Jobs on the wire: In search of the perfect labor market

The Internet as the most recent development in communication technology might dramatically reduce transaction costs and thereby lead to the emergence of a nearly perfect market. This would have drastic implications for labor markets and the social security system. In the first part of the paper, the influence of the Internet on transaction costs is examined. It is shown that the Internet will not necessarily lead to a decrease of transaction costs. Therefore, it is not clear whether the Internet will promote a perfect labor market. Moreover, it is shown that an outsourcing to the Internet will only take place for certain jobs which can be easily standardised. The second part of the paper shows what an Internet‐based labor market may look like. To show this, the model of monopolistic competition is used. A result of these considerations is that an increased outsourcing to the Internet may lead to a kind of association of freelancers. This revised version was published online in June 2006 with corrections to the Cover Date.