Reassessing Markets and Employment Relations

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The emergence and decline of markets, competition in markets and the contraction of markets are powerful social and economic processes that have a profound impact on employment relations. Weber et al. (1948, p. 1) described the competition in markets as a struggle between people without war. For Schumpeter (1942), the rise and fall of companies in markets were part of capitalism’s creative destruction. Commons (1909) pointed to the ‘competitive menace’ in markets that drove down the living standards of workers while Polanyi (1944) regarded markets as grinding ‘satanic mills’ that destroy social relations if they are not embedded in social institutions. In addition, a variety of authors have linked globalization and the related expansion and liberalization of markets to the decline in labour standards and labour rights (Jenkins and Turnbull this volume; Moody, 1997; Tilly, 1995). In a recent important article, Piore and Safford (2006) question the importance of markets for employment relations. They strongly rebut the thesis that changes in employment relations are driven by market forces, and instead suggest that they can be attributed to the rise of new identity groups and the mobilization of individual rights at the workplace. They observe a change from a collective bargaining regime to an employment rights regime based on shifting social identities. The collective bargaining regime was underpinned by class-based worker identities and labour unions that negotiated the terms 171 August 7, 2010 6:36 MAC/REAR Page-171 9780230_221727_09_cha08 PROOF of employment relations through collective bargaining. The decline of classbased identities and the rise of groups based on gender, sexuality, disability and other forms of identity underpinned the emergence of the new employment rights regime. These identity groups mobilized individual rights such as equal opportunity and anti-discrimination laws and thereby changed employment relations. Emphatically, according to Piore and Safford, changes in employment relations have not been ‘produced by the increasing encroachment of the competitive market and the growing hegemony of neo-liberal ideology that has championed market-oriented reforms’ (Piore and Safford, 2006, p. 300). In contrast to Piore and Safford, this chapter seeks to demonstrate the importance of markets for changes in employment relations by identifying different mechanisms through which markets shape employment relations (see also Brown, 2008). In addition, the chapter provides evidence for the thesis that the impact of markets on employment relations has increased. This twofold purpose of the chapter is developed in six steps. First, states have focused on extending and liberalizing markets with the effect that markets have become more important in shaping employment relations compared to other governance mechanisms, such as law, associations and hierarchies. Second, the rise of a neo-liberal ideology has increased the legitimacy of markets in governing societies and employment relations. Third, the scope of many markets has broadened, exposing firms to greater competition. Fourth, increasing product-market competition and changing government regulations have created space for the mimicking of employment relations practices within sectors, a process that is described as a product-market-driven isomorphism. Fifth, management has segmented employment relations to reflect market niches. Sixth, and finally, management has introduced practices within firms, such as working time flexibility and performance-based remuneration, to link the employment relationship to market conditions. This chapter interrogates the impact of markets on employment relations from the macro to the micro level, but also points to the relationships between factors and different levels. Changing government regulation and the rise of a neo-liberal ideology are initially discussed at the national level. The discussion of the scope of markets encompasses both local and global markets. Product-market isomorphism and segmentation are processes that work at the sectoral level, while the last section of the chapter focuses on market-oriented employment relations practices on the firm level. In order to specify the link between employment relations and markets, the chapter draws on political science, economic sociology and employment relations. In doing so, the focus is on developments in western democracies, in particular the United Kingdom, 172 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-172 9780230_221727_09_cha08 PROOF Germany, Spain and the United States, based on secondary data and the author’s own research (Hauptmeier, 2009). The changing axis of governance – the extension of the market mechanism Economic activities and employment relations in modern societies are organized by at least four governance mechanisms: the law, markets, hierarchies and associations (Campbell et al., 1991; Hollingsworth et al., 1994). States govern societies by law. Markets coordinate the exchange and allocation of goods, services and employees. Management organizes economic activity and employment relations through hierarchical decisions (Williamson, 1983). Associations such as labour unions and employers’ associations engage in collective bargaining and regulate the substantive and procedural terms and conditions of employees. The state plays a central role in constructing and legitimizing these different governance mechanisms. States engage in both market-making and market constraining activities (Scharpf, 1999). They establish and liberalize markets, but at the same time, state-sanctioned governance mechanisms such as laws, hierarchies and associations constrain markets. Despite the continuing dual role of states in market-making and market constraining, states have increasingly focussed on promoting and extending markets in comparison to other governance mechanisms, which has afforded markets greater weight in coordinating and shaping economic activities and employment relations. The four governance mechanisms mentioned above exist in all market economies. However, the foundation and relative weight of each governance mechanism varies across countries. Hall and Soskice (2001), in their ‘varieties of capitalism’ thesis, point to the organization of economic activities beyond the market via associations in coordinated market economies, while the role of markets is more prevalent in liberal market economies. EspingAndersen (1990) earlier pointed to variation in the degree to which people are dependent on selling their labour power in the labour market under different types of welfare regime. In neo-liberal welfare states, labour is largely a commodity, while the provision of alternative income streams and social benefits ‘de-commodifies’ labour in continental and Scandinavian welfare states. In all economies, the relative weight of the different governance mechanisms is influenced by historical compromises. Crouch (1993) pointed to the crucial role associations played during the formation of modern states. If associations supported state actors in their quest to rule the new nation states against Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-173 9780230_221727_09_cha08 173 PROOF church and crown, they permanently secured an influential role in the governance of economies. After World War II, the Western industrialized countries renegotiated economic order on the national and international levels and struck a balance between the governance of markets, states and employer associations and management hierarchies. Ruggie (1982) called the emerging social and economic post-war order ‘embedded liberalism’. Within embedded liberalism, the state sanctioned the role of associations, such as labour unions and employers’ associations, in the governance of the economy and employment relations. These intermediary organizations between state and citizens relieved the state from the task of regulating a complex and conflict-prone area of society (Streeck and Schmitter, 1985). In addition, it was suggested that associations were closer to and better informed about the specific features of the employment relationship than were distant state bureaucracies. Over the last three decades, however, the pattern of relationships between state and associations has changed and two novel state approaches towards associations have emerged. On the one hand, centreright governments in liberal states such as the United States and the United Kingdom attacked labour unions and sought to diminish their role in regulating employment relations. Subsequent centre-left governments in these countries did little to re-establish the role of labour unions. In continental coordinated economies, states did not attack labour unions, but they stopped proactively promoting the governance of employment relations via employers’ associations and labour unions. States included employers’ associations and labour unions in social pacts in a number of European countries in the 1990s (Ebbinghaus and Hassel, 2000; Hassel, 2009), but these states relied less on social pacts in the following decade. Employers’ associations and labour unions continued to play an important role in training regimes in coordinated market regimes such as Germany. However, there are few examples of legislation that strengthened the regulatory capacity of labour unions and employers’ associations. While western states stopped pro-actively promoting the governance of employment relations via associations, they pro-actively promoted markets. National governments expanded markets and liberalized trade by negotiating bilateral and multilateral trade agreements (e.g. GATT and NAFTA) and through international organizations (e.g. the World Trade Organization) (Dicken, 2007). An important vehicle for the liberalization of markets became regional economic integration. In Europe, the European Union created common European markets by enforcing the freedom of movement of employees, goods, services and capital (Jabko, 2006). In North America, the North-American Free Trade Agreement (NAFTA) liberalized product markets. 174 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-174 9780230_221727_09_cha08 PROOF The liberalization of markets increased trade, e.g. the volume of world exports increased from $59 billion in 1948, to $1.838 billion in 1983 and reached $13.619 billion in 2007 (WTO, 2008). Furthermore, states privatized stateowned companies and exposed a greater part of the economy to market competition. The countries of the European Union agreed in the run-up to the introduction of the euro to privatize state-run companies in sectors such as telecommunications, postal services and transport. Beyond Europe, the International Monetary Fund (IMF) forced states to privatize state-run companies when countries called upon the IMF during economic and financial crises (Stiglitz, 2002). The unilateral or multilateral market making of states has been far-reaching and informed by liberal economic ideologies (see next section). States continue to govern societies by law. Proponents of neo-liberalism and globalization often proclaim the retreat of the state and underestimate the visible hand of the state (e.g. Friedman, 2007). The more interesting question is how the hand of the state intervenes in the political economy. On the one hand, states have cut different social benefits, but social expenditure measured as a percentage of GDP did not decrease markedly in many western states (this is to some extent related to skyrocketing health care costs) (Pierson, 2001). On the other hand, there is clear evidence that states liberalized labour markets. States lowered employment protection and alternative income streams such as unemployment benefits (Bosch and Weinkopf, 2008; Salverda et al., 2008). Employment relations continue to be regulated by substantive laws, and Piore and Safford (2006) point to equal opportunity and anti-discrimination laws as examples. But not all employment laws work to constrain markets (e.g. in the way that minimum wage legislation establishes a ‘floor’ under cost competition in the market). Equal opportunity legislation, for example, gives particular categories of workers a ‘level playing field’ to compete in the market for jobs without discrimination. Many employment laws are Janus-faced, inasmuch as they both constrain and enable labour market competition. Managers govern firms and their employment relations through hierarchical relationships and decision-making (Williamson, 1983). However, the governance of companies and employment relations via management hierarchies is constrained by laws, associations and markets. For example, states enforce health and safety laws, environmental standards and labour laws, setting limits for management decision making. Collective bargaining agreements bind management action to commonly agreed contractual terms and norms with labour unions. Coase’s initial formulation of management hierarchies emphasized that firms integrate production to bypass markets in order to avoid transactions costs (that occur through the need to negotiate exchange, to ensure compliance and to market finished goods). Companies can avoid such Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-175 9780230_221727_09_cha08 175 PROOF transaction costs ‘by forming an organization and allowing some authority (an ‘entrepreneur’) to direct the resources [efficiently]’ (Coase, 1937, p. 390; cited in Hamilton and Feenstra, 1995). Thus, while firms sometimes create markets they also attempt to avoid transaction costs and limit competition (Marchington and Parker, 1990). There are numerous interrelationships between the different governance mechanisms identified thus far. For the purpose of this chapter, the relationship between governance by markets and associations is of particular importance. The impact of product-market competition on collective bargaining has been well-documented through the regular Workplace Employment Relations Surveys (WERS) in the United Kingdom (Kersley, 2006). Based on this data, Brown and his collaborators found a strong relationship between the level of product-market competition and the coverage of collective bargaining – increasing competition drove the decline of collective bargaining measured in successive WERS (Brown et al., 2009). Over recent decades, the axis of governance has changed in employment relations. In the United Kingdom and elsewhere, employment relations continue to be governed by laws and management hierarchies, but the liberalization of markets and privatization of companies exposed employment relations to the pressure and competition of markets to a far greater degree. And this, in turn, helped decrease collective bargaining coverage and the regulating capacity of labour unions and employers’ associations. Ideas and markets: the rise of neo-liberal ideologies The rise of neo-liberal ideologies in the 1970s and 1980s (Harvey, 2005) encouraged policy makers to pursue the liberalization of markets. But what was the source of this ideological shift? In the first part of this section, it is argued that capitalist crisis has been a major driver of ideological change, including the rise of neo-liberalism. The second part then discusses how collective actors adapted to neo-liberal ideas and the expansion of markets. Major economic crises tend to lead to fundamental changes of ideology. They are historical junctures that have the potential to change world views and set the evolution of economies and employment relations on different trajectories. Subsequent developments seem to follow a path-dependent logic (Hay, 2006). As Weber explained: ‘Not ideas, but material and ideal interests, directly govern men’s conduct. Yet very frequently the world images that have been created by ideas, like a switchman, have determined the tracks along which 176 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-176 9780230_221727_09_cha08 PROOF action has been pushed by the dynamic of interest’ (Weber et al., 1948, p. 280). The account presented here emphasizes the importance of major economic crises in switching world views, which set action on different tracks. Research on deep economic crises indicates that ideological changes follow a similar pattern (Blyth, 2002; Gamble, 2009). They trigger not only economic but also ideological turbulences. The previously dominant economic paradigm becomes discredited and is blamed for the economic crisis. Actors associated with the previous economic paradigm lose power, while during and in the aftermath of the crisis soul-searching takes place and new economic ideas are explored and developed. These ideas have to be a viable alternative to the previous paradigm and offer solutions for overcoming the crisis (Hall, 1989). This section describes the ideological shifts following the world economic crisis in 1929 and the economic crisis of the 1970s in a stylized form. The conclusion returns to this theme and discusses the possibilities of ideological change following the 2008/2009 financial and economic crisis. In the wake of the world economic crisis in 1929, the previously dominant laissez-faire economic ideology and policies became discredited (Galbraith, 1955). It became accepted that reliance on free markets had led to the social and economic catastrophe of the 1930s and that laissez-faire policies could no longer address social and economic problems. In the search for new ideas, John Maynard Keynes (1936) contributed crucially to the articulation of a new economic ideology, which suggested a stronger role for states in governing the economy. A key economic idea was that governments should actively take part in the governance of society and improve the functioning of markets via anti-cyclical state intervention. The changing ideological economic ideas contributed to Roosevelt’s New Deal. Keynesian economic ideas also informed the re-forming of western states after World War II (Hall, 1989). Henceforth, state intervention in the economy, via collective regulation of employment relations and welfare state legislation, constrained markets. The Keynesian economic paradigm came under pressure during the economic crises of the 1970s (Blyth, 2002; Gamble, 2009). Rising unemployment and inflation now appeared to be permanent problems. Keynesian economic policies focussed on limiting the rise of unemployment through increased spending, which however also drove up the debt of governments fuelling higher inflation. An increasing number of economists and politicians argued that Keynesian economic policies caused the economic malaise and a new set of economic ideas slowly rose to prominence throughout the 1970s, promising to address the economic problems of the time. Milton Friedman and the Chicago School of Economics argued that it was the foremost task of governments to keep inflation rates stable, but otherwise governments should not Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-177 9780230_221727_09_cha08 177 PROOF interfere with self-regulating markets (Friedman, 1962). This neo-liberal ideology sees markets as the most important and effective governance mechanism for the coordination and organization of economic activities. The ‘invisible hand’ of the market, the exchange mechanism of supply and demand, would allocate resources, people and products most efficiently and produce the greatest welfare for society if states would only interfere as little as possible. The gradual change towards this neo-liberal paradigm gained momentum when Thatcher and Reagan came to power in the United Kingdom and United States (Harvey, 2005). While the 1980s marks a general shift towards neo-liberalism, Gamble (2009) differentiates between different types of liberal market ideologies. Market fundamentalists regarded markets as the panacea for solving economic problems, while more moderate neo-liberal ideologies acknowledged the role of states in establishing functioning markets or mitigating some of their adverse social effects through welfare and other policies. Despite these ideological differences, the idea that markets are an efficient and legitimate mechanism for governing economies and employment relations became stronger across the board. The market idea was further strengthened through the collapse of communism in the late 1980s and early 1990s. This alternative ideology and way of governing societies was decisively weakened. The triumph of market capitalism led some observer to declare the end of history and of ideological differences (Fukuyama, 1992). The spread of neo-liberal ideologies and interrelated material changes, such as the expansion and liberalization of markets, changed the context if not the content of employment relations. As management and unions adapted to this changing socio-economic context, their own ideologies changed over time; in particular they accepted the idea that markets are a legitimate and efficient governance mechanism. Sabel has argued that ‘workers, like the rest of us, can change themselves and the world by defending their interpretation of it’ (Sabel, 1984, p. 132). The broad ideological changes seen within the labour movement, however, suggest the opposite: unions defended themselves by changing their interpretation of the world. There were two aspects to this process of adaptation. Firstly, radical union ideology that contested the hegemony of market mechanisms receded and in its place an increasing number of unions became more market oriented. This orientation, in its turn, led unions to engage in ‘productivity coalitions’ with management (Windolf, 1989), in which unions accepted the goal of management to maintain competitiveness and traded concessions in order to enhance the performance of firms in which their members worked. The ideological basis was an exchange between management and labour: workers 178 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-178 9780230_221727_09_cha08 PROOF participated in the effort to increase productivity while management would attempt to protect jobs. Others within the union movement retained a more radical ideology (Ancel and Slaughter, 2005) and urged resistance to neoliberalism through increased use of the strike weapon. This call to arms failed to resonate, however, and strike rates across western democracies have plummeted (Gall, 1999). A primary response of unions to expanding markets was to gradually reformulate their ideologies and to become more market oriented. The attack on unions by the Reagan and Thatcher governments in the United States and the United Kingdom encouraged management to take on labour unions and resist the collective regulation of employment relations. It is not clear if this was initially an ideological change or if the previous truce had only been based on the power of unions and subdued anti-union sentiments. In any case, the idea of resisting unions and collective regulation became stronger in the 1980s. In addition, the orientation of Human Resource Management (HRM) emerged and there was a shift in the function of labour departments in large organizations from managing discontent to developing employee commitment and performance (Jacoby, 2004). As markets became more legitimate, management increasingly linked employment relations practices to market forces through devices such as performance-related pay and working time flexibility. The latter are specific manifestations of the market ideology permeating the workplace, to which we return in the last section. The scope of product markets and employment relations The relationship between the scope of product markets and employment relations is well-captured in Commons’ (1909) classic article on the Philadelphia shoemakers. Initially, the shoemakers’ union secured a stable income by organizing all producers in the local shoe market. However, the expansion of the product market to other cities increased competitive pressure. Rising sales of shoes produced with low-wage labour put downward pressure on wages. Only after the shoemakers expanded their union to the scope of the product market and organized all companies within it did they secure their income and standard of living. This was a key insight: workers or their unions had to take wages out of competition in order to prevent their income falling and rising along with the fluctuations of the market (Ulman, 1966). In fully unionorganized product markets, producers would compete over the quality and price of the product, better service, or more efficient work organization, but not over paying workers lower wages and benefits. Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-179 9780230_221727_09_cha08 179 PROOF After World War II product markets and employment relations institutions were delineated by the borders of the nation state. The scope of product markets and employment relations institutions broadly matched one another. National producers focussed on national markets, while they were sealed-off from foreign competition through trade barriers. Based on national employment relations institutions, unions were able to establish multi-employer and sectoral collective bargaining not only in countries with a corporatist tradition but also in liberal economies (Sisson, 1987). However, the gradual removal of trade barriers and liberalization of markets by states has extended the scope of the product market beyond national borders and the reach of union organization. Unions early on recognized the need to expand their organization beyond national borders and founded global unions, but these lacked the power and capacity to take wages out of competition (Gordon and Turner, 2000). In Europe, the attempts by European trade unions to coordinate wages across borders have not been successful (Gollbach and Schulten, 2000). The changing scope of product markets has also influenced employer strategies. In national product markets, unions tended to have more power. Militant unions at one company could push for higher wage levels, which encouraged unions at other companies to follow suit. Companies could compete with each other over paying higher wages. Taking part in multi-employer and sectoral collective bargaining protected individual employers against militant unions and upward wage competition. Delegating the negotiations to a higher bargaining level took contentious issues out of the workplace (Sisson, 1987). For bigger companies multi-employer or sectoral collective bargaining could be a cheap solution. They tended to have a higher productivity compared to smalland medium-sized companies. As the average productivity increase was an important guideline for wage increases, the rise in wage cost was often lower than the rise in productivity in large companies. But the expansion of product markets beyond national boundaries changed the logic for employers. Competition in international markets constrained union demands and employers were to a lesser degree dependent on protection against high wage demands by unions. In an open economy, unions were aware that market share could be picked up by foreign companies with lower wages, which would undercut the economic base of a company and lead to job losses and pressure on wages. When developing wage demands unions would increasingly keep an eye on the wage levels of competitors. In addition, in international product markets, management potentially had the option to exit and could relocate production to low-wage countries (cf. Hirschman, 1970). Management’s exit option and the threat to use it increased the bargaining power of employers vis-à-vis labour. 180 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-180 9780230_221727_09_cha08 PROOF Despite the gradual, greater openness of economies, the extent of productmarket expansion has been exaggerated by advocates of the strong globalization thesis (Friedman, 2007). Only some truly global markets have emerged, other markets remained regional, national or local in scope (Dicken, 2007). The level of competition that impacts on employment relations can be assessed by differentiating between sheltered and exposed sectors (Scharpf and Schmidt, 2000). The latter sectors are exposed to international competition, while the former are sheltered from it. Typical sheltered sectors include the public sector and health care as they cannot easily be relocated to other countries. Manufacturing tends to be exposed to international competition. The degree of competition is correlated with the required skill levels. The lower skill levels in textiles for example, made it one of the first sectors to be relocated to low-wage economies (see Jenkins and Turnbull this volume). Manufacturing producers dependent on high-skills (e.g. the automotive sector) began to relocate production at a much later stage. The level of competition is also influenced by how easily products can be transported; it is cheap to ship T-shirts around the globe while it is comparably expensive to transport cars. Not all exposed sectors are global sectors though. Trade and market liberalization have a strong regional focus as in Europe, North-American and recently in East Asia. Trade barriers have been removed within these regions but continue to exist for countries outside each regional bloc. Despite these qualifications with respect to the expansion of markets, the scope of many markets has increased. This has exposed labour unions to greater competition and has contributed to the decline of collective bargaining (Brown et al., 2009). The expansion of markets beyond borders and national employment relations institutions has weakened the unions’ capacity to limit competition and to regulate the employment relationship. The regulating capacity of unions has remained stronger in sheltered sectors, which in many countries are now the main redoubt of union membership and organization, but the overall trend for unions has been adverse. Product-market-driven isomorphism of employment relations The expansion of markets, the declining capability of collective organizations to set standardized rules and the trans-national integration of companies has created more space for the diffusion of employment relations practices across countries (Edwards, 1998). By drawing on the institutional literature in sociology, this section argues that the spread of employment relations Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-181 9780230_221727_09_cha08 181 PROOF across countries can be described and understood as a product-market-driven isomorphism (DiMaggio and Powell, 1983). Markets are organizational fields that are based on regulatory rules enforced by states (e.g. property rights, contract laws), a role structure that includes incumbent and challenging companies and a shared understanding of what the action in markets mean (e.g. market actors are aware that a continuous failure in the product market means the extinction of a company) (Fligstein, 1996, 2001). In constantly changing markets, it is difficult for companies to identify the best course of action. Managers have incomplete information, no clear knowledge about means–end relationships and they do not have the rational capacity to compute best practices. Organizations face two principal sources of uncertainty, namely (i) productive uncertainty in its own ability to develop and utilize human resources and new technologies, and (ii) competitive uncertainty in its product market which, unless the firm is a monopolist, is inherent in the ability of its rivals to respond with their own business strategies (Lazonick, 1991). One way to deal with such economic uncertainty is to mimic practices from competitors that are perceived to be successful (DiMaggio and Powell, 1983). On a more specific level, the transnational integration of companies, global production and HRM systems, standardization, benchmarking, coercive comparisons and whipsawing are vehicles for the spread of employment relations practices between competitors. Multinational companies have been described as a trans-national space (Morgan et al., 2001). This suggests that multinational firms have some degree of freedom to develop similar employment relations practices. There are numerous examples of companies that have standardized and integrated production and work organization across borders. For example in the auto industry, car producers mimicked lean production practices from Japanese competitors that threatened the market share of established producers. Toyota developed the original lean production system. Later other producers developed their own equivalents; for example General Motors launched its Global Manufacturing System. The latter defines work standards and production principles (e.g. in the area of health and safety) which General Motors seeks to implement at all of its plants worldwide. Multinational companies in the service sector, such as Starbucks and McDonald’s, have also developed standardized work organization systems, which they have sought to implement worldwide. In addition, a number of multinational companies have developed global HR strategies that guide employment relations practices across countries (Ferner et al., 2006). Benchmarking is a crucial instrument or mechanism for the implementation of standardized work and employment relations practices (Sisson et al., 182 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-182 9780230_221727_09_cha08 PROOF 2003). Management benchmarks the degree of implementation of their global programmes and performance on a variety of indicators such as labour costs or the productivity of subsidiaries. Benchmarking can have a number of different functions. It provides management with differentiated information about the business and helps to identify subsidiaries that are underperforming as well as demonstrating best practices. Positively identified employment relations practices can be implemented at other plants. Different authors point to the coercive aspect of benchmarking in the employment relationship as underperforming plants are threatened with disinvestment or plant closure (Marginson et al., 1995; Mueller and Purcell, 1992). Such forcing strategies can be used to overcome local idiosyncrasies and resistance, and help to advance the implementation of standardized employment relations practices. Dominance effects might help to understand the direction for the spread of employment relations practices across companies and countries (Elger and Smith, 2005). Companies mimic employment relations practices from dominant economic countries and from companies that are perceived as leaders in a particular product market. These business practices are not always based on rational considerations. Abrahamson has pointed to management fads and fashions that can lead to the gradual adaptation and spread of new business practices (Abrahamson, 1991; Abrahamson and Eisenman, 2008). In identifying product-market-driven isomorphism we do not wish to advance a convergence argument. There is a wide range of factors that limit convergence and shape particularities in employment relations, including national institutions, culture, plant histories, union resistance and the socioeconomic local and regional context (on the latter, see Locke, 1992). However, a number of employment relations practices have spread and diffused across different countries, a development which requires explanation. Katz and Darbishire (2000) found that four different employment relations patterns have spread within such diverse countries as the United States, Germany, Australia, United Kingdom, Sweden and Japan, despite very different national institutional frameworks. In my own research on the auto industry I found that a wide range of employment relations practices have spread across countries including outsourcing, night work, whipsawing, benchmarking, working time flexibility, performance-based pay systems, two-tier wage systems, common health and safety standards and lean production principles (Hauptmeier, 2009). The international research group GERPISA makes the case that the transfer of production models and best practices requires an adaptation to the local and national context, which leads to the hybridization of production models (Boyer, 1998).1 Even though the particularities of some employment relations practices vary across countries, they can broadly function Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-183 9780230_221727_09_cha08 183 PROOF equivalently (Locke and Thelen, 1995). For example, two-tier wage systems in the United States, Spain and Germany are adapted to the institutional context, but pursue similar goals such as the introduction of lower-tier wages for newly employed workers. The degree to which employment relations practices can spread across countries varies. Training, employment protection and worker representation structures continue to be more strongly shaped by national contexts. Previous literature in this area does not identify a clear logic or set of factors that explain the particular employment relations or HRM practices that are more amenable to diffusion across countries and which are more heavily influenced by country effects. Market segmentation of employment relations Beyond isomorphic processes in product markets, employment relations vary within product markets. There is evidence that employment relations differ systematically across market segments. Product-market segmentation, the identity of companies in product markets and the image sensitivity of companies in markets differentiate employment relations and working standards. Traditionally, labour unions sought to standardize employment relations and working conditions within product markets, but the decline of unions and decreasing scope of collective bargaining has given management more leeway to differentiate employment relations practices in line with the characteristics and competitive condition of market segments. Pine suggests that the ‘basics of market-driven management are to segment, target, position and create. Segment your customers and potential customers into meaningful groups that have homogenous needs within each group. Target those market segments that match the capabilities of the firm and have the highest business potential . . . Position your firm and its existing and potential products and services in each of the market segments . . . Finally, create the product and services that meet the requirements of your target market segment’ (Pine, 1993, p. 223). In the field of HRM contributors to the matching model emphasize that HRM practices need to meet organizational objectives (Fombrun et al., 1984). Schuler and Jackson have elaborated on the ‘strategic fit’ theme and argue that the implementation of different organizational strategies require different ‘role behaviours’ on the part of employees (Schuler and Jackson, 1987). Batt (2000, 2001) shows that call centres in the United States targeted four market segments: operator services, residential, small businesses and middle market. Each market segment correlated systematically 184 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-184 9780230_221727_09_cha08 PROOF with a set of work and employment relations practices, including types and level of compensation, discretion to influence work methods, skill requirements and type of interaction with the customer. Another study of service sectors, including banking and hotels, found differences between lower and upper market segments (Keltner and Finegold, 1999). Service firms pursuing an efficiency-oriented strategy minimized labour input, invested little in skill development and kept work tasks simple and repetitive in order to increase volume. Service firms pursuing a high-quality strategy, in contrast, favoured more labour intensive services that matched customer needs and invested more resources in recruiting, training and career development. The sociology of markets provides a different account for explaining differences between market segments. White (1981) suggests that companies do not orient themselves towards consumers as neo-classical economics would suggest, but towards each other. Firms observe each other and look for market niches that are not overcrowded. Markets are a social structure, in which companies adopt different roles or identities (Aspers, 2006a, 2006b), and in this sense, companies can influence their own exposure to competition (Marchington and Parker, 1990). This approach has not been widely adopted in employment relations, but a relationship between the identity of companies and employment relations seems to exist. For example, high-end market producers in the German auto industry such as Daimler and Porsche produce most parts of their vehicles in-house, while mass-producers outsource a larger proportion of their production. In addition, the image sensitivity of companies in markets can differentiate labour standards. Companies that are highly dependent on their image in the market are susceptible to consumer campaigns and can be forced by social movement pressure to comply with core labour standards and adopt social codes of conduct. Social movement organizations can deploy less pressure on companies that are not so dependent on a high reputation with consumers (e.g. companies in the middle of the supply chain). This suggests a differentiation of social and labour standards between companies that are image sensitive and those that are not. Consumer campaigns in the 1990s targeted labour rights and human rights violations of companies such as Nike and Reebok (Ross, 1997). These companies quickly realized that the use of child and forced labour hurt their image, sales and profits. The companies reacted to campaigns by introducing social codes that defined minimum social and working standards for plants producing for these brands. Nike introduced monitoring teams that regularly inspect production sites (Locke and Romis, 2007; Locke et al., 2007). To what extent consumer pressure and corporate responsibility change business behaviour is, however, contested in the literature. Jones and Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-185 9780230_221727_09_cha08 185 PROOF colleagues (2005) argue that this pressure leads to significant changes in working standards if stakeholders are included in the enforcement of social codes of conduct, while Baneerjee (2007) regards social codes of conduct as mere window-dressing to obscure exploitive business practices. Market-driven employment relations practices on the company level The liberalization and extension of product markets increased competition. One management strategy to cope with increasing competitive pressure has been to bring the market mechanism into the company by linking employment relations practices within firms to the product market beyond. This section discusses market-oriented employment relations practices such as working time flexibility, within-company markets for the allocation of production, contingent pay and outsourcing. Working time flexibility is an employment relations instrument that links the working time of employees to swings in the market. During peak demand, employees work more, while they work less in times of low demand. Such an adaptation of working time can respond to daily, weekly or even annual changes in demand. For example, call-centres try to adapt to daily fluctuations, retailers to weekly variation including high demand on weekends and car producers to annual changes in demand as people buy more cars in the summer compared to winter. Under competitive pressure, increasing working time flexibility can save costs and increase productivity in various ways. Working time flexibility decreases the total volume of labour at slack times, decreases the costs of inventories, while some measures circumvent the payment of overtime premiums. Working time flexibility is determined within national institutional frameworks, but this leaves significant scope for more flexible working time at the firm level. In the German auto industry, for example, management and unions jointly introduced various working time flexibility measures to cope with the impact of the recessions of the European auto market in 1993. The head of labour relations at Volkswagen sought to promote working time flexibility with the metaphor of ‘the breathing company’ – production and working time were supposed to breath in line with the ebbs and flows of the market (Hartz, 1996). Unionists in Germany agreed to working time flexibility earlier than unions in other European countries because it was a way to defend comparatively high wages and jobs. Companies such as Ford, General Motors and Volkswagen then sought to introduce the same working time flexibility measures in other European countries such 186 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-186 9780230_221727_09_cha08 PROOF as Spain. However, Spanish unions resisted working time flexibility fiercely in the 1990s and only agreed to concessions in the following decade (Hauptmeier, 2009). Another practice that links employment relations to product markets is the introduction of within-company markets for the distribution of production (Greer and Hauptmeier, 2008). General Motors was one of the first companies to develop this strategy. This management strategy is a development of the earlier use of whipsawing and coercive comparisons (Mueller and Purcell, 1992). General Motors has used a formal bidding process to offer the manufacture of a new product or production volumes to various plants, which are supposed to hand in a competitive tender that includes production costs and productivity estimates for the planned production. The rationale is not only to assign production to the most productive and cost effective plants but to control local management and labour. Labour unions feel pressured to make concessions in the context of production assignments in terms of wages or greater flexibility, as only sufficient production and high utilization of plants secures employment levels and wages in tight and competitive product markets. Pay has also become more insecure and dependent on the performance of the organization (Cappelli, 1999). Increasing competition has encouraged managers to use contingent pay and the decline of unions has provided more scope to do so. Management’s strategy for contingent pay is to provide incentives for employees to increase their performance and to shift market risks to employees by withholding pay if the company is not performing well (Brown and Heywood, 2002). The regular WERS surveys allow assessment of the evolution of contingent pay for the United Kingdom. For example, collective payment by results increased from 15 per cent to 29 per cent of private United Kingdom workplaces between 1984 and 2004 (Pendleton et al., 2009). In particular, the increase of profit-related pay schemes is significant, which grew from 20 per cent to 45 per cent in private sector companies. The evidence of the WERS surveys shows a clear relationship between product competition and contingent pay. The higher the product competition, the greater is the propensity of companies to use contingent pay (Pendleton et al., 2009). Contingent pay has also increased in coordinated market economies such as Germany (Kurdelbusch, 2002). The outsourcing or vertical disintegration of production is another instrument that links employment relations to the pressure of markets (Doellgast and Greer, 2007; Greer, 2008, p. 20). Vertical disintegration is typically described as the making of new intermediate markets in previously integrated production processes (Jacobides, 2005). This can include outsourcing Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-187 9780230_221727_09_cha08 187 PROOF of production to another company, the foundation of independent subsidiaries and the use of temporary employment agencies. These developments have introduced markets for the sourcing of people, parts and services in comparison to the governance of integrated production processes via management hierarchies. The changing boundaries of the firm and creation of new markets has also made it more difficult for unions to cover workers through collective agreements. Vertical disintegration has contributed to the segmentation of employment relations with lower wages and working standards driven by greater market exposure at the periphery of the firm compared to the core (Doellgast and Greer, 2007). Conclusion This chapter has challenged Piore and Safford’s (2006) thesis that changes in employment relations have been primarily shaped by law, judicial opinions and administrative rulings and the mobilization of these norms by identity groups over the last 30 years, rather than by markets. It is argued that Piore and Safford underestimate the impact of markets, which have become a more prevalent force in shaping employment relations as they have unfolded via various mechanisms. States have changed the axis of governance. Market economies and employment relations are coordinated and organized by the four governance mechanisms: laws, markets, hierarchies and associations. States – unilaterally and multilaterally – focussed on liberalizing labour and product markets and privatizing state-run companies. This has exposed employment relations to a greater extent to markets and increasing competition, in turn, has led to the decline of collective bargaining (Brown et al., 2009). To be sure, the governance of employment relations by laws, hierarchies and associations continues to be significant, but the relative weight of markets in shaping employment relations in comparison to the other governance mechanisms has increased. These changes in the regulatory and material context of employment relations are closely intertwined with the rise of neo-liberal ideologies. As the actors in employment relations adapted to a changing socioeconomic context, they became more market oriented and markets became a more legitimate reference point and governance mechanism in employment relations. An increasing number of unions gradually took on a greater responsibility for the competitiveness of companies, while more radical union ideologies and strikes declined. Managers segmented employment relations and aligned them with the competitive characteristics of market segments, 188 Contextual influences shaping the employment relationship August 7, 2010 6:36 MAC/REAR Page-188 9780230_221727_09_cha08 PROOF linked flexible working time to fluctuating demand in markets and made part of the income of employees dependent on the company’s performance in markets. Outsourcing and vertical disintegration created new markets and shifted employees from previously integrated production and service companies to more precarious forms of employment. In addition, increasing market competition and declining coverage of collective bargaining gave more space for isomorphic processes in product markets that contributed to the spread of employment relations practices between competitors. The changing axis of governance towards markets, the decline in collective bargaining and the rise of market-oriented employment relations practices can be traced back to the economic crisis of the 1970s. Major capitalist crises tend to trigger ideological change. In the wake of the economic crisis of the 1970s, the gradually unfolding shift from the Keynesian to the neo-liberal economic paradigm paved the way for the expansion and increasing legitimacy of markets in governing economies and employment relations. The big question today is whether the 2008/2009 economic crisis will similarly lead to far-reaching ideological changes. As in previous major economic crises, the current crisis has led not only to economic but also to ideological turbulence. Previous economic ideas have become discredited and new ideas are emerging. Confidence in the efficiency of self-regulating markets has been shaken to the core. The notion that states should play a significant role in ensuring the functioning of markets has become more popular following decisive state intervention in financial markets to avoid collapse. Before recent developments, it would have seemed absurd to many that governments would bail out private companies and put them under state control. In addition, the G20 has now developed the shared belief that financial markets need more regulation and common action seems possible. At present, ideas seem to be in a state of flux and no coherent new paradigm is on the horizon. One might argue that the slightly improved economic situation in 2010 and the intention of governments to reduce budget deficits with accompanying cuts in social benefits and public services is a return to the previous economic orthodoxy. However, the ideological changes following the major economic crises in 1929 and in the 1970s were also not immediate and only unfolded gradually. Roosevelt implemented the New Deal in 1937 and neo-liberalism only became a more popular currency after the elections of Thatcher and Reagan in 1979 and 1980. If history is an indicator, the current capitalist crisis will lead to ideological change. This may shift the axis of governance once again and, in turn, reshape employment relations. Marco Hauptmeier August 7, 2010 6:36 MAC/REAR Page-189 9780230_221727_09_cha08 189 PROOF Note 1. GERPISA stands in French for Groupe d’ Etudes et de Recherches Permanent sur l’ Industrie et les Salariés de l’ Automobile. In English, the group’s name has been summarized as the International Network of the Automobile (web page: http://gerpisa.org/en). References Abrahamson, E. 1991. ‘Managerial fads and fashions: the diffusion and refection of innovations’. Academy of Management Review, 16 (3): 586–612. 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