Economics explains discrimination in the labour market
Economics explains discrimination in the labour market

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Economics explains discrimination in the labour market

6.2.2 The role of market forces

The second distinguishing feature of the segmented labour market theory concerns the role of market forces in affecting labour outcomes. Although the impact of market forces is not denied, their role is seen to be in the product market rather than the labour market. The part played by labour market influences, particularly excess demand but also trade unions, is seen as subsidiary to such features of the product market as demand variability, employer power and production technology. Similarly, internal labour markets are thought to develop not so much as the result of the type of technology and the skills employed by the firm, as of the power relationships and control strategies that are required within the organisation.

A key distinction employed in the segmentation literature is that between those jobs and workers in firms with structured internal labour markets and those in firms which are open to external labour market conditions. What, then, are the consequences of this distinction for the structure of wages? As we discussed earlier, jobs in the primary segment are generated by employers in core sectors whose ability to pay is boosted by large size, high capital intensity and high profitability, as well as a degree of monopoly power in their product markets. Secondary jobs are provided by firms located in the periphery, where firms are smaller and capital intensity is lower, and product markets are highly competitive on price. According to the theory, wages in the periphery will, as a result, be set at competitive levels which, since the secondary segment is characterised by an abundant supply of labour, will be low.

The advantages enjoyed by core firms do not, however, automatically result in favourable employment conditions for workers. Powerful employers can use their substantial resources to deny special advantages to employees through actions such as union busting and the relocation of production to low-wage, low-unionised regions. Conversely, even highly competitive product markets may yield core rather than periphery jobs if employees are well organised and able to fend off competition from home and abroad – as in parts of the coal, trucking and construction sectors in the US.

In any event, core employers need not extend primary jobs to all their employees. As a range of functions, particularly services such as cleaning and catering, is generally limited to secondary status either within the firm or in subcontractors, the contours of segmentation run through individual firms, not simply between sectors. Similarly, small firms may not offer just the low pay and job instability of the classic sweatshop, they may be the source of jobs with the high rewards offered by producers of speciality and high technology goods.

The differentiation of pay within internal labour markets is explained in neoclassical theories in terms of firm-specific skills which can only be developed through on-the-job training. The senior workers who possess such skills must be sufficiently well paid and secure in their jobs to ensure their willingness to train others. A sharper differentiation from neoclassical analysis, however, is achieved by elaborating a further factor, namely custom. The stability of work groups within internal labour markets is a favourable environment for the generation of norms or accepted ways of doing things. Employers must accommodate such norms if production is to continue without constant interruptions. Custom can be seen as both the accumulated total of norms which develop often quite informally as well as a norm in itself – the requirement that established practices be respected. Thus two groups of workers for whom the accepted practice is that they should be paid the same will often be paid the same, even if the presence of excess demand for one and excess supply for the other calls for different pay rates. Similarly, the job evaluation techniques that determine pay in many internal labour markets reward skill and responsibility in proportions which vary not with the relative availability of workers in the external market but with their relative position within the organisation.


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