Unit 2 Unemployment, wages, and inequality: Supply-side policies and institutions
2.6 Segmented labour markets
Until now we have assumed that all workers receive the same wage in a single labour market. The contrast between the situation of Mar and her mother Carmen in Section 2.1 highlights the fact that even in the same industry and occupation, there can be distinct labour markets. In what is termed the primary labour market, workers may have job security, enjoy high wages, and be represented by trade unions (this applies to Carmen, for example, who worked for the state broadcasting company). ‘Job ladders’ allow promotion to better paying and more secure jobs. Primary labour market jobs are frequently referred to as ‘good jobs’.
This article vividly describes Spain’s segmented labour market and its negative consequences for unemployment, including showing how it worsened the effects of the COVID-19 pandemic on the Spanish labour market as compared with other countries.
- primary labour market
- When the labour market is segmented into separate parts, a primary labour market is a segment where conditions for workers are relatively good, typically with trade union representation, high wages, and job security. See also: secondary labour market, segmented labour market.
- secondary labour market
- When the labour market is segmented into separate parts, a secondary labour market is a segment where conditions for workers are relatively poor, typically with low wages and short-term contracts or limited job security. This might be due to their age, or because they are discriminated against according to race or ethnic group. See also: primary labour market, segmented labour market.
- segmented labour market
- A labour market with two or more distinct segments that function as separate labour markets, with limited mobility of workers from one segment to the other (including for reasons of racial, language, or other forms of discrimination). See also: primary labour market, secondary labour market.
The secondary labour market describes workers who are on short-term contracts with lower wages and limited job security. Workers in this market are often young or from populations discriminated against by race or ethnic group. (Carmen’s daughter Mar was qualified for a job in the same occupation as her mother, but was stuck in the secondary labour market.)
In many European countries, jobs in the secondary labour market are called ‘zero-hours contracts’ because the employer does not commit to providing work for any particular number of hours. Comparing two workers with the same set of skills, the one in the secondary labour market will receive a lower income than their ‘twin’ in the primary labour market assuming they work the same number of hours. Institutions benefit the workers in the primary labour market, leaving workers in the secondary market disadvantaged, thereby increasing income inequality.
Figure 2.18 shows a Lorenz curve for an economy with a segmented labour market: a low-wage segment and an equal number of high-wage primary segment workers. The owners are not segmented because they can easily invest their wealth in firms in either or both sectors and, as a consequence, the rate of return will be the same in both sectors. The elimination of labour market segmentation would mean that all workers receive the same wage: wages rise in the secondary labour market and decline in the primary labour market. Work through Figure 2.18 to understand how inequality falls as illustrated by the Lorenz curve. Since the degree of competition in the product market is unchanged, the profit share and the price-setting curve are not affected.
Figure 2.18 The effect of labour market segmentation.
A model economy with labour market segmentation
Elimination of labour market segmentation
Effect on inequality
Trade unions may affect the extent of labour market segmentation.
Where unions have reduced labour market segmentation and narrowed the wage differentials among workers, inequality is lower. An example is the solidarity wage policy introduced in Sweden (Section 2.4).
Elsewhere, however, unions reinforce labour market segmentation, using their power to protect the wages and conditions of the ‘insiders’ in unionized jobs while the ‘outsiders’ have temporary contracts and lower wages. As suggested by the case of Mar and Carmen, the Spanish labour market with its high union coverage has a higher degree of labour market segmentation than many other high-income economies.
Taking the gig economy in the UK as an example of where workers in the secondary labour market have ‘temporary contracts’, Exercise 2.5 applies the Lorenz curve to determine the outcome of this form of labour market segmentation.
Question 2.7 Choose the correct answer(s)
Consider a segmented labour market exactly like Figure 2.18, except that the primary labour market has 50 workers (instead of 40) and the secondary labour market has 30 workers (instead of 40). The number of unemployed workers, number of owners, and cumulative share of output of each group are the same as in Figure 2.18. Based on this information, read the following statements and choose the correct option(s).
- If 10 workers have 0% of the output, 30 workers have 10%, 50 workers have 50%, and 10 owners have 40%, the area underneath the Lorenz curve is 2,700, so the Gini coefficient is \((5,000 \ – \ 2,700)/5,000 = 0.46\).
- Now, 15 workers have 0% of the output, 25 workers have 10%, 50 workers have 60%, and 10 owners have 30%. The area underneath the Lorenz curve is 2,925, so the Gini coefficient is 0.415 (a slight decrease in inequality).
- Now, 10 workers have 0% of the output, 30 workers have 5%, 50 workers have 60%, and 10 owners have 35%. The area underneath the Lorenz curve is 2,650, so the Gini coefficient is 0.47 (a slight increase in inequality).
- Now, 10 workers have 0% of the output, 80 workers have 60%, and 10 owners have 40%. The Gini coefficient is 0.36 (compared to 0.46 in the initial situation), a decrease of 0.10.
Exercise 2.5 Labour unions in the gig economy
In the UK, gig economy workers can join a labour union called the IWGB (Independent Workers’ Union of Great Britain). In contrast, in other countries such as the US, union membership is not open to workers in the gig economy.
Use a Lorenz curve diagram like Figure 2.18 to illustrate the effect of allowing gig economy workers to join a labour union (compared to when they were not allowed to join). Explain what might happen to income inequality (the Gini coefficient) and why.
