Segmented labor market theory (1970S)

The labor market consists of various sub-groups which have little crossover capability.

Wage determination differs from group to group.

A common example is dual labor market theory.

Also see: crowding hypothesis

Source:
F Wilkinson, ed., The Dynamics of Labor Market Segmentation (New York, 1981)

Neoclassical economics

The theory of labor market segmentation contrasts with neo-classical economic theory, which posits the existence of a unified market for labor, consisting of buyers and sellers in open competition.[citation needed] The labor market thus functions as do other markets. In this model, the difference between different workers’ wages and conditions arise from individual differences in their human capital (skills, experience, or formal education) or tastes. On the latter, as part of the theory of compensating wage differentials, those who prefer risky or dirty jobs receive higher compensation than those who take safe or clean ones. Put another way, differences in compensation for labor arise only on the supply side.

The theory of labor market segmentation posits that differences on the demand side imply differences in compensation that are not explained by individual worker characteristics. Labor markets are not perfect markets. Non-market institutions such as craft unions and professional associations affect employer strategies, producing different results for workers with similar characteristics.

All workers should be subject to the same employment standards, such as minimum wages, maximum hour laws, occupational safety, security and health laws, regardless of sector.[4]

History

Modern labor market segmentation theory arose in the early 1960s. It changed the view of many economists who had seen the labor market as a market of individuals with different characteristics of e.g., education and motivation. This perspective was intended to help explain the demand-side of the market, and the nature and strategy of employers. The idea of non-competing groups developed under the general label of labor market segmentation theory. The theory emerged in the United States

Theory

The market segmentation model was developed to accommodate the differences in job markets. For example, lawyers and fashion designers work in different markets. Such markets arise from the division of labor, increasing differentiation and specialization. These workers are unable to switch between occupations because they require different skills and investment in training and qualifications. For example, nurses and doctors form separate occupational labor markets even though they work side by side in the same organizations.

Geographical labor markets emerge because of the costs and disruption workers incur in changing locations. As a result, wages for the same work can remain higher in some locations than others. Conversely, employers would incur costs and disruption if they attempted to relocate to an area of lower labor costs, and might experience increases in non-labor expenses. Cultural differences such as preferences for leisure time versus work may follow geography. As ever more work becomes transacted over digital networks, in some industries, geographical labor markets have become less relevant, and we have seen the rise of a so-called planetary labor market.[5]

Geographical segmentation also occurs on a global basis, specifically between developed and less-dedeveloped countries. However, when labor migrates to developed countries, migrants tend to remain within their original segment, receiving less compensation than native workers.[6] One study found that neoliberal globalization had expanded labor market segmentation. It found that in the West, nations import capital, consumer goods and services exported by countries in the rest of the world, where lower wage workers produce the exports

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