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Flexible Labour Markets

What is a Flexible Labour Market?

Flexibility is the ability to respond to change quickly while safeguarding a degree of fairness. These changes might include the impact of innovation and changing technology, shifts in consumer preferences and external shocks, such as the recent global trade slump or volatility in world energy and food prices. Economists who believe in the power of freely functioning markets for goods, services, capital and people are strong supporters of flexible labour markets. A flexible labour market has several characteristics

Occupational (functional) flexibility – the ability of the workforce to perform different tasks and also to acquire and apply transferable skills.

Ease and cost of hiring and firing workers – how costly it is to adjust the size of the workforce so that employment can be matched during the different stages of a cycle.

Contractual flexibility: In many industries, workers are now offered jobs on six or three months and sometimes on month-to-month contracts.

1. Wage flexibility: Wage flexibility refers to the ability of changes in real wages to eliminate imbalances between the supply of and demand for labour. This can be seen in the expansion of performance related pay and the regionalization of pay awards so that payment can reflect differences in demand for and supply of labour and also variations in regional living costs. Wage flexibility has become an important issue during the current recession.

Geographical flexibility: Many businesses now expect their workers to be able to move within and across different regions and countries during their working life. There are always barriers to geographic mobility of labour, particularly across national borders, but also within individual countries. These barriers relate to family commitments, career progression and benefits and property (for example the costs involved in moving home and the constraints imposed by wide regional variations in house prices).

The table below summarises different aspects of labour market flexibility with examples for each:

Price (wage)

Numerical

Temporal

Functional

Location

Flexibility

Flexibility

Flexibility

Flexibility

Flexibility

Regional and local pay agreements rather than national wage settlements

Expansion of

Ability of labour force to use varied technology

Geographical

short term

flexibility

employment

contracts

 

Pay packets reflecting skill differentials

Growth of home working

Increased use of part-time staff to meet changes in demand

Transferable skills within the workplace

Willingness to

relocate

Use of performance related pay to boost productivity

 

Core of full-time employees on contracts

   

The UK is generally regarded as having a flexible labour market with the United States measured as having the highest degree of flexibility. But not every country has to follow the same labour market model and there is no unique template for success. The Danish economy has recently been praised for its model of “flexicurity”

Part Time and Self-Employment in the UK

Millions, seasonally adjusted, source: Labour Force Survey

4.3 4.3 Self Employment 4.2 4.2 4.1 4.1 4.0 4.0 3.9 3.9 3.8 3.8 3.7
4.3
4.3
Self Employment
4.2
4.2
4.1
4.1
4.0
4.0
3.9
3.9
3.8
3.8
3.7
3.7
3.6
3.6
3.5
3.5
19.75
19.75
19.50
19.50
Part Time Employment
19.25
19.25
19.00
19.00
18.75
18.75
18.50
18.50
18.25
18.25
18.00
18.00
00
01
02
03
04
05
06
07
08
09
10
millions
millions
millions
millions

Advantages of a flexible labour market

Source: Reuters EcoWin

1. Neo-classical economists believe that flexible wages and flexible employment helps to ensure that markets clear rapidly eliminating any excess supply or demand, so economies automatically move into long run equilibrium at potential output.

2. Improved occupational mobility of labour leads to less structural unemployment and a reduction in the natural rate of unemployment

3. Flexibility makes the British economy more attractive to inward investment

4. The economy can respond more flexibly to an external shock – because wages and employment are more flexible

Disadvantages of a flexible labour market

1. There are concerns about a lack of training for workers on short-term contracts

2. Frequent job changes for workers can be unsettling for them and for their families.

3. There are concerns about the link between a flexible labour market and relative poverty – because of the reduction in trade union membership and less employee- bargaining power.

4. Many people on short-term job contracts do not enter into any occupational pension.

5. There is a risk of “slash and burn” during a recession

6. What of the social implications of labour market flexibility – the “24 hours per day” work culture and the possible effects on family life?

Barriers to labour market flexibility

Although workers in the UK and the USA are probably subject to fewer regulations than in most other Western European countries, there remain plenty of laws and regulations affecting workers which

limit the flexibility of the labour market. Each of them can be justified either on economic or social grounds.

1.

2.

3.

Holiday entitlements, rights to maternity and paternity leave and health & safety laws

4.

Employment laws to protect workers from unfair dismissal.

5.

The recession and wages

Wage flexibility is often taken as a sign of a flexible labour market. The deep recession in 2009 has led to a sharp fall in the average growth of pay settlements and in many industries, workers have been prepared to accept wage freezes or pay cuts. This short article looks at some of the issues of wage reductions during a downturn.

Taking a pay cut

What connects professional rugby players at Gloucester RFC, pilots flying with BA, staff at Swindon’s Honda car plant, employees of the successful Game retail store and thousands of people working for the Royal Mail? The answer is that all of them have been asked either to take a pay cut for the year ahead, or at the least endure a wage freeze until economic conditions improve. They are part of a growing trend.

Pay is under pressure. According to news reports this week, the average wage in Britain, including bonuses, fell by 0.4 per cent in the three months to March – knocking about £95 off annual salaries to £24,000. People working in the private sector are at highest risk of a wage freeze or actual wage cut, whereas average earnings in public sector jobs continue to rise at or just below the rate of inflation.

To some economists pay cuts in a recession are what one might expect and hope from a flexible labour market. Wages and bonuses can rise during an upturn, so why should they not dip during a downswing in the business cycle? Indeed without some pay cuts, the brunt of the recession will be seen through large-scale job losses and a higher risk of business failures. But as is always the case in economics, the reality is far from straightforward.

Yes a pay cut can reduce a firm’s costs and improve their cash flow and profitability. And for many workers, faced with the prospect of a short run dip in the pay packet set against the chance of a job lost for good, the decision to take a wage cut might seem straightforward - but it is not:

1/ Wage cuts and deflation: If wage cuts become widespread across the economy the negative effect on real disposable income might cause a further drop in consumer demand, a deeper recession and a significant chance of deflation. In which case, the real value of debt will rise just at a time when people have less money to spare to start paying it back.

2/ Productivity: Pay cuts might seem an attractive option for a business but the medium term consequences for employee productivity and worker retention must be considered carefully. If productivity slips after a wage cut, the unit labour cost of production might rise.

3/ Pensions: For workers on final salary pension schemes, pay reductions can have a serious effect on their standard of living once retired.

Pay in a recession becomes a difficult issue and it will be interesting to see how management and trade unions respond to the challenge. I suspect much depends on how much further the Retail Price Index falls into negative territory. For the moment, inflationary expectations remain positive (people have not forgotten the pain of high food, fuel and energy prices in 2008) and this makes agreeing to a pay cut much more difficult to swallow.

Source: Tutor2u Economics Blog, May 2009