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 Michael Piore (Internal Labor Markets and Manpower Analysis, 1971) and others (Richard Edwards, Michael Reich, 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.