What’s it: Labor market flexibility refers to the responsiveness of the labor market to adjust labor supply-demand conditions. When the labor market is flexible, market mechanisms work to drive wages toward equilibrium immediately. The opposite is the labor market rigidity.
Why labor market flexibility is important
Labor market flexibility is essential to the economy. Companies can quickly respond to changes in market conditions by modifying their worker. They can adapt quickly when the supply-demand problem occurs or when the business cycle moves to a recession.
For example, during a recession, companies face weak demand. Companies face profitability pressures and force them to reduce production costs. When the labor market is flexible, they can immediately cut wages so that profitability is maintained.
However, indeed, falling wages are a difficult option to do in the real world.
Solutions to encourage a flexible labor market
Governments need to reduce or eliminate market disruptors that inhibiting the market from reaching equilibrium. It requires labor market reformation, such as by removing minimum wages, minimizing trade union activities, and so on.
Another option is by encouraging the ease of recruiting and firing workers. Thus, companies can immediately adapt to changes in their performance.
Improving labor supply-demand information and encouraging better education and training are other options. These steps increase labor mobility and reduce the economy’s natural rate of unemployment.