A labour market is seen as segmented if it "consists of various sub-groups with little or no crossover capability"[1]. Segmentation can result in different groups, for example men and women, receiving different wages for the same work.[2] The 19th century Irish political economist John Elliott Cairnes referred to this phenomenon as that of "noncompeting groups."
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The theory of labour market segmentation contrasts to the views of neo-classical economic theory, which posits the existence of a unified market for labour, consisting of buyers and sellers in open competition with each other. The labour market is seen as functioning in the same way as other markets. In this model, the only difference between different workers' wages and conditions arise from individual differences in their human capital (skills, experience, or formal education) or tastes. On the latter, as part of the theory of compensating wage differentials those who prefer risky or dirty jobs receive higher wages or salaries than those who take safe or clean ones. Put another way, differences in compensation for labour arise only on the supply side.
In the theory of labour market segmentation, there exists important differences on the demand side which imply differences in compensation and the like that are not explained by individual workers' characteristics. Since labour markets are far from perfect, non-market institutions such as craft unions and professional associations play a role, as do the different strategies employed by employers, in producing different results for workers with similar characteristics. Typically, labour market segmentation splits the aggregate labour market between the primary sector and the secondary sector. [1]
Modern labour market segmentation theory arose in the early 1960s. It opened the eyes of many economists viewing the labor market as just a market with people with individual characteristics of education and motivation as well as technology playing a major factor in terms of producing output. This view later on helped us look at the demand-side of the market, the nature and strategy of the employers. The idea of non-competing groups has been developed in theories that are identified under the general label of labour-market segmentation theory.The two key formulations are split into labour-market theory and internal labour-market theory, both developed in the United States. The labour-market segmentation theory revolves around the identification of a split between two analytically divisions in the economy and the labour-market.
Two key sectors of Labour Market Segmentation: Primary and Secondary Sector
The Primary Sector
In a primary sector the workforce as a whole is motivated to serve their employer because of wages, health benefit, and pension and job security. Job market consists of majority blue collar and white collar jobs. The primary sector generally contains the higher-grade, higher-status, and better-paid jobs, with employers who offer the best terms and conditions. These jobs are usually considered to be the occupational labour-markets, some industrial labour-markets. The primary sector is sometimes sub-divided into an upper and lower level.The primary workers are trying to prove themselves to their employers by portraying their skills and educational credentials.
The Secondary Sector
In a secondary sector, job management is entitled to complete control because there is a larger turnout. Many in this job type either leave or are replaced quickly. These jobs give low emphasis on job morale and their workers lack motivation. The secondary jobs are mostly low-skilled, require relatively little training, and can be learned relatively quickly on the job. There are few barriers to job mobility within the secondary sector. Because the jobs are unattractive, there is little incentive to stay, and there are high levels of labour turnover, with workers moving on to other jobs or employers. Wages are low, and the terms and conditions of the job are poor.[2]
This model of the labour market segmentation has been developed over the years to accommodate the fact that different job professionals work in completely different job markets. For example, Lawyers and fashion designers work in different markets. Some of the major dividing-lines that have been identified are occupational, geographical, and industrial. Occupational labor-markets arise from the division of labour, increasing differentiation and specialization. These workers are unable to switch between occupations because they require different skills and extensive investment in training and qualifications. For example, nurses and doctors form separate occupational labour-markets even though they work side by side in the same organizations. For examples specifying the minimum qualifications and experience requirement it restricts the entry into an occupation even if they work side by side in an organization. Geographical labor-markets are also defined considering that neither employers nor workers can move to another location without acquiring considerable amount of costs. As a result wages can remain higher in big cities as opposed to smaller cities. For example there are a vast number of unemployed people in certain parts of the world as opposed to others primarily because of the demographics, is it a town, city or near to home work place\The workers differ in their tastes and preferences for leisure time rather than work and for financial reasons rather than rewards. Their investment is their education, training, work skills, and experience. But it still makes sense to analyze labour supply and demand in the aggregate.The primary sector and secondary sector, both these sectors possess different wages and each employment characteristics are different. The concepts of primary and secondary labour-markets have now passed into conventional thought, with the primary labour-market commonly understood to mean people with secure jobs and good conditions of work in public-sector employment, the large corporations and highly unionized industries; while the secondary labour-market is understood to cover small employers, non-unionized sectors of the economy, competitive industries such as retailing, where jobs are less secure and conditions of work and pay generally poorest.[3]
The two markets are connected, with movement between them at specified ports of entry and exit. The jobs in the primary internal segment are those typical of the hard core of stable employees in a firm, need long on-the-job training in firm-specific skills, have security and good promotion prospects, a high span of discretion, and high material rewards.[4] Professional and skilled craft work requiring occupation-specific rather than firm-specific skills, and often supplied on a contract or self-employed basis. The secondary external segment provides jobs that are low skilled, offer little autonomy and responsibility, low and unstable earnings, and poor working conditions, including casual and seasonal work. The secondary internal sector offers jobs that are generally low grade but with some on-the-job training, security, and promotion prospects.
The concepts of primary and secondary labour-markets have now passed into conventional thought, with the primary labour-market commonly understood to mean people with secure jobs and good conditions of work in public-sector employment, the large corporations and highly unionized industries; while the secondary labour-market is understood to cover small employers, non-unionized sectors of the economy, competitive industries such as retailing, where jobs are less secure and conditions of work and pay generally poorest.[4].
New theoretical developments include the concept of International Segementation of Labour, which considers the different circumstances of the labour process in the global south and north. When labour from the south migrates to the north, this international labour segentation tends to remain intact within the destination country (Bauder 2006). The concept of Globally Segmented Labour Markets by John Asimakopoulos.[3] argues within a Marxist political economy framework using Social Structures of Accumulation theory, developed by American economist David Gordon, that neoliberal globalization has expanded labour market segmentation internationally. Accordingly, there are two global regions. The first is in the West where affluent citizens consume global products and services. The second is in the poor global regions e.g. China where poorly paid workers produce the global products and services. Asimakopoulos argues this is a natural evolution of Capitalism’s pursuit of profits through surplus labor.
Labour incomes are the most important component of total incomes. An alternative position: Total incomes vary largely because of variation in capital incomes and other non-labour income sources.
Employment is important primarily as a means of raising incomes and thereby reducing poverty. An alternative position: The goal of policy is employment maximization or unemployment minimization.
There are multiple labour markets. An alternative position: There is one single labour market.
Workers differ in terms of skills. An alternative position: Labour is homogeneous.
For workers of any given skill type, there are better jobs and worse jobs. An alternative position: The law of one price holds in the labour market.
The various labour markets are linked to one another. An alternative position: Changing conditions in one labour market have no effect on other labour markets.
Workers maximize utility. In low-income countries, utility can usefully be thought of as a function of income alone, although sometimes utility is a function of working conditions as well as income. An alternative position: No single unified purpose guides workers’ behavior.
Firms maximize profits and make labour market decisions accordingly. An alternative position: Firms exist to serve the interests of multiple stakeholders, of whom workers are one.
The number of good jobs is limited. Workers who take up bad jobs do so in preference to unemployment. An alternative position: The number of good jobs is not limited. Each worker is doing the type of job that maximizes his/her utility.
Open unemployment is less important a problem than is working poverty. An alternative position: Unemployment is the main labour market problem [5]
Workers who are in the similar trade are treated differently according to the sector they are placed in. The differences in the labour market segmentation imply differences in the way which they are trained, allocated, organized and paid. This has to be directly related to the way in which the labour process is organized. The two sectors organize the skills and education credentials.[4]
All employers should be able to receive the same employment standards examples, at least minimum wages, maximum hour laws, health laws etc. regardless of what sector they belong to. The management will not have complete control, there should be employment standards for all employees that allows them to monitor occupational safety, security, health safety and other required standards such as minimum wage requirement, maximum hour laws etc.[5]
Bauder, Harald (2006) Labor Movement: How Migration Regulates Labor Markets. New York: Oxford University Press.