Increasing labour market flexibility

Labour market flexibility means that it is easy for workers to change jobs and choose different types of work. It also implies that firms find it relatively easy to hire and fire workers can use temporary contracts, rather than get locked into rigid labour contracts.

Labour market flexibility is seen as a way to reduce unemployment, increase efficiency and encourage entrepreneurs to take a risk and employ workers.

The government can attempt to increase labour market flexibility in numerous ways.


How to increase labour market flexibility

  1. Reduce minimum wages. A high minimum wage may discourage firms from taking on new workers – especially young workers who have less job experience.
  2. Reduce the power of trade unions. Trade unions have the ability to go on strike to campaign for higher wages and can also put pressure on a firm to avoid redundancies. Reducing the power of trade unions will give the firm greater flexibility to hire and fire workers and set market clearing wages.
  3. Improve information for workers and firms. Helping to provide better information about job vacancies and which workers are skilled in the job will help labour markets function more effectively.
  4. Better education and training. The government can fund skills training to help low-skilled workers become more employable in a fast-changing job market. This will enable workers to be more skilled and will help to reduce immobility’s in the labour market.
  5. Make it easier to hire and fire workers. For example, remove regulations which require workers to be given notice or generous redundancy packages.
  6. Support in legislation, zero-hour contracts which enable firms to choose how much to employ workers
  7. Reduce protection workers have over collective dismissal.
  8. Abolish legislation, such as the maximum working week and unfair dismissal.
  9. Encourage more immigration from overseas. This enables foreign nationals to fill labour shortages in the UK
  10. Enable more home-building in property hotspots to help reduce the price of housing and rents, making it easier for people to live in areas with high employment levels.
  11. Improve child care facilities to encourage women to work. This could be quite a significant policy to give women the opportunity to work, in addition to looking after a family. Working parents are often looking for flexible work, such as part-time hours, flexible hours and the option to work from home.
  12. Make it harder to receive unemployment benefits, so people have a greater incentive to get a job.
  13. Reduce poverty trap where working more hours leads to a small marginal increase in income because of higher tax and lower benefits. This encourages people to stay on benefits rather than take a job.

Costs of increasing labour market flexibility

Whilst the above policies may increase labour market flexibility, it doesn’t necessarily mean it is a good idea. They all have some opportunity cost.

  • Higher-income inequality. Reducing minimum wages and power of trade unions leads to a division between those with secure jobs and those in increasingly flexible labour markets.
  • Workers on zero-hour contracts have fluctuating incomes which make it difficult to plan. It can leave workers struggling to meet regular bills
  • High labour turnover leads to high costs of training workers. Very flexible labour markets where workers don’t feel secure in their job may lead to lower motivation and lower productivity.
  • High labour turnover reduces the loyalty of workers to the firm
  • Can create an antagonistic relationship between workers and firms.

Readers Question: Evaluate the likely effectiveness of two policies that the German government could introduce to increase labour market flexibility.

Recently, the German government have introduced a variety of reforms to try and tackle the high rates of unemployment in Germany. These policies have included:

  • Make it easier to hire and fire workers.
  • Make it more tax-efficient to set up a small firm.
  • Unemployment and welfare benefits have been cut and rolled into one, to force people to leave what the Germans call the “Soziale Haengematte”, the welfare hammock.
  • People who have been without a job for a long time are offered poorly-paid “one-euro jobs” in the public sector, to help them get used to regular work again.
  • The employment offices have been restructured to provide more localised services.
  • German Unemployment at BBC

If we take cutting unemployment benefits. The idea is that this provides an incentive to look for work and accept lower-paying jobs. In theory, lower benefits increase the motivation to get a job rather than stay on the welfare system.

However, as the above article highlights, this becomes a problem when jobs are not available. In other words, people have a strong incentive to get a better-paid job, but there aren’t enough jobs going – particularly a problem in the current recession. Cutting welfare benefits will also create an increase in relative poverty.

Making it easier to hire and fire workers reduces the cost of taking new workers on, but it may lead to more temporary employment. So some workers may get taken on but it creates more job insecurity in the workforce.


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