Labor Market Flexibility

What is 'Labor Market Flexibility '

Labor market flexibility refers to firms' ability under a jurisdiction's laws and regulations to make decisions regarding employees's hiring, firing, hours and working conditions.

BREAKING DOWN 'Labor Market Flexibility '

A flexible labor market is one where firms are under fewer regulations regarding the labor force and can therefore set wages, fire employees at will and change their work hours. Less flexible labor markets are subject to more rules and regulations, including minimum wages, restrictions on firing, and other restrictions on employment contracts; labor unions often have considerable power in these markets.

Supporters of increased labor market flexibility argue that it leads to lower unemployment rates and higher gross domestic product (GDP), due to the unintended consequences of tight labor market restrictions. For example, a firm might be considering hiring a full-time employee, but fear that the employee will be extremely difficult to fire and may claim costly worker's compensation or sue based on alleged unfair treatment. The firm will likely choose to take on short-term contract workers instead. Such a system benefits the relatively small number of full-time employees with especially secure positions, but hurts those on the outside, who must move between precarious, short-term gigs.

Proponents of tough labor market regulations, on the other hand, claim that flexibility puts all the power in the hands of the employer, resulting in an insecure workforce. The labor movement began in the 19th century in the U.S. and Europe as a response to dangerous and dirty workplace conditions, extremely long shifts, exploitative practices by management and owners (wage garnishing, threats and other abuse), and arbitrary dismissals. Employers had little incentive to ensure that workplace injuries and deaths were rare, since they faced no consequences for creating hazardous conditions, and employees who could no longer work were easy to replace.