18. Market Failure in the Labour Market

Labour-market failure can prevent workers and jobs from matching efficiently or produce inequitable outcomes.

Must know

• Occupational immobility concerns skills.

• Geographical immobility concerns location.

• Discrimination can distort recruitment pay and promotion.

Must know definitions

Geographical immobility: the inability or unwillingness of workers to relocate to a different area to take up employment, due to factors such as cost, family ties, or imperfect information.

Occupational immobility: the inability of workers to move between different types of jobs due to a lack of transferable skills, qualifications, or training.

Structural unemployment: unemployment arising when workers' skills no longer match the requirements of available jobs, often caused by occupational immobility following structural economic change.

Explain and apply

Mechanism in brief: A worker may be willing to take a vacancy but lack the qualification or be unable to move. The resulting mismatch leaves jobs unfilled and workers unemployed despite their potential productivity.

Distinguish: Occupational and geographical immobility require different responses; wage differences alone do not establish discrimination.

Use the extract: Identify missing skills, location barriers or evidence of discrimination; explain how the barrier affects job matching.

• Labour markets should, in theory, adjust like any other market — a rise in wages in an occupation or area should attract more workers, and a fall should cause them to leave.

• In practice, labour is not perfectly mobile, and this immobility is a key cause of market failure in the labour market, contributing to a mismatch between vacancies and unemployment.

Causes and consequences of the geographical immobility of labour

• Geographical immobility occurs when workers are unable or unwilling to move to a different location to take up available work.

Causes include

The direct financial cost of moving and of housing in a new area (which particularly restricts those on lower incomes).

Social ties such as family and friends.

Imperfect information about vacancies elsewhere.

The practical cost and inconvenience of attending interviews far from home.

The consequence is that vacancies can persist in one region even while unemployment persists in another — wages may be higher where there is excess demand for labour, but workers in an area of excess supply are still unable to relocate to take advantage of it.

high cost of moving/housing + family and social ties + imperfect information about distant vacancies → workers cannot relocate to where jobs are available → excess supply of labour (unemployment) persists in one region alongside excess demand (unfilled vacancies) in another

Causes and consequences of the occupational immobility of labour

• Occupational immobility occurs when workers are unable to move from one type of job to another because they lack the necessary transferable skills, qualifications, or training.

• This is a particular problem when an economy undergoes structural change — for example, as an economy shifts from a manufacturing base towards services, workers made redundant from manufacturing often lack the skills required for service-sector jobs, and retraining can be costly and time-consuming, especially in the short run.

• The consequence of widespread occupational immobility is structural unemployment: workers remain unemployed even where vacancies exist, simply because their skill set does not match what employers in the growing sectors of the economy need.

structural shift in the economy (e.g. manufacturing to services) → workers made redundant lack transferable skills for new-sector jobs → retraining is costly/slow, particularly short run → occupational immobility → structural unemployment

Rapid recap

Occupational immobility concerns skills; geographical immobility concerns location. Information failures and discrimination can prevent labour from reaching its most productive use.

Diagram cue: trace the barrier → weaker job matching → unemployment.

Related chapters: Unit 3 chapter 16 (p. 76) · Unit 3 chapter 20 (p. 96)