Flexible/inflexible labour markets

For businesses to perform efficiently, one of the requirements is a flexible labour market.

For a labour market to be flexible, a number of conditions have to be met. Firstly, wage flexibility on the part of the workers needs to exist. This means that workers are willing to accept lower wages in times of recession etc, and that firms are willing to grant higher wages if MRP increases or something similar. In practice, this is one of the hardest conditions of a flexible labour market to be met; often wages are described as "downwards sticking", which highlights the reluctance of the workers to accept low wages in the fear that they may never rise back up.

The other conditions of a flexible labour market are somewhat more common. The second condition is high levels of labour mobility, including a workforce rich in transferable skills (to eliminate occupational immobility), and enough information and transport opportunities for people to get work in other areas of the country (to minimise geographical immobility). High levels of labour mobility can be achieved by investing in supply-side policies such as education and transport infrastructure.

Finally, for complete flexibility in the labour market, workers have to be willing to work more or less hours when needed, or to switch to a shorter or longer term contract. In reality, this condition of flexible labour markets is rarely fully achieved, because people normally have other commitments that mean that they can't simply switch to part-time without considerable warning.