Labor Market Segmentation

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Labor Market Segmentation

Labor market segmentation theory (LMS) has two principle elements: (1) the labor market can be modeled as consisting of a small number of distinct markets offering different wages, and (2) workers, particularly those from racial and ethnic minorities, women, and new entrants, cannot necessarily find employment in the segment that offers them the highest compensation.

The most common version of LMS is the dual labor market model. This divides the labor market into a primary labor market with well-developed internal labor markets, offering secure long-term employment and higher wages for well-educated, experienced, and senior workers, and a secondary labor market with little job security, short-lived jobs, and wages independent of education and experience. For men, a statistical model of wages with two sectors predicts individual wages much better than does a model with the same number of parameters but only one sector. Moreover, in one sector education and experience have a positive effect on wages, whereas in the other they do not. For women, the dual labor market model does not fit the data well.

Mainstream labor economists have also sometimes modeled the labor market as consisting of two sectors: government and private, manufacturing and nonmanufacturing, skilled and unskilled, and so on. But LMS differs from mainstream models of the labor market in two important ways. First, it implies that low wages are associated with undesirable job characteristics, whereas conventional models imply that workers in jobs with otherwise undesirable characteristics receive a compensating (higher) wage differential. Second, in LMS, wages do not adjust to clear the market. There are workers who are qualified for desirable jobs but are unable to find employment in those jobs.

In fact, high wages are often associated with good job characteristics. There is relatively little evidence that workers are compensated for bad job characteristics. This is not decisive evidence in favor of LMS. Advocates of the standard view argue that we have relatively poor data on workers’ earnings potential. Workers with high earnings potential take their compensation partly in the form of high wages and partly in the form of better working conditions, which explains the positive relation between wages and working conditions.

LMS is sometimes interpreted incorrectly as meaning that there is little mobility among sectors. Low mobility might mean most workers are happy where they work. In contrast, workers initially trapped in the secondary sector would change sectors upon obtaining primary-sector employment. The existence of queues for good jobs is the most significant departure of LMS from the conventional view, but it is difficult to test. Although compared with secondary-sector jobs, primary-sector jobs pay more and have characteristics that most people prefer; some secondary workers may not be excluded from primary jobs, but instead prefer secondary jobs and willingly accept the lower pay. However, the overrepresentation of some groups in the secondary sector is only consistent with free choice if their members are more likely than others to like secondary jobs. For some groups, such as African Americans, this is implausible and suggests that some workers in the secondary sector would prefer primary-sector employment.

SEE ALSO Dual Economy; Harris-Todaro Model