Labor Market Flexibility

What Is Labor Market Flexibility?

Labor market flexibility is an important aspect of the labor market. It allows companies to make certain decisions about changing their labor force in response to fluctuations in the market and to help boost production.

Organizations can make changes to their labor pool based on factors such as employee hiring and firing, compensation and benefits, and working hours and conditions. Companies do not have carte blanche, however, to implement a flexible labor market because of laws and policies that protect employees and the labor pool.

How Labor Market Flexibility Works

Labor market flexibility refers to how quickly a firm responds to changing conditions in the market by making modifications to its workforce. A flexible labor market allows employers to make changes in response to supply and demand issues, the economic cycle, and other market conditions.

But a truly flexible labor market only exists when there are few labor force regulations in place. When this is the case, employers are able to set wages, fire employees, and change employee work hours at will. And the changes can go either way. During tough economic times, for example, an employer that has high flexibility can cut wages and increase the number of hours that employees are expected to work to boost productivity. Conversely, when the economy is strong, the same employer may decide to give employees a slight raise and cut back on their hours.

Less flexible labor markets are subject to more rules and regulations including minimum wages, restrictions on firing, and other laws involving employment contracts. Labor unions often have considerable power in these markets.

Some of the other factors that affect labor market flexibility include employee skills and training, occupational mobility, minimum wages, part-time and temporary work, and job-related information that employers make available to their employees.

Labor unions can limit labor market flexibility by negotiating higher wages, benefits, and better working conditions with employers.

Pro and Cons of Labor Market Flexibility

Supporters of increased labor market flexibility argue that it leads to lower unemployment rates and higher gross domestic product (GDP) due to the unintended consequences of tight labor market restrictions. A firm may consider hiring a full-time employee, for example, but be concerned that the employee would be extremely difficult to fire (should that proved necessary) and could claim costly worker's compensation or sue based on alleged unfair treatment. The firm may choose instead to take on short-term contract workers.

Such a system benefits the relatively small number of full-time employees with especially secure positions, but hurts those on the outside — those who must move between precarious, short-term gigs.

Proponents of tough labor market regulations, on the other hand, claim that flexibility puts all the power in the hands of the employer, resulting in an insecure workforce. The labor movement began in the 19th century in the U.S. and Europe in response to dangerous and dirty workplace conditions, extremely long shifts, exploitative practices by management and owners — wage garnishing, threats, and other abuse — and arbitrary dismissals.

Employers had little incentive to ensure that workplace injuries and deaths were rare, since they faced no consequences for creating hazardous conditions, and employees who could no longer work were easy to replace.

Factors Impacting Labor Market Flexibility

As mentioned earlier, unions, employee skills and training, minimum wage regulations, and job-related information can all have an impact on flexibility in the labor market.

Labor unions

Also called trade unions, these organizations represent the collective interests of a group of workers. Employees can band together through their union to initiate negotiations for better wages, working conditions, benefits, and working hours, making the market less flexible.

Employee skills and training

When employees are skilled and have ready access to training to improve on or add to their skills, they are better able to respond to changes in the market. For example, a customer service representative who goes back to school to get training in the information technology (IT) sector is able to respond to the growing demand for IT technicians when vacancies arise.

Minimum wages

State and federal regulations limit how low employers can set the base pay per hour for employees. These minimums are based on changes in the cost of living and inflation. Some employers feel higher minimum wages cut into their productivity as well as their bottom line.

Job-related information

People rely on the information provided by employers about the jobs available in the market. The more informed job seekers are about open positions, the easier it is for employees to respond to fluctuating conditions within a company's workforce and in the market, making it much more flexible.