SEGMENTED LABOUR MARKETS: THEORY AND EVIDENCE …kumlai.free.fr/RESEARCH/THESE/TEXTE/INEQUALITY/Segment/leontarid… · unexplained many major labour market policy issues such as

SEGMENTED LABOUR MARKETS: THEORYAND EVIDENCE

Marianthi Rannia LeontaridiUniversity of Aberdeen

Abstract. This paper examines the possibility of accepting the labour marketsegmentation approach as a valid alternative to the classical and neo-classicalanalysis of labour markets. It consists of three main parts. The first part contains ahistorical analysis of both the distant and recent origins of the labour marketsegmentation hypothesis. Part two outlines the central ideas of bothsegmentationalists and radical theorists who attempted to explain the fragmentednature of labour markets and the importance of institutional and social influencesupon pay, employment and mobility of individual workers between differentlabour market sectors. The third part examines the case for labour marketsegmentation using four alternative techniques and discusses the issue of mobilityamong different labour market segments. It is thereby concluded that the lack ofagreement among the segmented labour market theorists on both theoretical andmethodological issues has prevented them from developing a consistent andconvincing argument based on verifiable empirical evidence to validate theirthesis.

Keywords. Segmentation; Internal and external markets; Mobility.

1. Introduction

The theory of Segmented Labour Markets (SLM) has been identified with a groupof economists who challenged the classical explanation of the workings of thelabour market and argued that both the neo-classical and classical treatment leaveunexplained many major labour market policy issues such as the dispersion ofwages, and as a result income distribution, unemployment and discrimination. It isthis fundamental accusation against the classical theory which lies at the heart ofthe segmentationalist approach. Insisting upon the fragmented nature of labourmarkets and the importance of institutional and social influences upon pay andemployment, the segmentationalist approach shifts the emphasis away from thesupply side of the labour market and places the focus on the demand side.

The thrust of classical economics is the study of maximising behaviour byindividuals and firms. Rational economic agents constantly strive to maximisetheir economic well-being. In this approach, the maximisation of utility byindividuals according to their own assessment of their well-being is ethicallydesirable and the working of unfettered markets is seen to co-ordinate attempts byindividuals to maximise their economic well-being given the objectiveopportunities open to them.

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In particular, neo-classical labour economics consists of the marginalproductivity theory of demand based on profit maximising behaviour of employersand a supply theory based on utility maximisation by workers. The labour-supplytheory, in turn, emphasises issues related to: individual productivity, such asdecisions on investment in human capital which determines one’s skill oroccupation, and leisure choices, which determine the amount of one’s laboursupply. The wage structure is then taken as given, differentiated by workerattributes. Moreover, endogenous changes in tastes of individuals and details ofthe institutional framework of markets are largely ignored.

Segmentation theory on the other hand questions the existence of a directlinkage between the productive capacities of an individual and her wage as wellas the allocation of that individual across jobs, implicit in the neo-classical andhuman capital version of labour market theory. In the SLM approach, labourmarket problems are considered against a dynamic framework in whichmaximising behaviour, to the extent that it does exist, is relatively unimportantcompared to the neo-classical approach. Industrial organisation, product marketand technological conditions, managerial control strategies and systems oflabour market regulation are all recognised as having an influence on thestructure of jobs and in contrast to the orthodox theory of the labour market, thedistinction between ‘good’ and ‘bad’ jobs is not based on individual differencesin productivity.1 Instead, as firms become the main agents structuring the systemof employment, emphasis is placed on the development of institutionalconstraints in relation to pay formation, and the endogeneity of individualtastes.�

Neo-classical theory assumes that individual workers can freely make a choiceamong a wide range of job options in the labour market, based upon theirpersonal tastes, preferences, abilities and skills and thereby receive rewards onthe basis of their human capital endowments. Segmentation theory on the otherhand, argues that the labour market is not a single competitive market, but iscomposed of a variety of non-competing segments between which rewards tohuman capital differ because institutional barriers prohibit all parts of thepopulation from benefiting equally from education and training. It is arguedfurther that vulnerable groups of workers may become trapped in the lowersegment of the labour market thereby limiting severely the mobility ofemployees between the lower and the upper segment so that excess demandpressures cannot compete away the wage differential. While the secondary sectorearnings are influenced by supply and demand forces, primary sector jobs areinsulated from such pressures. Thus the supply side explanations of humancapital theory regarding the workings of the labour market are rejected andreplaced by a more demand oriented theory.2

Hence, what emerges as the crux of the SLM approach is the idea that thelabour market segmentation that exists does not correspond to skill differentials inthe labour market, but rather institutional rules are substituted for marketprocesses. As a result, competitive pressures to equalise wage differentials areabsent.

64 MARIANTHI LEONTARIDI


2. Theoretical development: a historical perspective

The segmentationalist approach has both a recent and a distant history. Its recentorigins, which shall be examined later, go back to the 1960s when thepersistence of poverty appeared to be the most important social problemmotivating the SLM economists (Piore, 1970). Empirical findings of urbanlabour, poverty and unemployment in the USA in the 1960s were focused on thepersistence of income inequality (Thurow, 1975) despite significant increases ingovernmental social welfare expenditures and a variety of anti-poverty andtraining programmes (Gordon, 1972). Focusing on the ghetto labour marketsGordon stated:

… the government became increasingly concerned with those central cityareas in which unemployment rates remained especially high in the midst ofgeneral prosperity… For many workers in the ghetto…problems like lowwages, job instability, menial work, low skills, poor worker motivation,discrimination, poor job information and inadequate job access seemedequally to demand attention. If you had one problem, you were likely tosuffer from some of the others as well… (Gordon, 1972)

However, in a longer perspective, the segmentationalist approach may be seen asa continuation of older debates. More especially, it may be traced back to Cairnes,John Stuart Mill and Pigou who, dissatisfied with Adam Smith’s competitiveconception of the labour market, argued in favour of institutional realities whichdefy the workings of the competitive labour market. The American Institutionalistschool of thought in the early 1900s was built upon this tradition and developedthe so called ‘structuralist’ and ‘balkanised’ models of the labour market.(Dunlop, 1957; Kerr, 1954)

2.1. Adam Smith: Of the wages of labour

Adam Smith focused on the discussion of ‘equilibrium wage differences’, bywhich he meant the wage premiums occasioned by certain conditions ofemployment, while Cantillon was the first writer to broach the subject in asystematic way. Cantillon maintained that workers similarly trained and similarlyendowed in every other respect will nevertheless earn more or less according tothe degree of time and expense in acquiring skills, the degree of risk inemployment and the extent of trust required of employees.

In the Wealth of Nations (Book I, Chapter 10, Part I) Smith provided thearguments for wage differentials based on ‘compensating differentials’. Accordingto him wages vary:

1) in inverse proportion to the agreeableness of the employment2) in direct proportion to the cost of learning the business3) in inverse proportion to the constancy of employment4) in direct proportion to the trust that must be placed in the employee and5) in inverse proportion to the probability of success.

SEGMENTED LABOUR MARKETS 65


However, what is frequently overlooked is the fact that despite his adherence toarguments supporting the competitive workings of the labour market to equalisewage differentials, Adam Smith recognised that certain institutional constraintsexist which might foster pay inequalities among individuals who are initiallyendowed with the same skills. In particular, he argued that apart from theinequalities arising from the nature of the employments themselves, as outlinedbriefly above, other inequalities may arise. Smith explained that the laws andregulations concerning the apprenticeship system and the practices of what hecalled an ‘incorporated trade’ were a serious impediment to labour mobility eitherwithin the same establishment or from one establishment to another similar one.As a result, competitive pressures to equalise wage differentials may prove to beabsent.

The statute of apprenticeship obstructs the free circulation of labour from oneemployment to another, even in the same place. The exclusive privileges ofcorporations obstruct it from on place to another, even in the sameemployment. It frequently happens that while high wages are given to theworkmen in one manufacture those in another are obliged to contentthemselves with bare subsistence. (Smith, 1910, p. 122)

2.2. The theory of non-competing groups in the labour market: John Stuart Mill’sand John Cairnes’ criticisms of Adam Smith’s conception of the labour market.

Arguments regarding the functioning of the labour market have been long-standing. The main disagreement is in respect to wage determination with Smith,as the forerunner of the neo-classical school, emphasising the competitive natureof the labour market and Mill and Cairnes arguing in favour of institutional rulessubstituting for market processes. Both of the above emphasised the existence ofnon-competing industrial groups as a feature of the labour market. Cairnes wrote:

What we find, in effect, is not a whole population competing indiscriminatelyfor all occupations, but a series of industrial layers, superposed on oneanother, within each of which the various candidates for employment possessa real and effective power of selection, while those occupying the severalstrata are, for all purposes of effective competition, practically isolated fromeach other. … [T]he average workman, from whatever rank he be taken,finds his power of competition limited for practical purposes to a certainrange of occupations, so that, however high the rates of remuneration in thosewhich lie beyond may rise, he is excluded from sharing them. We are thuscompelled to recognise the existence of non-competing industrial groups as afeature of our social economy. (Cairnes, 1874, pp. 66 & 68)

A new class of considerations was then opened which was hardly taken intoaccount before by Adam Smith and other political economists. Mill analysed theeffects of education and social class as being the determinants of ‘pre-marketsegmentation’ resulting from characteristics or attributes acquired by workers



prior to entering the workforce. With reference to Adam Smith’s ‘compensatingdifferentials’ Mill argued:

…it is altogether a false view of the state of facts to present this as a relationwhich generally exists between agreeable and disagreeable employments…the more revolting the occupation, the more certain it is to receive theminimum of remuneration, because it devolves on the most helpless anddegraded, on those who from squalid poverty, or from want of skill andeducation, are rejected from all employments… the inequalities of wages aregenerally in an opposite direction to the equitable principle of compensationerroneously represented by Adam Smith as the general law of remunerationof labour. (Mill, p. 388)

In other words, the existence of non-competing groups means that competitionwill not bring into equality the rates of return on different forms of human capitalinvestment as Smith and the neo-classicals suggest. Moreover, Mill’s reference tothe entrapment of the disadvantaged workers in undesirable occupations reflects aconcern with factors that might cause ‘in-market segmentation’, i.e. inequalitygenerated as a result of market processes. The existence of certain labour marketinstitutions, such as the restrictive practices of the guild system, has severeconsequences in that it may establish and renew immobility between the differentsectors of the work force.

So complete, indeed, has hitherto been the separation, so strongly marked theline of demarcation between the different grades of labourers, as to be almostequivalent to a hereditary distinction of caste; each employment being chieflyrecruited from the children of those already employed in it, or inemployments of the same rank with it in social estimation, or from thechildren of persons who, if originally of a lower rank, have succeeded inraising themselves by their exertions. (Mill, p. 393)

2.3. Pigou: a classical view on segmentation

Writing in 1944, Pigou, one of the most eminent classical economists, concludedthat often labour markets failed to clear, as the classical competitive modelindicated, implying thereby, that workers might not always be engaged in‘thorough-going competition’ for jobs. The reasons Pigou outlined to support hisideas were primarily of an institutional nature and although he presented factorssuch as trade unionism and the availability of unemployment compensation, assome of the main obstacles to the classical functioning of the labour market, herewe shall concentrate upon his views on labour market segmentation.

Pigou realised that labour markets are segmented, not only due to mere skilldifferentials, experience and competence, as these define purely the heterogeneousnature of labour as a factor of production, but also due to the restricted movementof labour between and within industries. He argued that many ‘centres ofproduction’ exist within the labour market and the observed immobility of labour



between those centres was the result of ties that the workers developed withrespect to the locality of the centre, its specialisation or the jobs available withinit. ‘…labour is not perfectly mobile among centres of production, but specifiednumbers of work-people are tied to the several centres as the result, maybe, ofhistorical accident.’ (Pigou, 1945, p. 19)

Nevertheless, even in such a segmented labour market, the presence ofthorough-going competition within each centre, the segment, would clear themarket, although it would not be able to compete away wage differentials betweenthe different segments for otherwise identical workers. ‘…thorough-goingcompetition among wage-earners would secure that full employment wasestablished everywhere except in centres where, in order to establish it, wage rateswould need to be nil or negative. … there will be full employment, but divergentwage rates.’ (Pigou, 1945, p. 19)

It is obvious therefore, that Pigou clearly understood the importance ofinstitutional factors responsible for obstructing the competitive workings of theclassical labour market.

2.4. The American Institutionalist School of the 1940’s and 1950’s

The American Institutionalist school of thought could be regarded as the interimstage between the recent and distant origins of the SLM approach. Their argumentwas that labour markets did not function in line with the equilibrium analysis ofthe day, but their operation was influenced by the complexity of the moderneconomy and determined by the contemporary institutional establishments, suchas large bureaucratic corporations and unions.

Dunlop (1957) talked in terms of ‘the institutional study of the decision makingprocess, internal to a management organisation or a union…’. He introduced theconcepts of ‘job clusters’ within firms and ‘wage contours’ across the labourmarket, as being the mechanisms seeking to relate an internal wage structurecorresponding to the internal labour market (ILM), produced by the large firm orthe union and an external wage structure corresponding to the external labourmarket.�Kerr (1954) wrote in terms of ‘institutional markets’ whose ‘dimensions are setnot by the whims of workers and employers but by rules, both formal andinformal’. In contrast to Fisher’s (1953) ‘structureless market’, Kerr identified fivedistinct sources producing barriers, which divide the labour market into distinctcompartments:

(1) the preferences of individual workers(2) the preferences of individual employers(3) the actions of the community of workers(4) the actions of the community of employers and(5) the actions of government. (Kerr, 1954, p. 96)

The result is a ‘Balkanised’ labour market where institutional rules set well-defined boundaries between its ‘internal’ and ‘external’ components. The ILM is



an administrative unit, the pricing and allocation of labour being determined by aset of administrative rules and procedures. In the external market, pricing andallocation are determined by supply and demand. (Kerr, 1954, p. 102)

The above neoinstitutionalist theories supporting the existence of an ILM wereused by the segmentationalists of the 1970s, 1980s and l990s as a building blockfor constructing the recent SLM approach. However, different writers saw labourmarket segmentation under a different perspective and delineated segments in thelabour market by using different rules. It would thus be useful to examine next allthese proposed sources of segmentation and identify the proponents of thesetheories.

3. Sources and descriptions of segmentation

The contemporary segmentationalist literature is highly varied. Analyses differwith respect to the delineation of segments and also the associated sources ofsegmentation. However, straddling these differences is the emphasis placed on theexistence of the within-firm labour market as the central decision making body forissues such as hiring contracts, pay, job rewards and on-the-job training, which isrelatively shielded from the external spot market. Hence the main empiricalhypothesis of the SLM approach is that observed wage differentials are not a resultof underlying skill differentials, but rather a direct consequence of the ‘dual’nature of the labour market.

The neo-classical theory of labour markets yields predictions about wages andemployment by concentrating on supply side variables and making a minimalnumber of assumptions. Emphasis is placed on public investments in generaltraining as well as on private investments in specific training (Becker, 1964). As aresult, human capital explanations of wage inequality have focused on theheterogeneous nature of workers, which most commonly tends to includedifferential investments in human capital, as the primary cause of wagedifferentials (Mincer, 1974). In other words, one worker may earn more thananother in the labour market because he is more highly educated or skilled, whileworkers with certain skills will be paid higher wages than others with minimum orno skills within the same firm simply because their skills are translated into highermarginal productivity. Moreover, higher wages are paid to workers found in jobswith unattractive job attributes, such as monotony or high probability of accidentoccurrence in order to offset those attributes.

In contrast, in the SLM literature duality in the labour market implies that alljobs belong to either the ‘primary sector’ or the ‘secondary sector’ of the labourmarket. The primary sector contains all the ‘good’ jobs, normally to be foundwithin firms with internal labour market structures, where institutional rules aresubstituted for market purposes. Those jobs are characterised by high negotiatedwages, economic security and rapid turnover leading to career advancement. Thesecondary sector on the other hand, contains the ‘bad’ jobs which are typicallyunskilled, offer no regular career ladders and wage rates are low and determinedcompetitively.



This section will therefore propose to outline the central ideas of several newtheories attempting to explain the fragmented nature of labour markets and theimportance of institutional and social influences upon pay and employment.

3.1. Piore, Doeringer and Piore and the dual theory

Building upon the work of Kerr and Dunlop, on the concepts of internal andexternal labour markets, Doeringer and Piore developed the ILM theory into auseful analytical instrument in order to outline the basic ideas of labour marketduality and deal with the variety of policy concerns of the 1960s, such asstructural unemployment, technological change, racial discrimination and theemployment and training of the ‘disadvantaged’ workers. The ILM thereforerepresents the integration of a wide range of ideas on labour market structure,labour mobility and wage determination and was thereby defined as:

… an administrative unit, …, within which the pricing and allocation oflabour is governed by a set of administrative rules and procedures. Theinternal labour market governed by administrative rules, is to bedistinguished from the external labour market of conventional economictheory where pricing, allocating and training decisions are controlled directlyby economic variables. These two markets are interconnected however andmovement between them occurs at certain job classifications which constituteports of entry and exit to and from the internal market. (Doeringer and Piore,1971, p. 2)

Piore (1975) and later Rebitzer and Taylor (1991), argued that labour marketsegmentation is a response to flux and uncertainty in a market containing anidiosyncratic factor of production. In particular, the primary sector is organised soas to shelter workers and firms from that uncertainty. Doeringer and Pioreoutlined two important factors responsible for the emergence of an ILM structure.The first is based on the notion of skill specificity. This entails the increasedtraining, recruitment and screening costs incurred by the employer in order to fillthose vacancies with a high skill content with the appropriate candidates. In otherwords, as skills become more specific, employee training becomes morespecialised and demanding, thus encouraging the employer to invest in expensiverecruitment and screening methods in order to minimise turnover and therebyreduce costs.

The second factor is custom or customary law within which notions of ‘equity’and ‘fairness’ are expressed through an unwritten set of rules based largely uponpast practice or precedent. The device of such notions is deemed necessary if acordial industrial relations climate is to prevail and stability of employment, acentral feature in the ILM structure, is to be encouraged.

For Doeringer and Piore (1971, p. 40) stability of employment is the mostprominent feature of the ILM. The introduction of career ladders3 and mobilitychains, on-the-job training, pension schemes, rewards and discipline systems andthe exercise of strict managerial control over the workforce are designed to build a



stable and loyal core personnel. Stability brings along rigidity and irreversibility inthe administrative rules, which in turn creates solid and cohesive ILM structures,which are favoured by employers because they reduce the costs of turnoveramong workers who have been provided with enterprise-specific skills.4

Having developed a more detailed ILM theory than their predecessors,Doeringer and Piore, attempted to link it to the ‘Dual Labour Market’ theory,which had emerged through the writings of a group of economists, such asHarrison (1972), Averitt (1968) and Bluestone (1970), to explain the persistenceof urban poverty and unemployment in the USA despite the introduction oftraining programmes to increase the human capital of the disadvantaged workersas proposed by orthodox economists. The theory postulates a dichotomisation ofthe labour market over time, into two separate sectors, ‘primary’ and ‘secondary’.

The primary sector is seen as being composed of a series of well-developedILMs (Doeringer and Piore, 1971, p. 167). The internal labour market in theprimary sector does not function primarily along profit-maximising lines. Ratherinstitutional rules are substituted for market processes. The employment relationsof a representative firm in the high-wage sector are structured and governed byformal rules, set mostly by trade unions, and informal rules which together coverthe content and wage rate attached to each job, hiring requirements, promotionopportunities as well as the organisational structure that ties jobs together. As aresult the ILM is protected against external wage pressures and most importantlyfor the SLM theory, mobility between the two markets is limited to the extent thatexcess demand pressures cannot compete away the wage differentials. Hence jobsin the primary sector appear to exhibit characteristics such as high negotiatedwages, great promotion possibilities, good working conditions, equity andemployment stability. Jobs in the secondary sector of the labour market, on theother hand, are those outside ILMs, those in poorly developed ILMs, whichpossess formal internal structure but also many entry ports, short mobility clustersand low-pay work, and those in well developed ILMs which however are notattached to formal promotion lines. (Creedy & Whitfield, 1988, p. 259). Thus, onthe whole, secondary jobs tend to have low pay, little possibility for advancement,poor working conditions, high labour turnover and often harsh or arbitrarydiscipline.

Moreover, in terms of distinctions made between workers in the two sectors,their approach implies that those are parallel to the ones made between jobs. Inparticular, workers in the secondary sector relative to those in the primary sector:‘… exhibit greater turnover, higher rates of lateness and absenteeism, moreinsubordination, and engage more freely in petty theft and pilferage.Disadvantaged workers are confined to the secondary market by residence,inadequate skills, poor work histories and discrimination.’ (Doeringer and Piore,1971, pp. 165–166)

Dualism in Piore’s opinion seems to be primarily manifested in the industrialstructure of the economy and emphasis is hence placed on the demand side asopposed to the supply-side focus of neo-classical economics on worker attributes.Firms facing stable product demand tend to create primary conditions for



employment. The reason for this is to be found in the skill specific nature oflabour which becomes a ‘quasi-fixed factor of production’ due to the huge ‘sunk’costs invested in the specialised training of the firm’s employees. It is only thosefirms faced with stable product demand that can afford large investments inmodern capital intensive up-to-date technologies, which in turn create the need forhigh skill specificity on the part of employees, generating thereby, ILM structures.In contrast, those firms experiencing variable demand for their products, will tendto engage in labour intensive production techniques, avoiding the sunk costs ofcapital investment and labour training. Thus the dichotomy develops for the samereason that gives rise to ILM structures: that is cost minimisation.

However, later on Piore suggested redefining the primary sector as beingcomposed of two segments, or tiers as he called them, the upper and the lower.The upper tier of the primary sector consists of professional and managerial jobswhich involve high pay and status, great opportunities for advancement, but alsohigh mobility and turnover patterns, which normally tend to describe those in thesecondary sector. On the other hand, workers in the lower tier tend to have, incomparison to those in the upper tier, lower average pay, less opportunities forpromotion and more rigid administrative rules and procedures for wage settingand labour allocation. Piore then uses this new redefined theory of labour marketsegmentation in an attempt to link labour market structures to socio-economicsubclasses in the society. Therefore in order to prove that socio-economicmovement in our society is not random but occurs through set regular channels,Piore uses the concept of ‘mobility chains’ to describe those channels.

The points along a mobility chain may be termed stations: they generallyinclude not only jobs but also other points of social and economic significance.Thus people in a given job will tend to be drawn from a limited range ofschools, neighbourhoods, and types of family backgrounds; and conversely,people leaving the same school or neighbourhood will tend to move into one ofa limited set of employment situations. (Piore, 1975, p. 128)

Class based segmentation may then offer not only an explanation for the labourmarket segmentation but also for the relative immobility between segmentssuggested by the dualists. Disadvantaged workers become confined to thesecondary sector, not because of any difference in ability or skills but because ofthe negative feedback they get from interacting with people of their own classonly and hence suffering from the impact of institutional forces on them, such asdiscrimination.

The dual labour market theory is most applicable to blacks in urban slums,these workers seem to be trapped in a world where all of the segments oftheir life reward a single set of behavioural traits and offer a single set ofbehavioural models. To attempt to change one component of that setting byopening primary jobs may not be enough, since other aspects of their livescontinually pull them back to secondary behavioural traits. (Doeringer andPiore, 1971, p. 180)



While Doeringer’s and Piore’s analysis has much in common with that of neo-classical theorists an important difference is the rejection of the notion that thewage competition model describes accurately and totally the workings of thelabour market. Jobs in high-wage sectors are not allocated by strict price rationingand returns to human capital investments differ among each sector. Some peoplewho are qualified for and desire employment in the primary sector are unable toget it due to institutional barriers preventing intersectoral mobility while upwardmobility is observed only in the ‘good’ jobs.

3.2. Wachtel; Edwards, Reich and Gordon; and the radical theory

Radical theories of segmentation are similar to dual labour market theories instressing institutional change and behavioural rules as the most importantelements determining the nature of the labour market and the labour process.

The labour market consists of those institutions which mediate, effect ordetermine the purchase and sale of labour power; the labour process consistsof the organisation and conditioning of the activity of production itself, i.e.the consumption of labour power by the capitalist. Segmentation occurs whenthe labour market or labour process is divided into separate submarkets orsubprocesses, or segments, distinguished by different characteristics,behavioural rules and working conditions. (Edwards, Reich and Gordon,1975 p. xi)

However the proponents of these theories appear to place more emphasis upon the‘social relations of production’5 and maintain that: ‘… segmentation arises notfrom market forces themselves but rather from the underlying uses of labourpower.’ (Edwards, 1979 p. 165) Concerned with the problems of persistentpoverty and unemployment in the USA in the 1960s, Edwards, Reich, Gordonand Wachtel sought to examine the important divisions and income inequalities inthe American working class by focusing on the evolution of American capitalism.They proposed that segmentation of the labour process and labour markets cameto replace the stages of proletarianisation, in which wage labour was the dominantmanner of organising production, and homogenisation, in which production wasthe outcome of common repetitive, semi-skilled operations.

Dualism in the labour market, as described by Piore and Doeringer, emerged asa consequence of a new dualistic industrial structure. The competitive local-market-oriented nineteenth century factory system, which eliminated many skilledcrafts and created a large pool of identical semi-skilled line workers engaged inmass mechanised production of goods, gave way to a more closed, oligopolisticnational- and international-market-oriented capitalism dominated by giantcorporate enterprises, whose main concerns were: ‘…the creation and exploitationof monopolistic control, rather than the allocational calculus of short-run profitmaximisation.’ (Edwards, Reich and Gordon, 1975 p. xii)

In particular, as the monopoly capitalist firms grew larger and powerful, theircontrol over forces, which might have threatened their existence, became tighter.



Hence, their attempt to secure sufficient and good quality supplies of rawmaterials and labour led to their operations being vertically integrated and alteredthe nature of their internal relations. The latter involved the intensification ofhierarchical control as the means for controlling the proletarian-in-characterlabour movement, which had gained strength and militancy in the earlier years.The new system of control, which initially emerged out of those workplaces thattended to employ educated white collar workers, was the so called system of‘bureaucratic control’.6 Bureaucratic control abolished the personal supervision bysubjective foremen, who frequently evoked brutal and unstable worker responses,for a more subtle means of monitoring the workforces, in which the exercise ofpower became institutionalised and impersonal.

However, along with the dualism in the industrial structure there developed acorresponding dualism in the working environment, wage structures and mobilitypatterns among different working sectors. The reorganisation of the internalrelations of the capitalist enterprise, which exhibited both stable production andsales, created ILM structures reflecting that stability. In particular, bureaucraticcontrol in ‘core’ monopoly corporations with stable market demand conditions,preserved employment stability by creating career ladders and rewards for tenureand seniority within the firm. In ‘peripheral’ firms, though, where product demandwas unstable, workers experienced lower earnings and higher turnover rates.Moreover, it is believed that little mobility exists between the sectors while ILMs,which were described as being the inevitable creation of monopoly capitalism,clearly form the largest part of the ‘core’ (primary) sector.

The result was the ‘stratification’ of the working class; a term used by manycontemporal radical political economists to imply: ‘…the historical progresswhereby political forces encourage the divisions of the labour market into separatesub-markets…distinguished by different market characteristics and behaviouralrules.’ (Reich, Gordon and Edwards, 1973 p. 359) Hence: ‘…firms organisedbureaucratically operate through one set of labour markets, the primary markets,while those organised along lines of simple hierarchy operate through othermarkets, the secondary markets.’ (Edwards, 1975)

Some radical political economists argued in favour of a further divisionresiding within the primary labour market. In an exposition similar in somerespects to that of Piore, Edwards refers to an ‘independent primary’ and a‘subordinate primary’ segment. Regardless of the number of segments though theunderlying idea remained the same; the rise of monopoly capitalism wasaccompanied by a stratification of labour in which workers became highlydifferentiated in terms of earnings, employment stability and status. The roots ofthis segmentation were to be found both in technological changes and in thedevelopments in the social relations of production.

3.3. Thurow: the job competition model and queue theory

Thurow’s job competition model, which encompasses neo-classical firmoptimisation behaviour and hence appears to be the closest to the orthodox



position, places great emphasis on the importance of on-the-job training indetermining pay and employment levels in the labour market. As opposed to theneo-classical model of wage competition, where individuals compete against eachother on the basis of cognitive job skills acquired before entering the labourmarket, in the job competition model the individual’s earnings depend upon thequality of the job she acquires.

Wages depend on the characteristics of the job in question and individualworkers are ranked on the basis of their ‘trainability’. Because individuals havedifferent ‘background characteristics’ such as education, innate abilities, agehabits, personalities etc., they tend to incur different potential training costs foreach job they enter. Hence the existence of a ‘labour queue’, on which workersare ranked on the basis of their training costs, determines the order of access tojob opportunities. It is the interaction of this labour queue with the ‘national’distribution of jobs that determines the earnings distribution and may result ininitially equally productive workers being paid different wages.

Hence, the most preferred workers are those whose background characteristicsresult in their having the lowest training costs with respect to any job. Two veryimportant points are worth noting here: (a) the number and type of jobs, andhence training slots, are determined by the degree of technical progress and (b)the clearing of labour markets depends on the flexibility and success of the on-the-job training process which in turn is dependent upon the elimination of directwage and employment competition.

What the above implies is that neo-classical labour market structures, based onwage and employment competition cannot go hand in hand with the neo-classicalassumption of employer’s cost minimisation objectives. Any neo-classical typewage and employment competition would act as a disincentive to the process ofon-the-job training, where the passing on of skills and knowledge on the part of aworkforce is crucial for the long run profitability of the firm.

In this context, ILM structures can be seen as the direct means of repressingwage competition and generating the necessary security of earnings andemployment. Thurow’s model can therefore, be seen as creating a link betweenthe neo-classical assumptions regarding the firm’s optimisation behaviour and theemerging theories of ILMs of the late 1960s and early 1970s, where the formationof rigid wage and employment structures appear to emanate from the requirementfor the minimisation of training costs.

3.4. Okun: career labour markets

Okun’s analysis of the labour market takes Thurow’s model a step further in thatfirms are not only required to minimise the wage and training costs of theiremployees at any one time but also to develop effective mechanisms ‘…to provideand assess productivity and to build a reputation that will both enhance the supplyof willing applicants and hold down quit rates.’ (Okun, 1981, p. 81)

To achieve these goals therefore, the majority of firms pursue career personnelstrategies which involve the creation of a hierarchical employment structure



within the firm through which formal rules are set with regards to recruitmentmethods, wage-setting schemes, ‘promotion ladders’, reward and disciplineprocedures and monitoring of work. A labour market composed of firms operatingunder a set of structured employment relationships is defined by Okun (1981) as aCareer Labour Market (CLM). Following his definition and description of CLMsone can easily discern a striking similarity to the ILMs concept developed byDoeringer and Piore (1971).

The idea of an ILM has permeated through the SLM literature in an attempt toexplain the wage differentials between workers of initially equal productivity.CLMs are institutionalised hierarchical structures which are isolated from theexternal labour market where pricing and allocation of labour are determined bymarket forces. As in the previous theories, the ‘ports of entry’ between the twomarkets are limited and on-the-job training is important in developing most skillswithin the internal structure. As a result career-oriented employees are protectedfrom outside competition and assured by the potential employer at the start of thehiring process of a lengthy ‘partnership’ as well as of their occupationaladvancement within the firm.

According to Okun, in a CLM, both the employer and the employee are tied upin an arrangement of ‘mutual investment’ essential if long-term employment is tobe established and maintained. The principal aim in this set up is for the employerto amortise the ‘toll’ in the long run, i.e. the screening, hiring and on-the-jobtraining costs of the new recruits while maximising his profits and for theemployee to achieve and maintain a top quality of workmanship and productivity.However, the substantial costs for both firms and workers created by screeningand training, lead to reduced labour mobility which in turn affects the mechanismsfor setting wages in the labour market.7

Firms following the career labour strategy develop a particular mode oforganisation — the CLM — where:

(a) the internal wage structure does not correspond to market mechanisms butfollows an incremental-salary-scale path starting from payments lowerthan the value of the marginal product of the employee, yet higher than herbest alternative opportunity, and advances to the top of the remunerationladder usually through the acquisition of skills and experience

(b) recruitment is based on formal rules with new recruits filling the lowerlevel jobs on entry, while senior posts being filled by internalpromotions and

(c) rewards systems are used to motivate workers and induce their loyalty tothe firm, while enhancing their productive performance.8

The attachment created between employer and employee, as described inOkun’s ‘toll’ model, suggests the inevitable creation of a bilateral monopolysurplus, which may prove to be problematic in the long run as product demandfluctuates. Not all employers however would follow the same pattern of hiring,training and wage setting. In a neo-classical world, cyclical changes in productdemands are usually translated partly into changes in employment and partly into



changes in wages. On the other hand, Doeringer and Piore argued that firms withstable product demand are more likely to develop internal market structures.Hence applicants, although initially of equal productivity, will receive returns totheir human capital investments in line with a two-tier wage strategy. Due to thesplit, which emerges in a CLM model between the casual sector and the careersector of the labour force, one would therefore, expect that wages for jobs filledwith casual labour would respond much more to cyclical weaknesses of theproduct, and hence the labour market, than wages for career jobs.

Thereby, the strong inflexibility in the career segment of the labour market andthe implied rigidity of wages is best explained with reference to Okun’s famous socalled ‘invisible handshake’. As opposed to Adam Smith’s invisible hand, whichcannot operate effectively in the career labour market, the invisible handshakedescribes the employer-employee relations by making use of ideas associated withthe ‘Implicit Contracts’ theory based on the work of Baily (1974), Azariadis(1975) and Gordon (1974).

Implicit contract models recognise that the labour market in practice is not aspot auction market. Instead, the main idea is that firms and workers can maximiseprofits by reducing risk. In other words, both parties may engage in an implicitagreement in the form of shared informal understanding as to how each party willrespond to various contingencies. Risk averse workers are thereby provided with alevel of wage income which remains stable over the cycle.9

The brief review above has shown that the theoretical seed of SLM is not new.The non-homogeneous character of the labour market was first acknowledged bythe classical economists and later developed by the American InstitutionalistSchool. What is new however, is the emphasis placed by the new SLM theoristson the importance of institutional and social influences upon pay and employment.Despite their differences, with regards to the causes of segmentation, they allseem to agree on the dualist nature of the labour market. It is suggested that themechanisms governing wage and employment determination differ between thetwo segments and that the neo-classical theory of human capital is not applicablein the lower segment. Let us therefore take a closer look at the empirical evidencebefore we reach our own conclusions.

4. The evidence: methodological and theoretical issues

Virtually all labour market studies have shown that the labour market issegmented in some sense. Classical models recognise that labour markets aresegmented due to geographical and biological factors, especially age, which causelabour inputs to be imperfect substitutes for each other, while the SLM literaturetends to stress institutional factors as the main causes of segmentation. Ryan(1984) defines segmentation in general as ‘…the failure of the labour market totreat its participants even-handedly, in that it accords significantly differentopportunities to otherwise comparable people.’

Labour market segmentation though, does not constitute a single unifiedalternative to neo-classical theory. There appear to exist almost as many versions



of segmentation as authors in this field. Nevertheless, Ryan (1984) andPsacharopoulos (1978) outline three key propositions central to the segmentationtheory, which form the basis for a series of tests attempting to confirm or rejectthe segmentation hypothesis:

1. few clearly identifiable segments exist within the labour market, thedelineation of which is not a clear and established statistical procedure;

2. mobility barriers prohibit the movement across different segments andhence imply that labour markets do not clear and;

3. each segment has different employment and wage setting mechanisms andthe neo-classical theory of human capital is little or not applicable in thelower segment of the labour market.

Hence, the interesting question, which this part will attempt to answer is notwhether the labour market is segmented, but rather along what lines. Inconducting an empirical examination of labour market segmentation therefore,two methodological issues are of major importance; the first issue involvesdefining and delineating segments within the labour market while the secondexamines how this procedure is related to a series of statistical and econometrictechniques which test each one or all of the above three main hypotheses.

4.1. The creation of segments

Just as there are differences in the theoretical formulations of segmentation, thereare also differences in the criteria and methodology used to define and createsegments in the labour market. In its earlier formulation, the segmentationhypothesis was based on the idea that the labour market was divided into twoseparate and virtually self-contained parts, the primary and secondary segments ofthe labour market. (Doeringer and Piore, 1971)

However, the literature does not contain any single operational characteristic ora testable empirical hypothesis for identifying the demarcation boundariesbetween the two segments or indeed determining how many segments areappropriate. Initially there existed checks for bimodality of the distribution ofearnings and other measures of job quality but no evidence was found that theearnings distribution was bimodal in practice. (Psacharopoulos, 1978)Researchers therefore, have resorted to using a number of different criteria todefine segments. Therefore, one source of confusion is the different variable basesused to determine the segment to which an occupation is to be assigned.

Some researchers use job characteristics to define segments. Flatau and Lewis(1993) used information on a broad range of job characteristics, thought todescribe primary sector employment, including wages, employment benefits,general and specific training opportunities and requirements and job security, todelineate segment boundaries in the Australian labour market in accordance withthe dual labour market hypothesis.

In the US Rosenberg (1980) focused on the low income areas in Brooklyn,Detroit and San Francisco and assigned occupations in the two segments of the



labour market by using four job dimensions representing training, education,nature of the job and wages level. While Boston (1990), using data from asupplement to the 1983 US Current Population Survey identified two labourmarket sectors, a primary and a secondary, on the basis of the workers’ answers tothe question of whether specific skills or prior training were conditions foremployment. In the Netherlands, Van Ophem (1987), by making use of a similartechnique, based on eight quality job characteristics allocates the jobs to threesegments, a primary sector consisting of two tiers and a secondary sector, in linewith Piore’s (1975) latest representation of SLMs.

Other researchers use industrial characteristics to define segments. One versionof LMS between types of jobs is associated with a duality in the industrialstructure of the economy. (Edwards, Reich and Gordon, 1975) Thedichotomisation of the industrial structure between what has been called ‘core’and ‘periphery’ industry sectors, stems from such factors as technology,organisational structure, the nature of product demand and union power andinvolves a considerable overlap with the division of the labour market betweenprimary and secondary segments.

McNabb (1987) allocated workers to a primary and secondary segment byusing two factors, generally associated with disadvantaged employment, to dividethe British industry between core and periphery sectors: a) the proportion offemales employed in each industry and b) the proportion of workers not coveredby any form of collective agreement. However, by contrast to the dualisticapproach of high-wage and low wage segments, Osberg et al. (1987) used astratified random sample of private employees and assigned them to six segmentsdefined with respect to the product market characteristics of the employingestablishment. The same sample though, was later dichotomised when Baffoe-Bonnie (1989) assigned a priori each one of the above six industrial sectors to ahigh-wage primary segment and a low-wage secondary segment.

In contrast, some researchers use subjective measures to define segments.Osterman (1975) used the 1967 US Survey of Economic Opportunity to arbitrarilyclassify jobs into a secondary sector and a primary sector consisting of two tiers. Hesubjectively assigned jobs to sectors based on factors judged to be important by duallabour market theory, (Piore, 1975). Jobs placed in the secondary sector werecharacterised by low wages and unstable employment patterns, upper tier primarysector jobs were high wage jobs with a high degree of worker autonomy and allother jobs were classified as lower tier primary sector jobs. Classifications werebased on the following four criteria borrowed from Robert Blauner (1967):

1. the separation from the ownership of the means of production and thefinished product

2. inability to influence general managerial policies3. lack of control over conditions of employment and4. lack of control over the immediate work process.

Finally segments were defined by the use of occupational rating scales. InBritain Psacharopoulos (1978) and McNabb and Psacharopoulos (1981) used the



Goldthorpe and Hope occupational rating scale to assign individuals to two labourmarket segments, the primary and secondary. This scale was constructed byclassifying occupations (as defined by the Census Office) into ‘occupationalgrading units’ according to the nature of the work task they involve and the statusof their employment. Each occupation was subsequently given a grade on a scalereflecting its desirability in terms of the prestige attached to it. The basis of thisgrading was defined independently of the rewards and requirements of jobsthrough a survey in which people were asked to assess the social standing ofparticular jobs.

4.2. Statistical and econometric techniques

This section will present a statistical and econometric analysis of the two mostimportant claims of the segmentation hypothesis; a) that there is a distinct low-wage labour market in which there are no returns to schooling, experience or insome cases tenure and workers do not receive on-the-job training and b) that thereare non-economic barriers that prevent mobility across sectors. The latter iscrucial to the segmentationalist theory because the existence of inter-sectoralmobility would imply the equalisation of wages between sectors, i.e. anydifferentials would simply be competed away by firms and workers.

Studies on the validity of the above claims have concentrated on four distinctmethods of analysis:

1. testing for LMS with human capital models given a priori segmentdetermination

2. factor analysis3. cluster analysis and4. switching regressions

4.2.1. Human capital models — a priori segment determination

Human capital theory emphasises worker heterogeneity, including differentialinvestments in human capital, rather than differences among jobs, as the primarycause of wage differentials. What this implies is that low wage jobs consist of lowproductivity workers who are unable or unwilling to obtain the necessary skillswhich would allow them to access higher paid jobs. Hence poverty could beeliminated by investment in human capital through training programmes whichwould provide individuals with more skills or with incentives to obtain moreskills.

In contrast, the SLM theorists have maintained that jobs can be roughly dividedamong those with low wages, bad working conditions, unstable employment andlittle opportunity for advancement (secondary jobs) and those with high wages,good working conditions and opportunities for advancement into higher payingjobs. As a result it is suggested that the mechanisms governing wage andemployment determination differ among the segments. In particular, while the



secondary labour market has completely flat low wage profile, the primary markethas a wage profile similar to that predicted by the human capital theory. Theinadequacy of human capital investment in the secondary segment is onehypothesis that is common to all versions of segmentation theory.

Researchers have attempted to test directly the hypothesis that the wage-settingmechanisms are different among labour market segments by predetermining thenumber of segments in the labour market on the basis of the characteristics of thejobs or of the industry and thereafter testing for differences in the wage equationsfor each segment. The basic analytical tool in these studies is an augmentedclassic human capital earnings function.10 Regression analysis is employed toexamine differences in the wage determination process in the two labour marketsectors and separate earnings functions are estimated for each segment.11

A favourable result to the segmentation hypothesis would be that human capitalrelated variables perform considerably less well as explanatory variables insecondary labour markets. However, considering that a segmentation design,derived by using firms, industries or occupational characteristics, might producedifferent results, we shall test two different dimensions of the theory: industrialduality and occupational segmentation.

4.2.1a. Industrial duality

Under this version of segmentation, the starting point for differentiation in thelabour market is the nature of demand for employee services; in other words, theindustrial structure. Those who focus on industrial structure (e.g. Buchele, 1983;McNabb, 1987; Osberg et al., 1987; and McNabb and Ryan, 1990) emphasise theimportance of variables such as technology, unionisation, organisational structure,nature of product demand and size; placing therefore, the industry under the focusof investigation rather than the particular employment or establishment.

Osberg et al. (1987) estimated wage equations for both the labour market as awhole and six segments of the labour market determined a priori. Having testedand rejected the idea that the two most popular specifications of a human capitaltype wage equation, the quadratic and ‘Gompertz’, are equally good explanationsof the wage determination process within different segments of the labour market,they demonstrated that when separate regressions are run for separate segments ofthe labour market the human capital model fits the data quite well in somesegments and quite poorly in some others.

When alternative hypotheses were tested against the most popularoperationalisation of the human capital hypothesis, the conclusion for roughlyhalf the labour force, segment 1 to 4, was that those alternative hypothesesshould be preferred to a human capital specification of the wage equation.Indicatively, for the core industry segment, the two competing hypotheses are asfollows:

ln Wg = a + b1S + b2T + b3T2 + u (1)

ln Wg = a + b1S + b2BOSS + b3EMP + u (2)



where:ln Wg = natural log of hourly wage rate

S = years of educationT = wage − S − 5

BOSS = number of employees supervisedEMP = years of continuous employment with current employer

(tenure)

Equation (2) supports the internal labour market hypothesis which suggests thatwages are characteristics of jobs and that individuals move up job hierarchies asthey gain seniority with firms.

The results do not necessarily reject the human capital theory. Although theyindicate that some form of segmentation exists, certainly not strict duality,emphasis is placed on the fact that high-wage and low-wage sectors arethemselves aggregates of quite dissimilar segments. Hence within both sectorsthere may exist segments within which the human capital estimating equationsperform rather well. This explains why some other authors have, when testingsimple dualistic models, found human capital explanations convincing for wagedetermination within both the high-wage and low-wage sectors, (e.g., McNabb1987; Psacharopoulos, 1978; and McNabb and Psacharopoulos, 1981).

In the British context, McNabb (1987) set out to test for strict industrialdualism by estimating separate earnings functions for primary and secondarysector workers. The sample was divided a priori as indicated in the previoussection.

ln W = a0 + a1S + a2EXP + a3EXP2 + a4OCCUPN + a5 ln WKS + u (3)where:

W = annual earningsS = years of formal schooling

EXP = years of work experienceOCCUPN = occupation in which individual is employed

WKS = weeks worked per year

The results show that schooling and work experience are highly rewarded in bothsectors. Indeed there is evidence that periphery employers may place a higherpremium on human capital. Moreover, although the importance of workers’positions in the occupational hierarchy is confirmed as the main factor affectingtheir level of earnings, differences in education and experience account for ahigher proportion of the explained variations in earnings than occupation.

Therefore, McNabb’s findings led him to conclude that it is education and workexperience that have the greatest explanatory power with respect to earningsdifferentials rather than industrial affiliation. ‘…there is no support for thedominant role given in the segmentation theory to industrial attachment in



determining individuals earnings inequality and the hypothesis that industry-specific factors give rise to significant differences in the way earnings aredetermined’ (McNabb, 1987, p. 271).

4.2.1.b. Occupational segmentation

The failure to establish highly significant results in favour of strict industrialduality made researchers reconsider the assumption that ‘good’ and ‘bad’ jobs aresynonymous with ‘core’ and ‘periphery’ sector industries. The weakness of theabove approach lay in the tendency of individual employers to segment their ownforces into ‘good’ and ‘bad’ jobs. As a result LMS studies moved away fromindustrial demarcation to an examination of the jobs themselves, i.e. occupationalsegmentation.

Osterman (1975) estimated three earnings equations; one for each of his threearbitrarily predetermined segments. The equations are:

Eln = b0 + 1b A + b2 A +2 b3 Ed + b4 R + b5 U + b6 H +i4= 1

20

bI + e� � � � ��

where:

E = annual earningsA = age

A2 = the quadratic form provides the best representation of therising and levelling-off age-earnings profiles

Ed = years of school completedR = race (1 if white, 0 if black)U = weeks unemployed previous yearH = hours worked previous weekI = fourteen dummy variables for the industry in which the

individual worked (1 if in that industry, 0 if otherwise)

Osterman’s results indicate that earnings in both primary segments are moresystematically determined with almost all variables being significant, whiledifferences exist in the magnitude of the variables’ effects; for instance, higherreturns to education are present in the upper primary segment. However, theresults for secondary occupations indicate that earnings tend to be influenced onlyby the time spent unemployed and the number of hours worked per week, whichare shown to be significantly negatively and positively different respectively fromthe comparable coefficients in the other sectors. This supports the view thatemployers regard workers hired to secondary jobs as largely interchangeable.

Moreover, race appears to be a significant factor in the lower primary segmentwhich is interpreted by Osterman as being the result of institutional constraintspresent in this tier which permit racial discrimination. Whereas, in the upper primarysegment wages are set primarily on the basis of human capital investment and in the



secondary segment as a result of perceived homogeneity. When the same equationswere run separately for both black and white workers, to control for pre-marketdiscrimination, the results remained the same. Osterman’s results therefore, implythat wage differentials may exist across segments for labour of comparable qualityindicating thereby the existence of occupational labour market segmentation.

A similar technique however, used in Britain by Psacharopoulos (1978) andMcNabb and Psacharopoulos (1981), failed to produce evidence in favour of theexistence of LMS and in particular labour market duality in the UK.Psacharopoulos (1978) employed only a simple Mincerian human capital model12

and having used the Hope-Goldthorpe occupational rating scale to determinesector attachment he failed to find any conclusive evidence of differences in thedetermination of earnings between the two segments.

McNabb and Psacharopoulos (1981) analysed the same sample as the one usedin Psacharopoulos (1978)13 using augmented classic human capital earningsfunctions14 for the entire sample and then separately for the primary andsecondary segments. The hypothesis that all coefficients for both segments areequal was rejected, indicating that the determination of earnings may differbetween sectors. However, the relationship between income and education andexperience in both sectors was positive and significant, although of a lowermagnitude in the secondary segment. Also, counter to the demand-side emphasisof the segmentationalist literature, most industry dummies turned out to besignificant. Therefore, all the results can easily be interpreted as evidence againstlabour market duality in the UK.

Following McNabb and Psacharopoulos, Neumann and Ziderman (1986) useddata drawn from the Israel Labour Mobility Survey and estimated the sameMincerian type human capital earnings function for the primary and secondarysectors of the Israeli labour market separately. The results were highlysupportive of the dual labour market hypothesis. Lack of significance of thehuman capital coefficients in the secondary segment confirmed the idea thathuman capital investments do not contribute to earnings augmentation insecondary markets.

Apart from their obvious inconclusiveness the previous studies suffer, each to adifferent degree, from a series of methodological flaws. Although there is now asubstantial literature on LMS, its major weakness is attributed to definitionalproblems relating to the construction of labour market segments as well as to theunsatisfactory nature of many of the tests conducted.

4.2.1.c. Truncation bias

The major problem which permeates most hypothesis testing of segmentationalisttheory is the process of segment delineation. So far in our analysis, most studieshave used a priori classification systems, failing thereby, to account for theendogeneity of an individual’s labour market segment. This was Cain’s (1976)main criticism of this kind of work. He criticised the technique of dividing thelabour force into high and low wage segments and then regressing earnings on



education and other human capital variables. He argued that arbitrarily dividing asingle market into high and low wage segments would create a truncation bias.

The effect of truncation occurs when sample data are drawn from a subset of alarger population of interest. Boston suggests that ‘…censoring and truncating ofsegments occurs when definitions are used that fail to include observations abovea floor or below a ceiling or when observations are eliminated from a sample.’(Boston, 1983, p. 101) By this he means that one would observe, for example, inthe low-wage segment only those highly educated people whose unobserved low‘ability’ placed them below the expected earnings for their schooling level. Hencethe return to schooling would appear low for this group.

Testing for both industrial dualism and occupational segmentation are subject tothis. The a priori determination of industrial sectors or the arbitrary demarcationline drawn between good and bad jobs will bias returns to human capital. Aspointed out by Cain it is not very surprising that the effect of schooling onearnings is lower in the lower segment since the high values of the dependentvariables are cut of (figure 1).�Psacharopoulos (1978) criticised this approach on the grounds of circularreasoning. What he meant is that if a segment is defined on the basis of pay levelsit is a circular argument to claim that the secondary segment has low pay. To thateffect he argued that splitting the sample into two segments is equivalent tostandardising for occupation, since irrespective of the split criterion highly paid



Earnings £

Low earnings

‘Best fitting’ line showing the relation for the whole population.

‘Best fitting’ line showing the relation for the truncated population.

Years of shool completed

Figure 1. Truncation bias

occupations are bound to be clustered in the upper segment and lower paidoccupations in the lower segment. The correlation between earnings and segmenttypes would therefore, result in a higher regression slope in the primary segment.Hence: ‘Standardising for occupation in an earnings function underestimates thereturn to schooling as it denies the effect of schooling on earnings via changes inoccupations.’ (Psacharopoulos, 1978, p. 428–29)

In the SLM literature, Harrison (1972) fits his regressions separately for ghetto,or low-income-area, residents and so effectively truncates on earnings. Osterman(1975) assigns jobs into three sectors on the basis of their typical characteristics inthe literature, which, among others, include low wages; thereby leaving his studyopen to the criticism of truncation bias. Whereas, McNabb (1987) determinessegments on the basis of the proportion of females employed in the industry,which could be interpreted as indirect truncation bias since women tend to be paidless.

In response to the serious criticisms outlined above, most researchers offerdifferent solutions in order to avoid truncation bias. Mayhew and Rosewell(1979), McNabb and Psacharopoulos (1981) and later Neumann and Ziderman(1987) used an occupational cut-off criterion, namely the Hope-Goldthorpeoccupational rating scale, to define segments. This scale is not constructed bydirect reference to income and education which implies that to a large extent itavoids truncation bias.

Others tried to avoid truncation bias by using different cut-off criteria. Osberget al. (1986) defined labour market segments with reference to the major productmarket of the employing establishment; a criterion logically distinct from paylevels. While, Rumberger and Carnoy (1990) and Boston (1990) usedinformation on the specific training requirements of jobs to define labour marketsegments. In this way each segment included workers irrespective of theirearnings or, in Boston’s case alone, of job related attributes.

Finally, Dickens and Lang (1985) have implemented a technique which allowsone to estimate the wage equation for unobserved sectors simply by postulatingthe number of sectors and the determinants of sector attachment. This is themethod known as switching regressions which we shall analyse in detail in section4.2.4.

4.2.1.d. Sample selection bias

Heckman (1979) defines sample selection bias as ‘…the bias that results fromusing selected samples to estimate behavioural relationships…’. He describes twopossible sources for it: first, the existence of self selection by the individuals beinginvestigated and second the self selective nature of decisions taken by analysts ordata processors with regard to data collection. In our case, dividing the sample onthe basis of occupation or industry can have serious consequences for theestimation of earnings equations. In particular, since a worker’s choice of industryor occupation is not independent of unmeasured characteristics, there exists thedanger of sample selection bias.



Heckman and Hotz (1986) used an a priori classification to divide their sampleinto two groups: one consisting of individuals whose annual income fell below thepoverty level and one consisting of those above the poverty level. Thereafter theycorrected sample selectivity by using Heckman’s (1979) two-step procedurewhich translates the problem of income truncation into a problem of omittedvariable bias, such as ability or motivation.

Theodossiou (1990) used Lee’s (1978) two-step procedure to correct forsample selectivity in estimating a simple career model. Following Okun’s analysisof career labour markets, he split the sample into career and non-career sectors onthe basis of a variable describing the career prospects open to an individual workerand estimated two earnings equations for career and non-career workersrespectively:

ln Eic = bc

0 + b1cXi

c + bc2Zi

c + ec

ln Ein = b0

n + b1nXi

n + b2nZi

n + en

where:

Xi are variables describing individual characteristicsZi are variables describing jobs and industry characteristics.

Both earnings equations in this model appear to be mispecified since it wasassumed that the effects of personal job and industry characteristics on wageswere independent of the career status of the employee. Correcting for sampleselectivity bias therefore, means abandoning an ordinary least squares (OLS)estimation in favour of a bivariate probit model since:

E(ec | Csi p 0) % 0 and E(en | Csi ≤ 0) % 0

Osberg et al. (1987) examined another aspect of sample selectivity bias. Indeciding whether to change jobs, individuals compare the monetary and non-monetary attributes of their current jobs with those of the jobs they could get.However, only the ‘moving’ wage for those who actually move and the ‘staying’wage for those who actually stay can be observed. Job mobility and wages arethus simultaneously determined.

Again the two-step Heckman procedure was employed to correct for sampleselectivity bias. The results not only showed supporting evidence of the duallabour market hypothesis, but also that one could go very wrong in estimating thedeterminants of individual wages for workers in the ‘marginal’ segment of thelabour market by ignoring the returns to job mobility.

4.2.2. Factor analysis

Factor analysis is a statistical technique which is used in order to discoverunderlying patterns in the data. This allows a reduction in the number of variablesunder consideration by identifying a relatively small number of factors that can beused to represent complex relationships among sets of interrelated variables. Eachfactor is a composite variable and its interpretation is suggested by the set of the



original that ‘load high’ (either positively or negatively) on it. The basic factoranalytic model is of the form:

Xi = ai1F1 + ai2F2 + … + aimFm + ei

i = 1 … n

where:

Xi are n standardised variables described linearly in terms of (m + 1)underlying factors: m common factors and a unique factor ei associated withthe ith variable; aim are the constants used to combine the m common factors.

Factor analysis is a technique for testing strict industrial dualism. Ideally if dataare consistent with an interpretation of the labour market in terms of strict duality,i.e. a core/periphery type distinction, a common factor would be identified thatseparates individuals into these two distinct groupings. This factor should loadhigh on those dimensions of industrial structure, e.g. technology, concentration,capital intensity etc., discussed in the dual economy literature.

The next step of the analysis involves computing ‘factor scores’ for eachindustry. An industry’s factor scores are therefore, computed from a factor-scorecoefficient matrix and the frequency distribution of those scores is examined inorder to ascertain whether it is consistent with the hypothesis of dualism. Someresearchers have indeed found a dominant factor fitting the dual market typologyand have also found bimodal distributions of factor scores.

Oster (1979) used factor analysis of data for 83 3-digit 1960 Census codeindustries to test for strict industrial dualism. Factor loadings were estimated butonly the first three principal factors were taken into consideration15: I) a tentativedual economy factor II) a sex factor and III) a race factor. However, neitherfactor II nor factor III captured the kind of differences among industries proposedby the theory of dual economy. Only factor I loads significantly and with thehypothesised signs on all those variables, such as establishment size, totalindustry receipts concentration etc., that reflect a core-periphery pattern ofstratification.

Moreover, following Pearson’s method, Oster fitted the distribution of values offactor I to a mixture of two normal distributions. The proposition that the sampledistribution was generated by a mixture of two normal probability densityfunctions (PDFs) could not be rejected. Hence the hypothesis of a dual economywas supported. However, although Oster’s technique managed to confirm thehypothesis of structural dualism without resorting to arbitrary assignation of jobsor individuals to the two sectors, no test to affirm or reject the dual labour markethypothesis was conducted.

Dual labour market theory suggests that large industries with high capitalintensity and product market concentration have lower rates of separation andunemployment. (Edwards, 1975) Four different measures of employment stabilitywere used as dependent variables while independent variables included a dummyto indicate employment in the core or periphery, and a number of variablesdescribing personal characteristics and job requirements to control for human



capital effects. The results were robust, confirming the hypothesis that coreindustries are characterised by greater employment stability and thereby acceptingthe dual labour market hypothesis.

In Britain Sloane et al. (1993) used data drawn from the Social and EconomicLife Initiative (SCELI) which covered six local British labour markets in 1986and 1987 (Aberdeen, Northampton, Swindon, Kirkcaldy, Coventry andRochdale). Their model identified four important factors reflecting human capitalcharacteristics, job stability characteristics of individuals, industry effects and thecomposition of the workforce. Having identified the factors they then proceededto estimate human capital earnings functions separately for each group with highand low scores on each factor. Generally their results suggested that the labourmarket was basically homogeneous.

Although factor analysis has attempted to overcome the problem of arbitraryassignation of jobs or individuals to the labour market segments, it is still used totest only strict duality. However, labour market segmentation may not necessarilyimply pure dualism as several studies indicated. Moreover, the interpretation offactors is subjective and not testable statistically. Researchers have to rely heavilyon the dual economy literature to get guidance with regard to expected loadingsfor variables which can be problematic when these are not central to mostdescriptions of core and periphery industries. Furthermore, bimodality establishedin such studies refers to product-market attributes rather than to labour marketoutcomes. McNabb and Ryan (1990) argue that: ‘…the labour marketconsequences of bimodal duality have been limited to differences betweenearnings or turnover in the two segments. No one has established the existence ofa bimodal duality in pay or turnover parallel to that in industrial characteristics…’(p. 169)

Nevertheless, failure to establish strict duality does not mean that one shouldthrow the labour market segmentation theory out with the bath water. The nexttwo techniques may reveal a better insight of the theory.

4.2.3. Cluster analysis

Cluster analysis is a method of assigning occupations or employees into relativelyhomogeneous groups with respect to a given set of variables. It therefore providesa means for drawing together the full set of job characteristics that are presumedto define segment boundaries. It is purely a statistical method which implies thatspecific hypotheses cannot be tested. Nevertheless, its major advantage is that itcan determine into how many clusters the observations fall naturally, withoutforcing the data into a predetermined number of segments.

In addition to this, cluster analysis can also provide information on the distancebetween clusters or segments. This allows one to delineate tiers more easily withinsegments and identify any ‘outliers’, i.e. occupations which are particularlydissimilar to others. Also, by using cluster analysis one can present and measurethe degree of earnings dispersion without necessarily forcing the results into astrict duality structure (Ryan, 1981).



In Australia, Flatau and Lewis (1993) found evidence of distinct segmentswithin the workforce but ruled out strict duality. Their results suggest thatoccupations cluster into three distinct groups; ‘secondary’ ‘intermediate’ and‘primary’ sectors with tiers within the primary sector. They argued that:‘…defining labour market segmentation in terms of wages alone or some othersingle attribute is fraught with difficulties because of the lack of correlationbetween these characteristics. Only by considering the multidimensional aspect ofjob characteristics and distinguishing between communality of factors cansegmentation be analysed.’ (p. 293)

Drago (1992) used cluster analysis in conjunction with the segmentation modelof Gordon, Edwards and Reich (1982), which described labour segmentation onthe constructs of ‘class conflict’ and ‘divide and conquer’, to allocate a sample ofAustralian workplaces among the primary independent, primary subordinate andsecondary segments. Although his results do not mirror those of Gordon Edwardsand Reich (GER) the cluster analysis was consistent with the assertion that suchsegments exist and the evidence generally supported the view that Australian firmshave used segmentation as a tool to divide and conquer their workforces. Inparticular, what are considered the three key indicators in the GER model, i.e.internal promotion systems, on-the-job training and unexplained wagedifferentials among workers of comparable quality, perform as expected.

The primary independent segment is characterised by skilled white collaremployees with high incomes and internal promotion opportunities. Theworkplaces are most likely to be owned by large multinationals which recruitemployees from ILMs and attempt to generate worker loyalty through wageinequality and non-pecuniary awards. The primary subordinate segment is mainlyblue collar, heavily identified with manufacturing, mining and construction andexhibits characteristics such as lengthy job tenure and on-the-job training. Finallythe secondary segment includes small periphery firms which offer low pay, littletraining and limited promotion opportunities. Not surprisingly employees exhibithigh turnover rates and job tenure is usually short.

In the US Anderson et al. (1987) used cluster analysis to construct clusters in afree manner, i.e. without imposing any beliefs stemming from the segmentationtheory, on the process. Their results showed no sign of dual or SLM. Boston(1990) on the other hand, used cluster analysis to partition markets in accordancewith dual labour market considerations in collecting his variables. FollowingWard’s method, which uses a stopping criterion of two clusters, he found atheoretically appealing clustering of occupations into two sectors, a primary and asecondary sector, separated by race and gender. Thereafter, running human capitalregression for each of the four groups he concluded that 15% of the earningsdifferential was unexplained, which led him not to reject the hypothesis thatprimary sector workers receive wage premiums.

In Britain, Sloane et al. (1993) constructed clusters using variables which alsoprovided a reasonable representation of the various dimensions of labour, marketsegmentation. The algorithm revealed two segments of roughly the same size buttheir characteristics were not in line with the segmentation hypothesis. While



segment 1 consisted of ‘core’-type firms, they appeared to be more reliant on theuse of casual labour, placing thereby aside the ILM market hypothesis. Moreover,after applying a human capital model to each segment no high-wage low-wagedichotomy was revealed.

What the above evidence indicates is the fact that although cluster analysissolves the problem of a priori segment determination, the results are highlydependent upon the number or type of variables used to determine the clusters andthe kind of algorithms used.

4.2.4. Switching regressions

So far the statistical and econometric techniques used for testing the segmentationhypothesis have proven to be fraught with problems and flaws, mostly related tothe accurate delineation of labour market segments. As noted earlier, the startingpoint for any analysis of the segmentation hypothesis is to estimate separateearnings equations for each labour market sector. However, the main difficulty inspecifying wage equations for each sector is that no prior information exists on theassignment of individuals to these sectors. Thus it is appropriate, if possible, totreat sectors as unknown.

In a series of papers Dickens and Lang (1985, 1987a&b, 1988a&b, 1992a&b)have implemented a technique which allows one to estimate the wage equationsfor unobserved sectors; that is a switching regression model with unknownregimes. This technique enables one to derive the probability of sectorattachments directly from the observed distribution of wages and worker attributesand thereby resolves the problem of attributing primary or secondary sectoremployment to everyone in a given industry or occupation.

To implement the switching regression model, Dickens and Lang (1985)specify two wage equations and a model explaining the probability of sectorattachment, and estimate all three equations simultaneously. (See Appendix )‘The main question is: do two wage equations fit the data significantly better thanone and do the best-fitting equations fit the predictions of the dual labour markethypothesis?’ (Dickens and Lang, 1985, p. 794) The above hypotheses can easilybe tested by comparing the log likelihood values for the two models since thesingle equation model is nested in the switching model.

Dickens and Lang (1985, 1992b) estimated an OLS wage equation for thewhole labour market and the dual labour market model as described in theappendix. All the results for the OLS model were similar to those obtained byother researchers and the primary sector wage equation resembles the OLSequation. In particular, the returns to schooling and experience are quite high,while no race differential appears to exist.

However, the results from the secondary sector wage equation appear tocontrast sharply with the OLS equation. That is, the secondary sector wageequation is almost everywhere below the primary sector, while the returns both toexperience and schooling are essentially zero. Moreover, the likelihood ratio testwith a chi-squared statistic of 177 shows that we can reject the single labour



market (OLS) model at any conventional level of significance (at 1% level ofsignificance the critical value is 29.14). This implies that the two equations fit thedata better than one and hence, the prediction of labour market duality, that are noreturns to education or experience in the secondary sector cannot be rejected.

However, criticisms of the simplicity of the OLS model with regards to theexistence of possible non-linearities in the explanatory variables andheteroscedasticity of the error term, led the authors to reconsider the evidence andsubject it to further tests. (Dickens and Lang, 1987a) Again the dual labourmarket model outperformed a complex single labour market model and ‘passes’ agoodness of fit test.16 However, the dual labour market model cannot account forcertain spikes in the wage distribution and hence Dickens and Lang argue: ‘…wedo not propose that the labour market consists of exactly two distinct segment.Only that dualism is a useful simplification.’ (Dickens and Lang, 1988a, p. 131)

Nevertheless, considering the overall remarkable consistence of their findingswith the DLM typology, Dickens and Lang applied the switching equationtechnique together with the information on the individual wage to sort individualsinto primary and secondary sectors. They argued that earlier a priori classificationsystems appeared to have missclassified many workers for two reasons. First,because even within the same firm there may be both primary and secondaryworkers. The concept of the flexible firm implies duality within an enterprise, witha ‘core’ and a ‘periphery’ workforce.17 And second because classification systemsbased solely on industry will disagree considerably with those based solely onoccupation since many occupations are common to many, if not all, industries.

Using a large data set18 and having estimated the wage equation, they thenrecomputed the probability that each individual was attached to the primarysector. Their results were substantially in accord with descriptive work on the duallabour market. There was however, one caveat. None of the industries oroccupations examined can be identified as being entirely secondary. It appears thatprimary workers may exist even in those industries or occupations which aresubstantially secondary.

Hence, it is suggested that the varying degrees of inaccuracy inherent in an apriori system of classification may be the reason for the inconsistency of resultsacross different studies.

4.3. Mobility

So far the central hypothesis examined in this study has been that different rewardand incentive systems exist across the segmented labour markets for otherwisecomparable individuals. Several authors have suggested that the mere existence ofdistinct wage equations for the primary and secondary sectors would indicate arefutation of the human capital theory. (Osterman, 1975, Buchele, 1983)

However, in order for differential reward mechanisms to exist across sectors,labour mobility must be limited. Otherwise sectoral convergence would occur asfirms and workers bid away systematic sector differences. Dickens ad Lang havenoted that: ‘…if an individual can move out of the secondary sector in order to



obtain returns on experience and education, the existence of a sector in whichthere are no returns is inconsequential’ (Dickens and Lang, 1985, p. 793). Hence,the important question to be examined in this section is: are primary sector jobsrationed?

The issue of mobility has been central to the SLM literature. The propositionthat the poor are confined to the secondary segment constitutes the mostfundamental criticism of human capital theory because it implies that labourmarkets do not clear; that is access to some sectors is subject to non-pricerationing. In dualist studies, both in the US and in the UK, several authors haveaddressed the issue of mobility between the two sectors. More significantly, theyargued that there is a hierarchy of sectors with access to the highest paying beingthe most difficult. However, once more the results are highly contradictory insome cases.

For Britain, Psacharopoulos (1978) examined the crucial issue of mobility byanalysing data relating to 6,873 male employees obtained from the 1972 GeneralHousehold Survey. An age-occupational scale profile was constructed to analyseintra-generational socio-economic mobility, while inter-generational mobility wasexamined through the use of a mobility matrix constructed on the basis of theHope-Goldthorpe scale for the jobs of employees and their fathers.

In the first case, the evidence showed the existence of a normal career pattern,where workers initially take less desirable jobs upon entering the labour force andlater progress by obtaining better jobs. In the second case, although a fair amountof occupational transmission between generations is present, some upwardmobility exists too. With almost as many workers moving upwards as those whoremain in the lower segment, significant amounts of mobility out of low-leveloccupations was found to be associated with higher levels of schooling. Hence,Psacharopoulos concludes that all of his tests fail to support the hypothesis thatthe UK labour market is segmented.

Mayhew and Rosewell (1979) used the 1972 UK Oxford Mobility Survey totest for a ‘strong’ version of the SLM hypothesis, where there are specificidentifiable segments between which lifetime mobility is severely limited. Theyconstructed a mobility matrix based on a maximum of four possible jobs for anyindividual male worker and following Osterman (1975) they assigned individualsto one of the three segments, upper primary, lower primary or secondary, on thebasis of occupational status.

Like Psacharopoulos, they found evidence of both upward and downwardmobility but the vast majority of individuals remained in their staring segmentindicating substantial inter-sectoral immobility. Moreover, human capitalvariables such as education, experience and age appeared to be importantdeterminants of both initial allocation among and upward mobility betweensectors. Access to higher positions in the occupational hierarchy is correlated withthe level of education of workers. This finding was also reported later by McNabb(1987) who along with Mayhew and Rosewell concluded that the UK labourmarket does not suffer from the rigid immobility endorsed by segmentationtheory: ‘…while increased schooling may not lead to increased earnings within



semi- and unskilled occupations and in personal service jobs, high levels ofschooling can enable workers to move up the occupational hierarchy into jobs thatoffer higher average earnings’ (McNabb 1987, p. 270).

Although the above studies clearly indicate the superiority of the human capitalmodel in explaining the significant amounts of lifetime mobility out of low leveloccupations, it must be remembered that they are only examining observations onwhite males and are unable to analyse the impact of race and gender. Furtheranalysis is therefore required before certain conclusions are reached.

In the US several early studies presented evidence with regards to inter-sectoralmobility, which refuted the dual market hypothesis. Leigh (1976) reportedsubstantial and comparable earnings growth for both blacks and white males,while Schiller (1977) reported extensive upward mobility of individuals at thebottom of the income distribution during the period 1957 to 1971 and attributedhigh immobility rates for blacks solely to discrimination.

Other writers however, argued that this differential mobility supports the DLMtheory. Rosenberg (1980), despite accepting that ‘the secondary segment is notairtight’, also found that human capital variables do not explain the upwardmobility of minority workers. Carnoy and Rumberger (1980) used bothoccupational and industrial divisions of the US labour market to examine mobilitybetween segments for whites and blacks and also those individual characteristicswhich contribute to mobility.

Their results indicate that more upward mobility exists in general thandownward mobility. Yet, racial differences are obvious. Black males were lessupwardly mobile for secondary jobs than whites. They were more likely to begintheir career in the secondary sector and having done so they were less likely tomove than were whites. Overall, the patterns of mobility for whites were muchmore affected by schooling, age and marriage whereas, the effect of vocationaltraining was universal.

Boston (1990) took a step further and examined the inter-sector mobility ofworkers between 1982 and 1983 by race and gender. He discovered that bothwhite men and women, although surprisingly enough women more that men,experience greater upward mobility than black men and women. Moreover, theage-cohort profile of secondary sector workers corresponded to the SLMhypotheses. That is, while a very high percentage of young workers start theircareers in the secondary sector, a disproportionate number of older black workers‘get stuck’ in secondary sector occupations. A logit equation employed to identifyattributes associated with upward mobility revealed that education has the largestpositive effect and being black has the largest negative effect.

Although studies of differential mobility between races are suggestive, duallabour market theory maintains that individuals cannot always choose the sectorwhich they prefer to be employed in. Some workers would prefer primary sectoremployment but cannot find jobs there. Measuring mobility therefore, does notprovide a test of rationing of primary sector jobs. Dickens and Lang (1985,1992b) using switching regression analysis, tested the presence of non-economicbarriers to primary sector employment.



First, they postulated a mechanism for allocation of workers between thesectors in the absence of rationing based on workers free employment choices.Assuming that workers have perfect information and would behave so as tomaximise utility over their lifetime, then they would choose primary sectoremployment if the net present value (NPV) of their income stream in the primarysector exceeded that of the secondary sector. To model this they tested a series ofconstraints on the switching equation.

If the hypothesis of workers’ free choices of sectors is to be accepted, and tastesfor the non-pecuniary aspects of employment were not related to certain individualcharacteristics such as her place of residence, her marital status, education or race,then it would be expected for the coefficients of the variables describing thesecharacteristics in the switching equation (see appendix) to equal the coefficients inthe two wage equations. However, since assumptions like the above, with regardsto workers’ preferences, are highly unrealistic further testing shows that thehypothesis of free choice is easily rejected.19 Dickens and Lang are thus driven toconclude that blacks are discriminated against when seeking primary employment.

While this model appears to be compatible with the theory of queues theevidence suggests that rather than allocating jobs randomly, primary sectoremployers discriminate against blacks. However the relation of labour marketsegmentation to race discrimination is not considered in this study.

5. Conclusions

This paper has examined whether the theory of labour market segmentation couldbe considered as a possible valid alternative to the neo-classical analysis of labourmarkets. The main argument in the labour market segmentation approach isusually presented as a conflict between the SLM theorists and the neo-classicalsregarding the existence or otherwise of labour market segmentation. However thereality is far more complex.

Classical theorists themselves accept that labour markets are segmented but notto the extent or for the same reasons put forward by the segmentationalists. Inclassical models geographical and biological reasons, especially age, cause labourinputs to be imperfect substitutes for each other. In addition labour marketinstitutions, such as labour unions, and government laws, such as minimum wagelegislation or laws on in-migration, also cause market segmentation. While in theformer case individuals are differentiated by their different attributes in the latter,segmentation emerges essentially as a consequence of wage rigidity.

The above contrasts sharply with the notion of ‘good’ and ‘bad’ jobs whichpermeates the SLM literature. Workers with, at least initially, similar skills arearbitrarily allocated to different quality labour market sectors; those containing‘good’ jobs and those containing ‘bad’ jobs. Thus the observed wage differentialsare not the result of underlying skill differentials but of certain institutional rulesand social influences.

It can be argued therefore that the labour market is segmented and this is anestablished fact. What still remains to be proven though is along what lines. What



this paper has shown is that even the most enthusiastic proponents of the SLMtheory have failed so far to develop explicitly a concise methodology capable ofvalidating their arguments, in particular, with regards to the issue of mobility,which has been central to the SLM literature.

What most of the empirical studies examined here have in common, is that theytest for the strong version of the segmentation theory which is the dual labourmarket hypothesis. Their weakness is that they presuppose the number ofsegments that exist in the labour market. However, even those which do not makethe dualist assumption produce unreliable results. As we have seen using a priorisegment determination methods, or factor analysis the results become highlyvaried. The number of segments in the market varies from two to six. Clusteranalysis may solve the problem of segment determination but then the results areagain highly dependent upon the number or type of variables used to determinethe clusters and the kind of algorithms used.

In Britain tests both for different wage structures among labour market sectorsand the mobility of workers among those sectors, produce inconclusive results.However state-of-art econometric techniques such as switching regressions haveprovided clear evidence of labour market segmentation in the US. The questionover the precise segment determination still remains unanswered though, sinceeven this technique is based on labour market duality.

Because the segmentationalists have not been able to develop either a cleartheory or methodology which consistently produces a specific number of segmentsor convincing criteria for determining the type of segments or the features thatdifferentiate those segments, they have not effectively taken us any further thanthe classicals did. That there exists a degree of segmentation in the labour market.

The proposition that the poor are confined to the secondary segment, which hasbeen central to the SLM literature, constitutes the most fundamental criticism ofhuman capital theory because it implies that labour markets do not clear.However, the theory remains weak since neither the causes of immobility barriersnor the reasons for secondary workers’ entrapment have yet been establishedempirically. That there is some degree of occupational immobility is well known.(Thurow, 1970; Okun, 1981; Pigou, 1945; Mill, 1909) It would therefore, beimportant for future research to deal with the issue of labour mobility amongsectors: Is it possible to divide the labour market into a number of differentsegments between which labour mobility is restricted? Can the allocation ofindividuals or occupations into these segments be predicted from a set of variableswhich are interesting for matters of economic policy? The outcome of a researchprogramme attending to answering these questions can determine the relevance ofa strong version of the SLM approach.

Acknowledgements

I would like to thank I. Theodossiou, P. J. Sloane and an anonymous referee of this Journalfor their helpful comments. All remaining errors are of my own and none of the above isresponsible for the views expressed.



Notes

1. The SLM approach is in direct conflict with Adam Smith’s concept of compensatingdifferentials. In his theory, bad jobs should be paid more, ceteris paribus.

2. The seminal work in this literature is that of Doeringer and Piore (1971) and Gordonand Harrison (1972). The literature through 1975 was surveyed by Cain (1976) andsubsequently by Wachter and Taubman (1986).

3. More formal human capital theory has adopted a similar concept to that of a ‘careerladder’. In particular, Lorne Carmichael (1983) defines a ‘promotion ladder’ as‘…the arrangement that offers a fixed number of high wage jobs to trained workerson the basis of their seniority level.’ The article thereby argues that the optimal labourcontract controlling turnover in the presence of investments in specific human capitalwould be the one which offers a promotion ladder to the trained employee.

4. Neo-classical economists have only indirectly examined the ILM structure byconcentrating on analysing separately a number of phenomena which have beenassociated with it and which distinguish it from wage competition. Prime examplesof these constituents parts which are analysed in isolation are reduced turnover, jobattachment, internal promotion, rent sharing and seniority. (Parsons, 1986) As aresult, although the distinction between a firm’s internal market and competitionamong firms is not alien to human capital theory, this form of neo-classicalreductionism is in direct contrast with the holistic approach of the institutionalanalysis of the ILM which was most fully developed by Doeringer and Piore (1971).The latter has changed the focus of much of the labour market analysis in that it hasopened up the ‘black box’ of the employing organisation which in neo-classicaltheory still remains the domain of industrial sociologists and industrial organisationtheorists. SLM theory differs from the neo-classical paradigm in that in examiningthe workings of the labour market, the former does not ignore the internal workingsof employing organisations as the latter tends to do.

5. This term was used by Edwards (1975) to refer to the institutional arrangementsgoverning production. The social relations of production embody elements of powerand control such as sanctions, incentives, distribution of responsibilities and otherapparatus by means of which power is exercised and are essential in explaining themarket process. ILMs are created as part of an effort to alter the social relations ofproduction within large firms.

6. See Edwards (1972) for a more detailed analysis of the ‘bureaucratic control’ system.7. It would be expected that earnings in the non-career sector would be little influenced

by individual capabilities, experience and training, unlike the earnings of individualsin the career sector. ‘…The pure case of a casual labour strategy would involve zeroscreening and training expenditures … it would offer a single wage rate to all workersregardless of tenure with the firm; … [and] because high pay represents a return tosome differential skill or attainment on the part of workers, the unsorted casualworkers are bound to be paid low wages. They are stuck with ‘dead-end’ jobs, whichare nonetheless their means of livelihood. The firm with a casual labour strategy mustexpect high cyclically sensitive quit rates; its workers will have no inhibitions aboutquitting to obtain more favourable opportunities as they arise elsewhere in the labourmarket. …’ (Okun, p. 82)

8. Two separate criteria can be used for segmenting the labour market in line withOkun’s CLM theory. The first criterion relates to a worker’s career prospects. That is,given the requirements of the ‘toll’ model, firms in the career sector are expected topay high wages to valuable workers to achieve long attachments and thereby amortisethe toll incurred by the firm in hiring the particular employee in the first place. Thesame firms are not expected to do so for easily replaceable workers in the non-careersector though. The second criterion relates to the amount of on-the-job specifictraining that the individual workers are offered by their employers in the career labour



markets. Non-career labour market workers are not guaranteed long termemployment relationships in the absence of on-the-job specific training. (Okun,1981, pp. 81–82) For more details and empirical results see Theodossiou (1995).

9. For more details on Implicit Contract theory see Rosen (1994).10. For an exposition of the relevant human capital earnings functions see Mincer

(1974).11. There are alternative assumptions, different from Mincer’s, that lead to different

empirical formulations of the human capital model, and hence the choice offunctional form ought to be made on an empirical basis rather than a theoretical one,(Blinder, 1976).

12. ln Y − a + bS + cEX + dEX2 where: Y = annual earnings, S = completed years ofschooling and EX = experience.

13. The sample was drawn from the 1972 UK General Household Survey and itcontained 6,789 white male workers of all ages who were not in school or apprenticesbut were employees in their main occupation in 1972.

14. The independent variables included a series of dummy variables describing workerand industry characteristics.

15. For a more detailed discussion on the technique of principal factors see Harman(1967, Ch. 8).

16. For more details on the test, check Dickens and Lang (1987a).17. A more detailed exposition of the ‘core’ and ‘periphery’ workforce dichotomy can be

found in Atkinson (1985 & 1986).18. Drawn from the 1983 US Current Population Survey consisting of all male heads-of-

household between 20 and 65 years of age who were employed, reported that theynormally worked more than twenty hours a week, earned more than the minimumwage and for whom data were available.

19. For a more detailed analysis of the whole testing procedure check Dickens and Lang(1985).

Appendix

The system is composed of two wage equations (1, 2) for each sector and anequation determining sector attachment (3):

ln Wi = Xibp + epi (1)ln W i = Xibs + esi (2)

yi* = Ziba + eai (3)where:

W i: is the individual’s wagesXi and Zi: are vectors of characteristics associated with the ith individualbp, bs and ba: are vectors of parametersep, es and ea: are normally distributed error termsyi* is a latent variable measuring the tendency for the ith individual to be in theprimary sector and the subscripts p and s indicated primary and secondarysectors.

Equation (1) is the wage equation if the individual is in the primary sector;equation (2) is the wage equation if the individual is in the secondary sector; andequation (3) is the switching equation.



We cannot observe yi* but if yi*p 0 the individual is in the primary sector andher wage is determined by equation (1); otherwise if yi*≤ 0 the individual is in thesecondary sector and her wage is determined by equation (2). In other words, theindividual works in the primary sector if and only if:

eai p −Ziba (4)

Given a set of observations on n individuals’ wages and characteristics, thelikelihood function for the problem therefore is as follows:

;i = 1

n

[Pr�(e a p Z i ba�|�Z i , X i , ep) f�(ep) + Pr(� e á Z �b �|�Z , X , e )a i a i i p�� f (e s )�� ]−�

If we assume that ep, es and ea are normally distributed, then the log-likelihoodfunction for the problem is given by:

;i = 1

n

{(1 − F�[( − Ziba − (spa )/spp ep) (/ 1 − 2spa s/ �pp

�

)1 2/ ])f(ep)

+ F�[(1 − Z i ba − ( )ssa /sss es ) (/ 1 − 2ssa )/sss1 2/ ]f �(es)}� ��

��

where f (.) and F(.) are the normal density and cumulative distributions; spa, ssa arecovariances between ep and ea and between es and ea respectively; spp and sss arevariances; and saa is normalised to one.

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SEGMENTED LABOUR MARKETS: THEORY AND EVIDENCE …kumlai.free.fr/RESEARCH/THESE/TEXTE/INEQUALITY/Segment/leontarid… · unexplained many major labour market policy issues such as