Types of Labour Market Flexibility

Types of Labour Market Flexibility

  • A flexible labour market is one that adjusts quickly and smoothly to changes in demand and supply
  • Types of flexibility include:
    • Numerical flexibility – the ability to change the number of workers, or ease of hiring and firing
    • Temporal flexibility – the ability to change the hours people work
    • Locational flexibility – the ability to change where people work – at home, somewhere else or at the man place of work
    • Functional flexibility – the ability to change the tasks workers perform
    • Wage flexibility – the ability to change the amount paid to workers

The Consequences of Flexibility

  • A flexible labour market allows firms to match their production closely to demand
    • This should keep their average costs low, as they won’t be overstaffed during periods of low demand, and will be able to raise output when demand rises
  • For workers, labour flexibility can a good thing
    • It can create more employment, as firms are likely to want to recruit more workers at times of rising demand if they know they can get rid of them when they’re not needed
    • A flexible labour market can attract foreign investment that is likely to boost employment
  • It can also be a bad thing
    • Because you can be employed quickly in a flexible labour market, you can also be out of work quickly – less job security
    • This would mean that a worker would need to be more occupationally and geographically mobile, which can put stress on workers
    • Greater wage flexibility tends to result in a greater wage inequality.

The Flexibility of the UK’s Labour Market

  • The UK’s labour market is more flexible than most of the EU’s
    • The least four decades have seen an increase in temporary employment, part-time employment, flexible hours, job sharing, career breaks and homeworking
  • In the 80s, the government introduce legislation so that hiring and firing people became easier, making the labour market more flexible

Government Measures to Achieve Labour Market Flexibility

  • Government can intervene and increase the flexibility of the labour market in several ways:
    • Increase labour market information, training and education should make workers more mobile, and hence make labour more responsive to demand
    • Cutting the unemployment benefit or link it more closely to the search for employment
  • If the supply of labour becomes more wage-elastic, firms will be able to respond to changes in demand faster
  • Reducing income tax will encourage workers to work more hours, and the unemployed to look for work, and for those looking to retire to stay in the workforce
    • This will work if the overall effect of the substitution effect is greater than the overall effect of the income effect (i.e. more people choose to work more hours than choose to work fewer)
    • Studies have shown, however, that changes in tax rates don’t really alter the hours worked
  • Cutting job seeker’s allowance may reduce the time that the unemployed spend searching for a job, as it makes it less attractive, but this would only work if there are jobs available.
  • Removing protective employment legislation can make the labour market more responsive
    • g. maternity leave laws increase the cost of employing workers, and allowing workers to appeal against dismissals makes the process more expensive
    • Employment protection benefits those who have jobs but makes it more difficult for the unemployed to gain work