Segmented Labour Markets
Barriers to entry in the labour market
Segmented labour markets are caused by barriers to entry within labour markets.
Barriers to entry could include skill sets required, qualifications, knowledge, experience and expertise, your network etc.
Barriers to entry cause wages to be unequal
If barriers to entry did not exist, then labour could move freely to where the highest jobs are paid. In this case everybody would be paid the same wage (in the long run), as there is nothing preventing new workers from joining their labour market of choice so they can earn more.
We know in the real world that barriers to entry do exist between different labour markets. If there are higher barriers to entry, we would expect higher economic rent payments, as there will be limited competition in the supply of labour.
These barriers to entry can potentially lead to market failure because it means that different wages are paid across a segmented labour market. The forces of supply and demand cannot work to equalise wages among the working population. This can have negative impacts on inequality and poverty.
There are benefits of a segmented labour market
However, barriers to entry are sometimes necessary. For example, a doctor needs to train for around 7 years to become qualified and legally practise medicine. Without this barrier to entry in place, we would have unqualified doctors in the labour force (and we don’t want that!).
Qualifications can help improve overall welfare because it keeps the worker honest and credible.
Remember also that there are also non-monetary benefits of work to consider which affects labour supply. Without market segmentation there would still be some difference in wages because of the non-monetary benefits that exist in jobs.
For example, jobs with flexible hours – some people may value this highly and be prepared to accept reduced pay. Some people are not motivated much by money e.g. a fireman – they choose to do what they do because they enjoy saving peoples’ lives.
Therefore, even without entry barriers some people would still accept lower wages in return for greater non-monetary benefits.
So, in summary we have learned:
The many causes of labour market failure
The problem of unemployment
Skill shortages
Imperfect information
Immobility of labour
What the government can do about these isuses
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