Chapter 8: Labour Market Segmentation

A chapter of Globalisation and Welfare State

Keywords: Labour Studies;

While it is easy to think of the workers in a labour market as largely homogeneous, in practice they are not. Rather than treat them as all totally different they can be usefully collected into common groups, in a theory of segmented labour markets.(1) Here we use the theory in its simplest form of segmentation – the dual labour market.

The notion of a dual labour market has not been popular in New Zealand – at least among economists. That a market can be segmented into at least two parts, flows between which are seriously impeded, does not rest easily with a view of a world in which there is a high degree of substitution, unless some government action impedes it.

On the other hand it is not difficult to see a job quality spectrum in the workforce with at one end a set of `good’ jobs and at the other end of `bad’ jobs. At the top end working conditions are characterised by high pay, promotion prospects, good security, quality working conditions, and attractive fringe benefits. At the other end the workers have jobs which are poorly paid, with little prospect of advancement, poor working conditions, and insecure tenure. Such work is often intermittent and its workers can be frequently unemployed.

At issue is what happens in the middle of this spectrum. As Rob Bowie points out, the distribution of the jobs along the spectrum could be unimodal, suggesting a considerable continuity within the workforce, or it could be bimodal suggesting a segmentation of the labour force into primary and dual labour markets.(2) His notion is illustrated in Figure 8.1a and 8.1b.(The graphs for this chapter are not reproduced here. They may be obtained by contacting the author, including a fax or postal address.)

An alternative approach is to ask about the interconnectedness of the labour force. It is idle to assume that an unemployed teenager in Kaitaia is a ready substitute for a senior Treasury official in Wellington, but we might ask how the change in either’s work situation influences the work situation of the other. The immediate problem here is any answer involves a time frame. We would not expect an immediate response in the lower quality end of the labour market to a change in the higher quality end, but we could envisage that the changes percolate down over time. If changes transmit quickly, the labour market may be treated as reasonably homogeneous – as is explicitly or implicitly assumed in much of the economic discourse. If the time involved is decades or even generations, then practically the labour market may be treated as heterogeneous and segmented.

Note that a worker’s place on the quality spectrum can change over time. Many adolescents in low quality jobs in the retail and fast food sectors, are tertiary students in training for quality professional positions. But it is also possible that work experiences and on the job training enable a worker to upgrade their position, moving steadily up the work quality ladder. In the following I shall for simplification ignore, the life cycle patterns – most evident in the adolescent story, but include the upgrading process within the labour force. I shall also ignore the complications of the internal labour market, and the peripheral workforce,(3) noting however that non-standard work need not necessarily mean a segmented labour market.(4) Alas, brevity of presentation requires a very simple approach.

The Evidence for a Dual Labour Market in New Zealand

What systematic evidence do we have of the degree of segmentation in the New Zealand labour market? Using existing statistics Bowie provides `circumstantial evidence’ that there are a group whose working conditions are analogous to those in a secondary labour market. He noted that women and ethnic minorities appear more likely to be among that group.

Sociologist Susan Shipley surveyed 750 households in Palmerston North, mainly from the perspective of women in the labour force. Finding that part time workers were more predominantly female and that gender segmentation was more marked in the full-time labour force, and argued that this pointed to labour market duality. There is a tendency in her work, (5) to equate part-time work with the dual labour market. It is of course only part of the totality of the secondary market, and some part-timers – such as professionals with a high leisure preferences (including phasing into retirement) – may be working part-time in the primary market.

More generally that women and men had such different occupational profiles, (6) and that it was taking such a long time to break those differences down suggests that there was not a great deal of mobility in the labour market, except slowly through time. A dual labour market would be the minimum segmentation required to explain this gender differentiation.

Two statisticians, Harry Smith and Robert Templeton,(7) used income tax data to identify income profiles over time. The found that the 81.6 percent of the salary and wage earners who were in the highest income quintile in the 1980 tax year were still in the top quintile in 1981. Seven years later 55.9 percent were still in the top quintile. This probably underestimates the longitudinal stability and security of being a well paid employee. In any year about a sixth of workers will be in the top bracket by accident, perhaps because of high overtime, and will quickly drop out the following year. It would appear that about 65 percent of the remaining five sixths will still be top income earners seven years later. Of those who do not retain their income levels some will have migrated, retired, or died, some gone into self employment, and some will have gone voluntarily into lower paid less demanding jobs. The true figure, after adjustment for these effects, for the group remaining in the top quintile after seven years is almost certainly over 80 percent. That represents an annual fall out rate into lower income brackets of less than 3 percent. The picture for those lower in the income stakes is of greater instability, but there is no great expectation for advancement. Suppose the employee was in the middle quintile in 1980. Then the chances of being in the top quintile seven years later, was 9.5 percent, and that figure includes young professional workers, at university or starting out on a career and quickly building up an income.

Treasury officials misinterpreted the results, by focusing on those at the bottom of the distribution which includes children, students, small investors, and part-time workers. (8) Because the data is based on tax returns, this group is poorly represented in the data, but the Treasury concludes that 46 percent of those in the lowest quintile are in a higher quintile seven years later. True, but few are in the top quintiles. Rather there is considerable churning at the bottom of the income distribution, where quite changes in circumstances (say redundancy to unemployment and thence back to employment) can change incomes over the years, and hence location in the income distribution. The Treasury also quotes data for 1991 to 1993 on `tax filers’, but it is poorly documented with no discussion on the data base, and so how many are left out. (9)

Undoubtedly there is considerable labour market churning – repeated movements in and out of the work force – especially as at the bottom of the labour market. Over the period from October 1988 to June 1993, 754,312 enroled on the New Zealand Employment Service register.(10) To give some idea of this magnitude, the average size of the labour force was about 1,612,000 people, so the enroled unemployed represent about 47 percent of that total, or around 10 percent of the labour force each year, over an almost five period in which the average rate of unemployment at any point in time was 8.7 percent. This overestimates the likelihood of being unemployed because of inflows (from school leaving, returning to work, and immigration), and underestimates it insofar as not all unemployed registered. Whatever is the true figure it would appear that a high proportion of the labour force experienced unemployment in the five year period.

Those who enrol more than once, are counted but once in the above total. In fact over 45 percent were enroled at least twice, and 2.1 percent more than 5 times. This suggests that at least 21 percent of the labour force experienced repeated unemployment in the 4¾ year period, and 1 percent experienced it on five or more occasions. The average number of enrolments was 1.78 times for non-Maori, and 2.18 times for the Maori. The average cumulative duration on the register was 59.2 weeks, the Maori averaged 68.8 weeks. The register does not pick up all the churning, but the available data is indicative that it was substantial in recent years.

Chandra Dixon looked at two industries – plastics and hotel/restaurant – after the ECA legislation, and found that substantial differences in gender (80 percent male vs 32 percent male), skills (37 percent unskilled vs 64 percent), workplace training (48 percent vs 23 percent), and working conditions (98 percent fulltime vs 38 percent, 1 percent casual vs 26 percent). Especially relevant for the discussion below, is the implication of the study that it remained much easier to unionize the plastics industry where work had primary labour market characteristics, whereas hotel/restaurant unionisation was much more difficult.(11)

Altogether we have tantalising evidence which is not inconsistent with the dual labour market hypothesis, of (at least) two types of labour market experience: stable employment with good pay and conditions for some, and instability, poor pay and conditions for other, with little linking the two for those in the middle of their work life cycle.

However one reason why the evidence is not conclusive may be that in the labour market conditions of the traditional welfare state, potential segmentation was over-ridden by some of the institutional arrangements, arrangements which have since been abandoned as a result of the rise in unemployment and the subsequent change in the legislation.

Duality under Full Employment

There are at least two major processes which integrate a dual labour market under conditions of high employment. The first is the cost of recruitment is high, and so that it is in the interests of employers to hold onto to staff, while the cost of job change by the worker is low and so he or she is seeking out better work opportunities. This means that it is in the interests of the firm, to provide good working conditions for the workers, and there is a process of subtle competition for labour by firms which is passing down the working conditions of the upper part of the labour market into the lower part.

Second, the firm having recruited hard-to-obtain workers has the incentive to keep them. That involves providing some sort of career path within the firm, typically by upgrading skills. This generated an upward pressure of workers up the occupational ladder, in what amounts to ongoing functional flexibility. It was by this, and related, means that many workers acquired their human capital. Formal education was important, but it is unrealistic to expect such education to provide work based skills.

These two effects were reinforced by the industrial law which meant that many of the conditions in a the primary market were passed on into the secondary market via the award system. The award system was much more pervasive than the statistic of 55 percent of the employee workforce covered by unions implied. There were two reasons why there was a shadow of the award system over workers lower in the labour force hierarchy. First, many employees are too high on the quality ladder to be covered by unions, so the proportion of the unionisable workforce was greater than the apparent 55 percent. Second there were many workers who while not members of a union were de jure covered by an award – adolescents are an obvious group; and there were many workers who were not de jure covered by an award, but were de facto protected, in so far as the award conditions were a bench mark which set their minimum employment conditions. (On the other hand, some workers nominally covered by a union and a award had little more support than the un-unionised in the shadow of the award system.) More generally the award system was the formal underpinning of a much wider set of informal work practices, sometimes referred to as implicit contracts.(12)

Because of these linkages Bowie suggested that the New Zealand labour market could have been characterised by what he called `heuristic duality’, in which the distribution of workers by job quality is not peaked in the middle but flat. If that plateau begins sagging in the middle we would be moving towards classical duality. (Figure 8.1c)

Figure II shows a diagrammatic presentation of the dual labour market under the conditions of full/high employment. The duality is there, but the percolation of working conditions down and the mobility of workers up through on-the-job experience, meant the two segments were interdependent, generating Bowie’s heuristic duality, an effect reinforced by the award shadow. There was still the hierarchy of job quality implicit in the job quality spectrum, but the divergence was not as great because of the linking the segments together.

Duality under High Unemployment

What transformed the labour market was the rise of unemployment. For the firm, the existence of the unemployment sump markedly reduces the cost of recruitment of low skilled workers. We can expect firms to change their employment practices as a consequence. There will not be the same incentive to maintain the workers in the firm’s employ. Instead the layoffs and short term recruitment become more common. This is `numerical flexibility’. At the same time on-the-job upgrading of workers’ skills will be come less attractive, reducing `functional flexibility’. For many low skilled workers mobility within the labour market will be in and out of unemployment, rather than a systematic progression as they acquire additional skills.

The terms numerical flexibility and functional flexibility are a part of a wider debate on labour force flexibility. The other aspects of flexibility – externalisation, internal numerical flexibility, and wage flexibility – could be included in a more detailed venue. It is sufficient to note here that while they adding them would enrich the detail of the dualism, but would not – I think – add any major innovation.(13)

I have extended the notion of functional flexibility from where the standard workers’ job assignments are modified according to needs, to encompass workers obtaining new skills, typically on the job but with an element of formal training and sometimes involving changing of employer. In this context, the notion of `modification’ involves a real time career path. In a fully employed economy this process of upgrading occurs from at the upper end of the secondary market, linking it to the lower end of the primary market. Where there is unemployment with its emphasis on numerical flexibility, and workers continually moving between jobs and unemployment, there is not the same incentive to employees to acquire on the job related skills, nor for employers to encourage that development.

A policy response to the growing unemployment was the restructuring of industrial relations via the Employment Contracts Act, which increases the numerical flexibility by reducing the roll of unions and awards in the secondary labour market, while simplifying the recruiting and laying off of workers. Few, if any, workers in the secondary labour market will be able to be unionised effectively. The shadow of the union award system also diminishes, so that working conditions in the secondary market becomes detached from those in the primary market, thus shifting from Bowie’s heuristic duality (Figure 8.1c) to strict duality (Figure 8.1b).

As predicted by Treasury at the time, the Employment Contracts Act is associated with reduced real wages among the more marginal workers. (14) Working conditions, that were once protected and provided through the awards, and the award shadow, also seem to have deteriorated. The delivery of work welfare through a government protected union based industrial relations system was a fundamental feature of the traditional New Zealand welfare state was compromised, while the secondary labour market is much less attractive than it was in the past.

Its separation from the primary market may lead to increased separation in the social structure, although perhaps not as greatly. Many workers in the secondary market will be the wives and adolescent children of those in the primary market, and their households may well remain in the mainstream of New Zealand life (although family fragmentation may reduce this effect). But where the household prime income earner is in the secondary market – either as a low skilled man or a single woman or solo mother – those households will be even more marginalised than they have been in the past. A relatively high proportion of those households will involve ethnic minorities.

These changes as a result of unemployment and legislation are illustrated in Figure III, which contrasts with Figure II, where there was full employment. In particular the secondary labour market has lost its protection from the awards and the award shadow, while it is more vulnerable to unemployment. The primary and secondary labour markets will function more independently of one another, and there will be increased social heterogeneity. The consequences are enormous and extensive.

Next Chapter Ch 9: The Internationalisation of the New Zealand Economy

1. Bowie (1983a), Dixon (1995), Doeringer & Piore (1971).
2. Bowie (1983a:93).
3. Bowie (1983a,b,c).
4. Whatman (1995).
5. and even more strongly in Clark (1986).
6. Horsfield 1988, Hyman 1994, Hyman et al 1988.
7. Smith & Templeton (1990).
8. Barker (1996), Treasury (1996).
9. A similar problem applies in Creedy (1995).
10. Department of Labour (1994).
11. Dixon (1995).
12. Easton “The Labour Market and Economic Liberalisation”, (1987).
13. Brunhes (1989:13), Easton In Stormy Seas (1997:173-178).
14. Treasury (1990:157).