Labor Market Flexibility Versus Job Security -- Why Versus?
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| Opinion |
Labor Market Flexibility Versus Job Security -- Why Versus?
William A. Douglas, November 1, 2000
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In This Document: In this piece William A. Douglas argues that a nation with a flexible labor market, able to shift workers from one economic activity to another quickly without social disruption, would have a competitive advantage over countries unable to adjust to the rapidly changing demands for new working skills in the new economy.
In the mid-1990s Peter Drucker, with his usual perspicacity, told us that from now on, "a country's competitive position in the world economy has to be the first consideration in its domestic policies and strategies." 1 A nation with a flexible labor market, able to shift workers from one economic activity to another quickly, smoothly, and without social disruption, would have an substantial competitive advantage over countries unable to adjust smoothly to today's quickly changing demands for various working skills as technology progresses and consumer tastes vary. The nation with labor market flexibility would be like an ideal baseball team on which all members could play any position with equal skill -- it would be very competitive!
Like any desirable thing, achieving labor-market flexibility costs money and effort -- there is no such thing as a free lunch. Unfortunately, today many employers hope to get labor-market flexibility "on the cheap," without concerning themselves with how society will pay the costs involved -- nor with which social sectors will bear those costs. Citing fashionable neo-Liberal economic doctrine, they simply propose to greatly weaken present legal requirements for protecting job security, such as substantial severance pay, prior notification of labor-force reductions, or seniority rules. These employers want freedom to hire whomever they want when they need them, and then to dismiss them when the firm no longer needs them. Some employers seem to believe that workers are bio-degradable, and they can just use them and then throw them away. Efforts at creating labor-market flexibility that are opposed by those who comprise that market -- the workers -- are not likely to be effective, especially in democracies.
The United States has unusually weak provisions for job security, both in its labor legislation and in the contents of many collective-bargaining agreements. For decades, it has been common for U.S. employers to "lay off" workers for weeks or months during times of slack product demand, and then bring them back when business picked up. (In the U.S., unemployment insurance programs, not the employer, were supposed to support the workers during business downturns.) This practice on the part of employers would be considered socially unacceptable in many countries, even in some developing nations. Because of this atypical situation in the U.S., many Americans are unaware of the extent to which workers elsewhere have been guaranteed employment security, and of the degree to which those workers are disturbed at the current world-wide drive to take away many of those guarantees. In the industrialized countries, especially in Western Europe, legislation severely limited an employer's capacity to dismiss workers once they were hired on a firm's payroll. Often prior notification to the government, and/or the pertinent trade union, was required before workers could be dismissed. In France, up until 1986 not only prior notification to the government, but authorization by the government was required. 2In many countries requirements for hefty severance payments made it expensive for firms to dismiss redundant workers. Also common were limits on the hiring of workers on fixed-term contracts, a practice which firms used to avoid putting the workers on the formal payroll and thus having to pay them legislatively-required benefits. In developing countries, despite their poverty, workers in the formal sectors of the economies have long been given extensive protection from being dismissed.3 In 1995 the World Bank noted disapprovingly, "In many Latin American, South Asian, and Middle Eastern countries, labor laws establish onerous job security regulations, rendering hiring decisions practically irreversible."4
To just weaken or abolish such job-security provisions is not really creating labor flexibility, but rather just labor expendability. Allowing employers to "fire at will" does not necessarily provide for shifting workers smoothly from where they are no longer needed to where they can be productive -- it may often simply put the dismissed workers on the street, unemployed. A recent International labor Organization study argues that reducing employers' responsibility to provide job security inevitably ends up imposing new tasks on the state, which must provide stronger and wider social safety nets to take care of the unemployed workers. True labor flexibility must be based on worker versatility -- the workers must possess a variety of skills, so that they are qualified to change jobs as the changing economy alters. Building those skills requires time, and creating the worker versatility that can provide true labor flexibility must be a continual process. When a worker receives the dreaded "pink slip" of dismissal from an employer, it is too late to begin thinking only then about alternate skills.
Neo-Liberal theorists indicate that societies face a forced choice between labor-market flexibility and job security. However, there is no inevitable trade-off between the two -- both are desirable goals, and both can be achieved, through careful planning and an equitable distribution of the costs of achieving them. In 1986 Jean-Claude Paye, the Secretary-General of the OECD, stated: "There is no necessary contradiction between flexibility and security. Indeed reducing uncertainty can contribute usefully to improving flexibility." 5
The neo-Liberals often portray the workers' desire for job security as an effort by a selfish "labor aristocracy" to achieve a privileged position at the expense of employment growth that could allow those who are unemployed, or are underemployed in the informal sector, to obtain decent work. For example, the World Bank's 1995 World Development Report entitled Workers In an Integrating World states that "excessive job security regulation may protect those who are in wage employment at the expense of outsiders - the unemployed and those in the informal and rural sectors." The Report therefore recommends that "restrictive job security regulations should be lifted," for example, by adding "economic cause" to the list of allowable reasons for dismissal in job security legislation. 6
Actually, the desire for job security is a laudable one. Workers with children to feed who are fortunate enough to obtain good-paying, decent jobs in the formal economy would be irresponsible if they did not seek to make their positions secure. With economic globalization and technological change creating rapid changes in labor markets, the danger of one's job being abolished is very real. Job-security arrangements are simply an insurance policy against economic disaster for workers and their families.
In 1995 the Trade Union Advisory Committee (TUAC) to the OECD published a proposal for achieving what it termed "adaptabilty of workers," rather than the "negative flexibility" sought by neo-Liberal theory. 7 The International Labor Organization (ILO) has also done extensive research into how labor-market flexibility could be made compatible with the interests of the workers, including their need for job security. The ILO published a book on flexibility issues in 1988, and two more in 1999.8 Both the TUAC and the ILO stress the role of continual skill-training as one key to labor flexibility -- with good reason. Consider the following two scenarios:
A worker comes home from work at the Acme Widget Company and glumly tells his or her
spouse: "Bad news! -- my job's been abolished. The boss gave me my notice today. In a week,
I'll be on the street."
The same worker comes home and announces excitedly: "Good news! -- I've been selected
for a skill-training program that will place me in a new job in a new firm, at higher pay."
.
One thing is in common to both scenarios -- the worker will no longer be working for the Acme Widget Company, because the worker is no longer needed there. The first scenario is an example of worker expendability; the second is an example of true labor flexibility, or as the TUAC terms it, adaptability. Creating such flexibility through training programs clearly takes time, advance preparation, and money.
The TUAC study, after citing several examples of firms that negotiated with the workers about flexibility measures, concluded:
"The involvement of unions in the change process has maintained job security,
and secured a greater commitment to training as the most effective way of improving
the quality of working life, job satisfaction, and workforce commitment."
9
TUAC notes approvingly that the OECD's 1994 Jobs Study also gives high priority to life-long training processes for workers, and sees high-quality education in the public schools as providing workers with the basic knowledge enabling them to utilize effectively the life-long training programs. 10
In addition to skill-training programs, the TUAC and the ILO note that there are additional measures which can obviate the need for dismissals of workers when economic changes require a "downsizing" of all or part of a firm's workforce. These include:
Early retirement programs, given that for workers nearing retirement age, it may be cheaper to begin paying them their pensions a few years early than to re-train them for new jobs that they will hold for only a limited time prior to reaching the standard retirement age. 11
Workforce reduction through normal attrition, in which the firm, rather than dismissing
workers involuntarily, simply does not replace workers who leave voluntarily, for their own
reasons.
Spreading the work, especially by reducing the imposition of forced overtime work, thus
allowing the firm to retain more of its workforce, even if the total time worked declines. In
Western Europe, the length of the regular workweek itself has also been reduced in some labor-management agreements on flexibility, spreading the total time worked among the workforce, rather than dismissing some of the workers. 12
Relocation subsidies, providing workers who have a job opportunity elsewhere, but are
deterred by the cost of moving to another city or region, with the means to make the move,
thus reducing the need for the firm they leave to make forced dismissals.
The common goal of these various measures is to allow firms the flexibility to reduce their labor costs as economic conditions change, but without having to resort to involuntary dismissals. The firms can then afford to offer stronger guarantees of job security to their employees. 13
Both the TUAC and the ILO stress that trade unions now recognize the need for labor-market flexibilization, and will negotiate with management on ways to achieve it. 14What trade unions oppose vigorously is the unilateral imposition of flexibilization measures by employers. Such unilateral imposition can cause serious social unrest, as in the case of a general strike in Korea in early 1997.15 The ILO's Muneto Ozaki calls for collective bargaining as the most effective way to achieve flexibilization:
"... the collective bargaining process provides the best forum for achieving workable trade-
offs in the area of flexibility ... By enabling workers and management to arrive jointly at a
workable solution -- rather than having the employer unilaterally decide what is best for the
organization -- collective bargaining can instill in the workers a sense of commitment to the
change process and build trust, leading to a better working relationship on both sides." 16
A study by the Communications Workers Union (CWU) in Great Britain noted that in the downsizing of the firm British Telecom "full union consultation ensured no compulsory redundancy. The union negotiated terms for voluntary redundancy." The CWU concluded that trade unions will "look open-mindedly at new, more flexible methods of working, provided that they are instituted by negotiation and have positive benefits to the staff concerned." 17
In such negotiations, workers want employers to assume their fair share of the costs of achieving true flexibility, rather than resorting to "fire-at-will" labor expendability, which imposes all the costs and risks on the workers. Employers should be tasked with sharing the responsibility to prepare their employees for placement elsewhere in the labor market, should their services no longer be needed by the firm. Adopting this principle of shared responsibility for creating worker versatility will help build a firm's owners, managers, and workers into the kind of collaborative production team required by new production technologies. The spirit prevailing in an enterprise should not be just "everyone for himself," but rather, "all for one, and one for all." If the firm has no loyalty to workers, workers will not be loyal to the firm. A healthy firm needs a feeling of mutual commitment, with all parties proud that when economic changes affect the industry, "we take care of each other -- we make sure everyone is on board." Tasking the employers with a share of the responsibility for a "contingency placement plan" will also oblige the employers to pay a share of the costs of making workers versatile.
Employers could more easily accept a share of responsibility for assuring employment for their workers if they could spread the risks and costs of doing so beyond the individual firms involved. The ILO notes that agreements among the social partners at the sectoral or national levels of the economy "can deal with dimensions of labour market flexibilization that are beyond the reach of any single enterprise." 18 Through agreements negotiated at the level of an entire industry sector, individual firms in that industry could have the flexibility to dismiss redundant workers, whose employment would be guaranteed at the sectoral level by all the social partners in the industry as a whole. This concept can be developed into an illustrative example of how labor flexibility and job security could be made compatible, rather than contradictory.
Labor and management in a given industry, such as textiles, light-electronics, or food processing, could assume jointly the responsibility for guaranteeing employment of workers in that industry. Together they would develop, fund, and direct life-time re-training services, job-placement services, early retirement programs, relocation subsidies, etc. The training would prepare the workers with a broader set of skills, giving them, before they face a need to change employment, the versatility in skills required for labor flexibility. The other aspects of the program would assist the now-versatile workers within the industry to adjust when changes in markets and technology make them redundant. Thus the program would constitute a way to forge a contingency placement plan for all the workers in the industry, and offer them a guarantee that they would never be left without a way to receive an income.
These programs could be financed by contributions from both the employers and the workers involved. The employers would have an incentive to contribute, for the programs would provide firms in the industry with the labor flexibility they need, and would build a feeling of mutual commitment among management and the workers. Such "team spirit" has often been regarded as one factor in the success of Japanese businesses, and the study by the ILO's Muneto Ozaki notes that Australian employers who experimented with casualization of the workforce found that the lack of the contingent workers' commitment to the firm was a drawback. 19 The workers would also have incentives to contribute funds from their wages to the industry-wide program. They would receive the guarantees of job security which are so important to them, especially to workers in developing countries with high unemployment and a large informal sector. The ILO has noted numerous instances in which workers have accepted a negotiated trade-off of less money for more security. 20 With both employers and workers contributing to the budget of the program, it could be managed by these social partners themselves, rather than by the state. Keeping the program within the private sector would reduce the scale of bureaucracy involved, and allow the firms and trade unions in the industry to tailor the program to fit their specific needs.
In developing countries, the formal sector employers and workers who would enjoy labor flexibility and guarantees of job security in such a system would not only have an obligation to help pay for the benefits it would provide, but also a social obligation to help their fellow citizens who are unemployed or underemployed in the informal sector. While it is unfair to label those in the formal sector an "economic aristocracy," it is true that they are in far better economic circumstances than firms and workers in the informal sector. Thus the formal sector social partners should not only contribute to the budget of their industry's program of flexibilization with job security, but also contribute to a special venture-capital fund that would finance the start-up of labor-intensive enterprises. Contributing to such a social solidarity fund would be a small price to pay for the benefits of having a secure place in a modern, competitive industry. The long-term goal would be not just to protect the favored situation of the formal sector, but eventually to bring the entire society into formalized, productive economic activity, ending the oft-lamented "segmentation" of the labor market and of the economy as a whole.
Such arrangements in various economic sectors could give a nation's economy the ability to move workers quickly and smoothly from one job to another, without social disruption, and this would make the economy very competitive in the global marketplace. This heightened competitiveness would offset the costs of the program, thus allowing the firms involved to prosper even while competing with firms from less enlightened nations practicing only labor expendability, not flexibility, and bearing the social and economic costs that inevitably ensue from such practices.
Combining flexibility with security would also build a much stronger, more cohesive society. As the ILO's Guy Standing asserts:
"A fear spreading around the world is that social progress was arrested in the late twentieth century, when flexibility came to mean insecurity, and when more people found themselves living isolated, without social responsibilities beyond themselves and their immediate family ... If social groups become more detached from each other in terms of security and lifestyle, the sense of fraternity or community will be eroded ...Justice requires that everybody should be provided with basic security..." 21
These principles apply just as much in the United States as elsewhere in the world. In the globalized economy, the U.S. cannot afford to remain one of the industrialized nations in which employment for many workers is least secure. Writers as disparate as Harvard economist Dani Rodrik, Ethan Kapstein of the Council on Foreign Relations, currency trader George Soros, and William Greider of Rolling Stone have all warned in recent years that social unrest born of the effects of globalization could afflict the United States. Such authors refer frequently to Karl Polanyi's attribution of the First World War to the disruptive socio-economic effects of the earlier round of economic globalization that occurred in the late 1800s. Judging from the broad spectrum of demonstrators at the Seattle meeting of the WTO in 1999, and at subsequent meetings of the World Bank and IMF, this predicted unrest has already begun to appear. Sensationalist press coverage of the antics of some fringe groups during these demonstrations obscured for many readers the fact that not only did the U.S. labor movement (which outside of the precincts of the Chamber of Commerce is not widely regarded as a hotbed of extremism) participate in strength, but also many responsible, mainstream NGOs from the fields of environmentalism, social reform, and human rights. It is time for the U.S., without giving up the required labor flexibility, to also build a stronger sense of social solidarity and economic security for its workers, lest Ethan Kapstein's forebodings prove prescient:
"The world may be moving inexorably toward one of those tragic moments
that will lead historians to ask, why was nothing done in time?" 22
NOTES
1. Peter Drucker, "The Age of Social Transformation," The Atlantic Monthly, November, 1994,
p. 77.
2. Sarfati (see note #5, below), pp. 20, 23.
3. The World Bank, Workers in an Integrating World, World Development Report, Oxford
University Press, New York, 1995, p. 89.
4. Ibid, p. 34.,
5. Trade Union Advisory Committee to the OECD, Adaptability Versus Flexibility, Paris, 1995,
p. 7.
6. World Bank, op. cit, pp. 89, 90, and 109
7. TUAC, op. cit
8. Hedva Sarfati and Catherine Kobrin, eds., Labor Market Flexibility -- A Comparative Anthology,
Gower Publishing Company, England, 1988.
Ozaki, Muneto, ed., Negotiating Flexibility -- The Role of the Social Partners and the State, ILO,
Geneva, 1999.
Guy Standing, Global Labor Flexibility -- Seeking Distributive Justice, St. Martin's Press, New
York, 1999.
9. TUAC, op.cit., p. 20.
10. Ibid., p. 21
11. Ibid., pp. 19, 20.
12. Ozaki, op. cit., pp. 117, 121, 123, 124; TUAC, op. cit., p. 19.
13. See Ozaki, p. 127.
14. Ibid., 89, 99; TUAC, op. cit., p. 25.
15. Ozaki, op. cit., p. 90.
16. Ibid., p. 144.
17. Communication Workers Union, Making a Good Job of Employment Policy, April 28, 1998,
pp. 4, 17, and 34. Available on the website of the Postal, Telegraph, and Telephone International:
http://www.ptti.ch/cwuemploy.htm.
18. Ozaki, op. cit., p. 118.
19. Ibid, p. 92.
20. Ibid., p. 127-128.
21. Guy Standing, Global Labour Flexibility, St, Martin's Press, New York, 1999.
22. Ethan Kapstein, "Workers and the World Economy," Foreign Affairs, May/June, 1996, cover.
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