Labour Market Segmentation: The Theoretical Case

Abstract

THIS PAPER surveys some of the key theoretical literature on labour market segmentation. The aim of the paper is to question the applicability and relevance of neoclassical theory, and to suggest an alternative approach -segmented labour market theorytowards understanding the issues of low pay, poverty and discrimination. Contemporary labour economics analysis may be divided into three categories: the neoclassical, the dual and the radical schools of thought. The neoclassical approach tends to emphasize the role of individuals, and in particular the human capital approach suggests that differences in pay are a consequence of differences in the acquisition of skills. The dual labour market approach focuses on structural and institutional patterns which impede the mobility of workers. The radical school embraces the structural argument but attributes the cause of segmentation to monopoly capital, in an attempt to divide and control the labour force. Finally, in the discussion on labour market segmentation, this paper concentrates on an analysis of the structure of labour markets in the form of internal and dual labour markets. Most of the research in this area relates to the American experience of racial discrimination. Theoretical Background Neoclassical TheoryThe classical theory of wages was concerned with the determination of the aggregate level of wages, while neoclassical theory places emphasis on the personal distribution of income. According to neoclassical theory, wages are determined by the intersection of demand and supply curves, as the price of any other commodity is determined. Underlying the demand side is marginal productivity theory and underlying the supply side is human capital theory. The demand curve for labour represents a derived demand, that is, labour is demanded because workers produce goods which are sold on the market. Employers view labour in terms of marginal productivity and hence wages 1982 SAJE v50 (4) p363 are determined in relation to productivity. This means that, in a competitive market, firms must pay a wage equal to the marginal revenue product of labour. A major development of neoclassical economics is the "human capital theory", following Schultz, Becker and others.*(2) The human capital model states that wages are determined by investment of individuals in formal education and on-the-job training. Education and training are responsible for the acquisition of skills; thus Becker suggests that workers receive wages in accordance with their level of skill. The amount of on-the-job training and other types of investment in human capital tend to decrease with age or experience and this is why age/earnings profiles are concave from below.*(3) Furthermore general training increases the marginal product accruing to all firms but specific training increases marginal product only to the firm providing it. However, the concept of human capital does not change the fact that the wage paid far a particular job is determined by supply and demand. In other words, wages may differ for worke...

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