Advantages and disadvantages of labour market flexibility

This study note looks at some of the benefits and drawbacks of a flexible labour market.

What is a flexible labour market?

• Flexible employment contracts e.g. zero hour, temporary, part-time
• Flexible working arrangements e.g. home-working, flexi-time, overseas employment
• Flexible rewards – basic pay, bonuses, share-options, commission payments
• Flexible tasks/ roles / responsibilities

Advantages of labour market flexibility

1. Often attractive to employees who want a better work-life balance or who have family responsibilities
2. Can help increase female labour market participation and raise the employment rate among younger workers
3. Easier for employers to hire and fire staff – easier to adjust the payroll to changes in required output (matching labour demand and supply)
4. Flexible real pay help helps reduce wage stickiness in the labour market – workers might price themselves back into work after a recession or accept pay cuts to keep their job during a downturn
5. Flexible skills within the labour force reduces the risks of structural unemployment due to occupational & geographical immobility
6. More flexible labour market can help improve the trade-off between unemployment and inflation (flattening the SR Phillips Curve)
7. Flexible labour market is attractive for inward flows of foreign direct investment which boosts growth

Risks / drawbacks from labour market flexibility

1. Lack of training. Part-time and temporary staff may not get sufficient training which limits the growth of their human capital and productivity growth
2. We have seen a rise in working poverty – the taxpayer ends up subsidizing low pay through the tax credits and benefits system
3. Well-being issues – precarious employment and incomes can increase stress, also harder to get a home loan (mortgage)
4. Rising inequality – so opponents of flexible labour market argue that it contributed to a widening gap in wages/earnings and higher relative poverty
5. Increased cost of agency staff – the NHS in particular spends a huge amount of money each year on agency staff – increases taxpayer burden
6. Little sign that a flexible labour market has increased business investment – indeed may encourage the substitution of labour for capital
7. Persistent regional unemployment differences question whether a flexible labour market helps to address disequilibrium in the jobs market