In neoclassical economics, the market is a perfect entity that works smoothly in matching buyers and sellers. In employment markets, for instance, employers can easily find the talent they require, while individuals can easily find the right job for them.
This is obviously not the case, and the inefficiencies of the labor market herald the rise of intermediaries that try to iron out those kinks. In Studies of Labor Market Intermediation, MIT’s David Autor outlines three key reasons why labor market intermediaries are so important.
- Informational market failure: This occurs when information is imperfectly or asymmetrically distributed in the labor market, leading to suboptimal outcomes. For example, employers may not have complete information about the skills and qualifications of potential employees, and job seekers may not have complete information about the job market. As a result, there may be a mismatch between the skills and qualifications of workers and the requirements of available jobs.
- Coordination market failure: This occurs when there are difficulties in coordinating the actions of workers and employers in the labor market. For example, in the absence of an efficient labor market intermediary, workers and employers may find it difficult to identify each other and match up for mutually beneficial employment. This may result in inefficiently high levels of unemployment or job vacancies.
- Externalities: This occurs when the actions of one economic agent affect the well-being of another, without that effect being reflected in market prices. For example, a worker who invests in education and training not only benefits himself but also contributes to the overall productivity and competitiveness of the labor market. However, the full benefits of such investments may not be reflected in the wages or other compensation received by the worker, leading to underinvestment in human capital. Similarly, employers who invest in worker training may not be able to fully capture the benefits of those investments, leading to underinvestment in training.
An important role
Labor market intermediaries, such as staffing agencies, job placement services, and online job boards, play an important role in connecting job seekers with potential employers. They help to facilitate the matching of skills, experience, and job requirements, which can be difficult and time-consuming for both job seekers and employers.
There are a number of reasons why labor market intermediaries are important:
- They help job seekers find suitable employment opportunities: Intermediaries have access to job openings that may not be advertised publicly, and can help job seekers find opportunities that match their skills and experience.
- They provide valuable resources and support: Labor market intermediaries can offer job seekers advice on resumes, interviewing techniques, and other job search skills. They may also provide training opportunities to help job seekers develop new skills or upgrade existing ones.
- They assist employers in finding qualified candidates: Employers often turn to labor market intermediaries to help them find qualified candidates for their job openings. This can save employers time and money, as they don’t have to sort through a large number of resumes or conduct extensive recruiting efforts.
- They help to reduce labor market frictions: Labor market intermediaries can help to reduce frictions that arise when job seekers and employers have difficulty finding each other. This can include information asymmetries (where job seekers and employers lack information about each other), coordination problems (where job seekers and employers have difficulty arranging interviews or negotiating job offers), and search costs (the time and effort required to find suitable job opportunities or qualified candidates).
Overall, labor market intermediaries play an important role in facilitating the efficient functioning of labor markets, helping job seekers find suitable employment opportunities, and assisting employers in finding qualified candidates.
