The degree of labour market flexibility is the speed with which labour markets adapt to fluctuations and changes in society, the economy or production.
The most common definition of labour market flexibility has been the neo-liberal definition. This entailed the ease of labour market institutions in enabling labour markets to reach a continuous equilibrium determined by the intersection of the demand and supply curves. In the words of Siebert, labour market institutions were seen to inhibit "the clearing functions of the market by weakening the demand for labor, making it less attractive to hire a worker by explicitly pushing up the wage costs or by introducing a negative shadow price for labor; by distorting the labor supply; and by impairing the equilibrating function of the market mechanism (for instance, by influencing bargaining behavior)."
The most well-known concept of labour market flexibility is given by Atkinson. Based on the strategies companies use, he notes that there can be four types of flexibility.
External numerical flexibility is the adjustment of the labour intake, or the number of workers from the external market. This can be achieved by employing workers on temporary work or fixed-term contracts or through relaxed hiring and firing regulations or in other words relaxation of employment protection legislation, where employers can hire and fire permanent employees according to the firms’ needs.
Internal numerical flexibility, sometimes known as working time flexibility or temporal flexibility, is achieved by adjusting working hours or schedules of workers already employed within the firm. This includes part-time, flexi time or flexible working hours or shifts (including night shifts and weekend shifts), working time accounts, leaves such as parental leave, and overtime.
Functional flexibility or organizational flexibility is the extent to which employees can be transferred to different activities and tasks within the firm. It has to do with organization of operation or management and training workers. This can also be achieved by outsourcing activities. Job rotation is a label given to many functional flexibility schemes.
Financial or wage flexibility occurs when wage levels are not decided collectively and there are more differences between the wages of workers. This is done so that pay and other employment costs reflect the supply and demand of labour. This can be achieved by rate-for-the-job systems, or assessment based pay system, or individual performance wages.
However, labour market flexibility refers to more than the strategies used by employers to adapt to their production or business cycles as it is in the definitions above. Increasingly, the common view is that labour market flexibility can potentially be used for both workers and companies, or employees and employers . It can also be used as a method to enable workers to "adjust working life and working hours to their own preferences and to other activities". As companies adapt to business cycles and facilitate their needs through the use of labour market flexibility strategies, workers adapt their life cycles and their needs through it (Chung, 2006).
The European Commission also addresses this issue in its Joint Employment Report and its new Flexicurity approach, calling for an adequate method to enhance flexibility for both workers and employers that is “capable of quickly and effectively mastering new productive needs and skills and about facilitating the combination of work and private responsibilities.” ETUC also emphasizes the importance of the development of working time flexibility as an alternative to implementing external flexibility as the sole method of increasing flexibility in the labour market (ETUC, 2007).
In their report on working time, the Trades Union Congress has also argued that flexible working should be extended to all workers through stronger regulations (Fagen et al. for TUC, 2006). As authors Gerson and Jacobs agree, “flexibility and autonomy are only useful if workers feel able to use them” (Gerson & Jacobs, 2004, pg. 238).