The Reemergence of Segmented Labor Market Theory

Abstract

According to dual labor market theory, the labor market can be usefully described as consisting of two sectors: a high-wage (primary) sector with good working conditions, stable employment, and substantial returns to human capital variables such as education and experience, and a low-wage (secondary) sector with the opposite characteristics. Moreover, primary jobs are rationed, that is, not all workers who are qualified for primary sector jobs and desire one can obtain one. Finally, the sector of the labor market in which an individual is employed directly influences his or her tastes, behavior patterns, and cognitive abilities. Thus the dual labor market model or, more generally, segmented labor market models, is simultaneously a description of the income distribution, a claim about the absence of market clearing, and a radical departure from the standard neoclassical assumption of fully rational actors and exogenously determined preferences. While this last element is potentially the most interesting, even its proponents fail to give it the attention it deserves, and related work has not been incorporated into the segmented labor market model. In this paper, we therefore concentrate on the first two elements of the model. Segmented labor market theory was sufficiently popular in the late 1960's and early 1970's to be taken seriously by prominent mainstream labor economists. However, two influential and largely negative reviews (Glenn Cain, 1976; Michael Wachter, 1974) portrayed the segmented labor market hypothesis as largely atheoretical and based, at best, on questionable statistical analysis. It seems fair to say that even sympathetic mainstream critics felt that key insights from the segmented labor model could be incorporated into neoclassical analysis and that the remaining elements of the model did not form a sufficiently coherent theory to pose a challenge to the neoclassical model. Whatever the merits of this perception, it is clear that advocates of the segmented labor market approach did not develop a formal theory which conformed to the standards of mainstream economists. With some notable exceptions (Michael Piore, 1975; David Gordon, 1972), the work was atheoretical. Moreover, the empirical methods used tended to fall outside the norm (for example; interviews, observational studies, and historical and institutional analysis). Advocates of the segmented labor market perspective, mostly radical political economists, chose instead to develop their own research program outside the mainstream. The reemergence of segmented labor market theory is linked with the reversal of these two tendencies. The theory has been pursued by economists using modern tools of imperfect information theory and state-of-the-art econometrics. As a result, the approach has again attracted the attention of the mainstream. Even a few years ago, it would have been a clairvoyant observer who predicted that Lawrence Summers would be working on a theoretical model of labor market duality (with Jeremy Bulow, 1986), that Robert Solow would count among his recent work a dual market model (with Ian McDonald, 1985) and that James Heckman would publish an article in which he undertook an empirical test of a dual market model, failed to reject the model, and then devoted much of the rest of the article to attacking his and other tests of the dual labor market view (see his article with V. Joseph Hotz, 1986). Since the theoretical developments are largely associated with efficiency wage and *Departments of Economics, University of California, Berkeley, CA 94720 and NBER, and Boston University, 270 Bay State Road, Boston MA 02215 and NBER, respectively. This study was supported in part by NSF grant no. SES-8606139. Lang acknowledges support from a Sloan Faculty Research Fellowship; Dickens acknowledges support from the Institute of Industrial Relations at Berkeley.