Labor market segmentation

Labor market segmentation is the division of the labor market according to a principle such as occupation, geography and industry.

One type of segmentation is to define groups "with little or no crossover capability". This can result in different segments, for example men and women, receiving different wages for the same work. 19th-century Irish political economist John Elliott Cairnes referred to this phenomenon as that of "noncompeting groups".

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. 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.

A related concept is that of a dual labour market (DLM), that splits the aggregate labor market between a primary sector and a secondary sector.

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 two key formulations are divided into labor market theory and internal labor market theory. The labor market segmentation theory revolves around the identification of a split between two analytic divisions in the economy and the labor market.

Primary sector

In a primary sector the workforce as a whole is motivated to serve their employer because of wages, health benefit, and pension and job security. The job market consists of a majority of blue collar and white collar jobs. The primary sector generally contains the higher-grade, higher-status, and better-paid jobs, with employers who offer the best terms and conditions. These jobs are usually considered to be the occupational labor markets and some industrial labor markets. The primary sector is sometimes sub-divided into an upper and lower level. Primary sector workers are trying to prove themselves to their employers by portraying their skills and educational credentials.

Secondary sector

Secondary sector jobs are mostly low-skilled, require relatively little training, and can be learned relatively quickly on the job. Many such jobs feature high turnover, and/or variable demand. Employers are reluctant to invest in such workers, via advanced training or other employee development activities. Wages are low, and the terms and conditions of the job are less favorable.

Theoretical explanation

This model of labor market segmentation has been developed over the years to accommodate the fact that different job professionals work in completely different job markets. For example, lawyers and fashion designers work in different markets. Some of the major dividing-lines that have been identified are occupational, geographical, and industrial. Occupational labor 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 extensive 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. For examples specifying the minimum qualifications and experience requirement it restricts the entry into an occupation even if they work side by side in an organization. Geographical labor markets are also defined considering that neither employers nor workers can move to another location without incurring a considerable amount of costs. As a result, wages can remain higher in big cities as opposed to smaller cities. There are, for example, a vast number of unemployed people in certain parts of the world as opposed to others primarily because of the demographics--is it a town, city or near to home. The workers also differ in their tastes and preferences for leisure time rather than work and for financial reasons rather than rewards. Their investment is their education, training, work skills, and experience. But it still makes sense to analyze labor supply and demand in the aggregate.

The primary sector and secondary sector both possess different wages, and each sector has different employment characteristics. The two markets are, however, connected with movement between them at specified ports of entry and exit. The jobs in the primary internal segment are those typical of the core of stable employees in a firm, need long on-the-job training in firm-specific skills, have security and good promotion prospects, a high span of discretion, and high material rewards.[4] Professional and skilled craft work requiring occupation-specific rather than firm-specific skills, and often supplied on a contract or self-employed basis. The secondary external segment provides jobs that are low skilled, offer little autonomy and responsibility, low and unstable earnings, and poor working conditions, including casual and seasonal work. The secondary internal sector offers jobs that are generally low grade but with some on-the-job training, security, and promotion prospects. The concepts of primary and secondary labor markets have now passed into conventional thought, with the primary labor market commonly understood to mean people with secure jobs and good conditions of work in public-sector employment, the large corporations and highly unionized industries; while the secondary labor market is understood to cover small employers, non-unionized sectors of the economy, competitive industries such as retailing, where jobs are less secure and conditions of work and pay generally poorest.

New theoretical developments include the concept of International Segmentation of Labor, which considers the different circumstances of the labor process in the global south and north. When labor from the south migrates to the north, this international labor segmentation tends to remain intact within the destination country (Bauder 2006). The concept of "Globally Segmented Labor Markets" by John Asimakopoulos. argues within a Marxist political economy framework using Social Structures of Accumulation theory, developed by American economist David Gordon, that neoliberal globalization has expanded labor market segmentation internationally. Accordingly, there are two global regions. The first is in the West where affluent citizens consume global products and services. The second is in the poor global regions e.g. China where poorly paid workers produce the global products and services. Asimakopoulos argues this is a natural evolution of Capitalism’s pursuit of profits through surplus labor.

Debates and propositions

• Labor incomes are the most important component of total incomes.
  • An alternative position: Total incomes vary largely because of variation in capital incomes and other non-labor income sources.
• Employment is important primarily as a means of raising incomes and thereby reducing poverty.
  • An alternative position: The goal of policy is employment maximization or unemployment minimization.
• There are multiple labor markets.
  • An alternative position: There is one single labor market.
• Workers differ in skills.
  • An alternative position: Labor is homogeneous.
• For workers of any given skill type, there are better jobs and worse jobs.
  • An alternative position: The law of one price holds in the labor market.
• The various labor markets are linked to one another.
  • An alternative position: Changing conditions in one labor market have no effect on other labor markets.
• Workers maximize utility. In low-income countries, utility can usefully be thought of as a function of income alone, although sometimes utility is a function of working conditions as well as income.
  • An alternative position: No single unified purpose guides workers’ behavior.
• Firms maximize profits and make labor market decisions accordingly.
  • An alternative position: Firms exist to serve the interests of multiple stakeholders, of whom workers are one.
• The number of good jobs is limited. Workers who take up bad jobs do so in preference to unemployment.
  • An alternative position: The number of good jobs is not limited. Each worker is doing the type of job that maximizes their utility.
• Open unemployment is less important a problem than is working poverty.
  • An alternative position: Unemployment is the main labor market problem [1]

Workers who are in the similar trade are treated differently according to the sector they are placed in. The differences in the labor market segmentation imply differences in the way which they are trained, allocated, organized and paid. This has to be directly related to the way in which the labor process is organized. The two sectors organize the skills and education credentials.

All employers should be able to receive the same employment standards examples, at least minimum wages, maximum hour laws, health laws etc. regardless of what sector they belong to. The management will not have complete control, there should be employment standards for all employees that allows them to monitor occupational safety, security, health safety and other required standards such as minimum wage requirement, maximum hour laws etc.

See also

• David Gordon
• Split labor market theory
• Flexicurity

References

• Bauder, Harald (2006). Labor Movement: How Migration Regulates Labor Markets. New York: Oxford University Press.