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  1. 1. LABOUR MARKET SEGMENTATION The New Approach to understanding structural behavior and changes
  2. 2.  The classical and neoclassical theory determines the equilibrium wage rate on the basis of external labour supply-market and an internal firm demand. The drawback with this analysis was that it didn’t consider employee-employer relations; there wasn’t any unification of the supply and demand side models of compensation and employment. It was in 1986 that a detailed analysis of matched employee-employer data was recognised
  3. 3.  Both the schools of thought leave many major labour market policy issues- wage dispersion, income distribution, unemployment unexplained. The thrust area of classical economics was on profit maximization behaviour of both the individual and the firm; workers maximise utility by bargaining for higher wages and firms maximise profits by keeping labor costs constant This orthodoxy was challenged on the grounds that it ignored the institutional structure and social influences
  4. 4. THE DUALIST THEORY The dual labor market theory depicted a primary market of unionized jobs with higher pay and a secondary market of the low-paying jobs characterized by job- instability; This ‘dualisation’ argument to neo-classical school was developed in US labor market research. This division of labor market corresponds to the empirical observed structural wage differences unaffected by demand and supply conditions
  5. 5.  The distinguish between primary and secondary labour market lies in the market regulation and its feedback mechanism- Primary labour market- characterized by long-term employment contracts, career growth patterns, limited affect of market fluctuations; in effect it does not behave as a market Secondary labor market-wage level fluctuations, manpower requirements, employment decisions effect performance and pay scales Thus market regulatives are mostly operative in the secondary sector; this gives rise to segmentation
  6. 6.  The radical approach of DUALISM to labor market theory has been based on observed empirics of American capitalism; i.e. political and economic forces in the monopoly capitalist structure have given rise segmentations(primary internal and secondary external) and the sources of these segmentation are internal to the economic system We thus define labour market segmentation as historical processes of political and economic forces that have brought about segregation into separate sub segments, distinguished by behavioral rules and labour characteristics
  7. 7. INTERNAL AND EXTERNAL LABOUR MARKET The internal labour market represents a heterogeneous collection of compensation and HR management policies that effect the growth possibilities of the employee in the current organisation ILM are basically long-term contractual agreements; the rules are characterised by match-specific investments, asymmetric information, risk aversion and transaction-costs. The agreement includes wages, hours of work, promotion opportunities and grievance procedures. These agreements, however long-term in nature are incomplete and could be affected by exogenous future events
  8. 8.  The external labour market represents a collection of heterogeneous employment opportunities available to an individual as an alternative given the person’s current job status. Thus external labour market signifies the returns to human capital and search costs involved among potential employers; it implies fluidity in worker movement across firms and wages being decided by an aggregate process The existence of the external market implies that hiring patterns are influenced by external forces, i.e. worker mobility, wage bargaining power of the labour outside the firm and market structure
  9. 9.  Thus in the SLM theory, we talk about the existence of direct linkages between the productive capacities of a worker and wages, job allocation across firms depending on the human capital and information structure between employee and organisation As pointed out earlier, the segmentation stemmed from the capitalist conduct of firms in the 1970s, SLM theory lays emphasis on the development of institutional constraints on firms’ behavior, and the systems of labour market regulations We deal with the institutional rules that define the segments and not individual skills that were considered in the orthodox theory as the factor for wage differences.
  10. 10. ABOWD, KRAMARZ AND MARGOLIS ANALYSIS The AKM analysis considers the external market effect as captured in the employee’s external wage rate that depends on the labor market characteristics and the opportunities of the worker’s other wage outcomes. We also define the internal-external wage differential: the difference between what is currently received and what is available as alternative. It depends on the firm’s compensation policy and the correlation of its HR policy with that of the other firms in the market
  11. 11.  In the given equation, wit is the natural log of wages per unit time for individual I in period t Ѳi is the individual labor characteristic, i.e. external market features ψJ(I,t) is the part related to the firm or the internal forces Xitβ is related to individual like years of schooling, experience, etc and is time dependent Here J(I,t) is the identity of the current employing firm
  12. 12.  Statisticaldecomposition of the given equation gives us the estimated internal and external wage rates of an individual employed in firm j- = And the expected external wage rate is- Thus the difference between internal and external wage-rate is given by the jth firm policies relative to that of other firms in the market . An alternative to estimate direct internal-external wage difference is to decompose aggregate industry effects into person and firm effects
  13. 13.  Wecan consider an alternative model to the one given earlier as- Where K measures the aggregate effect of firm-size or industry. AKM shows that the LSE of K can be expressed as the weighted- average of average firm and person effect- This can be interpreted as-by what amount the measured person(external) effect deviates from its average and by what amount the firm(internal) effect differs from the average
  14. 14.  Thus AKM actually estimates a model in which the individual effect is decomposed into a certain permanent, non-time varying characteristic and a part due to non-observable statistic. Similarly, the firm effect is decomposed into effects of firm compensation policies and another due to seniority of posts available to insiders and outsiders. The AKM analysis brings out the gap between internality and externality for an individual i employed in firm j at time t; whether current primary segment employment is satisfactory or there’re other alternatives in the external market
  15. 15. THE WAGE DYNAMICS The segmentation of the labour market into ‘good’ and ‘bad’ jobs outlines the existence of involuntary unemployment In formal sector, firms decide upon contractual agreements with workers; these implicit contracts entail performance incentives, higher rents, re- employment options and higher pays- it leads to job rationing and creates pool of involuntary unemployed Primary sector jobs are characterised by such implicit agreements, hence remain outside the labour market, it leads to workers falling back into informal sector jobs
  16. 16.  Secondly, the incomplete nature of the contracts gives rise to the dual nature of employment and thus the ‘bad’ jobs characterised by low rents and subsistence wages The variability in wage is observed as a consequences of the institutional arrangement rather than labour/wage flexibility The influences of the labour-market on firm wage policies depends upon the internal(intra-firm) labour market-the permanent workforce and skilled manpower and on the other hand unskilled markets
  17. 17.  Thus, intra-firm wage rate determination controls the external market. In other words, market conditions are influenced by the work-force employed i.e. primary sector employment, the skilled work-force deciding the wage rate with the management- the implicit contracts give rise to a ‘pattern of wages’ in the long-run. In order to maintain constancy of wages, firm takes to job-rationing. Thus the “enterprise wage policies’ affect the wage setting and its subsequent dynamics depending upon the skilled labour employed and the labour market conditions
  18. 18. EMPIRICAL ISSUES Although the SLM theory has gained momentum and is now viewed as a better explanation to wage fixing and structural employment, there exists disparities regarding the method of segmentation How far the dualist structure holds valid is still subject of further analysis, whether it applies in strict sense, whether labour mobility is restrictive and is discrimination among race and gender a dominating factor in explaining the internal and external structures- all these issues need further modeling along the empirical data