A micro-analysis of labour market flexibility

This article employs an elementary bargaining model to characterise the consequences of increasing labour market flexibility. In the model a policy change relaxes a non-wage minimum condition of employment. The policy change has ambiguous effects on the share of the surplus that accrues to workers and may leave workers worse off. Moreover, where a worker is on the minimum wage, total welfare may be reduced as workers seek to circumvent the minimum wage by sacrificing non-wage conditions of employment. The results add to our understanding of the motivation and composition of groups, such as labour unions, opposed to labour market reforms. Moreover, they imply that it may be welfare enhancing to retain rigid labour market conditions for workers on, or close to, the minimum wage.