Segmentalism

Segmentalism is a system of labor arrangement in which wages are set above market clearing levels. This can be done either through the cooperation of labor and capital, or unilaterally. The benefit to capitalists is efficiency. If wages are high, there is high demand for positions, and employees are reluctant to leave. Because employees are more loyal, happier, and more likely to stay, the firm can make co-specific investments with them without worrying about those investments leaving the firm. Investment banking is a good example of this industry. Economic downturns destabilize this arrangement because competing firms can set up new enterprises and compete on price, while the old segmentalist firms are forced to maintain their benefits or their people.

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