Externalisation or internalisation of employment? HR Management

In the competitive model of the labour market, employment is externalised. There is no commitment to providing long-term employment. Wage rates are set in line with what appears to be the‘going rate’ in the local labour market. In other words, labour is a variable factor of production. The advantage to employers of employment systems based on open external labour markets and occupational labour markets is that they can minimize labour costs by quickly adjusting the size of their workforce in response to changes in their production requirements.

In the case of open external labour markets, where wage rates are set in line with the ‘going rate’ in the market, employers can be sure that they are paying the minimum that is necessary to attract a supply of workers. However, there are powerful reasons for internalising employment within the firm, at least to some extent. Internalisation includes a variety of measures that create, to varying degrees, a long-term employment relationship that is, also to varying degrees, insulated from external labour market pressures.

Efforts are made to retain existing workers. Wages are set according to internal criteria, such as job evaluation or the need to motivate and reward performance, rather than by reference to an external ‘going rate. Rather than being a variable cost, labour becomes a quasi-fixed cost. In such cases firms tend towards an employment system based on an internal labour market. Employment systems are shaped by a wide variety of factors that can be grouped into the following categories:

  • the nature of employers’ labour requirements;
  • organisational constraints;
  • workers’ pressure and influence;
  • features of the wider labour market context;
  • the influence of non-labour market institutions.

Employers labour requirements

One view of employment systems is that they represent different ways in which management addresses three fundamental issues with respect to labour:

  • how to obtain and retain an appropriately skilled workforce;
  • how to ensure that workers deliver the levels of effort and the quality of performance that management requires for profitable or cost-effective production;
  • how to achieve the first two objectives in such a way as to minimise employment costs relative to output.

How they do this – the employment strategy that they follow and the employment system that develops from it – will depend on the specific nature of their labour requirements, i.e.:

  • the extent of their need for a stable workforce;
  • the relative importance of transferable and firm-specific skills;
  • the extent of their need for workers’ active consent and cooperation in production.
  • The need for a stable workforce

    The influence of labour turnover costs

    The basic competitive model of the labour market assumes that the only cost to the employer of hiring workers is the wage that has to be paid. Consequently, replacing workers who leave does not add to costs. This means that the workforce at any point in time is disposable and the employer has no particular interest in retaining current workers in preference to hiring new ones from outside the firm. In practice, however, it is costly to replace workers who leave. The main costs are:

    • Disruption of production owing to the unplanned reductions in the workforce that result from workers leaving. There is usually a delay in replacing workers who leave because of the time it takes to advertise the vacancies and recruit a pool of job applicants and select from among the applicants. Once selected, new workers may also have to work out a notice period with their previous employer. During this time there may be a loss of production, causing revenues to fall.
    • The costs of recruitment and selection, such as the financial costs of advertising for recruits and the cost in terms of management time spent in recruiting and selecting replacements.
    • The costs of training new recruits. These include more than just the direct costs of providing training, such as materials and equipment, paying trainers, etc. It also includes the costs in terms of reduced output while the new recruits are being trained.

    While undergoing training, new recruits are less productive because they are not fully occupied in production and neither are they fully competent. Where training includes a significant element of on-the-job training by experienced workers, the time spent training new recruits will also reduce the experienced workers’ productivity. Even after completing their training, new recruits may not be fully competent until they have gained some further experience in the job.

    This means that employers may have a strong interest in limiting the extent of labour turnover. They will prefer to retain ‘insiders’ – those currently employed – to having to replace them with ‘outsiders’ drawn from the external labour market. In order to retain workers and reduce labour turnover, employers can adopt a variety of policies:

    • Deferred benefits. These are benefits that are contingent on workers remaining with the organisation. Examples are company pensions and holiday entitlements that become available only after a minimum period of service.
    • Seniority wages, whereby pay increases with length of service. Where the cost of replacing workers is high, the addition to wage costs by ‘paying for seniority’ may be less than the costs saved by reducing labour turnover.
    • Avoidance of redundancy dismissals during temporary downturns in production. Employers will try to avoid laying off workers by not replacing those who leave, cutting overtime and introducing ‘short time’ working. This is because, should the employer dismiss workers, there is no guarantee that they will be available when production recovers. The employer would then have to incur the costs of recruitment, selection and training. If these costs are perceived to be high it may be worth the employer’s while to retain workers even if they are temporarily under-employed.
    • During upturns in production, employers may initially prefer to achieve higher output by increasing the output of the current workforce, for example through overtime working, before hiring additional workers. This is because the costs of overtime working may be lower than the costs of recruiting, selecting and training new recruits. Only if employers become confident that the increase in demand is going to be sustained will they add to the size of the workforce.

    Policies such as these internalise employment by fostering long-term employment relationships and giving workers a degree of protection from external labour market pressures. Employers prefer to retain their current workforce to incurring the costs of replacing them with outsiders. However, measures to create stable workforces, such as pension schemes and other incentives to remain with the organisation, are themselves costly. Therefore the extent to which employers seek to internalise employment depends on the cost of labour turnover. The lower the costs of labour turnover, the less the incentive for employers to internalise employment.

    The need to protect investments in training

    When firms invest significantly in training their employees they will want to keep them once they are trained. This creates pressures for internalisation of employment and can be seen as an extension of the costly labour turnover argument above. The basic competitive model of the labour market assumes for simplicity of analysis that workers come to firms with the skills that are needed for their jobs. In reality this is often not the case, particularly for new entrants to the labour market.

    This is because many skills can only be learned through practical experience on the job in addition to off-job training. Training is usually seen as an investment in human capital, i.e. there is an initial cost of training (the investment) that increases skills (the addition to human capital) that produces a return on the investment in the form of higher productivity and higher wages.

    One of the main costs of investing in training from the employer’s point of view is that workers are not very productive while they are being trained, so during the training period the value of what they produce is less than the cost of their employment to the employer. Once trained, however, the value of their output starts to exceed the costs of employment and the firm begins to get a return on its investment. However, the employer will only get a positive return on that investment if the employee, once trained, stays with the firm for a sufficient length of time.

    The greater the training investment by the employer, the longer the period that workers have to stay with the firm before it can get a return on its investment and the greater the loss should they leave during that time. The need to retain trained workers will reinforce pressure on employers to offer deferred benefits, long-term employment security and the possibility of further training, internal promotion and career progression.

  • Transferable versus firm-specific training and skills

    As shown above, occupational labour markets arise when workers have skills that are transferable from one firm to another. These skills are often acquired through formal training that leads to a certified qualification that serves as proof of ability. Occupational labour markets are efficient institutions for matching workers with defined occupational skills to jobs that have been designed to use them. In this respect they are in line with the competitive model of the labour market, which assumes that workers already possess the skills needed for their jobs when they are hired, as skills are acquired through training outside the firm.

    Also, the skills that are acquired are assumed to be transferable, that is, equally useful in all firms. However, employers frequently require firm-specific skills. Firm-specific skills are needed when a firm designs jobs in such a way that they do not match existing occupational skills. In such cases, firms will have to provide their own customised training for workers. Because the training is specific to a particular firm the skills it imparts are not transferable to other firms.

    Therefore firm-specific training and skills only increase the value of the worker (and hence their wage) in the firm where the training is provided. This provides an incentive for the worker to remain with the firm in which he or she was trained. How does a need for firm-specific skills arise? It may be that the firm in question operates an idiosyncratic technology. In other words, the firm’s technology is dissimilar to that of other firms. This means that workers who are not already employed in the firm will not be trained in the use of the technology.

    The training that workers are given will of necessity be specific to the firm. Because the technology is not widely used, this training will be of little use to workers should they leave the firm. Technological idiosyncrasy is less unusual than might be imagined. Not only does equipment vary significantly between firms, even in the same industry or sector; even where it is similar it may be configured differently, leading to differences in work organisation and to jobs being designed differently across firms.

    Workers trained in the operation of one firm’s system will be less competent in the operation of another and may well require further training. Designing jobs so that they require firm-specific skills creates a strong basis for internalizing employment. It becomes easier to develop and promote an existing employee into a vacancy than hire someone from outside. This is because the insider’s familiarity with the internal systems and routines of the firm and its technology means that they require less formal training before they become competent in their new role than an out- sider does.

    It also increases the mutual dependence of the employer and the employee. Management’s dependence on the existing workforce is increased because they alone possess firm-specific skills. This protects them from competition from outsiders. At the same time the workers are more dependent on their current employer because their skills are not marketable in other firms and loss of their current job would mean a reduction in pay. Moves from transferable to firm-specific skills are, therefore, strong forces promoting internalisation of employment and the development of internal labour markets.

  • The need to gain workers’ cooperation in production

    A further assumption behind the basic model of the labour market is that workers exert full effort in their work and that issues of motivation do not arise. In reality, workers can and do control and limit their effort levels. What employers want from workers is actual productive effort. What they get when they hire workers is their productive potential. The extent to which productive potential is utilised, that is, the actual level of effort provided by the worker, cannot be determined at the time the worker is hired and is dependent on a number of factors, one of which is the worker’s own motivation.

    One of the functions of management is to ensure that workers’ productive potential is converted into desired levels of actual productive effort because if this does not happen, firms will be paying for effort that is not being supplied and their costs will be increased. Of course, this begs the question of what is a reasonable level of effort relative to the wage and this is one of the most frequently contested issues between workers and management.One way of trying to ensure that workers supply the required level of effort is by subjecting them to direct control (Friedman, 1977).

    Traditionally, this took the form of direct personal supervision by a superior and externally imposed discipline. Today, direct supervision is supplemented with electronic surveillance, ‘mystery customers’ and customer questionnaire surveys in a managerial effort to make workers’ effort levels increasingly visible. Supervision is, however, costly and in certain circumstances the costs of implementing effective supervision may be so high that it is impractical as a means of ensuring workers’ compliance.

    These circumstances arise when the nature of the product or the production process makes it difficult to define what the appropriate effort levels are for each worker and to measure how hard they are actually working. Normally effort is defined and measured in terms of outputs achieved during a defined time-span, such as a working shift. However, this is not always straightforward. Some ‘outputs’, such as many services, are intangible and hard to quantify. Even when the product is tangible, the production process may involve complex links between operations that make it difficult to measure individual workers’ contributions to output.

    These problems become more intractable for managers when workers have detailed knowledge of the production process that managers do not. This makes it very difficult for managers to define appropriate effort levels without the agreement of workers. It also raises the possibility that workers might mislead managers about the level of effort needed to achieve a given level of output in an attempt to slow down the pace of work and/or increase their earnings.

    Heavy reliance on supervision and surveillance may also be counterproductive because of the resistance that it can generate among workers. Workers often perceive supervisors to be using their authority in arbitrary ways that fail to appreciate workers’ knowledge of production and disregard their concerns. Workers also often feel that close supervision means that management does not trust them. In such situations workers may resist managerial authority by restricting their effort levels and using what collective power they have to challenge management authority directly, for example by support for trade unions and possibly some form of industrial action.

    Alternatively, they may quit the organisation in search of more attractive working conditions. The costs of direct supervision mean that it is not always the best way for managers to obtain the levels of effort that they want from workers. The alternative is to encourage workers to exercise responsible autonomy at work (Friedman, 1977). In other words, it may be more cost-effective for managers to offer positive incentives to ensure that workers cooperate with management and use their job knowledge and their initiative to maintain and improve efficiency.

    These incentives are generally taken to include guarantees of long-term employment security, opportunities for training and internal promotion, fringe benefits and pay that is higher than the market rate. In other words, employment is internalised. The intention behind this is to generate a climate of trust between workers and management that provides a basis for cooperation and an incentive to high effort. It also raises the cost to the employee of losing their job should they fall short of the standards demanded by management.

    As shown above, the extent of employers’ reliance on positive incentives to effort is related to the complexities of the production process and workers’ tasks. This suggests that positive incentives to effort will figure more highly in the management of highly skilled workers than low-skilled workers. From this it is tempting to argue that incentives to internalise employment will be greater where skilled workers are employed rather than unskilled workers.

    However, while this may be largely true, it is important to recognise that employers often rely on workers’ willingness to exercise a degree of responsible autonomy even when little skill is required, and that even low-skilled jobs require some training. Managers in service sector organisations often regard workers’ attitudes and behaviour towards customers as being important to the organisation’s success. This is particularly important for organisations that compete on the quality of their service and whose workers can control the way in which they interact with customers

    Because of this, employers often provide training to enhance workers’ interpersonal skills and rely on a significant degree of voluntary cooperation from even relatively unskilled workers. This limits the scope for developing casualised employment systems. This is illustrated in the activity box overleaf. This example shows that although supermarket employees do not possess significant firm-specific skills, the two companies in question depended on them to develop attitudes and behaviours that create a favourable impression among customers.

    Therefore they had to offer terms and conditions that enabled them to achieve this and this meant offering permanent jobs to the majority of their employees. This differentiated them as employers from other supermarket chains that compete mainly on price rather than on quality of service and therefore seek to keep labour costs as low as possible. Here we can see that the need for cooperation limits the extent to which these employers felt able to operate extreme versions of the open external labour market.

  • Labour requirements and employment systems – summary

    Different employment systems can be seen as ways in which firms seek to minimise the total costs of employment, including costs of turnover and the costs of gaining workers’ cooperation in production. These costs vary according to the technology of production and the levels and types of skill that employers require. Incentives to internalise employment will be greater where:

    • Costs of labour turnover are high. Costs of turnover will be higher the more the employer has to invest in training workers.
    • There is a need for firm-specific training and skills.
    • Costs of direct supervision are high and there is a need for workers to use their initiative and judgement to ensure the efficiency of the production process.

    Conversely, there will be little incentive to internalise employment where turnover costs are low, employers invest little in training, firm-specific training and skills are unimportant, and desired effort levels can be achieved through various forms of direct supervision. It is possible to use this analysis to generate some hypotheses concerning the type of employment system that firms will develop as a result of their labour requirements. These are illustrated in Figure.

    The idea that an organisation’s employment system should provide the most efficient way of meeting its labour requirements is central to the concept of strategic human resource management. As shown in Chapter, there is an emphasis within HRM literature on the need for ‘fit’ between HRM policies and wider business strategy. Labour requirements are derived from competitive strategy in the product market. The analysis above indicates specific ways in which the employment systems of organisations reflect their strategic labour requirements from this point of view.

    This is a useful approach, since it focuses attention on how firms can act rationally to minimise labour costs, including those of labour turnover and supervision. However, it would be misleading to argue that there is a simple, direct link between firms’ labour requirements and the degree to which they internalise their employment systems. It is not just employers’ labour requirements that determine employment systems, but a broader range of factors that includes organisational constraints, workers’ pressure, the labour market environment and the wider institutional environment in which organizations operate.

Organisational constraints

Managers are constrained in their choice of employment system by features of their organisation such as size, financial and managerial resources. These constraints mean that what management may desire in principle cannot always be achieved in practice. During 1998 two leading supermarket chains converted two-thirds of their temporary staff onto permanent contracts. Temporary workers had been hired to cope with seasonal peaks in demand or to enable stores to adjust more easily under uncertain trading conditions.

However, workers who remained on temporary contracts for too long lost motivation and this had a damaging effect on the quality of customer service. Other problems that managers associated with employing workers on temporary and zero hours contracts were lack of training and difficulty of communication. The size of an organisation has considerable effect on the financial and managerial resources that it possesses and hence on its ability to develop particular types of employment system.

Large organisations have greater financial resources than small ones and can support a wider range of specialist management functions, such as a human resource management function. Their financial resources also make them better able to provide favourable terms and conditions of employment and finance long-term investments in training. Opportunities for promotion are also greater in large organizations than in small ones. An organisation’s size therefore has a significant influence on the likelihood that it will develop an employment system based on an internal labour market. For the reasons just given, internal labour markets will be more likely in large organisations, less so in small ones.

Small firms are more likely to have to rely on systems based on occupational or open external labour markets. This may create dilemmas for managers of small firms who wish to have long-term, stable and committed workforces. It is evident at this point that employers’ labour requirements are often complicated and that management’s choice of strategy is constrained by features of the organisation itself. Nevertheless, it is still possible to argue that employment systems embody management strategies. But this proposition becomes open to question once the influence of workers is taken into account.

Employment system chosen as a result of labour requirements

Employment system chosen as a result of labour requirements

Employee pressure and influence

Pressure from employees can exert a powerful influence on how an organisation’s employment system develops. Workers have an interest in trying to protect themselves from the risks and uncertainties of a labour market that is otherwise controlled by employers. Workers have played an important role in the development of occupational labour markets through the actions of their trade unions. Historically, trade unions have imposed or negotiated rules that restrict entry to occupations and prevent employers from replacing workers being paid at union rates with cheaper, unqualified labour.

In some cases unions gained considerable control over the labour market and were able to use this to boost wages and protect the employment of their members. Pressure from workers can also generate internal labour markets. Writers such as Kerr (1954) and Osterman (1984) have argued that internal labour markets are, in part at least, the outcome of workers’ and unions’ attempts to improve conditions of employment for those employed in firms by protecting them from competition from outsiders.

The following quote from Osterman (1984) makes the point clear.

What Osterman is saying is that where workers stay with the same employer for a long time they develop a sense of group identity. This forms the basis for group norms concerning what is a reasonable level of effort in relation to pay and other rewards. It also provides a basis for collective organisation and action by workers to establish rules that shelter them from competition from outsiders and limit management’s freedom to hire, fire and redeploy labour and alter the pay structure.

These rules can be established formally by trade unions negotiating agreements with employers, or informally by groups of workers on the shopfloor putting pressure on managers to accept them as ‘custom and practice’. Once these rules have been established they are difficult to remove because of workers’ ability to act collectively to maintain and even extend them. The influence of workers means that employment systems are not necessarily determined simply by management’s labour requirements. Where workers are able to develop significant bargaining power, employment systems represent a compromise between the conflicting goals and priorities of workers and their employers.

The labour market environment

All organisations operate within a wider external context that comprises their product markets, the markets for their inputs, i.e. labour, capital and raw materials, and political, economic and legal environments. The labour market environment provides employers with various ways of defining their labour requirements and meeting them. At the same time it constrains their choice by making some routes harder to follow than others. The relevant features of the labour market environment are as follows:

  • the overall state of the labour market as measured by the unemployment rate and the number of unfilled vacancies;

If a group of workers remains in the same firm for some time, then a set of expectations, or customs, will develop. These expectations, which can be enforced through non-cooperation or even sabotage on the job, tend over time to become codified into a set of rules. The process of unionisation speeds this up and formalizes it, and hence many internal labor markets emerge out of unionisation drives. However, even in non-union situations customary rules and procedures and the force of group expectations can lead to internal labor markets.

  • the operation of labour market institutions such as the system of vocational education and training, the industrial relations system and the framework of employment law;
  • the pattern of labour market segmentation, in other words the extent to which the labour market is divided into advantaged and disadvantaged groups of workers and how.
  • The overall state of the labour market

    Low unemployment means that employers have to compete more actively for workers and it also means that workers have a wider choice of employment opportunities. This will lead to higher rates of labour turnover as workers leave organisations for better jobs elsewhere. In response, firms may adopt policies aimed at retaining employees, since vacancies arising from labour turnover will be hard to fill. The difficulty of filling vacancies through external recruitment will mean that there will be more internal promotion and redeployment and this may necessitate increased investments in firm-specific training.

    While these responses might be seen as moves towards an internal labour market system, they are not driven by the technical and skill requirements of production or a long-term employment strategy but by immediate pressures from the labour market environment. These pressures may be reinforced by the increase in trade union bargaining power that results from low unemployment and unfilled vacancies. Once established, these practices may become embedded, although employers may seek to reverse them should labour demand slacken and unemployment rise.

  • The operation of labour market institutions

    Two major institutional influences on employment systems are how well the vocational education and training system ensures an adequate supply of skilled workers, and how the industrial relations system shapes relations between capital and labour. The system of vocational education and training at industry and national level plays a crucial role in influencing the extent to which employment systems are based on occupational labour markets. It was argued earlier in this chapter that for occupational labour markets to operate effectively there has to be a training system that ensures a plentiful supply of workers with transferable skills.

    This means a system that provides broad, all-round training for the occupation so that, once trained, workers possess skills that are transferable from one firm to another. It is also necessary that there is clear regulation of training and qualification standards so that employers and workers have confidence in them. Otherwise workers will see little point in undertaking training, as the qualification will have low status. Finally it is essential that there is an institutional mechanism for preventing ‘free riding’, that is preventing some firms from obtaining the benefits of trained labour without contributing to the costs of training.

    Without such a mechanism, firms that provide training for the occupation risk having their trained workers ‘poached’ by competitors who do not train. This makes firms less willing to bear the costs of training workers in transferable skills. Therefore firms will invest less in training workers to develop transferable skills and this will reduce the supply of labour with these skills further. In the absence of institutions that support training in transferable skills firms will, over time, act in one of two ways. One way is to redesign jobs on the basis of firm-specific skills to ensure that, once trained, workers stay with the firm. The other is to deskill jobs, i.e. redesign them so that they become simpler, thus removing the need for significant training.

    The first response encourages a move towards internal labour market structures. The second enables employers to externalise employment more completely because unskilled labour is relatively plentiful and so costs of turnover are low (Marsden, 1986). The system of industrial relations, including labour legislation, influences the development of employment systems through its effects on the balance of power between employers and workers. Strong trade unions and legal rights for workers raise pay, restrict employers’ freedom to hire and fire, and may put pressure on employers to provide training opportunities and promotion paths for workers.

    This has the effect of protecting employed workers from unilateral management action and from being exposed to competition from the external labour market. It can encourage occupational or internal labour markets, depending on the nature of the training system and the way in which collective bargaining between unions and employers is organised. Where unions negotiate detailed agreements with employers that cover all or most firms in an industry, the effect will be to provide a framework of regulation that supports occupational labour markets.

    Where unions negotiate with employers on a company-by-company basis there may be more of a tendency for firms to move towards internal labour markets. Conversely, if trade unions ar weak and workers are granted few legal rights, employers have a freer hand to hire and fire and determine terms and conditions of employment unilaterally. Therefore they will be freer to determine their employment systems in the light of their labour requirements and the constraints imposed by their size and financial and managerial resources.

  • The pattern of labour market segmentation

    Some theorists have argued that the existence of different types of labour market reflects the division of the labour market as a whole into privileged and underprivileged, advantaged and disadvantaged segments. The advantaged segment, often referred to as the primary sector, is characterised by internal labour markets and institutionally regulated occupationa labour markets. Workers enjoy high earnings, good working conditions, opportunities for training and promotion, and considerable employment security.

    These are the ‘good jobs’. The disadvantaged segment or secondary sector is characterised by open external labour markets. Workers in this sector have low status and pay, poor working conditions, no significant access to training or promotion (they are in ‘dead end’ jobs), and experience considerable employment insecurity. These are the ‘bad jobs’. How good and bad jobs get created has been a matter of ongoing debate surrounding the theory of labour market segmentation.

    One line of explanation, advanced by two economists, Doeringer and Piore (1971), is based on the analysis of employers’ labour requirements outlined above. Some firms face strong pressures to develop internal labour markets in order to train, develop and retain suitably skilled workers and gain their voluntary cooperation in production. Others do not and are able to meet their labour requirements by drawing on open external labour markets. Another explanation (Gordon et al. 1982) is that some firms enjoy monopoly power in their product markets and are able to use this power to increase the selling price of the product, thereby increasing profits.

    Some of these companies will be faced by workers who have developed strong trade unions that can use their bargaining power to gain a share of these profits in the form of high wages and other benefits, including job security provisions. Management seeks to limit union solidarity and bargaining power by dividing the workforce into horizontal segments and offering the prospect of promotion to those who are cooperative and trustworthy. Meanwhile, firms that are unable to use monopoly power to raise their prices do not have surplus profits to share with trade unions, so terms and conditions of employment will be less favourable.

    Since it is more likely that large, rather than small firms are able to exercise monopoly power, primary sector employment will be concentrated in large rather than small firms. One of the central predictions of the labour segmentation thesis is tha there will be little movement of workers between the primary and secondary sectors of the labour market. Workers in the primary sector are unwilling to move to the secondary sector and the high level of employment security that they enjoy means that they are unlikely to be forced to do so through job loss.

    Workers who make up the disadvantaged segments of the labour market are unable to move up into the primary sector because employers see them as undesirable candidates for jobs. Primary sector employers want disciplined, cooperative workers with good work habits. Thus when selecting from applicants for jobs, primary sector employers will tend to reject those with unstable employment histories that involve frequent unemployment and job changes because they will assume that this indicates a poor-quality worker.

    This will automatically rule out secondary sector workers, regardless of their personal qualities, since by definition secondary workers are in unstable, insecure jobs. It is also the case, however, that because of their experience of poor work, some secondary sector workers will tend to develop negative attitudes to work and poor patterns of work behaviour that reinforce employers’ prejudices against secondary sector workers as a whole. These explanations for labour market segmentation emphasise the way in which firms’ employment decisions influence the wider labour market by dividing it into advantaged and disadvantaged groups. The question of whether the labour market is divided into primary and secondary sectors as a result of employers’ labour policies has generated considerable debate.

    Numerous empirical studies to test the theory have been carried out in Britain and the United States, with mixed results (see Joll et al., 1983; King, 1990 for a discussion of these). However, these are not the only explanations for the presence of disadvantaged groups in the labour market.

    Labour market segmentation can and does occur as a result of ‘broader social forces leading to discrimination within the labour market’ (Rubery, 1994: 53). Discrimination in the labour market means that workers’ chances of gaining access to ‘good’ or ‘bad’ jobs are heavily and unfairly influenced by non-work characteristics such as gender, race, class, work-unrelated disability and age. Thus two equally skilled workers will find themselves in different sectors of the labour market because one is a white male from a middle-class social background and the other is a working-class black woman. This reflects deep-seated patterns of discrimination within society in general as well as in the labour market.

    To take ethnic minorities as one example, the return to investments in education, that is, the amount that each extra year of education beyond minimum school-leaving age adds to lifetime earnings, is lower for most ethnic minority groups than for comparable white workers. This may be due to any or all of the following reasons that reflect patterns of racial discrimination:

    • Ethnic minority workers suffer unfair discrimination when they apply to enter higherpaying occupations and/or when employers are considering candidates for promotion.Therefore they get crowded into low-paid jobs.
    • Ethnic minority workers are paid less than whites for doing the same jobs or jobs that are of equal value.
    • Unfair discrimination means that ethnic minority workers are disproportionately likely to experience unemployment, so they spend less time in work and their lifetime earnings are reduced.

    Women also occupy a disadvantaged place in the labour market, although their position relative to men does seem to be improving in some respects. Women’s employment disadvantage reflects deep-seated societal norms concerning the family and the respective roles of women and men in domestic roles and paid work. Women take a disproportionate share of domestic labour and still tend to be regarded as secondary income earners. The domestic roles played by many women mean that their employment opportunities are restricted geographically and contractually.

    This is particularly true of women with children. In the absence of highly developed systems of childcare, childcare responsibilities mean that many women cannot travel long distances to work and also that they cannot work ‘standard’ hours. Therefore they are restricted to part-time work in the immediate locality. This means that they have limited choice of employment and therefore little bargaining power and may have to accept secondary sector terms and conditions of employment.

    The effect of such institutionalised patterns of discrimination is to increase the range of options open to employers. The presence of disadvantaged groups in the labour market means that some employers can fulfil their requirements for a stable, cooperative workforce without having to offer the positive incentives associated with internal labour markets or regulated occupational labour markets (Rubery, 1994). This is because, as indicated above, disadvantaged groups have few employment alternatives so they have to take what they can get.

    The absence of better alternatives makes these jobs more attractive than they would otherwise be and therefore more highly valued by workers. This is reflected in the willingness of many disadvantaged workers to remain with their employer and cooperate with management in order to keep their jobs.

Non-labour market institutions

Finally, employment systems are influenced by institutional arrangements that lie outside the labour market. As shown above, the family as a social institution is one of the main bases for defining gendered roles in employment and as such contributes to women’s disadvantage in the labour market. Another example of wider institutional influence on employment systems is the system of company finance. In the United Kingdom and the United States, financial systems are based on active stock markets, with investors buying and selling shares in order to maximise the value of their holdings on a yearly, monthly or even daily basis.

This puts great pressure on managers to maximise the short-term financial performance of their companies. In order to do this, they minimise their expenditure on long-term investment because the amount invested counts immediately as a negative item on the balance sheet while the returns, which count on the positive side, do not start to accrue for some time. Therefore large long-term investments make shortterm financial performance look poor. This leads to a fall in the share price and to threats of hostile takeovers, which threaten managers’ jobs.

The pressure to minimize long-term investment means that firms will invest relatively little in training and developing employees. Pressure to maximise short-term performance also puts pressure on firms to avoid committing themselves to long-term employment security for workers because if demand falls they need to be able to reduce costs quickly by cutting the workforce. Where financial systems are based more on bank credit, as in Germany, there is less pressure to maximise short-term profits and more scope for managers of firms to take a long-term view of how to grow the company.

This means that they will be readier to make long-term investments in training and equipment and will be more prepared to commit themselves to providing long-term employment security for workers. Recently a do-it-yourself supermarket chain announced that it was hiring older people to work part-time in its stores because they had better interpersonal skills than young workers did and they were more loyal and committed.

In order to explain how employment systems develop it is necessary to take a wide range of influences into account. These are summarised in Figure. From the diagram it is possible to see how the various factors discussed above interact with each other to influence employment systems in complex ways. For example, an organisation might require a stable, cooperative workforce. This might suggest that the employment system should be internalised to a significant extent, e.g. above-average pay and benefits, long-term job security and career prospects.

This could pose difficulties for organisations that are constrained by small size and limited financial resources or by pressures from financial institutions that judge firms on their short-term financial performance. However, as long as there is no need for a significant level of organisation-specific skill, it might be possible to attract such a workforce without having to internalise employment if the firm can draw from disadvantaged labour market groups.

Yet again, the extent to which this is possible will be influenced by the power of workers to influence terms and conditions of employment through trade unions and collective bargaining as well as the extent to which employment practices such as fixed-term and temporary employment are restricted by legislation. Therefore we can say that:

  • An organisation’s employment system is the outcome of the combined effects of firms’ labour requirements, organisational constraints, pressure from workers, the labour market environment and the wider institutional environment.
  • The wider institutional environment interacts with the labour market environment. Social institutions such as the family and institutionalised patterns of behaviour such as racism contribute to the presence of disadvantaged groups in the labour market. At the same time, labour market pressures may generate pressures for change in wider social institutions; for example, the growing participation of women in the labour market is beginning to challenge the traditional gendered division of family roles.
  • The labour market environment affects how employers define their labour requirements.

For example, the nature of the vocational training system will influence the extent to which firms organise production on the basis of low skills, firm-specific skills or transferable skills.

Influences on the development of employment systems

Influences on the development of employment systems

  • The labour market environment influences the nature and extent of workers’ ability to influence employment systems. For example, where trade unions and collective bargaining are highly developed, workers can exert more pressure on employers than where unions are weak and collective bargaining is uncommon. The presence of disadvantaged groups enables some firms to meet their requirements for stable, committed workers without having to offer primary sector employment conditions.
  • Organisational constraints reflect features of the wider institutional environment, for example how the financial system influences the financial resources available for long-term investment in the workforce.
  • The ways in which organisations develop their employment systems feed back into the wider labour market environment. For example, organisational responses to skill shortages such as poaching undermine occupationally based training systems and contribute to the decline of occupational labour markets. How organisations select their workforces can reinforce or modify patterns of labour market segmentation.

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