Understanding Labour Market Flexibility Should Matter to You

You're fired, clean out your desk office worker

If you’re someone who wants to work to support yourself (i.e. basically everyone), then the labour market is important for you to understand. Just like the “supply and demand” of products in a market, the supply and demand of labour makes up what we call the “labour market.” An employee therefore represents a supply, to be “bought” (by an employer) and “sold” (by an employee). Depending on several volatile factors, there may be more or less demand from employers, and the government may play a significant role in affecting this. However… which approach is the best for workers?


Labour market flexibility has been defined as “the ability adapt and respond to change” (Rubery & Grimshaw, 2003). Noam Chomsky, in the short video embedded above, critically explains the ramifications of imposing flexibility on the labour market. He briefly mentions how flexibility is actually a euphamism for the creation of conditions under which an employee can lose his job, as well as the fact that flexibility has in fact been seen by many to have a positive effect on economic performance. Of course, in such a brief video it is impossible to lay out all of the intricacies of the debate, but that is what this article is all about.

Gauging Flexibility

On one side of the debate, you have those who say that regulating the labour market protects employees from mistreatment. On other hand, some say that without flexibility, companies will not be able to adapt. As you can imagine, the issue is not black and white – it is nuanced, with governments around the world differing in degree of flexibility. How, then, can we gauge flexibility? We can use five indicators to tell us how flexible a labour market may be. Each of them are meant to respond to a market pressure, but they are also associated with negative ramifications if not kept in check.

1. Freedom to hire/fire – By freely hiring/firing, companies can adapt to changes in technology, product markets, and corporate restructuring; but this encourages layoffs during periods of economic troubles as a short-term response, which leads to a loss of skills and employee morale (not to mention a negative reputation of the firm). As Chomsky mentioned, when people are uncertain whether or not they will have a job the very next day, workers become more productive. As you can imagine, this uncertainty takes a psychological toll on employees.

2. Freedom (or willingness) to alter (or accept) job offers and new job conditions – This is useful since employment circumstances change (e.g. why pay ten people when a machine can replace them?), which may increase unemployment or precarious work (i.e. a crappy job characterized by low pay and lack of job security). But this also refers to employees’ willingness to accept jobs when they are unemployed. For example, workers may feel pressure to take the first opportunity that they see, but it may be in a professional’s best interest to wait until a more appropriate job demanding the skills they possess appears.

3. Freedom to alter working time – This may include adapting work times to high product demand, but it also may encompass keeping part-time workers just under the threshold of hours for requiring certain benefits and premiums. Employees may want this because it may help deal with the changing distribution of household responsibilities. However, as you can probably imagine, this may lead to conflict between the employee and employer.

4. Freedom to determine the form of contracts – This usually happens where future product or labour demand trends are uncertain. It often entails hiring temporary workers, because permanent contracts are more risky for employers. For example, a firm may want to hire more staff for a new product launch, or a hotel chain may want more staff for a big event or in peak season, but only until the project/event/season is finished. However, this generally means the jobs are lower-skilled and the skill development is often lacking in such cases. The low job security in these cases is often met with low motivation and morale. In other words, the changes employers make to contracts are often done to cut costs, not to increase efficiency.

5. Freedom to set wages – One theory states that unemployment should be met with decreased wages, so that the unemployed can price themselves back into work. Modern economists largely call for flexibility to adapt wages to market requirements, though this may lead to wage inflation in sectors with a tight labour market (i.e. one with a shortage of job applicants). Freezing or cutting wages (inline with product markets) to respond to financial difficulties may also hurt firms who are trying to recruit or retain employees.

Flexibility and Deregulation

It is not simply the case that labour markets lie on a continuum between regulated and deregulated, or between flexible and rigid. It is more complex than that. In fact, deregulation may not produce increased flexibility at all.  For example, in the 1980s, new low-wage part-time jobs were available to unemployed people in the UK to bring people out of unemployment; but the majority of these jobs were taken by people already in full-time work, like married women and young people. The jobs simply did not pay enough for people to go from unemployment to work. Legislation has created incentives since 1997 to help remedy the situation, but this case serves to demonstrate that state intervention had to solve the problem caused by leaving wages up to market forces.

The de/regulation debate kicked off in the 1980s and early 90s, when a clear difference became visible in the labour markets of America and Europe. The US created around 34 million jobs between 1980 and 1999, but there were only around 20 million jobs created in the entire European Union, despite the much larger working-age population within the EU. Around 3/4 of the American work-age population was employed by the turn of the century, but at the same time in the EU, employment returned to the same level as it was in 1980. However, recent reports show that America’s success in keeping unemployment low has not been sustainable.

US & EU unemployment in the 1990s & 2000s

Unemployment rates of US & EU converging in 2009

As the graph above demonstrates, the unemployment rates in the US and the EU converged in 2009. The next graph corroborates this by by looking at employment (not unemployment) rates from the 1980s. Again, the rates are converging.

Employment Rate of the US & EU from the 1980s to the 2000s

Employment Rate of the US & EU from the 1980s to the 2000s

A third graph corroborates this trend further.

Employment Rates 15-64y, from 1992 to 2010

Employment rates from 1992 to 2010, comparing several European countries individually with the EU and the US

In the mid 1990s, the OECD pressured European governments to deregulate their labour markets, arguing that flexibility would allow economies to adapt to change. However, two important things were largely overlooked at that time. First, some EU countries (like Denmark) had the same or better working-age employment rates than the US throughout the 1990s, and the unemployment gap was gone by the end of the decade. The growth in employment in the Netherlands was also much higher than that in the US, with unemployment that dropped under the US by 1999.

Second, labour market performance should not only be measured my (un)employment. During the late 1980s and 1990s in the US, there were several major concerns in the labour market. These included wage inequality, real income (i.e. one’s income, after taking inflation into account – which means the money isn’t worth as much if inflation increases faster than one’s salary rises), widening employment prospects between highly educated/skilled and uneducated/unskilled, poor career development prospects and low pay.

Much of this article has emphasized how flexibility is good for an employer, but keep in mind that employees are increasingly desiring flexibility in their jobs. In 2013, Clare Kelliher distinguished between flexibility ‘of employees’ (referring to organisations’ abilities to meet their needs by using labour in non-standard ways) and ‘for employees’ (which allows workers to choose how they work, and balance their work and non-work lives). She argued that employees increasingly want flexibility in how, where (i.e. from home vs. in the office), and when (i.e. flexible work hours) they work. Employers are especially aware of the demands of millennials (those born between 1980-2000), who highly value and desire work-life balance.

Comparing the US, Japan, and Germany

US: The US has no national-level employer association; and its trade unions are business unions that operate at the level of the company. Employers have much more power, as the bargaining power continues to decrease along with union membership and employee rights. The last of the industry-wide bargaining ended with the expiration of the steel agreement in 1986. Plant-level wage setting began to take place in the 1980s, with concession bargaining or “whipsawing” (i.e. a practice whereby companies make their plants exploitatively compete against one other, for example by having them lower their standards in order to get work). Also, the US is particularly flexible with regards to the absence of a requirement to justify or explain why an employee may be dismissed (AKA “at-will employment,” which also takes into account the fact that you can be fired without notice). Also, women working short hours is very uncommon in the US, unlike in the UK.

Japan: As in the US, unions in Japan are enterprise unions (company-level). However, whereas American employers want to have control over unions by decreasing their power, Japanese employers wanted to have control over unions by cooperating with them; so the relationship here is not so adversarial. In Japan, wage-setting is often done through informal coordination (e.g., major iron & steel companies making identical wage offers followed by other companies who do similar things in the Shunto) and then conglomerates of large firms (Zaibatsu groups) reinforce these wages across companies and sectors; and this process is akin to centralized systems of bargaining seen in countries like France, but it is informal, not legally regulated. Like the US, women working short hours is very uncommon in Japan, unlike the UK or the Netherlands.

Germany: Social partners (e.g. trade unions and employer associations) negotiate wages and working conditions without state intervention. However, the state mandates a high level of “juridification,” requiring, for example, that strikes and other industrial actions are only committed as a last resort. Works councils are also mandatory in Germany (and most, if not all, other European countries in the EU), and are distinct from unions; because they do not deal with wages, but with employment matters. Trade unions and works councils make up the ‘dual system’ of German industrial relations, and this helps ensure co-determination (i.e. employees as well as employers making business decisions).

Note that German works councils function at the company level, and trade unions generally function at the branch and industry levels. People who work a minimum number of hours (or earn a certain minimum income) are entitled to social protection like unemployment benefits. Therefore, part-timers generally don’t receive these benefits. Employment protection is quite deregulated in Germany, with increased easing of restrictions on fixed-term contracts in the 1980s. Bargaining is also becoming more decentralized, as company-level agreements raise markedly in the 1990s. According to Marchington and Wilkinson, in 2013 about three quarters of women and one quarter of men worked part time.

Wrapping it Up

Admittedly, this was not the most user-friendly introduction to the labour market; but it serves as an overall primer of many of the issues that countries around the world have to face. That is, do they give organizations the ability to act with flexibility (such as allowing them to fire people without warning) or regulate such practices? While it may seem to many people that flexibility may hurt employees, just keep in mind that certain success stories such as Silicon Valley represent the height of flexibility.

Perhaps this is an unfair characterization of flexibility, as the IT labour market is one in which job applicants have a great deal of power (because they are so highly in demand all around the world). However, the fact remains that this is just one example in which flexibility works well, because increased flexibility allows decisions, and therefore innovations, more able to be made. The flexibility and regulation debates will rage on as the businesses world evolves, changing national employment and legal systems with them.

In short, understanding the labour market will help you understand the risks and potential benefits regarding employment in certain sectors, industries, organizations, and countries. Considering how much time you spend at work, this should matter to you.

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