Overview
The theory of labor market segmentation contrasts to the views of neo-classical economic theory, which posits the existence of a unified market for labor, consisting of buyers and sellers in open competition with each other. The labor market is seen as functioning in the same way as other markets. In this model, the only difference between different workers' wages and conditions arise from individual differences in their human capital (skills, experience, or formal education) or tastes. On the latter, as part of the theory of compensating wage differentials those who prefer risky or dirty jobs receive higher wages or salaries than those who take safe or clean ones. Put another way, differences in compensation for labor arise only on the supply side.
In the theory of labor market segmentation, there exists important differences on the demand side which imply differences in compensation and the like that are not explained by individual workers' characteristics. Since labor markets are far from perfect, non-market institutions such as craft unions and professional associations play a role, as do the different strategies employed by employers, in producing different results for workers with similar characteristics. Typically, labor market segmentation splits the aggregate labor market between the primary sector and the secondary sector.
Read more about this topic: Labor Market Segmentation