Segmented labour markets without policy-induced labour market distortions

Abstract

This paper argues that labour market segmentation does not require labour market distortions. Segmentation appears when innovations are introduced in an initially imbalanced environment: because the capital market is imperfect. Only large firms can adopt the modern techniques. Small firms have to force their workers to reduce their labour incomes in order to compete with the modernized firms. The latter do not reduce wages because their interest is to minimize total labour costs rather than the wage bill alone: with labour a quasi-fixed cost. The difference in behaviour tends to be significant.