6.2 Dual labour market theory

According to this theory, the labour market is composed of self-contained sub-markets or segments. Segmentation economists argue that ignoring the different identities of these segments and the constraints they place on the workers makes it impossible to understand the nature of labour market disadvantage. Basically, the dual approach hypothesises that a dichotomy has developed over time between a high-wage primary segment and a low-wage secondary segment. Working conditions in the primary segment are generally favourable; there is steady employment and job security, and the rules that govern the organisation of employment are well defined and equitable. The characteristics of secondary employment, on the other hand, are less favourable. Work here has little job security and there are high turnover rates. There are few opportunities for training or advancement and the work tends to be menial and repetitive.

Corresponding to this duality in the characteristics of jobs is a further distinction between primary (core) and secondary (periphery) industrial sectors. In the core sectors, firms have monopoly power, production is on a large scale, extensive use is made of capital-intensive methods of production and there is strong trade union representation. These establishments operate in national and international product markets. In contrast, employment in the periphery is located in small firms that employ labour-intensive methods of production, operate in competitive local product markets and have low levels of unionisation. Although they are not entirely coincidental, there is a considerable overlap between primary jobs and core industries, on the one hand, and secondary jobs and periphery industries on the other.

In contrast to the supply side and individual factors which dominate neoclassical models of the labour market, segmentation theory emphasises demand side and institutional factors. Specifically, segmentation in the labour market arises because of the characteristics of jobs rather than differences in worker attributes, such as education and training. Secondary jobs, however, are filled largely by groups whose attachment to paid employment has traditionally been weak, notably non-whites, females and youths. Primary segment jobs, on the other hand, tend to be the preserve of ‘prime age’ white males.

The segmentation that exists in the labour market primarily reflects the nature of internal labour markets (this is the labour market that exists within a firm – it determines how wages are set and labour is allocated within the firm) within which primary and secondary jobs are found. Internal labour markets can best be thought of as the type of labour market that exists within an organisation. At one extreme, the internal and external markets may be very similar: the structure of wages and the allocation of workers within the organisation will be determined simply by external market conditions. In this case, the internal market is similar to what is happening outside the organisation. At the other extreme are organisations (usually large employers) in which wage structures and employment policies are set apart from external labour market conditions. Such internal labour markets will often be highly structured and regulated, and have employment systems that confer significant advantages to those already employed in the organisation – ‘insiders’ – compared to outsiders. This is because access to jobs within the firm is granted preferentially, even exclusively, to existing members of the organisation via promotion along well defined ‘job ladders’, often on the basis of seniority rather than productivity. Outsiders, on the other hand, have access to only a limited number of low level positions.

Pay rates within structured internal labour markets do not respond to demand or supply conditions in the external market but rather to the specific requirements and needs of the organisation. Imbalances that develop over time in the supply and demand of particular types of labour vis-à-vis the external labour market are dealt with through a variety of non-wage adjustments, including recruitment and training, job redesign and subcontracting. Crucially, emphasis is on the institutional and social nature of internal labour markets rather than on any efficiency or economic considerations that may be proposed for their emergence. In order to provide an explanation of labour market disadvantage it is clearly important to understand why some organisations adopt employment systems that are protected from external market forces and why workers from disadvantaged groups have only limited access to the favourable conditions of work they provide.

Three features of the segmented labour market theory clearly differentiate it from neoclassical labour economics. These are described next.