DIVISION OF LABOR, COORDINATION, AND UNDEREMPLOYMENT

Heling Shi and Hayden Mathysen
Department of Economics
Monash University
Clayton, 3800
Australia

ABSTRACT

In this paper, a general equilibrium model is constructed to investigate the concurrent movements in the number of traded goods, structural underemployment, and real income. Departing from the neoclassical tradition of the dichotomy of consumption and production, individuals are assumed to be both consumers and producers. The equilibrium is characterised by the tradeoff between the economies of specialisation and the market transaction costs incurred in market exchanges. Coordination among participants would result in an optimal amount of marketing effort and correctly identify the most efficient economic structure. Failing to achieve the proper coordination would not only decrease real income in each economic structure, but also prevent the selection of the most efficient economic structure. These two unfavourable outcomes of coordination failure could result in two different types of underemployment.

Keywords: divisions of labor, coordination failure, unemployment

JEL Classification: E3, L1

In a self-sufficient autarchic economy that is devoid of sophisticated specialisation and division of labour, unemployment does not appear to be a meaningful concept. Trade in either commodities or factors are non-existent and consumption-production takes place within the entity of the household or individual, leaving every commodity self-supplied and consumed.1 Oppositely, industrialised economies that are characterised by sophisticated specialisation and division of labour, realise persistent cycles in trade activity and consequently the problem of unemployment emerges. While changes in factor endowments, technology or preferences may dictate the level of output in an autarchic economy, exclusively attributing unemployment to these exogenous disturbances in an industrialised economy is at best unconvincing. Assuming that flexible prices and wages exist in the long-run, these exogenous shocks would have to persistently re-emerge in order to maintain unemployment at a given rate.2 The implausibility of solely attributing the existence of unemployment to exogenous change in preferences, technology or endowments is greater when considering the fact that historical records reveal a strong correlation between patterns of unemployment and the business cycle in industrialised economies. The existence of unemployment in an economy that realises sophisticated specialisation and division of labour, in contrast to autarchy, immediately raises the possibility of a linkage between organisational structure and its by-product, unemployment. It is this conjecture that motivates this paper.

Post-depression onwards a plethora of theoretical insights into the cause of unemployment, beginning principally with Keynes (1936), have been developed. Yet these abstractions on the behaviour of macro phenomena are at best endowed with a partial insight into the unemployment problem. The mainstream studies that border on the conventional macroeconomic wisdom, underscore the importance of expectations (Lucas, 1972, 1973, 1980; Barro, 1976, 1981). Other mainstream research focuses upon technology shocks and inter-temporal labour substitution (Kydland and Prescott, 1982; King and Plosser, 1984), imperfect competition (Hart, 1982; Ng, 1986, 1992; Blanchard and Kiyotaki, 1987; Marris, 1991), and coordination failure and multiple equilibria (Diamond, 1982; Cooper and John, 1988; Shi, 1992). However, the above research embraces the somewhat restrictive neoclassical bipartition of consumption and production.3 The disadvantage with the partial equilibrium approach is that the above studies are devoid of any explanation on the evolution of firms and economic structure. That is, the division of labour and specialisation are given. Consequently, insights into the relationship between the division of labour and the existence of unemployment, based on the neoclassical dichotomy, are impossible.

This paper introduces a novel and perhaps more potent explanation for the existence of unemployment in a market economy that sheds the neoclassical dichotomy and attempts to explain the relationship between the division of labour and unemployment. We harness some of the contributions of Cooper and John (1988), Shi (1992) and Diamond (1982) on coordination failure and we attempt to highlight the impact of coordination failure on the utilisation of labour resources in a market economy whose agents¡¯ actions are deemed interdependent. As mentioned, however, unlike Cooper and John (1988) but similar to Diamond (1982), this paper proceeds beyond a dichotomised partial equilibrium framework. This is achieved by harmonising the coordination failure interpretation on the behaviour of macro phenomena with research lines spawned from Young¡¯s (1928) seminal paper. These research lines investigate the influence of specialisation and division of labour on economic organisation, economic growth, international trade etc in a general equilibrium framework. Principal contributors to the theory of specialisation and division of labour include Rosen (1978), Baumgardner (1988), Kim (1989), Locay (1990), Yang (1990), Yang and Borland (1991), and Becker and Murphy (1992) whose models endogenise the level of specialisation in individuals. Yang and Shi (1992), Yang and Ng (1993, 1994), Shi and Yang (1994, 1996) endogenise the number of goods, production roundaboutness, product diversity, and the emergence of the firm. By endogenising division of labour and specialisation, research into this sphere captures these important evolutionary phenomena in a general equilibrium model. However, this line of research has not engaged in any theoretical analysis explaining the behaviour of macro phenomena such as unemployment.4 More specifically, it has not explored the possible interdependence between unemployment and the concurrent phenomena of specialisation and division of labour.

Occupying this macroeconomic niche and introducing coordination between market participants as a potent determinant of economic activity and organisational structure, we can construct a new model that captures the symmetry and synergy between the division of labour, coordination and underemployment (or in the existence of an employment relation, unemployment) in a general equilibrium framework. In the model, the importance of the general equilibrium approach is underscored through the application of two types of general equilibrium comparative statics that capture this symmetry and synergy. The first type of comparative statics reveals the economic interdependence between relative prices, marketing effort, quantities of goods and the number of producer-consumer participants. This permits a marginal analysis of the efficiency of resource allocation for a given level and pattern of division of labour. But the usefulness of the general equilibrium approach is greater when employing the second type of general equilibrium comparative statics. The second type of general equilibrium comparative statics, based on infra-marginal analysis, encapsulates the evolution of market structure characterised by differing patterns and levels of division of labour and specialisation. Therefore, the general equilibrium perspective not only make it possible to examine the impact of coordination failure on the allocation of resources in the economy, but by endogenising specialisation and the division of labour we can examine the impact of coordination failure and underemployment on market structure evolution. Conversely, the general equilibrium identifies both a Pareto optimal allocation of resources and the most efficient economic structure that yields a maximum income per capita.

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