The purpose of this project is to test the fundamental hypotheses underlying much of labor economics. Virtually all government policies which are intended to affect employment are based on the maintained hypothesis that the marginal value product of labor is equilivalent to the wage rate. This is true of policies in developed as well as developing countries. However, observation has shown that many enterprises do not seem to operate according to this traditional model. In many countries institutional entities affect the labor market in fundamental ways. For instance, both wage-setting and hiring policies might be affected by union contracts. If such is the case, then policies affecting hiring, union negotiating, wage setting, and non-wage compensation could be misdirected, if they are based on the traditional model. The analytical methodology is based on a bargaining model in which a firm's objective function allows for the participation of several parties in co-determining the wage/employment outcome. It incorporates incentives and institutional constraints of both the labor market (union contracts and other labor/management agreements) and the government. The model can also be constrained to the traditional model, so the hypothesis of equality between wages and marginal revenue product can be tested. This model will be applied to extensive labor market data sets from the United States, China, Yugoslavia, Tunisia, and Senegal. %%% The movement of the labor market (that is to say employment, unemployment, wages, and non-wage compensation), in response to economic conditions, government policy, institutional structure, and managerial incentives is one of the most fundamental components of economic analysis. In virtually all analysis of the labor market a hypothesis is maintained that, in the absence of any outside intervention, firms hire workers such that the market value of the product produced by the workers is exactly equal to the compensation paid to them. In many realistic applications, however, that central assumption will not be correct. In particular, for industries or economies where a great deal of institutional structure, such as powerful unions, or government intervention as in the centrally planned economies, hiring and wage-setting procedures are determined outside the market itself. The labor market equilibrating mechanism plays a smaller role. Analyses assuming a freely equilibrating labor market, can yield incorrect results when applied to highly structured markets. This project examines the effects on economic analysis of maintaining the marginal value/wage equality when studying highly structured economies. A new model is developed to incorporate institutional considerations, governmental intervention, and managerial structure. This model is tested using labor market data from both developed and developing countries including the United States, The People's Republic of China, Tunisia, Yugoslavia, and Senegal. The dynamics of the labor markets in these countries cover a wide spectrum, varying from a relatively free market in the United States to a highly centralized, planned economy in the People's Republic of China.
