Increasing labour market flexibility

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 and the power of Trades unions.
  2. Improve information for workers and firms
  3. Better education and training. This will enable workers to be more skilled and will help to reduce immobility’s in the labour market.
  4. Make it easier to hire and fire workers.
  5. Support zero hour contracts which enable firms to choose how much to employ workers
  6. Reduce protection workers have over collective dismissal.
  7. Abolish legislations, such as maximum working week and unfair dismissal.
  8. Encourage more immigration from overseas. This enables foreign nationals to fill labour shortages in the UK
  9. 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.
  10. Legislation to outlaw discrimination
  11. Improve child care facilities to encourage women to work
  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.

Costs of increasing labour market flexibility

  • Higher income inequality – 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
  • High labour turnover leads to high costs of training workers.
  • High labour turnover reduces 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 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 worker.
  • 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.


Published November 28, 2012 | Tejvan Pettinger
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