What does neo-classic economics get wrong? Social policy, labour market dualisation, and labour reallocation

Abstract

The literature commonly assumes that social policy hinders labour mobility and reallocation across jobs and sectors. Particularly neo-classical economics posits that there is a trade-off between ‘security’ (social policy) and ‘efficiency’ (labour reallocation and employing workers in jobs where they are most productive). In a sample of 12 OECD countries between 2000 and 2008, this article shows that, as opposed to the common trade-off assumption, social policy supports greater labour reallocation across sectors. Furthermore, labour market dualisation as a result of the growth of ‘cheap labour’ reduces labour mobility across jobs and sectors. A higher share of ‘cheap labour’, defined as workers in low-paid jobs with little or no protection, segregates the labour market between ‘undesirable’ sectors (where cheap labour is employed) and desirable sectors (where wages are higher, and social protection is more expansive). This segregation impedes movement across sectors due to the fear of falling into an ‘undesirable’ sector. The social policy provides a safety net and helps bridge the labour market divide across sectors and hence positively contributes to inter-sectoral mobility.