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Explain what is meant by a flexible labour market and evaluate the role that a flexible labour market can have in improving the macro-economic performance of the British economy.

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Unemployment and Flexible Labour Markets Explain what is meant by a flexible labour market and evaluate the role that a flexible labour market can have in improving the macro-economic performance of the British economy. (30 marks) Since the 1980s, the labour markets have become more flexible. But what does this mean? How does this impact on the economy? First of all, what is meant by a flexible labour market is a labour market in which movement between jobs is made easier. This may be done in different ways, one being wage flexibility as well as contractual flexibility. This is where shorter-term contracts are brought into use, meaning that workers must renew their contracts, if they are to stay in work, every few years, rather than the great lengths of time that have been used in previous years. Furthermore, the ability to change wage rates more easily means that the gap between supply and demand is reduced. The ease of hiring and firing of workers is also a major cause of labour flexibility. ...read more.


Real Wage ASL NLF Level ADL e1 e2 employment The above diagram shows the difference between the National Labour Force and the aggregate supply for labour. This difference, (e2-e1) is the natural rate of unemployment. Increased labour flexibility will mean that with an increase in part time employment and short-term contracts, more workers are going to be attracted to work. This means that the gap between the aggregate supply of labour and the national labour force will fall, meaning that the natural rate of unemployment has fallen. A further effect of flexible labour markets is that productivity is likely to rise. The reason for this is that with shorter-term contracts, workers have a greater incentive to work well, so that they will be able to stay in employment. This is because, if people want to stay in work, they will have to work harder so as to appease their employer. This means that productivity will rise, and so the costs to that firm will fall. ...read more.


If there was no flexibility then workers could not be offloaded, and so there is excess supply of workers. Along with flexible labour markets, also come disadvantages. One of these is the concern over job security. With a more flexible labour market comes a greater ease of hiring and firing. Job security is therefore a threat to the current social environment, where workers prefer a steady job, where they can be sure of their status. A training gap will also become a problem due to the fact that many firms will not provide training if workers are only staying for a short time. This means that many workers will miss out on crucial training, especially if ICT skills are becoming more important. Finally, a rise in relative poverty may come about due to short-term workers only having their wages raised by a lesser extent than the higher paid long term workers. This means that the gap between wage payments increases, leading to a rise in relative poverty. N. Henderson 01/05/07 1 ...read more.

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