Labour market failures

Like product markets, labour markets can also fail. The main types of labour market failure are the existence of skills gaps, poaching, labour immobility and inequality.

Skills gaps, training and poaching

The theory of poaching suggests it will not benefit firms to provide workers with general skills that can be transferred from job to job. Firms are more likely to wait for other firms to spend money on training, and then poach workers with higher salaries, which they can afford because they have spent less on training. Poaching is an example of the free-rider problem similar to that associated with merit goods. In this case, training provides an external benefit to others, which they do not pay for.

Therefore, in free markets, there is likely to be a skills gap, because insufficient levels of general skills, such as literacy, numeracy and IT skills, will be provided by private firms.

Remedies

Because there is little incentive for firms to train workers in general skills, the government can compensate by:

Providing vocational training by sponsoring college and university courses that are less academic and more focussed on jobs and job skills.
Adding a skills component to academic courses, such as Key Skills and Functional Skills in the National Curriculum.
Giving financial assistance, such as training grants or subsidised training loans, such as career development loans.
Providing special training via the internet, such as the Learn Direct scheme, which is a recently established internet training service sponsored by the UK government.

Labour immobility

Labour immobility means that labour does not ‘move’ to where it is in greatest demand.

There are three types of labour immobility:

Geographical immobility

Geographical immobility occurs when workers are not willing or able to move from region to region, or town to town. Immobility is made worse by immense house price variation between regions. It may be extremely difficult for someone in Yorkshire to sell their property and buy an equivalent one in London.

Other factors also contribute to geographical immobility, such as strong social and family ties, and parents being unwilling to disrupt their children’s education by changing schools. The stresses of moving home can also be a deterrent to mobility for some.

Industrial immobility

Industrial immobility occurs when workers do not move between industries, such as moving from employment in the motor industry to employment in the insurance industry. Industrial immobility has affected the UK, and many other industrial countries, as the growth of service industries, and the decline of manufacturing industries, has increased the need for mobility.

Occupational immobility

Occupational immobility occurs when workers find it difficult to change jobs within an industry. For example, it may be extremely difficult for a doctor to retrain to be a dentist.

Industrial and occupation immobility are most likely to happen when skills are not transferable between industry and job.

Information failure also contributes to labour immobility because workers may not know where all the suitable jobs for them are.

A resulting problem with labour market immobility is that it can create regional unemployment, which is a type of structural unemployment. This means that a change in the structure of industry leaves some people unable to respond by changing job, industry, or location and as a result, they remain temporarily or permanently unemployed.

Immobility can also lead to rising labour costs, as firms have to increase wages to encourage workers to re-locate.

Remedies

There are several actions a government can take to increase the amount of mobility in the labour market. These can be through incentives or small nudges. Schemes either encourage workers to move or retrain, or give incentives for firms to relocate. Examples include:

Training and re-training schemes to enable labour to develop their general skills and become more employable in a variety of occupations or industries. General skills include transferable skills like numeracy, literacy and IT skills.
More information about job vacancies so that searching for work is easier.
Subsidies to labour or firms, such as help with re-location expenses, and subsidised housing.
Incentives to overseas firms locate subsidiaries in UK regions, such as in Wales or the North East.
Incentives to domestic firms to relocate to the regions, including providing ‘tax breaks’ and investment grants. Incentive schemes in the UK include Enterprise Investment Schemes and Venture Capital Schemes.

Unequal distribution of income

Labour markets also contribute to the unequal distribution of income in the UK economy.

Labour market failures