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Labor market flexibility refers to how quickly a firm responds to changing conditions in the market by making modifications to its workforce. A flexible labor market allows employers to make changes in response to supply and demand issues, the economic cycle, and other market conditions.

But a truly flexible labor market only exists when there are few labor force regulations in place. When this is the case, employers are able to set wages, fire employees, and change employee work hours at will. And the changes can go either way.

During tough economic times, for example, an employer that has high flexibility can cut wages and increase the number of hours that employees are expected to work to boost productivity. Conversely, when the economy is strong, the same employer may decide to give employees a slight raise and cut back on their hours.

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