Labour Market Flexibility And Productivity: Investigating The Role Of Human Capital In Emerging Countries

Abstract

This study examines the relationship between labour market flexibility and pro- ductivity, but with emphasis on the role of human capital in emerging economies. Labour market flexibility has primarily been regarded as a motivation for economic growth since it enables companies to adapt to shifts in market conditions through adjusting employment and wages. Alternatively, productivity gains are highly re- liant on labor quality, competence, and responsiveness. Human capital is thus the mechanism for adjusting the impact of flexibility in the labor market to economic performance. Based on theoretical assumptions and evidence, this paper discusses how productivity performance is influenced by labor market flexibility and adjusted by the availability and quality of human capital. The evidence points to the dual nature of flexibility: it can improve the efficiency of work, promote investment, and promote innovation, but undermine job security, wage protection, and long-term skill acquisition in its excess. The argument is even stronger though for develop- ing economies, where institutions, education systems, and labor market regulation are still in construction, so that the link between flexibility and human capital is even more pertinent. The conclusions are likely to shed light on how governments and policymakers can reconcile flexibility with investment in human capital in an attempt to achieve sustainable productivity growth. With cross-country data, the study makes a contribution to economic literature regarding competitiveness in emerging markets, human capital development, and the economics of work.