Labor Market Flexibility

Written By:
Paul Tracy
Updated August 5, 2020

What is Labor Market Flexibility?

Labor market flexibility is the degree to which a company is able to modify its labor force to maximize productivity.

How Does Labor Market Flexibility Work?

A company is constantly adjusting its labor force via variables like staff size, total productive hours, and wages. Labor market flexibility is the range within which a company can increase or decrease these variables. 

A company is constrained in its labor market flexibility by external controls -- including minimum wage requirements, regulations on employee work hours and laws governing employee hiring and firing. A company's level of labor market flexibility is inversely correlated with the stringency of external labor controls. For example, companies in states with strict labor laws have low labor market flexibility.

Why Does Labor Market Flexibility Matter?

Proponents of labor deregulation suggest that high labor market flexibility promotes long-term productivity, higher wages and lower levels of unemployment. By contrast, proponents of labor regulation suggest that low labor market flexibility protects members of the labor force from exploitation by employers.