Readers Question: This one is about flexibility in the labour market. I am wondering why globalisation has made a contribution to the increase in flexibility. Is it because firms face fierce competition so they have to hire workers only when they need them?
Increased competition is certainly one factor. If a firm has a domestic monopoly it faces little competition therefore it is easier to make profits. If globalisation causes that firm to face increased competition from before, it will need to find ways to reduce costs. One way is to increase the flexibility of labour markets. For example, giving workers flexible working hours and using temporary staff. This can help reduce unnecessary costs.
For firms trying to remain competitive, keeping wage costs under control is important. There are pressures for European countries (who have become uncompetitive within the Euro) to reform labour markets – making it easier to hire and fire workers, reduce labour costs e.t.c.
There is a debate on whether labour market flexibility actually increases productivity in the long term. There is a concern that greater flexibility may reduce worker morale and lead to a high staff turnover which are less loyal to the company. Also, some countries like Germany have a high degree of labour market regulation, despite being able to compete on an international market.
Migration and Flexible Labour Markets
The European Union has seen a rise in labour market flexibility with the entry of Eastern European countries into the EU. It means it is much easier for Eastern European workers to travel to Western EU countries to take advantage of high wages. For example, in the boom years, Ireland attracted a significant flow of workers from Poland and other Eastern European markets. This inflow of workers helped to keep wage growth under control. When the economy went into recession, unemployment rapidly increased. This increase in unemployment, especially in the construction sector, encouraged many Polish workers to return home to Poland. Therefore, the rise in unemployment was lessened by the outflow of workers. If there wasn’t the same labour market flexibility, there would have been higher wage inflation in the boom and a sharper rise in unemployment during the bust.