Labour Markets: Verbosity With Meaning

When a downturn hits, there is a fall in demand, and it is labour working at the lowest tier of the market which gets bumped out of the economy first. Many perceive this as a consequence of adhoc decisions on the part of employers, but infact such is a systematic consequence of the function of the labour market. Similarly, job creation in regions of high unemployment will not necessarily increase employment of personnel living in the region, not to the desired extent anyway, as argued by Ian Gordon, a professor at the London School of Economics. The two-fold reality calls for intervention.

When The Bug Comes to Town

Lets start by understanding the bumping down process first. It begins at the high-end tier of the market where the highly skilled and paid are placed, states Ian Gordon. As the downturn hits the economy, there is a fall in demand. This provides two basic choices for labour in the top tier: either accept reduced wages or face unemployment. Upon choosing the latter, labour in the top tier transfers the buck to the tier below. They are faced with a similar choice, and the process spreads through the different tiers of the labor market. With subsequent tiers passing the buck to the ones below, the lowest tier is eventually bumped out of the market (or working on voluntary terms).

Similarly, assume a company is established (new jobs are created) in an area of low skilled workers. The investment in the region, would not necessarily translate into jobs for the unemployed of the region. Instead most jobs will be pushed to other regions, as the new ones would mostly be taken by the already employed in same and nearby regions, creating an asymmetric picture with jobs being subsequently pushed out of the region, states Gordon.

For instance, the creation of new jobs in Central London will not mostly be taken by the unemp-loyed living in the area (some will be), and many from the outskirts or other parts of the city (or nearby city) will gain employment.

Alternatively, the jobs in the region may move between the already employed in the area, slowly and gradually pushing the creation of opportunities outside the target area (region of high unemployment residents).

This in classical terms provides perfect scope for government intervention to rectify the shortcomings of the labour market system. However, in a country where the government is weak; is unable to provide basic neces-sities/security to most, let alone identify and rectify such shortcomings, social problems are inevitable with a high probability of chaos over the long run. This will provide scope for what may be termed as corporate intervention (social responsibility).

In such circumstances, local solutions need to be developed to rectify the problems of labour markets rather than the continued stand-alone rhetoric of attaining the first best view of the world as noted by most academics and policy makers in the form of better government policies, greater responsibility, tailored and proactive policies’, with an advancement of the counter productive blame game.

In Pakistan, we continue to live in an ideal world, and are unable to move beyond the classical boundaries and definitions of our world set in a place far away from our local realities.

Looking for Solutions

We live in a post modern world driven by knowledge, and if it teaches us anything, it focuses on developing local solutions. This in the given case of Pakistan would involve responsibility and action being undertaken by the corporate and industrial sector (private), which would fill the gap between the shortcomings of the classical market system and the inability of the government to completely rectify it.

This does not mean that all should be taken away from the government’s plate. After all, they need to provide for favourable macro-economic conditions, assist and at times provide economic benefits to firms with most activity in the cause. In other words, the weakness of the government in the noted areas should be complemented by the potential strength of community and corporations in the other. Simply said, we need to go beyond the traditional scope of corporate social responsibility. It shouldn’t be noted as an act of philanthropy, rather as a by product of operation.

This may seem infiltrated with problems and bottlenecks at first. However if advanced in a stra-tegic, coherent way, under a self developed and directed strategy by the corporate sector, it has the potential to advance various clear benefits over the traditional outlook. This is purely because individual firms will advance action in their respective sectors, industries and scope of busines-ses. The approach should be tailored, focused and directed towards bridging a key gap, which would not only be a social cause, but will reap private benefit along with tacit gains and goodwill for the company.

In any case, the private sector is better informed; has greater market knowledge specifically with regard to current and future labour market conditions such as demand, supply, skills and shortages, due to the very nature of their interaction. Therefore, it is better able to tackle and rectify loopholes in the labour market system.

Before the private sector can actively get involved in such activities it needs to take note of the policies already in place, or should potentially be implemen-ted by the first-best body (government), and develop its framework accordingly. For instance, it is argued by Gordon in his paper in 2002, that skill development (and other supply side policies) is vital, as demand side policies in isolation will not always attain the desired results, especially in regions of high unemployment.

This is because the new created jobs will be pushed out of the area. At best, a focus on reducing unemployment through a pure utilization of demand side policies (inject demand in the area) will lead to an over estimation of employment effects.

Thus, the private sector needs to invest in skill development, help individuals push themselves up the skill and employment cart. The corporate and industrial sector can invest in developing vocational training centers or get involved in existing vocational centers, educate the management about the direction of current and future market, undertake a comprehensive portfolio, focus on market needs and shortages rather than providing training for populous and/or subsistence level careers.

The focus should be on pushing labour up their skill cart, rather than providing for their subsistence. Leading companies also need to invest in higher education, given the existing dearth in quality, with the aspiration of investing in a feeder for themselves in the form of schools and universities.

A noteworthy project in this regard is an initiative being taken by House of Habib, envisioning the launch of the Habib University, with the commencement of the first academic year in 2012.

Organizational incentives for self- growth need to be encouraged. Internal staff trainings are vital. They should not only be limited to what a company perceives to be its core team but across the board from junior to senior executives with a focus on specific and general skills. This would also change the face of human resource training and related support industries.

Some organizations, as noted by various authors, are skeptical of undertaking such an investment, as there is no guaranttee that the investment would reap private benefits to the company (if the employee switches his/her job).

There will certainly be free-riders, and may reap greater social benefits than private benefits in the short run, but in the long run, such companies will attract the highest quality of labour, brand and social image. Moreover, it will set the basis and tone for the market to follow.

After all, companies in Silicon Valley are known for leading the race of technological innovation, rather than being mass producers. Similarly, a company can find its niche beyond traditional grounds. Moreover, learning is a conti-nuous process. In fact, upward labour market mobility should be encouraged. This would involve developing a flexible labour market with individuals moving between jobs, to move up the employment ladder.

This would enhance the absorptive capacity of labour in the market, pushing people up the employment cart, as argued by Gordon et al. On the other hand, this may retard corpo-rations from investing in human capital given the tradeoff between private and social benefits.

However, if corporations can internalize the scope of social responsibility in their mandate, such concerns can be reduced. Further it is vital to understand how the scope for private gain will enhance over the long run. At the very least, such tailored and directed investments may be better utilized relative to lump-sum amounts, as they may produce better and focused results. Moreover, when a downturn hits, CSR budgets are reduced, even for the most stable of firms.

However, a deeper thought may reverse this action, especially as during times of economic slowdown, the economic cost (opportunity cost) of investment in human capital is low, as return on other investments are low. If the downturn is short lived, investment in training may make greater economic sense, as argued by an article in the financial times.

However, Teddy Wayne highlights the inability of people to think in terms of opportunity cost, unless forced to do so. Therefore common sense may recommend suboptimal thinking, even for the most stable and risk neutral firms, as the return from investing in human capital is tacit in nature, which may not always be directly measureable, not over the short run anyway.

It is important not only to focus on the number of jobs being created, but also on the quality of jobs, as such is vital for achieving sustainable economic development. Similarly, it is vital not to undertake training programmes for the sake of the matter, but focus on who gets training, as otherwise we will purely create greater competition at the lowest tier of the employment ladder, with minimal overall economic benefit, states Gordon.

Corporations can also polish internal procedures by enforcing and ensuring equal opportunity practices. Evidence noted by Buck et al points to discrimination by employers through postcodes in London. This may also be true for Pakistan as social and mental classifications may seek to influence behaviour, creating barriers in the workings of the labour market.

When There Exists a Light

The scope is vast and various other initiatives and innovative endeavours can be undertaken.

If parts of the government fail to attain the wholesome objective, so be it.

The civil society, and most importantly, a segment of that society, namely the corporate and industrial society should deliver. It may seem an ambitious task, requiring a cultural shift, it may even have some competing incentives, but after all we are talking about social responsibility which is not only an economic endeavour but involves a mental and emotional transition.

The seeds need to be set, it requires coherence and organi-zation; the ability to think beyond the current scope; the willingness to invest not only in the future of Pakistan, but in our
individual selves.


Gordon, Ian and Turok, Ivan (2005). How Urban Labour Markets Matter. In: Buck, Nick and Gordon, Ian and Harding, Alan and Turok, Ivan, (eds.) Changing Cities: Rethinking Urban Competitiveness, Cohesion, and Governance. Palgrave Macmillan, Basingstoke, UK, pp. 242-264.

Buck, Nick and Gordon, Ian and Hall, Peter and Harloe, Michael and Kleinman, Mark (2002). Working capital: life and labour in contemporary London. Routledge, London, UK

Gordon, Ian (2002). Unemployment and spatial labour markets: strong adjustment and persistent concentration. In: Martin, Ron and Morrison, Philip S., (eds.) Geographies of labour market inequality. Routledge, London, UK, pp. 55-82

Teddy Wayne (2009) Drilling Down, The power of a nudge towards drift, The New York Times 2009/05/25/business/25drill.html?ref= business

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Author Information

Ali Sohail is an economist by training with a postgraduate degree from the London School of Economics and Political Science. He has diverse experience spanning the auto industry; communication; education development and planning; business and economic research, analysis and writing.

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