What is a labour market, and how should it work? One common response to this tricky question lies in the field of logic. To understand what I mean, consider the following syllogism:

• • markets balance when prices are allowed to match supply and demand (major premise);

• • the labour market is a market (minor premise); and

• • therefore, the labour market will balance when prices (wages) are allowed to match supply and demand (conclusion).

It is not an exaggeration to suggest that this simple syllogism lies beneath much of European policymaking as it applies to labour markets. We find it rising to the surface when policymakers use rigid wages, strong labour unions and/or excessive regulations (for example, those that benefit market insiders at the expense of outsiders) to explain Europe's unemployment levels.

The foundations for this argument are simple: we have a great deal of work in the field of economics that helps us to understand how markets function – in theory (the major premise). We assume that the labour market is like other markets (the minor premise). We can then conclude that a well-functioning labour market is one that facilitates price (wage) flexibility, so that the market can clear – that is, there will be no unemployment (the conclusion).

Syllogisms offer the strongest form of logical argument. As long as both premises are true, the conclusion must be true as well. But the strength of the conclusion in a syllogism rests critically on the truthfulness of the underlying premises, and there are very good reasons to doubt the minor premise here. In this chapter, I argue that the labour market is not like other markets. In arguing this, I take aim at the underlying conclusion in the syllogism previously described: that the market for labour will clear by encouraging greater factor mobility, expanding the market for buyers and sellers, and by encouraging price (wage) flexibility.

To begin with, let us start with the mainstream approach to economics. Traditionally (that is, in classical approaches), economists lean on Say's law to assume that full employment is the normal state of an economy: any deviation from the ‘full employment’ state is regarded as abnormal. In this approach, the supply of labour (workers’ willingness to work) creates its own demand, so we needn't worry about problems of overproduction and unemployment.