Internalized labour market systems became more widespread during the 1960s and 1970s. In the United States, salaried and industrial internal labour markets, first developed during the 1920s and 1930s, became increasingly widespread in large corporations during the 1960s and 1970s. Internal labour markets also began to develop more widely in the UK, despite the continued importance of occupational labour markets. Long-term employment and opportunities for internal promotion had been characteristic of the civil service, local government, banking and certain sections of retailing for many years.
However, a number of studies also found evidence of salaried internal labour markets for professional engineers and professional chemists (Mace, 1979; Creedy and Whitfield, 1986) and more restricted versions of industrial internal labour markets for skilled and semi-skilled workers in engineering (George and Shorey, 1985). Moreover, even though fully developed internal labour markets were far from universal in the UK, the salaried internal labour market was an important influence on the development of ideas concerning personnel management and human resource management during the 1970s and 1980s.
Increasingly, internalisation of employment came to be seen as best practice (Boxall and Purcell, 2003; Nolan and Slater, 2003). Corporations such as IBM, with highly developed salaried internal labour markets, were held up as examples of sophisticated personnel management and pioneers of human resource management.
Factors contributing to the internalisation of employment in the 1960s and 1970s
Increasingly, managers designed jobs on the basis of firm-specific skills. This was partly the result of differences in the ways firms made use of technologies of production. It was also partly a response to features of the labour market. This was a time of full employment, which meant that workers could move easily between jobs in search of higher pay or better conditions. This encouraged employers to develop ways of retaining workers and reducing labour turnover.
In some countries such as the USA, UK and France, the absence of a training system that produced an adequate supply of workers with transferable skills meant that firms increasingly designed shopfloor jobs to require limited firm-specific skills and trained their workers internally. In some other countries, notably Germany, the presence of highly effective apprentice training maintained a stronger basis for skilled occupational labour markets.
Steady economic growth during the 1950s and 1960s provided a foundation for increasingly large-scale enterprises geared to producing for stable mass markets. As firms grew in size and complexity they needed more supervisory and administrative staff. This in turn created more layers of hierarchy, which extended job ladders and opened up career paths. At the same time, stable long-term growth made it rational for firms to commit themselves to developing long-term career paths for more of their employees. Large enterprises also had the financial and managerial resources to develop internal systems of training and promotion and set up formal internal pay structures.
Trade union membership and influence rose during the 1960s and 1970s. In Britain, unions extended their membership and representation among white-collar workers during the 1970s, contributing to the development of salaried internal labour markets. In representing their more traditional constituency among manual workers they were also able to establish ‘seniority’ rules with respect to redundancy dismissals and restrict management’s freedom to hire and fire.
In a number of European countries, workers’ ability to influence employment systems was encouraged to varying degrees by legally supported structures of collective bargaining and co-determination, as in West Germany and Sweden, or the ability of unions to influence government legislation, as in France. In West Germany an elaborate system of collective bargaining and employee co-determination was established after the Second World War, supported and regulated by law.
German workers, through their representatives, were empowered to influence not only wages and hours but also procedures for ‘layoffs, promotion criteria, changes in working conditions, the use of overtime and of “short time”, and the introduction of new technologies’ (Osterman, 1988: 119). This resulted in management providing a high degree of employment security for incumbent workers in return for their acceptance of flexible working practices, i.e. broadly defined job roles and ‘willingness to learn new skills’ (Osterman, 1988: 123).
In France, new developments in collective bargaining after the political unrest among workers and students in 1968 led to enhanced ‘job security, vocational training, [and] salaried status for manual workers’ (Goetschy and Rozenblatt, 1992). In the United States, even though trade union membership peaked in the mid-1950s and declined thereafter, unions were increasingly successful in pushing up wages in unionised firms. This gave firms an increasing incentive to avoid unionisation.
Therefore, during the 1960s and 1970s, more employers began to introduce personnel policies that combined long-term employment security, training linked to internal promotion, high wages and employee involvement in an attempt to buy workers’ loyalty and avoid or weaken unionisation (Kochan et al., 1986).
The growth in trade union influence in most countries was supported by developments in the labour market. Unemployment was low throughout the 1950s and 1960s. This enhanced unions’ bargaining power and influence. However, the labour market retained long-established structural features. One of the most important of these was the gendered division of labour, leading to gendered patterns of labour market segmentation. Women continued to be regarded as secondary income earners.
The concept of the man as the main ‘breadwinner’ remained dominant. Consequently, long-term jobs and careers were developed for men rather than women. The fact that household income depended on male earnings shaped trade union demands, which were for better pay, greater job security and better prospects for wage progression for men. During the 1960s and 1970s there was also a growth of legislative protection for workers in many countries, e.g. restricting employers’ freedom to make workers redundant, and laws protecting workers from unfair dismissal.
Developments in the wider institutional environment affected labour market policy and trade union influence. The development of social democracy in Europe after the Second World War involved the fuller recognition of the place of workers and their organizations within the nation-state. This was reflected in a commitment by governments to maintain full employment and create and support welfare states. These commitments reduced, although by no means eliminated, the inequality of power in the employment relationship and thus gave workers greater power to influence their terms and conditions of employment.
The social democratic spirit also led to a greater degree of political legitimacy and support for trade unions, reflected in the development of ‘tripartite’ institutions of economic management. These involved trade unions, together with government and employer representatives, in decisions concerning economic and social policy. In addition, as shown above, the 1970s saw legal extensions of workers’ rights to participate in decision-making at workplace level in countries such as West Germany, Sweden and France.
Restructuring employment since the 1980s: the externalisation of employment?
Since the 1980s, large corporations, particularly in Britain and the United States but also in Europe, have undertaken processes of ‘restructuring’, aimed at reducing costs and improving responsiveness to more rapidly changing, intensely competitive and less predictable markets. Job cuts on a large scale have been a central feature of the process, as have new patterns of work organisation and changes to employment structures. The effect has been to weaken internal labour market structures (Cappelli et al., 1997; Boxall and Purcell, 2003: 121):
We can use the analytical framework developed in the previous section of this chapter to explain these developments.
The effects of sectoral change – the shift from manufacturing to services The proportion of workers employed in manufacturing has declined in the USA and all the major European Union economies since the 1970s. At the same time there has been absolute and relative growth in the number of people employed in the service sector. The decline of employment in manufacturing and the growth of the service sector have altered the nature of skills required by employers.
Manufacturing is more likely to make use of idiosyncratic technologies and to require firm-specific skills. The growth of service sector employment has been concentrated at two poles – high-level professional and managerial skills at one pole, and low-skilled jobs at the other. High-level professional skills are largely acquired through formal training leading to nationally or internationally recognised qualifications. These skills are predominantly transferable, so there is no strong incentive for employers to develop internal labour markets for these workers, as they can easily move between firms in search of higher rewards.
Under-performers can be dismissed and replaced with new hires from the external (occupational) labour market. At the low-skilled end of the labour market there are even fewer incentives for employers to develop internal labour markets. Even where certain behaviours are needed in order to ensure satisfactory levels of customer service, these are usually fairly rudimentary, easily learnt and transferable. Therefore there is only limited training investment and consequently little need to retain workers in order to protect long-term investments in training. Consequently, it can be argued that the shift away from manufacturing to service employment means that fewer employers have strong incentives to develop internal labour markets.
The effects of increased competition – cost reduction and labour flexibility Since the 1970s, organisations have been subject to increasingly intense pressure from three main sources. First, markets have become increasingly competitive as a result of the emergence of new low-cost areas of production in China, South-East Asia and the Pacific Rim and, recently, Central and Eastern Europe. International competition has been encouraged by tariff reductions and freer trade between countries as a result of long-term projects such as the European Union and the World Trade Organisation.
Within individual countries, government policies of privatisation and deregulation have encouraged domestic competition by enabling more firms to enter certain areas of economic activity, such as mail services, gas, electricity and water supply, telecommunications and transport. Competition has put pressure on producers to reduce costs as well as improve the quality of their products. Secondly, markets for goods and services have become more volatile. Customers are more demanding than they used to be and products become obsolete much more quickly.
As a result of these changes, organisations have to be more innovative and responsive to change. Furthermore, the level of market demand is subject to sharper and more frequent variations than used to be the case, which means that organisations also have to be able to adjust the level of their labour inputs in line with changes in demand for their output.
Organisational restructuringhas been the widespread response to these pressures. Efforts at organisational restructuring have focused on decentralisation of hitherto large, centralised corporations and reductions in headcount in an attempt to eliminate unnecessary labour costs. Increasingly, organisations have sought to cut costs by reducing the number of employees who are not contributing directly to production or service delivery. This restructuring of organisations consists of four main elements:
For example, unemployment across the 12 member states of the European Union (excluding East Germany) rose from 3.7 per cent in 1975 to 9.9 per cent in 1985 and was still 8.1 per cent in 1991. In 2001 the unemployment rate across the 15 member states was 7.4 per cent (European Commission, 1996, 2002). On the supply side of the labour market there has been a significant increase in the proportion of women in employment. Across the European Union the proportion of women aged 15–64 in employment rose from 45.1 per cent in 1985 to 54.9 per cent in 2001 (European Commission, 1996, 2002).
In the UK and the USA there has also been a significant increase in the number of young people in part-time employment. This reflects the growth in the number of young people in further and higher education, for whom part-time or temporary work is a convenient way of supplementing their income. In terms of Rubery’s analysis outlined earlier, these groups have swollen the secondary segment of the labour market, providing a pool of cheap yet compliant labour from which employers can draw and so avoid having to invest in positive incentives to obtain desired levels of behaviour at work.
Policies that are currently aimed at increasing labour market participation among ethnic minorities, women and older people may add to the disadvantaged segments of the labour market unless they are linked to improvements in educational and training opportunities and forms of regulation that deter employers from adopting ‘cheap labour’ policies. However, high unemployment and low rates of job creation have led to growing criticism of labour market regulation in many EU member states. It has been argued increasingly that high levels of protection against dismissal and restrictions on employers’ freedom to employ people on part-time and temporary contracts deter employers from creating new jobs.
The proposed remedy has been to increase labour market flexibility by reducing these protections and restrictions and in some cases by legislating to reduce the bargaining power of trade unions.Nevertheless, the European Union has not followed a simple course of labour market deregulation. Instead it has tried to encourage increased labour market flexibility within a reformed framework of regulation. While this has meant relaxing a number of regulations limiting, for example, the employment of workers on temporary and fixed-term contracts, there is a commitment to ensuring that such ‘non-standard’ workers enjoy the same employment rights as full-time, permanent workers (European Commission, 1999).
The European Commission has also espoused the principle that in a more flexible, decentralized labour market, workers should have enhanced rights of representation and participation in decision-making (Gill et al., 1999). This is linked to the Commission’s continued emphasis on the importance of Europe competing internationally on the basis of highly skilled, adaptable workforces (see Chapter 16 for further discussion). The most radical policy shift in the direction of labour market flexibility has occurred in the UK, where trade unions and collective bargaining, rather than government legislation, were traditionally the main curbs on unilateral management action.
The decline of trade union membership and collective bargaining coverage that resulted from economic policy and anti-union legislation during the 1980s and 1990s, together with the determination to minimise statutory protection for workers as far as possible, means that the British labour market is now the least regulated in Europe. Originally a Conservative government project, labour market flexibility has continued to be a priority for the Labour government since 1997.
The introduction of a national minimum wage, the strengthening of workers’ protection against unfair dismissal and legislation providing trade unions with a legal right to claim recognition from employers can be seen as a partial reversal of some aspects of Conservative policy. However, the level of the minimum wage is low, workers in Britain continue to have weaker employment rights than their counterparts in Europe and British trade unions continue to be subject to the most restrictive laws in the European Union.
The current government claims that labour market flexibility has enabled Britain to reduce unemployment far more successfully than the more highly regulated economies in Europe such as Germany and France. However, Britain has a higher incidence of low-paid employment than other major European economies and the most unequal earnings distribution (Rubery and Edwards, 2003). To varying degrees therefore, changes in the labour market emvironment have given employers greater freedom to restructure employment systems in line with their changing labour requirements and organisational constraints.
These policy shifts have been closely linked to radical changes in economic institutions. Financial markets have been deregulated, allowing capital to flow freely from one financial centre to another in search of the best possible short-term profits. This, together with advances in information and communications technology, has helped stimulate the growth of multinational corporations, which began during the 1970s. Furthermore, increasing pressures for free trade in goods and services, embodied in the formation of the Single European Market, the North American Free Trade Agreement and the World Trade Organisation, have given further stimulus to international competition and the internationalisation of production.
This has in turn intensified the pressures on governments to pursue economic policies that are acceptable to international investors, such as promoting labour market flexibility, and on firms to offer consumers better value for money by reducing costs and prices while improving the quality of products and services. These pressures have also been transmitted to workers and their unions. They are increasingly aware that the continuation of jobs depends on maintaining the competitiveness of their workplaces.
This competition is not confined to competition between companies. Multinational companies scrutinise the performance of their plants in different countries, comparing cost and productivity levels and concentrating investment in those that are deemed to be most efficient. This means that workers employed in different plants of the same company are in increasingly direct competition with each other. The consequence is that workers and their unions are less able to influence terms and conditions of employment or resist managerial initiatives aimed at weakening internal labour markets.
This is true even in economies such as Germany, where public policy has not shifted as radically in favour of labour market flexibility as in the UK (Katz and Darbishire, 2000; Whittall, 2001).
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