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Flexible Labour Markets

Author: Geoff Riley  Last updated: Sunday 23 September, 2012


What is a Flexible Labour Market?

  • Flexibility is the ability to respond to change quickly while safeguarding a degree of fairness
  • These changes might include the impact of innovation and changing technology, shifts in consumer preferences and external shocks, such as the recent global trade slump or volatility in world energy and food prices
  • Economists who believe in the power of freely functioning markets for goods, services, capital and people are supporters of flexible labour markets
  • A flexible labour market has several characteristics
  • Occupational (functional) flexibility – the ability of the workforce to perform different tasks and also to acquire and apply transferable skills.
  • Ease and cost of hiring and firing workers – how costly it is to adjust the size of the workforce so that employment can be matched during the different stages of a cycle.
  • Contractual flexibility: In many industries, workers are now offered jobs on six or three months and sometimes on month-to-month contracts.

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 and the regionalization of pay awards so that payment can reflect differences in demand for and supply of labour and also variations in regional living costs. Wage flexibility has become an important issue during the recession with hundreds of thousands of workers experiencing wage freezes of wage cuts.

Geographical flexibility

Many businesses now expect their workers to be able to move within and between regions and countries during their working life. There are always 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 table below summarises different aspects of labour market flexibility with examples for each:

Price (wage)





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

Willingness to relocate

Use of performance related pay to boost productivity


Core of full-time employees on contracts



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 leads to less structural unemployment and a reduction in the natural rate of unemployment
  • Flexibility makes the British economy more attractive to inward investment
  • The economy can respond quickly to an external demand or supply-side 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
  • 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 relative poverty – because of the reduction in trade union membership and less employee-bargaining power.
  • Many people on short-term job contracts do not enter into any occupational pension.
  • There is a risk of “slash and burn” during a recession
  • What of the 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 subject to fewer 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.

Wage flexibility is often taken as a sign of a flexible labour market. The recession in 2009 led to a sharp fall in the average growth of pay settlements and in many industries, workers have been prepared to accept wage freezes or pay cuts.

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