correct option(s).

  • Both ‘buyers’ and ‘sellers’ of labour benefit from having long-term relationships.
  • The labour market is a matching market because the firm and the worker both care about each other’s characteristics.
  • Software that a firm exclusively owns is an example of a firm-specific asset.
  • When a match between worker and firm is destroyed, that worker is counted as unemployed.
  • For firms, it can be costly to continually replace and retrain workers. For workers, it can be costly to continually move jobs because they would lose some workplace skills and relationships, and may have to move to a new region.
  • A key characteristic of a matching market is that people on each side of the market care about who they match with on the other side.
  • Firm-specific assets refers to the skills, networks, and friendships that are valuable only while an employee remains in a particular firm.
  • It depends on whether the worker continues to seek employment. If the worker chooses to leave the labour force (by becoming inactive or by not searching for a new job), they are no longer counted as unemployed. If the worker moves directly to another job, they would also not be counted as unemployed.