Over the last twenty-five years, governments of both political persuasions appear to have become wedded to the concept of ‘labour market flexibility’. In this chapter we look at the meaning of a flexible labour market and consider its pros and cons.

What is a Flexible Labour Market?

Economists who believe in the power of freely functioning markets for goods, services, capital and people are frequently strong supporters of flexible labour markets. But there is no unique definition of the term. In fact we find that a flexible labour market has several characteristics

Occupational (functional) flexibility – this refers to the ability of the workforce to perform different tasks and to acquire and apply transferable skills. A worker with transferable skills will be able to move easily from one job to another – they will be occupationally mobile. Flexibility can also be encouraged by better training, and provide incentives for people to adapt their skills. There is still a ‘skills gap’ between the UK and many of our main international competitors. Rapid technological change and the pressures of globalization are putting a premium on raising the skills of the workforce and increasing the adaptability of people in work.
Ease and cost of hiring and firing workers: Reforms to UK employment laws now make it easier to hire and fire workers - this reduces the costs to the employer of making modifications to the size of their employed labour force. Output and employment can more easily be matched during the different stages of an economic cycle.

Contractual flexibility: In many industries, workers are now offered jobs on six months, sometimes on month-to-month contracts. There are even some instances of zero hour contracts – where the number of hours that someone is asked to work will vary from week to week – but with no guarantee of any hours being available at all! Part-time workers now make up around 25 per cent of the UK workforce this is high in comparison to much of Europe. Compared to the EU as a whole there are also a relatively high number of employees with flexible working patterns in the UK, such as shift and weekend working.

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 (where some part of the total pay package is linked to productivity, company profits or to other indicators of performance. In many industries there is evidence of regionalization of pay awards so that payment can reflect differences in regional demand for and supply of labour and also variations in regional living costs

Geographical flexibility: Many businesses now expect their workers to be able to move within and across different regions and countries as part of their career development. There are always natural 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 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! There is no unique template for success in raising employment and reducing unemployment whilst at the same time protecting the employment rights of people in work. The Danish economy has recently been praised for its model of “flexicurity”!

Flexibility as a broad economic idea is basically the ability to respond to economic change efficiently and quickly while safeguarding a degree of fairness. Changes include the impact of innovation and changing technology, shifts in consumer preferences and external shocks to the UK economy, such as the recent global slowdown or the surge in world oil prices. According to the Treasury, a high degree of flexibility means that the British economy will be more resilient in the face of such exogenous shocks and will therefore minimise the costs in terms of lost output and jobs.

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

Price (wage) Flexibility	Numerical Flexibility	Temporal Flexibility	Functional Flexibility	Location Flexibility
Regional and local pay agreements rather than national wage settlements	Expansion of short term employment contracts	Flexibility of working time i.e. overtime and weekend working	Ability of labour force to use varied technology	Geographical flexibility
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
Wider use of performance related pay as an incentive to boost labour productivity		Core of full-time employees on contracts

 

Employment Rates in the UK economy
			Percentages of adults aged 16+
	Men	Women	All
1981	82.1	59.1	71.0
1991	79.9	66.2	73.3
2005	79.0	70.1	74.7
Source: Labour Force Survey

Has the flexible labour market model developed in the UK been beneficial to our growth prospects? There is certainly no consensus on this answer, some economists believe that the labour market flexibility has led to an increase in wage inequality but other analysts argue that continued low levels of unemployment and inflation are testimony to a better performance.

Advantages of a flexible labour market

• 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.
• Improved occupational mobility of labour leading to less structural unemployment and a reduction in the natural rate
• Stronger employment creation during an economic upturn
• Flexibility makes the British economy more attractive to inward investment
• Higher productivity growth in the long run (which then helps to improve competitiveness)
• Contributes to an improvement in the inflation-unemployment trade off (see the next chapter on the Phillips Curve)
• The economy can respond more flexibly to an external economic shock – because wages and employment are more flexible

Disadvantages of a flexible labour market

• There are concerns about a lack of training for workers on short term contracts which has a long term effect on their ability to regain employment if they lose their jobs. This ties in with broader concerns about skills gaps in the economy.
• Shorter term contracts might lead to job insecurity – for some people, the concept of “job security” is being gradually replaced by the concept of “employability”. Frequent job changes for workers can be unsettling for them and for their families.
• There are concerns about the link between a flexible labour market and growing relative poverty – because of the reduction in trade union membership and less employee-bargaining power in many jobs.
• Shorter term employment contacts and eligibility for occupational pensions may lead to increased pensioner poverty in the long run, many people on short term contracts do not enter into any occupational pension.
• There is a risk of “slash and burn” during an economic slowdown / recession as companies seek to cut their workforces aggressively during a downturn.
• Longer term 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 government 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.
• The National Minimum Wage
• The European Union Working Hours Directive
• Laws on minimum holiday entitlements, maternity and paternity leave and health and safety at work.
  Employment laws which protect workers from unfair dismissal.

Reforms to national labour markets remains an important economic policy topic at the moment as many European countries look to increase their employment rates (partly as a solution to the impending pensions crisis) and reduce what, for many countries, has become a deeply-rooted unemployment problem.

Key Points

• Flexible labour markets are a supply-side policy designed to increase employment, raise productivity and keep labour costs under control.
• The strongest supporters of flexile labour markets are neo-classical economists who believe in the power of free markets and argue for less government intervention in the labour market
• The UK labour market has undoubtedly become more flexible in the last twenty years with rising part-time employment for most of this period; greater localization of pay agreements and a shift toward short-term contracts in many (but not all) occupations and industries
• There are plenty of barriers and imperfections in the UK labour market