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Labour market flexibility

Labour market flexibility refers to the willingness and ability of labour to respond to changes in market conditions, including changes in the demand for labour and the wage rate. Labour market flexibility is an important aspect of how labour markets function to adjust supply to demand.  Labour market flexibility is central to the supply-side of the macro-economy, and to its overall performance in achieving macro-economic objectives.

The demand for labour is, of course, a derived demand. In the short and medium term, the demand for labour adjusts to changes in national income and the business cycle. In the longer term, the demand for labour can change as a result of large scale and deep-seated changes to the structure of an economy, often brought about by changing technology or through globalisation and deindustrialisation.

Factors that can affect labour market flexibility

Mobility of labour

This includes occupational mobility - the willingness and ability to move from one job to another; geographical mobility - moving from one region or location to another; and industrial mobility - moving between industries.

The extent of labour migration

Allowing or encouraging labour to migrate between countries will increase the degree of labour market flexibility in the recipient country.

Wage flexibility

A key element of labour market flexibility is the flexibility of wages to adjust to bring about equilibrium between demand and supply. There are several type of wage flexibility, including relative wage flexibility - which relates to the adjustment of wage rates between sectors of an economy, or between regions - and real wage flexibility - the flexibility of real wages (nominal wages adjusted for inflation) to adjust to economic shocks.

Local vs national pay bargaining

If rates of pay are determined nationally, then pay may not reflect local conditions, and labour may not adjust to changes in local conditions creating relative wage inflexibility.

Making work pay

If the reward gap between work and non-work is too small, there may be little incentive to work. Hence, excessively generous unemployment benefits may reduce labour market flexibility. The amount of tax paid from wages (the tax wedge) can also affect flexibility via its affect on incentives.

Skills and training

Multi-skilled workers may be able to adjust their working patterns or workloads to suit changing demand conditions. Training, and training subsidies, can similarly improve labour mobility.

Barriers to entry and exit

If barriers to entry exist - such as the requirement for excessive qualifications, or due to trade union restrictive practices -  or barriers to exit - such as lengthy contracts or notice periods - labour will become less flexible. Racial, gender, disability or age discrimination may be regarded as barriers to entry, and, in an aggregate sense, reduces labour market flexibility.

Ability to hire and fire

Looking at flexibility from the firm’s point of view, a flexible labour market means that firms will have greater freedom to hire workers when demand increases, and also to fire them when demand decreases. This means that excessive legislation to limit the ability of firms to hire and fire will reduce flexibility.

Information

If labour is better informed about job vacancies, or about opportunities for promotion, workers can respond more effectively to changes in the requirements of firms.

Flexi-work

If firms are able to offer a flexible working environment and flexible working patterns, including flexi-hours jobs, overall labour market flexibility will improve. This is also called working-time flexibility.

The amount of part-time and temporary work

The labour market is more flexible when there is a larger proportion of part-time work relative to full-time work. Flexibility also improves when temporary contracts can be used.