A reflection on international labor markets

IE Focus | By Gayle Allard, Professor at IE Business School

We keep hearing about “flexible” and “rigid” labor markets, but what do these terms mean exactly? Does any one model work better than others?

We are hearing a great deal lately about “flexible” and “rigid” labor markets. What exactly does this mean? Is there any particular labor market model that works better than the rest?

Generally speaking a rigid labor market is one in which it is difficult to hire and/or fire workers, because such changes are subject to strict regulations and tend to be extremely expensive exercises. In Spain, up until the labor reform implemented earlier this year, it could take four years for a company to fire a worker who had worked there for many years. These norms seemed to put companies off hiring in general and created a “dual market” where some people were permanent and enjoyed too much protection, while the rest were in a far more precarious position, as well as earning considerably less.  A situation like this tends to reduce a country’s rate of productivity, given that permanent workers have no incentives to be more productive, and temporary employees are unable to produce more because the firm is not willing to invest in training them.