Wednesday, April 25, 2007

Flexible Labour Markets. - Benefits and Disadvantages

Flexible labour markets involve a minimum of government intervention, they are labour markets which work efficiently and are competitive. Many supply side economists argue flexible labour markets are of great importance in reducing unemployment and improving the competitiveness of the economy. However, although they have some benefits the advantages of flexible labour markets are not equally shared. In particular, there are concerns over the negative impact on job insecurity.

This is a short answer to an exam essay question. "Examine the Benefits of Flexible Labour Markets"

1. Reduce Classical (Real Wage) Unemployment

Real wage unemployment occurs when wages are set above the equilibrium, for example, through trades unions or minimum wages. Flexible labour markets help to keep wages close to the equilibrium and therefore avoid creating unemployment.

However it is worth noting that minimum wages and trades unions don't always cause unemployment. For example, if firms have monopsonistic power, wages can be kept below the equilibrium. A true flexible labour market would require both workers and firms to lose their market power.

2. Increased Investment.

Flexible labour markets help to reduce costs for firms; for example, workers can be employed when they are needed. It is not necessary to pay for workers who are not productive. This will help attract inward investment. It is argued one reason, for higher unemployment in France is that there are costs in hiring and firing workers, this reduces the incentive for firms to expand.

However if labour markets are very flexible workers may have greater job insecurity, and this can lead to lower productivity.

3. Reduces Wage Price Spirals

If workers have too much market power they can bargain for higher wages, this can lead to inflation.

4. Increases Labour Participation Rates

Flexible labour markets can be beneficial for workers. This is because it gives them more options of, when and where to work. This is particularly helpful for women with young children, for example, they can work part time and still look after their children.

However, although flexible labour markets have created work in the part-time, service sector, there has been less success in creating permanent, full time jobs.

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