labour-market segmentation In essence, neo-classical economic theory sees a market for labour, with buyers and sellers in open competition with each other, which functions in broadly the same way as other markets. There are differences of course. It is recognized that labour is not a completely homogeneous commodity: workers differ in their tastes and preferences for leisure rather than work and for monetary rather than non-monetary rewards; they differ also in human capital, their investment in education and training, work skills, and experience. But it still makes sense to analyse labour supply and demand in the aggregate.

This model of the labour-market has been refined over the years to accommodate the fact that doctors and dress designers, for example, work in entirely different markets. The British economist Alfred Marshall first introduced the idea of non-competing groups in the labour-market in the 1880s. The most significant dividing-lines have been identified as occupational, geographical, and industrial. Occupational labour-markets arise from the division of labour, increasing differentiation and specialization, with workers unable to switch between occupations requiring significantly different skills and extensive investment in training and qualifications. Nurses and doctors, for example, constitute separate occupational labour-markets, even if they work side by side in the same organizations. By restricting entry to an occupation, for example by specifying the minimum qualifications and experience required, those already in it can control the supply of labour and help to push up their wages. Labour-markets are also defined spatially, given that neither employers nor workers can move to another location without incurring substantial costs. As a result wages can remain high in big cities, for example, even when there are substantial numbers of unemployed in other parts of the country. The term ‘local labour-market’ is often used in reference to the market for jobs within a particular locale—such as a travel-to-work area, town, or city. Industrial labour-markets arise where employers in certain industries require particular skills, or combinations of skill, and seek to retain workers long-term after they have been trained. For example, police officers, civil servants, and coal-miners may be mobile across regions of the country and even employers, while exercising the same range of skills in their work, and obtaining similar or industry-standard terms of employment.

The idea of non-competing groups has been developed much further in theories that are identified under the general label of labour-market segmentation theory. The two key formulations are dual (or split) labour-market theory and internal labour-market theory, both developed in the United States by Peter Doeringer and and Michael Piore (Internal Labor Markets and Manpower Analysis, 1971)
and others ( Richard Edwards,, Michael Reich,, and and David Gordon , Labor Market Segmentation, 1975
), and extended through empirical research. A framework obtained by integrating these two into a single model has since been developed in Europe and is shown in the figure below.

Dual labour-market theory revolves around the identification of a split between two analytically distinct sectors in the economy and national labour-market: a primary sector and secondary sector with quite different wage and employment characteristics and processes. The theory states that job mobility between the two labour-markets is very restricted in normal circumstances; in effect workers in the secondary sector are trapped there unless, say, they go to college and obtain higher qualifications. The secondary sector is marked by pervasive under-employment and unemployment; jobs are mostly low-skilled, require relatively little training, and can be learnt 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 generally low, and terms and conditions the poorest offered. Theorists differ in their emphasis on ‘bad’ jobs in terms of pay and conditions, or on relatively unskilled work, and on whether the primary and secondary sectors also have distinctively different work cultures. The primary sector generally contains the higher-grade, higher-status, and better-paid jobs, with employers who offer the best terms and conditions. In some formulations the emphasis is on occupational labour-markets with controlled entry to them; in others the emphasis is on industrial labour-markets and the characteristics of employers. The primary sector is sometimes sub-divided into an upper and lower tier. These economic concepts of primary and secondary sectors draw on and have close similarities with sociological theory on social stratification and social mobility between classes. Similarly, the theory of internal labour-markets has close parallels in sociological debates on the ‘Balkanization’ of labour-markets, industrial feudalism, and the question of property rights in a job. Labour-market segmentation theory has been more accessible to sociologists than most classical economic theory (see LAISSEZ-FAIRE ECONOMICS), and has facilitated multi-disciplinary research on labour-market functioning.

The internal labour-market is an administrative unit, such as an office or factory, where the levels of employment and wages are determined by a set of internal administrative rules and procedures. It is quite separate from the external labour-market of conventional economic theory, where pricing, allocating, and training decisions are controlled by economic variables. The two markets are connected, with movement between them at specified ports of entry and exit. Otherwise jobs in the internal market are filled by the promotion or transfer of workers who have already gained entry. Jobs in the internal market are shielded from the direct influences of competitive forces in the external market. Another formulation of this perspective is insider—outsider analysis, which identifies the wage advantage attached to certain labour-market positions, types of employer, or industry.

In a study for the European Commission, R. Loveridge and A. Mok (Theories of Labour Market Segmentation, 1979) integrated these theoretical strands into the four-fold classification of firm-specific labour-markets shown in the figure above. 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. Professional and skilled craft work requiring occupation-specific rather than firm-specific skills, and often supplied on a contract or self-employed basis, would be typical of the primary external segment. 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 model makes it clear that movement between the primary internal and secondary external segments would be virtually ruled out, with varying amounts and directions of movement between adjacent segments, determined by changes in human capital and employers' responses to the changing economic environment.

Empirical research on industrial societies generally shows women, ethnic minorities, and migrant workers to be concentrated in the secondary labour-market. However, social scientists differ as to whether empirical analysis should focus on workers, jobs, occupations, companies, workplaces, industries, or some combination of these.

The concepts of primary and secondary labour-markets (or sectors) 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, and highly fragmented and competitive industries such as retailing, where jobs are less secure and conditions of work and pay generally poorest. See also INDUSTRIAL RESERVE ARMY.