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Inside the Firm Review: Part IV

Job Security and Staffing Arrangements

The automotive factory is not a good place to work; it has always been a tough work environment. Therefore, high labour turnover has long been a characteristic of this back-breaking industry and was one of the factors which motivated European makers such as Volvo to embark on 'quality of work-life' programmes of job redesign and work reform during the 1970s. It was hoped that by making the jobs more interesting, the auto industry might become a more sought-after source of employment. In some other countries, such as the USA, 'efficiency wages' in terms of higher hourly rates of pay and employment benefits were used in an attempt to attract and retain labour. In many European countries, legal and illegal 'guest workers' (e.g. from Morocco) were used to fill the vacancies in the factories as local labour sought more desirable jobs. Even in Japan, the auto industry was known as the employment of last resort and was regarded as “dirty and dangerous”.

The industry also has tended to follow economic cycles of boom and bust. And so, workers have been used to being either hired or fired in large numbers as the auto sales waxed and waned. Increased global competition in conjunction with economic recessions has devastated the 'good jobs' in the industry. In Japan, life-long employment in the lead firms is in decline. The case of Nissan is famous in this regard as it began to lay off workers during the recession of the early 1990s. Japanese auto unions have even sought to prevent their companies from opening plants overseas because they feared that this could threaten jobs in Japan. But they have not been successful in this regard in the long term. In Japan, it is difficult to distinguish between what is voluntary severance and outright dismissal, due to the practice of older workers being patted on the shoulder, and thereby asked to leave a company—getting rid of core workers through the practice of “kata tataki”, as the Japanese call tapping on the shoulder. Furthermore, the Japanese have long used subcontractors and temporary workers as a means of providing largescale employers with a relatively high degree of labour flexibility. Most continental European countries have laws which require employers to follow certain procedures when redundancies occur, in order to afford some protection to employees and give them a period of warning before they lose their jobs. However, these procedures have tended to collapse during harsh economic times.

In France, for example, the whole system of social protection has come under heavy fire. Firms are now permitted to depart from general provisions of the law, providing that the parties give their consent. Temporary workers and short-term contracts are increasingly used to reduce liabilities. In Germany, where the auto industry is said to be vibrant, there is still high employment security for the core workers in the lead firms but the government has permitted greater use of temporary and part-time workers who are not covered by the same level of protection. In Sweden where there is said to be the strongest degree of legal protection against job loss for both permanent and temporary workers, things have turned out to be bad as the economic recession hit the auto industry badly. During the early 1990s, Volvo closed a number of plants and Saab sold half of its auto business to General Motors. Although an economic recovery began by the mid-90s, and the health of the industry improved, companies have been reluctant to rehire auto workers at previous levels of employment. In the USA, employers have no obligation, contractual or otherwise, to provide security of employment. This led unions during periods when they were stronger to seek job security for its members through work rules governing job classifications and seniority in the internal labour markets. While many older unionized workers have been able to gain a degree of job security through agreements on reverse seniority layoffs, others have not. As unionization has declined and union bargaining power has been weakened, many employers have sought to regain control over these areas.

Indeed, by increasing the proportion of part-time, temporary and contract workers, employers have gained greater flexibility over the way in which the workforce is deployed, as they are able to vary the size of the workforce to meet fluctuations in demand. There is thus a growing divide between the job security and conditions of the core employees who have long-term or even permanent contracts of employment, and peripheral workers who are casual, part-time or on fixed contracts. A number of newer greenfield auto assembly plants have been built in USA as well as Britain, some of which are Japanese transplants. These are deliberately non-union so as to ensure that management has greater discretion over issues such as employment conditions and tenure. Employment in Britain has progressively become less secure as economic conditions have deteriorated and union strength has rapidly declined. On top of this, conservative governments have also reduced the obligations of employers to provide redundancy payments.

Even in Australia where government, as well as unions, are involved in strengthening the laws governing job security, bad times have seen firms shedding labour either through natural attrition or voluntary redundancy and the unions have just focused mainly on seeking to secure the most generous severance payments for their members. As imports have increased with a gradual reduction in tariff protection under the WTO regime, local making has gone down thereby reducing prospects for future employment. It is interesting to note how the composition of employment contracts is changing in the post-bubble e economy' phase in Japan. There are pressures undermining the life-time employment at the lead firms. The principle of lifetime employment continues to be held by management, though, because without it, the motivational basis of workers' and unions' cooperation would falter.

However, in order to defend the principle of lifetime employment, large firms are increasingly resorting to seconding and transferring their core employees (mostly older workers) to their affiliates and subsidiaries—the subcontractors in the production chain. Thus the practice of continuous employment within a single enterprise is slowly giving way to the practice of continuous employment within a group of enterprises. No doubt, the core-periphery model of labour markets is a useful analytical tool. The core is defined as the labour force which benefits from the stability of employment and functional flexibility, while the periphery consists of numerically flexible workers who provide a buffer for the core. In Japan, the core is contracting and the periphery is increasing with some part-time workers treated as quasi-members of the firm as a family community. Most of the part-timers are to some extent “permanent employees”—hired on contracts without a time limit. Why do they exist? What jobs do they perform? Why are their wages increasing even though they are not unionized? Answers to these questions pop up once we distinguish between “core part-time workers” and “supplementary part-time workers”.

The former perform highly skilled tasks acquiring their skills by on-the-job-training. The latter perform monotonous and repetitive jobs with no possibility of wage increases irrespective of job tenure or effort. Thus there are now “quasi-internal labour markets” at the lead firms. As such, the hoary dualistic labour market view that all part-timers are 'peripheral workers' or 'marginal workers' is now often misleading. In Japanese transplants in the USA, there are 'permanent temporaries' hired through local agencies and they work on the line with regular team workers. This permanent underclass of 'temporary workers' is , however, relegated to receiving lower wages, fewer benefits and enjoying fewer rights. There exist contract workers too but there is no interaction between them and the regulars. The contract workers do everything from maintaining the conveyor systems, cleaning the locker rooms and office area, running the cafeteria, and working in security to keeping up the grounds. Some of them even hold clerical positions. Recent studies about Hyundai Motor Co. in Korea and India have revealed multiple labour markets inside this firm which aggressively do cost-cutting by combining a strict dual labour market within and flexibility-linked wage policies. “The majority of workers in the Hyundai Motors India's (HMI) Chennai plant are hired at the trainee level for the initial three years.

The HMI expects a segment of them to leave the company during the trainee period under a variety of circumstances. The trainee workers, contrary to this misleading designation, are induced into core production processes and are paid very low wages. In effect, the trainee position is a de facto short-term contract job and helps Hyundai Motors to keep the wages down and to retain a low-paid workforce. It also enables the company to achieve greater flexibility in labour management as they could provide a buffer if a situation arises where there is a need to reduce the workforce. This practice of employing disproportionately large irregular workers has now become the norm in the automobile industry in the (Tamil Nadu) state.” The new labour mobilization strategy “creates arbitrary categories of employment for largely similar labour inputs. The workers are recruited from a group of people who possess more or less the same skill levels into greatly varying employment categories such as regular employee, temporary workers, trainee workers, apprentices, and contract workers. Their wages and working conditions vary significantly from one another.

However, in an integrated production system on the shop floor, they perform largely similar tasks”. According to a manager from Ford Motors India near Chennai, the majority of the workers on the shopfloor are skilled contract workers. “According to the International Metalworkers' Federation, there is widespread and growing use of contract workers in the automotive industry. Some assembly and parts-making operations in China are staffed almost entirely by workers on fixed-term contracts. In many cases, almost half of the workforce is in precarious jobs, receiving much lower compensation and social benefits than regular employees, unequal or inadequate access to facilities, and worse conditions of work. Similarly, in the case of India, a permanent worker at the Hero Honda Gurgaon operation can draw a monthly wage of up to Rs. 40,000, compared to only about Rs.6,700 for contract workers, with some earning only Rs. 2,200 .” There is extensive use of contract workers in the Korean industries, including the auto industry. The new competitive pressures have destroyed the “internal labour market” of the good old times—a portrayal that holds good everywhere in the globalizing world where firms must now be more flexible in order to compete: “This means that they must reduce their fixed costs, and this has had a serious impact on the security of jobs and worker remuneration…. Far-ranging changes are underway in how companies organize work: How they produce, where they locate the work to be done, and whom they hire to do the work.

central feature of these changes is what now appears to be a long-run… move away from what … constituted the dominant … employment system of the post-World War II era. …In the quarter-century after 1945, with job tasks substantially standardized and broken down into a finely-grained division of labour, managers commonly hired new young workers a the bottom of job ladders, trained them on the job, promoted people within the organization, and paid wages more in accord with seniority and experience than with individual productivity or current firm performance. ….by awarding greater job security to more experienced employees, businesses could in return expect that senior employees would more willingly train and otherwise teach skills to and share know-how with younger workers within the organization….But (now) there is a growing consensus among scholars that (this) old system is coming apart…The changes are motivated by a complex of reasons: deregulation, greater actual or potential competition from abroad, growing numbers of corporate hostile takeover attempts and other signals from stockholders that put a premium on short-term firm performance.

All of this has made managers increasingly conscious of short-term fixed….costs, and committed to reducing them whenever and as much as possible….What this amounts to, in practice, is a proliferation of different forms of work organization, blurring the traditional distinctions between 'core' and 'periphery', 'permanent' and 'contingent', 'inside' and 'outside' employees and between 'primary' and 'secondary' labour markets. Thus managers employ some workers in more or less routine wage and salary positions inside the firm or agency. But then they also hire temporary help agencies, management consulting firms, and other contractors to provide employees (ranging from specialized computer programmers to janitors and clerical personnel) to work alongside the 'regular' people but on short-term assignments and under the management of the contractor. Companies…outsource work formerly performed in-house to outside suppliers, here and abroad. They also shift some work from full-time to part-time schedules, in part to avoid federal labour regulations covering wages and benefits that have been interpreted by the courts as not covering 'leased' workers. The 'temp' agencies and other contractors are being used increasingly by managers in the 'focal' firm as a mechanism for screening potential regular employees, with candidates serving their 'probation' on the payrolls of the contractor before moving into the focal company or agency.

This creates the possibility for further inequities, since two persons working side by side for an outside contractor may be equally competent, yet one will eventually be absorbed into a fulltime job while the other remains bouncing from one temporary assignment to another…. Two concrete expressions of this growing heterogeneity in work organization and practices…are declining employment security and more uncertain wage and salary prospects over time….Flatter organizational structures—yet another workplace 'innovation' whose introduction in recent years has been responsible for the layoffs of so many middle-level managers—contribute to reduced promotion opportunities within the surviving internal labour markets of companies and agencies. More generally, the payoff to seniority, as measured by age-earnings profiles, is shrinking over time, both across the workforce and, more precisely, over the careers of specific individuals, including those who stay with the same employer. Workers in the 1980s and 1990s may now be facing increasingly fluctuating earnings from one year to the next.It appears that a growing fraction of pay is becoming 'contingent'—on individual job performance, on the fortunes of the employer, on the current state of the 'animal spirits' in the stock market, or on what the company thinks it can get for its money by turning to suppliers in other, lower-cost locations. Whatever the causes, the results are stagnating long-run average wages, declining personal mobility over time, and (possibly) increasing uncertainty in what a person's earnings next year will be.”

The flexibility aspect of industrial restructuring forces the management to go in for more and more irregular employment contracts. By contrast, the quality and productivity aspect of industrial restructuring demands from employers the offer of longer and stable employment contracts to the workers. The fact that irregular workforce has rapidly increased in the workplaces all over the world is the indication that the flexibility aspect of restructuring is overwhelming for cost-cutting. Economic theorisation in this regard is profoundly disparate or confused. Giving a worker a fair deal in terms of longish and stable employment contract brings out good performance. Similarly, the fear of losing a relatively better job also induces the worker to perform well. In light of this, the insight we can draw is that the employers have gone for flexibility for cost-cutting while expecting good performance from the increasingly irregularly employed workforce on the basis of fear of losing a job. Moreover, the passing on of responsibilities to direct production workers from management can be avoided by making quality the botheration of the managers and engineers, not of direct production workers.

This seems to be the underlying basis for the widespread observation in the world of lack of worker participation in many auto factories. In the context of globalization wherein the lead firms in the auto industry are making foreign direct investments in areas of vast reserve armies of labour, we cannot expect them to go in for 'high road' in their labour policies as their goal is to create low-cost positions for themselves in the areas of market growth. If the contingent workforce increases at the workplace due to labour flexibility requirement, how can issues of quality and productivity growth over time be managed? How can employee commitment arise? There is a contradiction between lowering labour cost through flexible labour arrangements and enhancing productivity through job security and relatively higher pay. “The kind of performance needed to take the world has nowhere been got out of labour through fear.

As the rest of the world has pointed out, workers cannot give their best without some commitment to the goals of the enterprise and some power to influence its decisions”. There are two ways of achieving this objective, viz. participative management and HRM. But most employers have opted for dealing with labour through Hobbesian fear and punishment. To sum up, the contract of employment is a central component of the placement of individual employees within the structure of a single organization as well as within the fabric of society. It is, in fact, a principal component of the incentive system. The entrepreneur's perception of his dependence on the employee tends to be reflected in the content and length of the employment contract on offer. At the extremes, patterns of employment represent either a short term profit-maximizing view in which labour is regarded as a variable cost or, by contrast, the longer-term perspective taken in high road theory, but only rarely adopted in practice, in which labour is treated as 'human capital'. In the context of lean production, the short-term view seems to be the guiding principle of the dominant practice of the employers. Permanent contracts are increasingly replaced by atypical contracts like fixed-term contracts.

This is not surprising in the context of depressed labour markets or the Lewisian unlimited supplies of labour. A more likely prognosis is that permanent contracts among direct production workers will eventually vanish. A minority among managerial workers may enjoy permanent secure employment but motivating them would become a problem when the promotion prospects are small as the number of openings at middle and senior management levels continue to shrink due to the removal under lean production of the so-called “layer of clay”—a stratum of middle management with little real function that preoccupies itself by interpreting instructions from above and filtering information from below. As a result, the bottom of the organization has little clear idea of top management thinking and top management has little idea of what is happening on the shop floor.

Removing that layer of clay allows information to flow more freely—something most companies now recognize as an essential part of maintaining their competitive edge but this is not without the downside as pointed out above. It seems that in order to get an edge over the rivals in low road competitiveness, the auto firms are getting rid of the old workers somehow or the other. While it is difficult for old workers to bear with the tough working conditions which lead to premature worker burnout, it seems that top management often considers older workers costly, less flexible and adaptable to new technology, and less willing to cooperate and learn new skills. Thus, how to manage an ageing workforce with decreased physical abilities towards competitiveness has become a serious concern in Western industrialized countries. The general reality is in terms of the moves by the automotive management to kick the old workers out on some pretext or the other and bring in raw youth. Employers prefer youth to 'oldies' because the former do not ask questions and resist unlike the latter; also because it seems that most auto workers get physically burnt out by the age of 35 to 40 years. Click here to read Part V.

By Annavajhula J.C. Bose, PhD
Department of Economics, SRCC

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