Labor market segmentation

A labor market is seen as segmented if it "consists of various sub-groups with little or no crossover capability". Segmentation can result in different groups, for example men and women, receiving different wages. The 19th-century Irish political economist John Elliott Cairnes referred to this phenomenon as that of "noncompeting groups".

A similar, almost synonymous concept is that of a dual labour market (DLM). However, as the word "dual" implies, a DLM usually refers to two parallel markets, whilst segmentation in the broadest sense may involve several labor markets.

The theory of labor market segmentation contrasts with the view of neo-classical economic theory, which posits the existence of a unified market for labor, consisting of buyers and sellers in open competition with each other. The labor market is seen as functioning in the same way as other markets. In this model, the only difference between different workers' wages and conditions arise from individual differences in their human capital (skills, experience, or formal education) or tastes. On the latter, as part of the theory of compensating wage differentials those who prefer risky or dirty jobs receive higher wages or salaries than those who take safe or clean ones. Put another way, differences in compensation for labor arise only on the supply side.

In the theory of labor market segmentation, there exists important differences on the demand side which imply differences in compensation and the like that are not explained by individual workers' characteristics. Since labor markets are far from perfect, non-market institutions such as craft unions and professional associations play a role, as do the different strategies used by employers, in producing different results for workers with similar characteristics. Typically, labor market segmentation splits the aggregate labor market between the primary sector and the secondary sector.

Modern labor market segmentation theory arose in the early 1960s. It changed the view of many economists who saw the labor market as just a market of individuals with different characteristics of education and motivation, as well as technology, playing a major factor in terms of producing output. This new perspective helped study the demand-side of the market, and the nature and strategy of the employers. The idea of non-competing groups has been developed in theories that are identified under the general label of labor-market segmentation theory.The two key formulations are divided into labor-market theory and internal labor-market theory, both developed in the United States. The labor-market segmentation theory revolves around the identification of a split between two analytic divisions in the economy and the labor-market.

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