What is labor market flexibility?
The flexibility of the labor market is an important element of the labor market. It allows companies to make certain decisions about changing their workforce in response to market fluctuations and to stimulate production.
Organizations can make changes to their workforce based on factors such as hiring and firing employees, compensation and benefits, and hours and conditions of work. However, companies do not have carte blanche to build a flexible labor market because of the laws and policies that protect employees and the labor pool.
How labor market flexibility works
Labor market flexibility refers to the speed with which a business responds to changing market conditions by changing its workforce. A flexible labor market allows employers to make changes due to supply and demand problems, the business cycle and other market conditions.
But a truly flexible labor market only exists when there are few regulations in force. When this is the case, employers can set wages, fire employees and change their hours of work at will. And the changes can go both ways. For example, in difficult economic times, an employer with great flexibility can reduce wages and increase the number of hours that employees should work to increase productivity. Conversely, when the economy is strong, the same employer may decide to give employees a slight increase and reduce their hours.
Less flexible labor markets are subject to more rules and regulations, including minimum wages, restrictions on layoffs, and other laws involving employment contracts. Unions often have considerable power in these markets.
Unions can limit labor market flexibility by negotiating higher wages, benefits and better working conditions with employers.
Some of the other factors that affect labor market flexibility include employee skills and training, job mobility, minimum wages, part-time and temporary work, and job-related information available to employees. the employer.
Arguments for and against flexibility in the labor market
Proponents of increased labor market flexibility argue that it leads to lower unemployment rates and an increase in gross domestic product (GDP) due to the unintended consequences of tight labor market restrictions. For example, a company may consider hiring a full-time employee, but is concerned that the employee is extremely difficult to fire and may claim compensation from an expensive worker or take legal action because of an alleged unfair treatment. The company can choose to hire workers on short-term contracts instead.
Such a system benefits the relatively small number of full-time employees in particularly secure positions, but harms those on the outside – those who have to move from precarious short-term employment.
Proponents of strict labor market regulation, on the other hand, argue that flexibility puts all the power in the hands of the employer, which translates into precarious labor. The labor movement started in the 19th century in the United States and Europe in response to unsafe and dirty working conditions, extremely long hours, and management practices by owners and managers – seizure of wages, threats and other abuses – and arbitrary dismissals.
Employers had little incentive to ensure that injuries and deaths in the workplace were rare, as they did not risk creating unsafe conditions, and employees who could no longer work were easy to replace.
Key points to remember
- The flexibility of the labor market allows companies to make decisions about their workforce in response to market changes and to stimulate production.
- Flexible labor markets allow companies to make changes such as hiring and firing employees, compensation and benefits, and working hours and conditions.
- Laws and regulations prevent employers from making changes as they see fit.
- Other factors that affect labor market flexibility include unions, skills and training, minimum wage restrictions and information on employment.
Factors Affecting Labor Market Flexibility
This article has addressed some of the factors that affect labor market flexibility above. We will describe what some of these factors mean for the labor market in this section.
Also called unions, these organizations represent the collective interests of a group of workers. Employees can band together through their union to start negotiations to improve wages, working conditions, benefits and hours of work, which makes the market less flexible.
Employee skills and training
When employees are qualified and have easy access to training to improve or increase their skills, they are better able to respond to market changes. For example, a customer service representative who returns to school for information technology (IT) training is able to meet the growing demand for IT technicians when positions become available .
The minimum salary
State and federal regulations limit how low employers can set basic hourly wages for employees. These minimums are based on changes in the cost of living and inflation. Some employers believe that higher minimum wages reduce their productivity as well as their bottom line.
Job related information
People rely on information provided by employers on the jobs available in the market. The more jobseekers are informed about open positions, the easier it is for employees to respond to changing conditions in a company’s workforce and in the market, which makes it much more flexible.