The economist John R. Commons is considered one of the founding fathers of institutional economics. He played a leading role in the developing of the labor economics field by establishing some core principles in his book Institutional Economics: Its Place in Political Economy (1934). Besides, as Kenneth Boulding (1957) stated, Commons’ ideas as a social reformer were very influential in shaping the New Deal and the American labor legislation and social security toward a welfare state.
It is worth noting that some generations of institutionalists in labor economics can be identified since then (Champlin and Knoedler, 2004). After the first generation of Commons and the Wisconsin School, the second generation emerged in the 1950s and included those economists, such as John Dunlop and Neil Chamberlain, who rejected standard economic textbooks and emphasized the role of institutional rules in structuring labor markets and industrial relations. Afterwards, the third generation focused on structural unemployment (e.g., Charles Killignsworth), segmented labor markets (e.g., Michael Piore). This generation also included post-Keynesian economists, such as Eillen Appelbaum. From 1980 to the present, the fourth generation has been broadened in order to include contiguous fields and new methods of research. Institutionalism has been broadened further to include the new perspective of Ronald Coase and Oliver Williamson that has informed research and model building based on the concept of transaction cost.
Despite de differences between generations, which are the elements that explain the institutionalist labor approach?
- The economic needs are culturally and historically situated.
- The rules of economic behavior do not derived from universal laws of nature by are culturally, legally and socially situated.
- Markets, as legal and cultural arrangements, are characterized by conflict, power relations and inequality.
- Governments are considered major players within the markets.
Indeed, the theoretical construct in labor economics of an institutional nature considers that:
- The microeconomic neoclassical model of demand and supply is misleading as an explanatory device for the study of employment, wages and labor outcomes.
- The labor market is not self-equilibrating.
- Involuntary employment, interindustry and interfirm wage differentials, besides racial and gender patterns of employment are relevant features of the labor markets in the real-world.
- The behavioral models of human agent should consider imperfect competition, theories of market organization and structure, legal rules and social norms.
- The study of the labor markets should privilege both realism in economics and a multidisciplinary, social science foundation.
- The commitment on a normative level to welfare criteria should include ethical goals.
Considering the relevance of this topic in economics education, students should be aware of the differences bweteeen institutionalist and neoclassical economists. Neoclassical and institutional economics are not just labels, but represent different ways of conceptualizing economics and shaping economic policies.
Champlin, D.P. and Knoedler, J. T. (2004) The institutionalist Tradition in Labor Economis. New York and London: M.E. Sharpe.
Boulding, K. (1957). A look at Institutionalism. American Economic Review. 47:1-12.