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Also by Edward J. Amadeo



Also by Susan Horton


COUNTRIES (editor with R. Bird)


R. Kanbur and D. Mazumdar)


Labour Productivity
and Flexibility

Edited by

Edward J. Amadeo
Pontificia Universidade Cat6lica
Departamento de Economia
Rio de Janeiro


Susan Horton
Institute for Policy Analysis
University of Toronto
First published in Great Britain 1997 by
Houndmills. Basingstoke. Hampshire RG21 6XS and London
Companies and representatives throughout the world

A catalogue record for this book is available from the British Library.
ISBN 978-1-349-25979-3 ISBN 978-1-349-25977-9 (eBook)
DOI 10.1007/978-1-349-25977-9

First published in the United States of America 1997 by

Scholarly and Reference Division.
175 Fifth Avenue. New York. N.Y. 10010
ISBN 978-0-312-17522-1
Library of Congress Cataloging-in-Publication Data
Labour productivity and flexibility I edited by Edward J. Amadeo and
Susan Horton.
p. cm.
Papers discussed at seminars hosted by the Universidad de
Guadalajara and the University of Toronto as part of a project
sponsored by the International Development Research Centre (IORC) of
ISBN 978-0-312-17522-1 (cloth)
I. Labor productivity-Congresses. 2. Labor mobility-Congresses.
3. Hours of labor. flexible--Congresses. I. Amadeo. Edward J.
II. Horton. Susan.
HC79.L3L33 1997
331.1 I '8-<ic2 I 97-12037

Selection. editorial matter and Chapter I © Edward J. Amadeo and Susan Horton 1997
Other chapters © Macmillan Press Ltd 1997
Softcover reprint of the hardcover 1st edition 1997
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List of Figures and Tables vi
Acknowledgements xi
Notes on the Contributors xiii

2 Labour Flexibility and Productivity: An Overview 2

Edward J. Amadeo and Susan Horton

2 Brazil: Labour Market Flexibility and Productivity,

with Many Poor Jobs 37
Jose Marcio Camargo

3 Labour Flexibility: The Case of Chile 65

Pilar Romaguera. Pablo Gonzalez. Alejandra Mizala and
Cecilia Montero

4 The Paradox of Flexibility and Rigidity: The Mexican

Labour Market in the 1990s I13
Francisco Zapata

5 Labour Flexibility and Productivity in Canada:

Markets, Institutions and Skills 151
Michael Baker. Morley Gunderson and Susan Horton

6 Labour Market Flexibility in the European Union 185

Robert M. Lindley

7 Labour Flexibility and Productivity in Japan 225

Neantro Saavedra-Rivano and Hideki Imaoka

8 Quantitative Flexibility in the US Labour Market 255

Steven G. Allen and Richard B. Freeman

Index 291

List of Figures and Tables

1.1 Components of labour flexibility 12

1.2 Output/worker, Brazil, Chile and Mexico, 1970-90 32
1.3 Output/worker, Canada, UK and USA, 1970-90 32
3.1 Chile: sectoral employment, 1966-93 70
3.2 Chile: index of real wages, general and public sector,
1970-94 72
3.3 Chile: labour force participation rates, 1976-93 74
3.4 Chile: employment, unemployment and informal sector,
1977: 1-1993: 1 77
5.1 Canada: participation rates by age and sex, 1975-93 153
5.2 Canada: composition of non-agricultural employment,
1975-93 155
5.3 Canada: full-time and part-time employment, 1975-93 155
5.4 Canada: unemployment rates by age and sex, 1975-93 156
5.5 Canada: average real manufacturing wage and
minimum wage, 1975-93 158
5.6 Canada: Index of Structural Change (ISC) for industries,
1971-93 and 1975-93 169
5.7 Canada: Index of Structural Change (lSC) for
occupations, 1977-93 and 1981-93 169
6.1 Europe: the size of the 'black economy' 192
6.2 Europe: Probation, redundancy and maximum hours 193
6.3 Europe: maximum duration for fixed-term contract
and temporary work 195
6.4 Europe: importance of hiring and firing laws as an obstacle to
employing more people 200
7.1 Japan: wage differentials, by age group and gender,
1993 234
7.2 Japan: wage differentials by educational level, male
workers, 1993 234
7.3 Japan: wage differentials, by educational levels, female
workers, 1993 234
7.4 Japan: Spring wage increases, 1981-92 237

List of Figures and Tables vii
7.5 Japan: effect of a 1 per cent increase in manufacturing
output on labour inputs 245
7.6 Japan: effect of a 1 per cent increase in GDP on
employment and per capita labour income 247
8.1 USA: real wage indices. 1960-93 260
8.2 USA: ISCs for one-digit industries at I, 5 and 10 year
intervals. 1900-92 265
8.3 USA: job reallocation in manufacturing. 1973-88 266
8.4 USA: ISCs for I-digit occupations over lO-year intervals
1910-80 267
8.5 USA: ISCs for I-digit occupations at 1.5 and 10 year
intervals. 1955-93 268
8.6 USA: ISCs across states over 10-year intervals.
1910-90 269
8.7 USA: ISCs across states over 1.5 and 10 year intervals.
1939-90 269
8.8 USA: median years with employer. by age, 1951-91 272
8.9 USA: ratio of group to total unemployment rate, by
years of schooling. men 25-64. 1970-91 277
8.10 USA: ratio of group to total unemployment rate, men.
1948-93 278
8.11 USA: ratio of group to total unemployment rate, by
gender, 1948-93 279
8.12 USA: ratio of group to total unemployment rate. by race.
men, 1948-93 279


l.l Four elements of labour flexibility 18

1.2 Summary of country evidence on labour market
flexibility and sectoral mobility 20
1.3 Growth of real wages and employment. selected regions
and countries. 1971-80 and 1981-92 23
2.1 Brazil: number of formal workers fired and % of these
workers receiving unemployment benefit, 1990-93 45
2.2 Brazil: number of workers fired by firms and number
of voluntary separations. 1991-95 47
2.3 Brazil: macroeconomic behaviour. 1974-92 51
2.4 Brazil: open unemployment rate, 1981-89 52
V11\ List of Figures and Tables
2.5 Brazil: duration of unemployment, 1981, 1983, 1986
and 1990 52
2.6 Brazil: duration of jobs, whole economy and industrial
sector, 1991 53
2.7 Brazil: turnover rates, 1989-93 53
2.8 Brazil: real labour income, by labour market segments,
1981-90 55
3.1 Chile: economic indicators, 1970-94 68
3.2 Chile: nominal wage equations, 1976-93 73
3.3 Chile: breakdown of labour supply, 1992 75
3.4 Chile: estimates of the size of the infonnal sector,
1980-92 76
3.5 Chile: wage differentials between fonnal and infonnal
workers, 1992 78
3.6 Chile: training programmes sponsored or administered
by the State 89
3.7 Chile: labour flexibility, typology of firms 99
Appendix Chile: Flexibility strategies in industrial finns 105
4.1 Mexico: macroeconomic and labour force indicators,
1980-93 ll5
4.2 Mexico: sectoral distribution of the economically active
population and sectoral employment growth %,
1895-1990 117
4.3 Mexico: the urban employment structure, 1940-89 118
4.4 Mexico: growth and composition of formal and infonnal
employment in the more urbanized areas, 1979-88 120
4.5 Mexico: structure of the wage-earning economically
active population, by sex, 1990 121
4.6 Mexico: employment according to size of company, by
sector, 1980-8 122
4.7 Mexico: composition of employed population according
to number of hours worked, 1979, 1988 and 1994 122
4.8 Mexico: numbers insured by public social security institutions,
growth rates for insured and proportion of insured in
relation to employed and total population, 1982-91 125
4.9 Mexico: employment in a sample of state-owned
enterprises, 1977-91 126
4.10 Mexico: real wages, 1985-92 126
4.11 Mexico: sub-sectors with highest and lowest growth of
total factor productivity and labour productivity, growth
rates, 1984-90, % 128
List of Figures and Tables ix
5.1 Canada: labour market characteristics, 1980-90 157
5.2 Canada: changes in the distribution of males' log
weekly wages, 1980-90 159
5.3 Canada: full year full-time non-agricultural employment
and weekly earnings, by industry, 1980-90 160
5.4 Canada: % deviation of the average weekly earnings in each
industry from the average for manufacturing, 1980-90 162
5.5 Canada: simulations of changes in average log weekly
earnings related to changes in the distribution of
employment across industries, 1980-90 163
5.6 Canada: employment and weekly earnings .and the
private and public sectors, 1985-90 163
5.7 Canada: male-female log weekly earnings differential,
1980-90 164
5.8 Canada: full year full-time non-agricultural employment and
weekly earnings, by province, 1980-90 166
5.9 Canada: % deviation of the average weekly earnings
in each province from the average for Ontario,
(log weekly earnings different), full year full-time workers,
1980-90 167
5.10 Canada: interprovincial mobility, 1975-93 168
6.1 Europe: labour market regulations, ranking of ED
Member States 196
6.2 Europe: labour market regulation and collective
bargaining level 198
6.3 Europe: EC firms' opinions about regulatory constraints,
1985 201
6.4 Europe: opinions of national employers' organizations
on regulatory constraints 203
6.5 Europe: associations between labour market phenomena,
regulatory strength and employment 204
6.6 Europe: the interpretation of structural change indices,
1960s-1970s 209
6.7 Europe: responsiveness of labour demand to real
product wages 214
6.8 Europe: responsiveness of real product wages to
unemployment 217
6.9 Europe: wage flexibility in the ED 217
7.1 Japan: basic data on the economy and labour market,
1980-93 227
7.2 Japan: composition of the labour force, 1975-93 228
x List of Figures and Tables
7.3 Japan: persons engaged, by size of firm and sector,
1975-93 229
7.4 Japan: modality of employment, by gender and age
group, 1987 and 1992 230
7.5 Japan: length of service in the same firm: Japan, 1977
and the USA, 1978 232
7.6 Japan: length of service in the same firm, 1977-93 233
7.7 Japan: union membership, totals and selected sectors,
1980-93 236
7.8 Japan: industrial disputes in selected developed
countries, 1979-90 237
7.9 Japan: rates of change of the employment rate and of its
explaining factors, 1973-85 241
7.10 Japan: relation between economic growth and changes in
employment, 1963-92 244
7.11 Japan: instruments for employment adjustment during
selected recession periods, 1975-93 246
7.12 Japan: labour participation rate, by gender, 1980-93 248
7.13 Japan: change in the labour participation rate, by
gender, 1973-76 249
7.14 Japan: change in bonus payments in manufacturing
industry and their relation to monthly wages, 1980-93 250
8.1 USA: types of evidence on labour market flexibility 260
8.2 USA: median years with current employer, by gender
and age group, 1951-91 272
8.3 USA: distribution of job tenure on longest job, male
workers aged 58-63 in 1969 and 58-61 in 1993 273
8.4 USA: mean annual hours worked, by wage decile, male
workers, 1970-90 278
8.5 USA: indexes of structural change for selected countries,
1960s, 1970s and 1980s 284
This book is the outcome of a project on the theme of labour productivity
and flexibility sponsored by the International Development Research Centre
(IDRC) of Canada. Thanks to IDRC the authors met twice - once in
Guadalajara in Mexico and the other time in Toronto in Canada - and there-
fore had the opportunity to share a wide range of views on the subject of
their work. This obviously greatly enhanced the quality of the contributions.
Gary McMahon from IDRC supported this project from the beginning
and thanks to his particular interest and expertise on the theme, contribu-
tors had an opportunity to profit from his insightful comments.
We are thankful to the Universidad de Guadalajara and the University
of Toronto for hosting the seminars in which the papers were discussed, as
well as to local discussants for their valuable comments. In particular, we
wish to acknowledge the helpful comments and suggestions on all
chapters which Professor Albert Berry provided.
We are grateful to our own institutions - the University of Toronto and
the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - for
providing us with a congenial atmosphere to carry out the editorial work.
Finally, we wish to thank Maria Jose Seuanez Salgado, a student at
PUC-Rio, for her excellent work in assisting the editors.


University oj TOroflto SUSAN HORTON

Notes on the Contributors
Steven G. Allen is Professor in the Department of Economics
and Business Management, North Carolina State University, and at the
National Bureau for Economic Research.

Edward J. Amadeo is Associate Professor in the Department of

Economics, PUC-Rio.

Michael Baker is Associate Professor in the Department of Economics,

University of Toronto.

Jose Marcio Camargo is Professor in the Department of Economics,


Richard B. Freeman is Professor in the Department of Economics,

Harvard University, the London School of Economics and the National
Bureau for Economic Research.

Pablo Gonzalez is Chief, Planning and Budget, Ministry of Education,

Universidad de Chile, Chile.

Morley Gunderson is Professor in the Department of Economics and

Director, Centre for Industrial Relations, University of Toronto.

Susan Horton is Professor in the Institute for Policy Analysis, University

of Toronto.

Hideki Imaoka is Professor in the Institute of Social Sciences, University

of Tsukuba.

Robert M. Lindley is Director of the Institute for Employment Research,

University of Warwick.

Alejandra Mizala is Professor in the Department of Industrial

Engineering, Universidad de Chile.

xiv Notes on the Contributors
Cecilia Montero is Investigator. CIEPLAN (Corporaci6n de
Investigaciado Econ6micas para Latinoamerica). and CNRS (Centre
National de la Recherche Scientifique). France.

Pilar Romaguera is Professor in the Department of Industrial

Engineering. Universidad de Chile.

Neantro Saavedra-Rivano is Professor in the Institute of Socio-

Economic Planning. University of Tsukuba.

Francisco Zapata is Director of the Centre for Sociological Studies.

EI Colegio de Mexico.
1 Labour Flexibility
and Productivity:
An Overview
Edward J. Amadeo and Susan Horton


Labour market flexibility is being seen as increasingly important, given

the rapid changes in the world economy and the intensification of global
competition. This book examines theory and country evidence to
challenge the myth that deregulation of the labour market is the surest way
to improve flexibility of labour and improve productivity. Labour market
flexibility should not be, as the World Bank states it is, 'a euphemism for
pushing wages down and workers out' (World Bank, 1995).
We start from the premise that labour market flexibility (wage and em-
ployment flexibility and ability to make sectoral labour reallocations) is
conceptually different from labour input flexibility (the ability to change
labour input, which in turn depends on skills and has a close relation with
productivity). We draw on the experiences of a group of developed
countries (Chapters 5-R) to understand better the experiences of labour
market flexibility in three Latin American countries (Chapters 2--4). The
experiences of the Latin countries are of great importance to an under-
standing of flexibility. On the one hand, these countries are being exposed
to external competition at an unprecedented rate, with the tearing down of
tariff and other barriers. At the same time some of the governments and
international agencies see an important part of the agenda as being the
dismantling of previous labour market institutions. What are the costs of
this policy? Are these reforms likely to improve productivity and bring
long-run benefits to workers?
This project has two main objectives;

1. The first is to evaluate the degree of labour market and labour input
flexibility in the countries where the research took place. To this end
researchers examined the data on the macroeconomic factors affecting
labour market flexibility - namely, wage and employment flexibility

2 Labour Flexibility and Productivity
and labour mobility across sectors - and the information on institu-
tional factors, management practices and policy instruments affecting
labour input flexibility.
2. The second objective is to propose alternative policy instruments to
enhance flexibility and productivity growth in the countries studied.
These proposals are divided into two groups. The first group refers to
general recommendations based on the common denominators among
countries. The second group of policy proposals are country-specific
and result from the effort of the individual teams in focusing the
analysis on the distinctive aspects of the issue in each country.

The OECD countries were selected so as to provide a breadth of ex-

perience with different modes of flexibility, and different institutions.
These ranged from the market-oriented US, to corporatist Europe, to
Japan where the lifetime employment system gives workers a much
stronger identification with firms. Canada was included as a developed
country, somewhat intermediate between the USA and Europe in terms
of institutions and degree of government intervention. Canada, like the
Latin countries, is a relatively small country with reliance on primary
exports and heavily influenced by the trade and investment policies of
the USA.
The Latin countries were selected so as to encompass a range of experi-
ence. Chile and Mexico were like many other Latin countries quite cor-
poratist, with heavy government intervention in the economy including
the labour market. In the case of Chile this has been very markedly dis-
mantled since 1972, and in Mexico is being substantially modified in the
wake of the 1982 debt crisis. Brazil by contrast had engaged in opening up
of the economy during the 1970s and undertook more heterodox adjust-
ment in the 1980s and 1990s. This did not involve wholesale deregulation
of the labour market, and union power if anything increased between the
1970s and 1980s with the return of democracy.
This chapter summarizes some of the theory and evidence from the
seven country study chapters which follow. We first discuss the concept of
flexibility (Section 1.2) and why deregulation of labour markets is not syn-
onymous with higher productivity. We then deal in a more theoretical way
with the distinction between labour market flexibility and labour input
flexibility (Section 1.3). The methodology employed is described in
section 1.4. Section 1.5 summarizes the country experience in labour
market flexibility (both in aggregate and intrasectorally), and section 1.6
focusses on country differences in institutions.
Edward J. Amadeo and Susan Horton 3

Labour flexibility has become a major issue in debates over the efficiency
of stabilization plans and structural adjustments. The capacity of the
labour market to promote the adaptation of the labour force to new cir-
cumstances is rightly seen as a major factor in reducing the costs of
macroeconomic shocks and policies. In this connection, real wage flex-
ibility and employment flexibility (or the mobility of workers across
geographical regions and sectors of the economy) play pivotal roles.
In this book, we look at flexibility from a broad perspective. We do not
deny the importance of the more conventional notion of 'labour market
flexibility' based on wage and employment flexibility. On the contrary,
we will assess it from both the conceptual and the empirical points of
view. But we will emphasize other dimensions of labour flexibility.
Accordingly, we see the latter as the combination of labour market flex-
ibility and labour input flexibility as discussed in more detail in Section
1.3. Given the attributes of the labour market, labour as an input can be
more or less adaptable to different circumstances. Technological changes
or movements in the sectoral profile of demand will have different impacts
on the levels of employment and productivity depending on the extent to
which workers can accommodate changes in the environment.
The determinants of labour flexibility are strongly affected by institu-
tions, management practices and public policies. In trying to identify
alternative ways to enhance flexibility, we must attack these different
dimensions. In other words, it seems fruitless to treat flexibility only from
a macroeconomic perspective or through the workings of the labour
market. We must integrate into the analysis a discussion of the roles of the
institutional apparatus which regulates the labour market and capital-
labour relations, the attitudes of management and workers within the
enterprise and public policies which affect labour directly.

1.2.1 Dimensions of Flexibility

The general question about labour flexibility is the following: to what

extent does labour mobility across sectors, geographic regions and skill
affect the timing and social costs associated with the implementation of
programmes aimed to adjust the economy to shocks of varied natures?
The conventional macro and microeconomic analysis takes for
granted that capital-labour relations are based on an exogenously given
4 Labour Flexibility and Productivity
technological set determined by an engineer's blueprint and regulated by
the so-called 'right to manage contract'. In a right to manage contract, the
profit maximizing firm (acting in the name of shareholders) and the union
(acting on behalf of workers), bargain over the wage rate and, once the
wage is determined, the firm decides on the level of employment based on
given technological and market constraints.
The right to manage contract is a benchmark but does not represent the
state of the art in theoretical labour economics. A variety of alternative
approaches has been developed in the recent past. I These approaches em-
phasize the existence of labour markets inside firms where on-the-job
training and seniority are very important determinants of wages and
employment, introduce a new set of 'objective functions' and hence incen-
tives on the part of the firm and workers, assume different forms of remu-
neration of workers, and point out the importance of the organization of
production in determining the productivity of labour. There are obvious
implications of these alternative approaches for the analysis of labour
flexibility and productivity.
However, most of the empirical analysis and case studies of labour flex-
ibility tend to ignore the insights stemming from the new approaches.
They are essentially based on the conventional right to manage model, and
as a result, they tend to emphasize certain dimensions of the problem
leaving aside other important aspects. In general they emphasize the
macroeconomic aspects ofJormal labour market.
The emphasis on the market is based on the simplistic view that labour
is like any other commodity whose price is determined by supply and
demand. It is true that to a certain extent, wages and workers' discipline
do indeed respond to market forces. However, due to the very specific
characteristics of labour contracts, institutional aspects also play a major
role. The history of the labour movement, the structure of unions and the
relation between unions, members and employers, the characteristics of
the bargaining process between unions and employers and labour legis-
lation, and the operation of labour market policies such as training institu-
tions are paramount to an understanding of the determinants of wages,
employment and labour productivity.2
The macroeconomic approach to labour market flexibility highlights the
costs - measured by the duration and extent of unemployment - of wage
rigidity. Wage rigidity certainly has macroeconomic determinants (market
conditions and wage laws are two examples) but it is within the firm,
where wage contracts take place, that the degree of rigidity is ultimately
determined. Not only wages, but more generally, labour costs - which
depend on the productivity of labour as well as non-wage labour cost - are
Edward J. Amadeo and Susan Horton 5
ultimately the result of the relation between workers and employers within
the firm. Thus, it is essential to look at microeconomic dimensions of the
relation between capital and labour in order to access the ultimate deter-
minants of flexibility.
We mentioned productivity in the previous paragraph as an important
determinant of labour costs. The skills and production of labour results
from the level of general education of workers, specific training, the
equipment available and the system of incentives which ultimately shape
workers' attitudes. Education is something exogenous to the firm whereas
the equipment and the system of incentives are intrinsic to the firm; train-
ing depends on the efficacy of official training agencies and on the learn-
ing by doing process inside the firm.
The analysis of flexibility is biased by the structure of labour markets
and institutions in the Northern hemisphere where informal practices
are not as significant as they are in the South. The informal sector is
structuraIly large in Third World countries and plays an important role
as a buffer in periods of adjustment. As a buffer, it is a mechanism
which increases the flexibility of labour. In this connection, the crucial
question is: How efficient is the informal sector as a mechanism of flex-
ibilization in terms of the adaptation of skills to new economic struc-
tures and the reduction of costs measured by unemployment and income
FinaIly, studies of labour flexibility totaIly ignore the interaction of
social actors in determining the set of feasible (and most efficient) solu-
tions to enhance flexibility. The outcomes of economic policies are not
independent from the response and attitudes of the major social actors.
The resistance to the adoption of policies on the part of important groups
depends on a collection of factors ranging from the incentives to free ride
to ideological or political considerations. Unions, employers' associations,
political parties, do affect the processes of adjustment and the degree of
labour flexibility.

1.2.2 The Costs of Labour Rigidity

The labour market responds in different ways to changes in the environ-

ment. In advanced industrial countries, the lack of labour flexibility results
in increases in the rate and duration of unemployment. Indeed, the long
wave of unemployment in many European countries since the late 1970s is
seen in the literature as a consequence of the lack of flexibility of the
labour market. 3 The costs of rigidity are accordingly associated with the
income losses and the depreciation of skills suffered by unemployed
6 Labour Flexibility and Productivity
workers; as well as with the reduction in investment and thus growth
potential in the long run resulting from the decline in profits due to lower
rates of capacity utilization.
Unemployed workers in advanced industrial economies live on savings
and unemployment insurance. These are not feasible alternatives for most
urban workers in Third World countries: they save almost nothing over the
course of their lives and the insurance system to protect them against
unemployment is extremely restrictive. The alternative is obviously to
migrate to the informal segment. In this context, the specific questions
here are: How long will the worker stay in the informal segment? What is
the degree of skill depreciation? If the worker's skills depreciate very fast,
instead of a transitory situation, the passage through the informal sector
may well become permanent.

1.2.3 Macroeconomics and the Labour Market

The exogenous shocks which make labour flexibility a relevant issue

usually have a macroeconomic character. The most common are stabiliza-
tion programmes, recessions and structural changes in the pattern of
demand and production. Orthodox stabilization policies and cyclical re-
cessions have the same consequences namely, a reduction in aggregate
demand and thus the demand for labour, given the real cost of labour.
Structural changes, on the other hand, lead to a mismatch between the
desired pattern of production and the sectoral distribution of labour, given
relative wages.
The two situations are different. In a stabilization or recession, labour
flexibility requires changes in the real cost of labour. In the case of struc-
tural changes, flexibility requires changes in relative wages. Conventional
analysis assumes that in either circumstance downward wage flexibility
will necessarily translate into labour market flexibility. Indeed, the cano-
nical notion of flexibility is associated with the degree to which wages are
flexible enough to (a) reduce labour costs and thus restore profitability in
face of recessions or (b) allow changes in relative wages in face of
structural changes.
Even in recessions and stabilizations, however, it should be noted that a
reduction of the product wage is not the only way to reduce labour costs.
An increase in labour productivity, given the wage, will have the same
effect. Hence, it seems to be very important to look at the determinants of
labour productivity instead of only concentrating on the determinants of
wage rigidity in discussing the determinants of flexibility.
Edward 1. Amadeo and Susan Horton 7
The typical analysis sees the cause of persistent unemployment and re-
cession in the downward rigidity of labour costs. Reducing the product
wage would tend to restore profitability and thus reduce the rates of unem-
ployment and idle capacity. However, in many Third World countries, un-
employment and stagnation result from deficient aggregate demand due to
poverty and inequitable distribution of income. When this is the case, an
attempt to reduce labour costs via wage cuts could depress aggregate
demand even further.
When looking at the experience of 12 developing countries during
stabilization plans, Horton et at. (1991) note that 'the evidence ... cer-
tainly does not support the rigid wage view', and conclude that 'aggregate
demand feedbacks from declining real wages and product market im-
perfections' may well be the cause of persistent unemployment during
stabilization attempts. They also note that 'in the case of Korea, owing to
the fast growth of labour productivity, it was able to reduce unit labour
costs in dollar terms by temporarily holding real wages constant, which
led to a very quick recovery of exports. At the same time, since the slow-
down in real wage growth was so short, there was no significant deflation-
ary impact in the domestic market' (p. 541).

1.2.4 Models of Labour Flexibility

In trying to identify major trends or models of labour flexibility, three dis-

tinct cases appear as obvious candidates for paradigms: the market-
oriented model, the neo-corporatist model, and the J-mode (to borrow
Aoki's, 1990, terminology). Most countries have elements of these three
ideal types. The three models result from different combinations of
systems of incentives and political and institutional forces which translate
into labour legislation and labour market policies and programmes.
The market-oriented mode resembles the right to manage system
mentioned above. The basis of this model is the absence of costs to fire or
layoff workers. When the costs of layoffs are low, firms will dispose of
their workers whenever their services become redundant. The market,
through movements of relative wages, serves as the central mechanism to
reallocate displaced workers. Workers will migrate from stagnant or
declining sectors into more dynamic sectors of the economy. When the
labour market is rigid, instead of moving across sectors, workers will
remain unemployed. The rate of unemployment and the duration of the
unemployment period are good measures of market rigidity. In Third
World countries, where the unemployment insurance is very precarious,
8 Labour Flexibility and Productivity
the informal sector plays an important role in enhancing the degree of
flexibility of the market.
Contrary to what the market-oriented model suggests, labour flexibility
is not necessarily associated with deregulation, low firing costs and
absence of agents with market power; nor with the workings of market
forces economy wide. What the neo-corporatist and J-mode systems show
is that - just the opposite - very regulated and institutionalized labour
markets and internal labour markets can also give rise to labour flexibility.
One could distinguish flexibility 'internal to the firm' and 'economy
wide', the latter meaning outside the firm.
In the J-mode described by Aoki, the source of flexibility rests inside
the firm and results from a system of incentives based on job security (life-
time employment), a specific system of promotion and work organization
and a pay system based on a combination of wages and bonuses. Aoki
argues that these three elements together provide the conditions for a coin-
cidence between the objectives of stockholders and workers. Different
from the right to manage type of contract, in the J-mode firm, 'the corpor-
ate management decisions ... are subject to the dual control (influence) of
financial interests (ownership) and employees' interests rather than to
unilateral control in the interests of ownership' (1990, p. 20). In face of a
change in the market environment, the alternative of laying off workers or
firing them is simply not part of the menu. Flexibility must then result
from a reduction in pay, the reallocation of effort and the acquisition of
new skills. Unions are enterprise-based in the J-mode firm and serve as an
ancillary instrument to the personnel department in enhancing the per-
formance of the firm.
Job security is also a characteristic of the neo-corporatist system but for
completely different reasons. Here the system of incentives works at the
political level nation wide. 'Encompassing organizations' (Olson, 1986),
that is, central unions and employers' associations, whose interests co-
incide to a large extent with the collective interests of the population,
together with political parties and the administration, negotiate the means
to attain two central goals, namely, full employment and low levels of
economic inequality. The means vary from negotiated wage restraint to
the development of agencies in charge of training and reallocation of
unemployed workers. 4
The three systems described should be seen as 'ideal models' in the
sense that they do not exist as such in any particular country. It seems
more accurate to say that in all countries the three models are combined
with different intensities. Thus, there are J-mode firms in the USA, but
they really predominate in the large enterprises in Japan. Small firms in
Edward J. Amadeo and Susan Horton 9
Japan or Italy act more or less in accordance with the market-oriented
system. Canada can be seen as a hybrid case with features of the regulated,
neo-corporatist European markets and features of the market-oriented US
We have tried to characterize flexibility in a broad sense, including
certain elements usually absent in conventional analyses. In particular, it
would seem entirely inaccurate to identify flexibility solely with the
features of the market-oriented model, i.e. low costs of firing, unregulated
labour market, low unemployment benefits, locally organized labour
unions and absence of active labour market policies.
The keys to flexibility are flexible labour costs (not necessarily wages)
and workers whose skills are adaptable to different circumstances - both
over the cycle and over more structural shocks. These two elements are
not alien to systems in which unions are strong and centrally organized,
the cost of firing workers is high (or even if they are not high, firing is
unusual), labour market policies are active and the labour market is not
totally unregulated.


The term labour market flexibility is widely used in relation to situations

in which the labour market is 'responsive' to changing demand and supply
conditions. Flexibility is often defined as the capacity of the market to
create the conditions for the economy to return to an optimal eqUilibrium
position after an exogenous shock. Optimality is typically associated with
a situation where there is full employment. Hence, the rate of unemploy-
ment (together with the duration of unemployment) is seen as the main
measure of labour market rigidity. The greater the rate of unemployment
resulting from an exogenous shock, the smaller the degree of flexibility of
the labour market.
This is rather a narrow definition. Indeed, according to it, flexibility is
not necessarily associated with an optimal allocation of the labour force in
the economy. A more encompassing notion would consider 'efficiency' as
another factor in defining a flexible labour market. Based on such broader
definition, in a competitive environment, the wages of homogeneous
workers should be equal to their marginal products. Accordingly, wage
differentials would result from differences in human and physical capital
among workers and jobs. If, for some reason, workers cannot move from
one sector of the labour market to another, and labour productivity differs
among sectors, the economy will be operating below the optimal allocation
10 Labour Flexibility and Productivity
of the labour force. Productivity and aggregate output could be increased
by transferring workers from the low productivity sectors to the high pro-
ductivity sectors.
Segmentation of the labour market reduces labour market flexibility by
reducing the mobility of labour. If in different regions, for example,
workers have different productivity but there is regional segmentation,
equilibrium in each market separately will generate full employment, but
the allocation of the labour force is not optimized.
Thus, if optimal allocation of resources is a condition for flexibility, we
need more than full employment to characterize a flexible labour market.
Indeed, under the broader definition, full employment is a necessary but
not sufficient condition for flexibility.
Another important element in the characterization of flexibility is the
timing of the adjustment in face of a shock. Flexibility in the sense just
discussed is a static concept. It has nothing to say about the time span
required for an adjustment of the economy towards the optimal position.
In face of a shock, if the structure of human and physical capital is such
that the costs of the shift from one occupation, sector, or region to another
are high, it would take a long time before the market could reach a new
equilibrium with full employment and an optimal allocation of the labour
One way to introduce dynamics is to consider explicitly the timing of
the adjustment. In this case, we could say that the longer the period of ad-
justment, the less flexible is the labour market. Flexibility will be greater
the easier it is for the economic agents to reconsider their decisions. In
this new sense, the (social and private) costs of labour reallocation become
an important variable in the characterization of flexibility. If these costs
are high, reallocation will be difficult and an exogenous shock will result
in long periods of labour misallocation and unemployment.
If flexibility is characterized by the recovery'of an optimal allocation of
the labour force among jobs in face of a shock, labour market rigidity can
result from three factors:

• Segmentation Rigidity can result from segmented labour markets in

the sense that it is difficult for workers with similar characteristics to
move from one segment of the market to another. Segmentation can
occur for different reasons. 5 If workers are unable to move, an external
shock which reduces labour demand in one segment of the market, and
increases demand in another segment, will generate misallocation of
labour and unemployment.
Edward J. Amadeo and Susan Horton II
If it is impossible for a worker to move from one segment of the
labour market to another, the market is rigid in the static sense. On the
other hand, if the cost of migrating to expanding sectors is very high,
so that labour reallocation is slow, the market is rigid in the dynamic
• Real wage rigidity given the level of labour productivity Given a
reduction in the demand for labour, marginal labour productivity will
become smaller than the real wage at the previous equilibrium situ-
ation. Given the productivity of labour, if the real wage does not fall
after the shock, the result will be below optimal labour allocation and
If there is complete downward rigidity of real wages and complete
upward rigidity of labour productivity, labour market will be rigid in
the static sense. If real wages react slowly, or if labour productivity
does not increase fast enough in response to an external shock, there
will be rigidity in the dynamic sense. Note that it is the relative reac-
tion of these two variables which matters. This point will be analyzed
with more care below.
• Employment rigidity The degree of employment rigidity is deter-
mined by the presence of barriers to the dismissal of redundant
workers by firms, and is affected by the incentives (costs and benefits)
for firms to reexamine their decision to employ workers. Employment
rigidity can also be seen from the workers' perspective, that is, accord-
ing to the incentives for workers to move from one job to another.

If the costs of dismissing workers are high, firms will be much more
careful when hiring new workers in order to avoid such costs in face of a
reduction in demand. The result will be that firms will increase their
labour force only when they are sure that the increase in demand is not
transitory. This will imply the misallocation of labour over the business
If the costs for workers of moving from one job to another are high, the
rate of labour turn-over will be much lower, especially during expansions.
This will also reduce the degree of labour mobility with potential deleteri-
ous effects for efficiency.

The previous discussion refers to the notion of labour market flexibility. In

what follows, we introduce the broader notion of labour flexibility which
encompasses both labour market flexibility - as determined by the degrees
of segmentation, real wage rigidity and employment rigidity - and labour
12 Labour Flexibility and Productivity
Figure 1.1 Components of labour flexibility

Mobility Employment Producti vity

flexibility growth

input flexibility. The latter refers to the capacity of labour qua factor of
production to adapt to changes in the environment. The greater such ca-
pacity, the greater the ability of the economy to attain an optimal position
in face of a shock given the real wage and the level of employment (see
Figure 1.1)
Labour input flexibility depends on the degree of flexibility of the
human capital endowment of workers and the potential rate of growth of
labour productivity. If the human capital endowment is too specific, so
that it is impossible for workers to move from one occupation to another,
the system is rigid in the static sense. If, on the other hand, it is expensive
and time-consuming to change the human capital content, there is rigidity
in the dynamic sense. Hence, the more specific is the human capital
endowment of the labour force, the greater the degree of rigidity.
Human capital flexibility has to do with the costs and benefits affecting
the decisions of firms and workers over the content of human capital for-
mation. General or formative training enhances the capabilities of workers
to learn new tasks and therefore to have multiple abilities. Specific train-
ing, on the other hand, is directed towards special tasks. Depending on the
type of capital-labour relations, the incentives to workers and firms to
invest in one or other kind of training can be very different. We shall
argue in the following section that these incentives are not independent
from the degree to which job security is valued by workers and firms as a
result of cultural factors and legislative constraints.
Labour productivity is also an important determinant of labour input
flexibility. As noted above, real wage flexibility is not a sufficient condi-
tion for flexibility. What matters is the relative movement of real wages
and labour productivity. In an economy in which productivity growth is
seen as part of the objectives of firms, and the potential growth of produc-
Edward J. Amadeo and Susan Horton 13

tivity is high, the possibilities of responding to a shock without relying on

unemployment and real wage deflation are obviously greater.
Note that human capital flexibility and productivity growth are not inde-
pendent from the institutional arrangements based on which issues such as
the pay system, job security, on-the-job training, work journeys, and so on
are determined. Hence, the institutional basis of capital-labour relations
plays an important role in determining labour flexibility.
There exists a latent contradiction between employment and real wage
flexibility - the determinants of labour market flexibility - and the deter-
minants of labour input flexibility, especially labour skills and hence
potential productivity growth.
In firms in which the main adjustment variables to shocks are the level
of employment and real wages, labour contracts tend to be short. In an
economy in which most firms react according to this pattern, the average
job tenure will be short, the frequency of unemployment - as measured by
the average number of times workers are fired - will be high, and real
wages will vary widely over the cycle. This is how observers commonly
picture a flexible labour market.
An important property of the labour market is the asymmetric nature of
the information available to agents. Firms have information about their
technology, their market possibilities and constraints, the way they relate
to their employees and what they expect from them. On the other hand,
workers know best their own productive capabilities, their motivation and
their working power. The information available to the two agents is gradu-
ally shared once the work relation materializes, that is, once the labour
contract starts. The extent to which the information is shared is directly
determined by the duration of the labour contract. This means that any
time a worker accepts a new job and an employer contracts a new worker,
they are both buying a lottery and not a good or service with known
characteristics. Thus, if the labour contract is short on average, the sharing
of the information will be limited.
The problem here is similar to that presented by Akerlof (1970) in his
'market for lemons'. There are 'good' and 'bad' workers. However, since
it is impossible for the employers to know beforehand who are the 'good'
workers and w.ho are the 'b'ad' workers, they will offer the same wage for
both. The market for good workers will tend to disappear as firms do not
have the incentives to offer high wages.
The quality of workers is a positive function of labour costs - including
wage costs and the costs of training. Since firms tend to pay low wages to
all new employees and provide only elementary and specific training, the
14 Labour Flexibility and Productivity
result will be the reduction in quality, which in turn will depress wages.
Hence, given the asymmetry of information in the labour market, short-run
contracts will result in the reduction of the quality of the labour force, low
productivity and low wages. Another important problem with short-run
contracts is that they increase uncertainty and distrust between employers
and workers, reduce motivation and, 'as the game theory literature shows,
increase the level of conflict, reducing productivity in the medium and
long run.
On the other hand, if labour contracts are long, firms will tend to be
more conservative and careful about contracting new workers. They will
do so only if they are sure the increase in demand is permanent. They will
try to figure out beforehand the quality potential of the workers they are
employing, But, at the same time, as workers become a quasi-fixed factor,
this will change the incentive structure of firms and workers and, as a
result, the work relation.
A similar argument can be made if real wages are too flexible. Actually,
from the point of view of workers, not only the level, but also the variance
of the real wage, affects their welfare. Thus, too much variance of real
wages will generate dissatisfaction, conflict, lack of motivation and loss of
producti vity.
If, for political, economic or cultural reasons, the normal length of the
labour contract is long, low productivity workers will affect the average
rate of productivity in a firm in the long run. This will force the firm to
develop schemes to increase motivation and the productivity of its em-
ployees. In general, we can say that the induction to work can be obtained
through punishment - the threat of unemployment - or through incentives
- pecuniary or others. If it is difficult or expensive to fire workers, the
threat of unemployment becomes non-credible and the induction to work
will have to be made through incentives.
Incentives are a function of promotion possibilities, good working con-
ditions, pecuniary incentives linked to productivity gains (bonus schemes)
and training opportunities. Hence, there are important by-products of insti-
tutional arrangements which induce long-run labour contracts, namely, a
higher incentive to invest in the labour force by the firms, and to adopt
flexible remuneration schemes and better working relations. Also, when
long-term contracts prevail, it becomes important to have a flexible labour
input in the sense that workers' human capital can be used on different
production lines or can perform different tasks. This will mean permanent
investment in training of a more general kind and an increase in the
qualification level of the labour force. All this will result in more pro-
Edward 1. Amadeo and Susan Horton 15
Finally, if the payment system goes from a purely wage system to one
where bonuses based on productivity become an important share of the
real income of the workers, the results will be greater flexibility of the
labour cost and possibly greater labour productivity. This will also reduce
the supervision costs of the firm, due to the. direct links between
remuneration and productivity.
Unemployment will be valued differently under different circumstances.
If labour contracts are durable, firms will try everything before they take
the decision of firing a worker. Firing becomes a 'last resort decision'
when nothing else works. Thus, if a worker is fired, the signal for other
firms is that there is something wrong with him, unless the firing was a
result of bad management. Thus, to be unemployed becomes important
information in the labour market, signalling that the worker has low pro-
ductivity potential or some other undesired characteristic. All this will
result in a longer period of unemployment for the unemployed worker.
In an economy in which workers become frequently unemployed, the
fact that a worker has been unemployed many times in the past does not
provide any relevant signal to the firms about his capabilities. Thus, it will
be less expensive for the firms to contract a new worker temporarily so as
to test his productivity, than to develop a human resources department to
select and train the workers. This will also mean that a high rate of labour
turnover will be a poor indication about the quality of the firm as an
employer. For the same reasons, the workers will have much less commit-
ment to the enterprise and will have incentives to change employment.
But it will also make dismissal a more undesirable punishment for the
worker, reinforcing the incentive to long-run labour relations which is
induced by the high costs of dismissals. Thus, in an economy where there
is some inducement to long-run labour contracts, firms and workers will
have the incentive to develop long-run labour relations. Long-run labour
relations, in turn, tend to generate a more cooperative attitude between
these two agents, reducing the level of conflict. Thus, the productivity loss
generated by conflicting labour relations is reduced.
What is being suggested is that institutional arrangements which
lengthen the duration of the labour contract also provide the information
required to cr~ate the market for good workers and for good jobs that is
missing in the case of markets with short-run labour contracts.
As a result, we would argue that too much employment and real wage
flexibility will tend to reduce labour input flexibility by reducing both
human capital flexibility and productivity growth. Hence, there seems to
be a potential contradiction between the determinants of labour market
flexibility and labour input flexibility. Indeed, low employment flexibility
16 Labour Flexibility and Productivity
has two opposite effects. On the one hand, it reduces labour market flex-
ibility through the increase in the duration of unemployment and it reduces
the rate of creation of employment. But it raises flexibility in other ways.
It induces firms to take action in the direction of increasing the productiv-
ity of its labour force and of investing in its human and physical capital so
as to make them more flexible and less specific, and of making labour
relations more cooperative and less conflictive. Thus, an external shock
which reduces demand could be counteracted by changes in the structure,
of production and increases in productivity, rather than exclusively by
reallocation of labour between sectors and regions.
Thus, there seems to exist an optimal level of employment flexibility,
which is smaller than the 'maximum'. If it is too high, there will be little
investment in human capital, low levels of qualification of the labour force
and little incentives to increase productivity. The rate of unemployment
will be small, but the quality of the jobs and the real wages will be low. If
it is too small, the increase in rigidity will be difficult to counteract by
measures which will increase labour input flexibility.
We should note that if labour flexibility is obtained through employ-
ment flexibility, this will have a perverse effect on potential productivity
growth, and therefore, the reaction to negative shocks will be mainly
through reductions in real wages, if they are flexible. On the other hand, if
flexibility is obtained through measures to increase the adaptability of
labour input, the response to shocks will mainly be through increases in
labour productivity. In the long run, we should expect that in the first case,
labour productivity will grow slowly, while in the second it will grow
much faster.
A final question is whether firms have a natural preference for employ-
ment flexibility in the absence of institutional constraints to the dismissal
of workers. This is a difficult question to answer. Small firms cannot
afford to develop human resources and training departments nor to post-
pone reductions in their labour force in face of negative shocks. In general,
therefore, job security is not part of their strategies, and employment flex-
ibility becomes the natural response in face of adverse demand circum-
stances. Large enterprises, on the other hand, due to economies of scale,
are able to build human resources departments, recruit and select workers
with greater potential and provide their employees with training. Due to
their capacity to bridge crises keeping the long run in perspective, it is
much easier for the large firms to avoid firing their workers during down-
turns if they see job security as an important factor in enhancing their
competitive advantage. Besides the differences in attitudes due to the size
of firms, there are other factors affecting the posture of firms towards job
Edward 1. Amadeo and Susan Horton 17
security. Political and cultural factors, affect the strategies of firms in this
respect. The case of the large Japanese enterprises and their 'lifetime em-
ployment' approach, for example, is well documented in the literature. 6
In face of the previous discussion, it becomes clear that the attitudes of
firms towards job security are relevant in discussing labour flexibility. If
firms have a preference for employment flexibility, investments in general
human capital formation become very risky. Firms will concentrate their
investments in specific training so as to avoid the losses associated with
the dismissal of workers. The lack of general training implies that the
labour force is less prepared to be reallocated to different lines of pro-
duction and to different tasks.


From a methodological perspective, it is very important to bear in mind

that markets and institutions develop over time and are not devoid of his-
torical determinants. Cultural elements are ingrained in the workings of
markets and the attitude of social actors, and it is not necessarily true that
trying to eliminate institutions will benefit economic development.
In this respect, it seems reasonable to argue that none of the models of
labour flexibility described in section 1.2 should be seen as targets for any
country. The development of the systems is the result of the history of the
countries with which they are identified. They should serve as ideal type
situations, given certain historical characteristics of each national context.
Under different national contexts, the systems can be adapted, but not
In the chapters in this volume, the authors emphasize four elements in
assessing labour flexibility, namely (a) the role of institutional arrange-
ments and legislative apparatuses; (b) the relation between macro-
economic performance and the labour market; (c) labour mobility, market
segmentation and the informal sector; and (d) labour processes and train-
ing. The assembling of these four elements is key to understanding labour
flexibility and productivity.
Three 'optimality criteria' are identified in order to discuss labour flex-
ibility, namely, the attainment of full employment, allocative efficiency
and productivity growth. These criteria correspond each to one of the
elements of labour flexibility, and all three of them apply to the analysis of
institutions, as shown in Table 1.1.
'Institutions and legislation' play an encompassing part in the analysis.
All the other aspects are somehow affected by the institutional organization

Table 1.1 Four elements of labour flexibility

Institutions and Labour market Segmentation Labour process

Legislation flexibility and mobility and training

Optimality (All) Full Allocative Producti vity

criteria employment efficiency growth
Instrument to System of Wage and Relative wage Reduction of
attain incentives as employment flexibility conflict and
"optimality" determinants of flexibility development of
individual and "human capital"
collective action
Edward J. Amadeo and Susan Horton 19
and the legislative apparatus around which (or based on which) the rela-
tion between employers and employees takes place. In a sense, the
institutions and the legislation affect all the optimality measures. They
affect the level of employment through the legislation on dismissals,
unemployment benefits, training agencies, etc. They affect allocative
efficiency through measures to reduce labour segmentation such as 'equal
opportunity clauses' or the operation of reallocation agencies. They affect
productivity through the system of incentives within firms which are in
turn strongly influenced by the structure and organization of the union
'Labour market flexibility', or wage and employment flexibility, is very
important in the determination of the rate and duration of unemployment.
'Segmentation and labour mobility' has a direct effect on the sectoral allo-
cation of labour and hence on the efficiency of the labour market. Finally,
'labour process and training' is paramount in the determination of the
productivity of labour and the adaptability if labour within the firm.
When assessing empirical evidence on flexibility, it is important to use
some benchmark. Without quantitative models of the elasticity of supply
and demand for labour in different countries, and some information about
the size of shocks, it is hard to make inferences based on observed
changes in prices (wages) and quantities (employment and unemploy-
ment). Even where comparisons are made using historical data, observ-
ing different countries responding to the same external events (for
example, oil price rises), the size of the shock varies by country depend-
ing on the degree of openness of the economy, the amount of domestic
production of oil, etc. It does seem likely that of the countries studied in
this volume, the USA (having the largest and least open economy)
suffered the smallest shocks, and that the shocks for the Latin countries
were amongst the largest, and this has to be borne in mind when
interpreting any evidence.



In this section we discuss evidence from the country studies on labour

market flexibility (flexibility of aggregate employment and wages), as well
as labour market segmentation and sectoral labour mobility. The discus-
sion of country evidence on institutions and productivity is in section 1.6.
Table 1.2 summarizes some of the evidence discussed in this section and
the next. Since we do not have fully-specified models which include the
Table 1.2 Summary of country evidence on labour market flexibility and N
sectoral mobility 0

Country/ Participation Trends Segmentation level Change in wage

Region response structure

Canada Discouraged worker Casualization Larger by Less increase in

region/union than inequality
Europe Discouraged worker Rise part-time; Large union, region Increase in
deregulation in UK effects inequality in UK
Japan Discouraged worker Small rise part- Strong seniority, No change
time; fall firm size effects
USA Discouraged worker Casualization Union effect falling; Large rise in skill
some region effects differential
Brazil Discouraged worker Shift from formal to Large wage gap, but Formal/informal
Informal also large flows and
gap widened
Chile Discouraged worker More flexibility in the Small Large rise in
1980s than 1970s: formal/informal education
despite prohibition gap differential
of collective
bargaining in the
Mexico Added worker More flexibility: High Large rise in
shift from formal/informal education
corporatist state- gap differential
Table 1.2 (Continued)

Country Wage flexibility Unemployment Hours Shift

response flexibility formal/informal

Canada Less than USA Larger than USA Low Low

Europe Low Large Low Low
Japan High (bonuses) Low High Transfers within
USA Medium Fairly low Low Medium
Brazil High (inflation) Low Less important High
Chile High (inflation) High Less important Low
Mexico High Low Less important High

22 Labour Flexibility and Productivity
labour market, results must be interpreted cautiously. We discuss below
the evidence from some indicators, first for the OEeD countries, and
secondly for the Latin countries.
Some existing studies use a common methodology to test an aspect of
flexibility across countries. The most common are studies of 'macro'
labour market flexibility - wage and (un)employment adjustment. Allen
and Freeman (Chapter 8 in this volume) summarize some previous results.
They discuss Layard et al.'s (1991) study estimating wage response to un-
employment using aggregate data (Phillips curves), in which Canada, the
USA and France exhibited an intermediate amount of wage flexibility,
wage rigidity was lowest in Italy, Japan and the EFTA countries, and was
highest in Australia, Spain, Germany and the UK. Studies of wage re-
sponse (Blanchflower and Oswald, 1994; also discussed in Allen and
Freeman, Chapter 8 in this volume) find that the elasticity of real wages to
unemployment rates is remarkably similar across a range of countries.
(Hoddinott, 1995, finds a similar response for one African country, Cote
d'Ivoire.) In other words, the casual observation that unemployment has
changed less in the USA than other countries in recent years may reflect
smaller shocks, not necessarily greater flexibility.
Studies based on historical data on labour market flexibility (wages and
unemployment), not controlling for the size of shocks, come to rather dif-
ferent conclusions. Such studies regard the rapid growth of employment in
the US in the 1980s - as compared to the ascent to double-digit unemploy-
ment in Europe - as evidence of greater labour market flexibility in the
USA (Klau and Mittelstadt, 1986). It seems fairly clear, however, that this
was accompanied by a much sharper increase in wage dispersion in the
USA than in Europe. The tradeoff between real wage growth and employ-
ment growth can be observed somewhat in data from Mazumdar (1994),
reproduced here in Table 1.3, although the fact that this is restricted to the
manufacturing sector alone (which has not been the main source of new
jobs) somewhat limits the scope of the analysis. In his decomposition
(using an identity) there is a tradeoff between growth in real wages and
growth in employment, for a given growth in output, conditioned also on
the changes in the domestic terms of trade (the relative price of consumer
goods relative to that of producer goods). For the two periods examined
(l971-80 and 1981-92), OECD countries as a group accepted falls in em-
ployment in exchanges for rising real wages. The two slower-growing
developing country regions experienced real wage cuts either in order to
mitigate employment losses (Latin America, where the terms of trade
effects were particularly adverse), or in exchange for increased employ-
ment (sub-Saharan Africa).
Table 1.3 Growth of real wages and employment, selected regions and countries, 1971-80 and 1981-92

Period/Region! Real wage Output effect Employment Domestic tot

Country growth effect effect

East Asia 5.32 11.46 5.77 -0.41
OECD 1.72 3.30 -0.23 -1.78
Latin America, Caribbean -2.13 1.89 -0.64 -4.60
Sub-Saharan Africa -3.40 1.19 4.39 -0.20
East Asia 5.17 12.06 4.36 -2.53
OECD 1.35 3.77 40.31 -1.99
Latin America, Caribbean -3.13 1.83 -0.78 -5.68
Sub-Saharan Africa -4.36 4.44 4.07 -4.73
Canada 1.67 2.97 1.12 -0.19
Japan 2.58 5.11 -0.99 -3.53
USA -0.09 2.78 1.00 -1.86
Canada -0.04 2.29 1.49 -0.83
Japan 2.00 4.44 0.56 -1.87
USA 0.63 3.56 -0.36 -3.29

Source: Regional aggregates from Mazumdar (1994): country data from unpublished work by Mazumdar. Data used are
manufacturing wages (UNIDO). Column 1 equals column 2 minus column 3 plus column 4, with a small discrepancy due to the
method of calculation of the instantaneous growth rates. Domestic terms of trade (Tot) effect refers to the producer goods price tv
relative to the consumer goods price.
24 Labour Flexibility and Productivity
Mazumdar's analysis (based on unpublished results; see also Table 1.3)
also permits comparisons for individual countries. Individual OECD coun-
tries behaved differently. The USA and Canada accepted lower increases
in real wages than the OECD average in exchange for higher employment
growth over the period 1971-80, and the same is true for Canada in
1981-90. This is consistent with the assertion in the literature that greater
wage flexibility in Canada and the USA required less adjustment in the
form of unemployment. However the analysis cannot be carried too far in
the light of the quite large and unexplained variations in domestic terms of
trade movements in different countries.
A different measure of labour market flexibility is frequency and
duration of unemployment. Shorter duration of unemployment (even with
greater frequency) might be interpreted as greater flexibility. On this
measure, data from Bivar (cited in Camargo, Chapter 2 in this volume)
suggests that amongst the developed countries the USA and Canada have
the most flexible labour markets (average unemployment duration is three
months or less), with Japan also exhibiting flexibility, whereas unemploy-
ment durations in the EEC countries are much longer (10 months for the
UK, and up to 105 months for the case of Spain).
Regarding indicators of ability to reallocate labour across sectors, more
studies exist of wages than of employment shifts. Wage structures have
been studied fairly intensively in individual countries. ILO (1995) com-
ments that Austria - seen as a very corporatist country - has the highest
inter-industry wage spread in Western Europe. Japan also has relatively
large economy-wide earnings inequality although the spread within the
firm is narrow (differentials between firms of different sizes are quite
marked, ILO, 1995). Poorer countries were in the past thought to have
wider differentials by education and skill, related to the relatively lower
supply of educated and skilled labour (Psacharopoulos, 1985).
Recent evidence indicates that there have in some countries been quite
marked changes in wage structure, somewhat to the surprise of many ob-
servers. The USA has experienced a marked widening of differentials by
skill and education since the 1970s (Murphy and Welch, 1992; Goldin and
Margo, 1992, Katz and Murphy, 1992), in sharp contrast to the narrowing
which had occurred between 1940 and 1970 (termed by Goldin and
Margo, 1992, the 'great compression'). This same widening has been quite
marked in the UK (Lindley, 1996, Chapter 6 in this volume), but less
marked in other European countries and in Japan. This may indicate some-
thing about the flexibility of wage structures, but at the same time it is
clearly important to take into account supply and demand effects. The
USA experienced a greater deceleration in the supply of skilled labour
Edward J. Amadeo and Susan Horton 25
than in other OECD countries, according to ILO (1995), and Baker et at.,
(Chapter 5 in this volume) explains the greater wage polarization in the
USA as compared to Canada as partly due to differences in the relative
growth of supply of educated labour in the two countries. Katz and
Murphy (1992) have a methodology for separating out demand and supply
effects which concludes that demand effects predominate in explaining the
change in USA wage structure. However this does not directly infer any-
thing about labour market flexibility without additional information.
As regards indicators of employment flexibility across sectors, ISCs
(indices of structural change) are one measure of the amount of adjust-
ment undertaken in labour markets. Allen and Freeman (Chapter 8 in this
volume) cite the OECD's results for developed countries 1969-89, which
suggest that structural change for the USA (based on one-digit industry
calculations) is lower than that of other OECD countries. The same is true
for Canada-US comparisons by one-digit industry and one-digit occupa-
tion since 1971 and 1977 respectively, according to Baker et at. (Chapter 5
in this volume). However this need not imply lower flexibility, more likely
simply that due to the larger domestic market and lesser importance of
trade, the adjustment required was less in the USA. Allen and Freeman's
time series data for the US (Chapter 8 in this volume) indicate no trend
over time in the ISCs by industry, occupation or region, which could be
interpreted as no change in labour market flexibility.
Another indicator of quantitative flexibility is tenure with firm.
Although longer tenure might be taken as implying lower flexibility, it is
not clear this is necessarily the case. In Japan for example the much higher
degree of mobility expected of employees within the firm (both geographi-
cally and between different positions) may offset the effects of longer
tenure within the firm, as compared to the USA. Saavedra and Imaoka
(Chapter 7 in this volume) confirm that employee tenure with the firm is
indeed longer in Japan than the USA, for below the age of 55 employees.
How do the Latin American countries rate on these indicators of flex-
ibility? It is difficult to make direct comparisons to the industrialized coun-
tries due to many differences. The Latin countries have a more limited
coverage of unemployment insurance (and hence a difference in what un-
employment statistics reflect), much smaller and more open economies,
and experienced much larger external shocks. As regards trends in real
wages and unemployment, it is clear that much larger adjustments have
been required of the Latin countries. Chile had astonishingly high levels of
unemployment in the early 1980s which took almost a decade to return to
acceptable levels. At the same time, real wages also showed enormous
fluctuations, falling by 60 per cent between 1970 and 1972 and recovering
26 Labour Flexibility and Productivity
to the 1970 level by 1982, and falling again by 20 per cent in the 1980s
before again recovering (Romaguera et al., Chapter 3 in this volume).
Some observers have argued that the extremely high levels of unemploy-
ment in Chile in the 1970s (25 per cent or more) were an indicator of lack
of flexibility in the labour market: in view of the drastic falls in real
wages, this scarcely seems credible. Mexico's recession came later but
also involved sharp reductions in real wages (around 40 per cent in indus-
try and construction and more than 50 per cent in agriculture: Zapata,
Chapter 4 in this volume, Table 4.10). Open unemployment was however
smaller than in Chile. Finally Brazil also experienced changes in real
wages, albeit smaller than in Chile and Mexico (real wages were 20 per
cent lower in the worst years of the 1980s as compared to 1981 levels),
and fluctuations in the level of open unemployment were also much
smaller than in Chile. For Brazil a study of wage response using the
Blanchflower and Oswald (1994) methodology indicated that wage
response was markedly more flexible than in the USA and Canada: in the
least flexible sector (the formal sector) the wage response was at least as
flexible as in the USA and Canada, and the other sectors exhibited greater
For developing countries, open unemployment is not necessarily very
useful as an indicator of ability to adjust, since poor workers often cannot
afford to be openly unemployed. Often more adjustment is borne by shifts
of workers between sectors, in particular from the formal to the informal
sector. In the OECD countries a related distinction sometimes made is
'good jobs/bad jobs'. In developing countries, a large degree of segmen-
tation between the formal and informal sector is seen as a source of
rigidity, as well as inefficiency. One test of segmentation is if workers
with identical human capital receive different returns in the two different
sectors. Typically, however, not all characteristics are measurable (and
workers may sort themselves between sectors based on unmeasured
characteristics), and hence an earnings gap cannot prove segmentation.
Nevertheless, the larger the earnings gap (using earnings functions), the
more likely segmentation is to be of concern. Larger gaps which are
harder to explain are more likely to involve queueing or other kinds of
rationing of access.
The informal sector has played different roles in different Latin coun-
tries. In Chile, Romaguera et al. (Chapter 3 in this volume) argue that the
formal/informal gap is quite small (20 per cent in terms of monthly earn-
ings, 10 per cent in hourly). They argue that the informal sector did not
play the role of a 'buffer' during recessions, and in fact this sector shrank
along with the formal sector. The informal sector is in any case quite small
Edward J. Amadeo and Susan Horton 27
- 20-25 per cent of non-agricultural employment, and as discussed above,
shifts into open unemployment were extremely large. In this respect Chile
is more similar to the OECD countries.
In Brazil there seems to be a greater fluidity between the formal and
informal sectors. The formal sector, as denoted by the existence of a
'signed contract', comprises about 52 per cent of the urban labour force
(Camargo, Chapter 2 in this volume). Workers can and do readily change
sectors. Even in the formal sector according to Amadeo and Camargo
(1994), 28-40 per cent of workers changed jobs in a year. Shifts between
the sectors can be a source of some flexibility in wage costs, since non-
wage costs in the formal sector are as much as 100 per cent of formal
sector wages (Camargo, Chapter 2 in this volume).
In Mexico, the informal sector also seems to be more important than in
Chile. Zapata (Chapter 4 in this volume) states that 45 per cent of the em-
ployed population is not covered by social security. The informal sector is
probably even larger than this, since it includes the self-employed. Zapata
argues that the informal sector did act as a buffer during restructuring and
recession, and also points out recent trends such as the informalization of
the service sector between 1979 and 1988, the feminization of employ-
ment, the shift out of public employment, and a decline in firm size
concentration. He likewise discusses the shift towards greenfield sites for
export, the increase in part-time work and the decrease in average hours
worked as part of a process of flexibilization of the labour force.
Of the indicators of sectoral labour reallocation, wage indicators are
more readily available than quantitative ones (ISCs - indices of structural
change, tenure with employer, etc.). The wage structure information is
interesting in that there is evidence of widening wage differentials in all
three countries. In Chile this is measured by a widening of skill and educa-
tion differentials (Robbins, 1994), in Mexico by a general widening in the
dispersion of wages (Berry, 1995), and in Brazil as a widening differential
between the formal and informal sectors, and the gap between formal
sector wages and the minimum wage. For Chile, use of Katz and
Murphy's (1992) methodology by Robbins (1994) indicates that as for the
USA, demand effects predominate.
The widening of wage differentials in developing countries is at first
sight surprising, in view of the simple predictions of the Heckscher-Ohlin
model combined with the Stolper-Samuelson theorem. However, this
widening is consistent with other theories of skill-augmenting trade and
endogenous growth, summarized in Robbins (1994). This would also be
consistent with the dismantling of labour market institutions in Chile after
1972, and with the trends towards informalization in Mexico discussed
28 Labour Flexibility and Productivity
above. These trends, paralleling US experience, may be taken perhaps as
undesirable aspects of flexibilization.


Table 1.2 (pp. 20-1) summarizes some of the evidence on institutions. It

can be seen that there are common trends in several countries.
Casualization of the labour force is evident in most of the countries in dif-
ferent forms, and this has been accompanied in several countries by a
widening of wage differentials. There are also differences in the mode of
adjustment which can be related to different institutions; these do not
imply greater or lesser flexibility, simply that the modes of adjustments are
different. Focusing on a single indicator of flexibility can be misleading.
For example, the USA may seem flexible when looking at employment
response to output growth, whereas Japan may seem flexible when looking
at wage response. These differences in mode of responses are in turn
related to different labour market institutions.
The USA is closest to the 'market-oriented' labour market model dis-
cussed in Section 1.2, and relies heavily on adjustment via external labour
markets, i.e. unemployment. This is encouraged by union seniority rules
for layoffs, and the fact that more senior workers have a greater say in
union decisions. Unions protect the hours of their members, and force ad-
justment onto marginal workers. The unemployment insurance system
also encourages adjustment via the external labour market. Those fired can
claim benefits (although the period is short), and experience rating for
firms is limited. The relatively limited legal protection against severance
makes dismissal of workers - even mass layoffs - relatively straight-
forward. In this type of system, it is important to have training mechan-
isms external to firms, at least for some kinds of workers.
The trends in institutions in the USA since the 1970s seem to have been
in the direction of greater flexibility. Unionization has fallen, the relative
value of the minimum wage has decreased, and the intensity of affirmative
action programmes from the 1960s has diminished. This has probably con-
tributed to the widening of wage differentials by skill and education,
although this has in turn mitigated (but not completely prevented) employ-
ment losses amongst the less skilled and less educated.
Canada is somewhat intermediate between the more laissez-faire USA
and more interventionist Europe. Much adjustment occurs via the external
labour market, but in a more modified form than in the USA. Unionization
has remained higher (in the face of more permissive legislation), un-
Edward J. Amadeo and Susan Horton 29
employment insurance is more generous than in the USA, especially in
depressed regions, and in some regions may have perpetuated a rather
marginal attachment to the labour force by some groups of workers. There
is also no experience rating of firms for unemployment insurance contribu-
tions, another difference from the USA. The rules on severance are a little
more strict. More segmentation exists: regional differentials are larger and
there is less evidence of a decline over time. Wage polarization has been
less marked than in the USA, but at the same time the unemployment rate
has also climbed relative to that in the USA.
In Europe, governments tend to be more interventionist, although there
is considerable variation. Germany (not examined in detail in Lindley,
Chapter 6 in this volume) has some similarities to Japan. The UK has
since 1970 made marked changes in its institutions and in several respects
is more similar to the US model than other European countries (see
Lindley, Figure 6.3, p. 195, on the importance of hiring and firing laws,
duration of temporary work, time needed to make workers redundant,
etc.). The UK has also experienced a precipitous decline in unionization as
in the USA, a fall in the union wage premium, and of all European coun-
tries the largest increase in wage polarization. However unlike the USA
the UK has not reaped the benefits anticipated in terms of employment
creation (see citations in ILO, 1995).
The other European countries are closer to the 'neo-corporatist model'
discussed in Section 1.2. The EFTA countries (Norway, Sweden, Austria
and Switzerland) are quite close to this model, although they are not dealt
with in Chapter 6 which focuses on the EU. According to ILO (1995)
these countries have had a better performance on unemployment than their
EU neighbours, although in Sweden at a considerable cost in terms of
public employment creation. Other neo-corporatist elements such as
centralized union bargaining are visible in France and Italy. Government
training expenditures tend to be higher in Europe than in the USA and
Canada, consistent with greater government intervention in labour markets
and greater use of the external labour market for job transitions.
Japan has again a very different set of institutions, and is the prototype
for the J-mode system discussed in Section 1.2. Despite Saavedra-Rivano
and Imaoka's efforts to downplay the differentials between Japan and the
USA (Chapter 7 in this volume), in Japan more adjustment occurs inter-
nally within the firm. Employees are expected to switch location or even
position, but to remain within the firm. Wage flexibility is greater than
elsewhere due to the bonus system. Saavedra-Rivano and Imaoka (Chapter
7) refer to the strikingly lower correlation coefficient between growth in
output and employment in Japan than in other OECD countries. At the
30 Labour Flexibility and Productivity
same time there exists considerable segmentation in Japan between large
and small firms (Mazumdar and Basu, 1994) which is not mentioned by
Saavedra-Rivano and Imaoka, and between different kinds of workers
(permanent versus part-time and 'arubaito', female versus male, etc.).
Japan has the rather dubious distinction, along with Korea, of having the
lowest ratio of female-male earnings in manufacturing using ILO statistics
(Horton, 1996). Another fonn of adjustment in Japan is through the rela-
tively early retirement age (around 55), which causes employees to shift to
lower paid jobs around this age.
Although the three models (market-oriented, neo-corporatist and
J-mode) are quite different in terms of institutions, it is interesting that all
models are facing some of the same external pressures. Unionization in
Japan has also fallen as in the USA, and there are predictions made that
wage polarization may similarly occur in Japan in the future (Saavedra,
personal communication).
In Latin American countries governments have been seen as more in-
terventionist in labour markets. Protection of the formal sector was seen
as an important factor in increasing segmentation of the labour market.
Strict rules on severance in several countries made it very difficult to lay
off workers, and led to circumvention by keeping workers on temporary
contracts. Relatively high mandated levels of non-wage benefits
exacerbated this. Strong unionization amongst formal sector workers
(often tied in to a corporatist alliance with the state as in Mexico) also
In Chile, the military government dismantled much of this structure
after 1972, with draconian measures such as suspending the labour code
for several years. In Mexico, Zapata (Chapter 4 in this volume) argues that
the rhetoric of corporatism still holds and ties unions' hands. Because of
their ties to the state (sometimes cemented by payoffs to corrupt union
leaders) unions have not as yet opposed the forces currently undermining
their existence, such as the shift of labour to the frontier, to services, and
the increasing feminization of the labour force.
Brazil is a little different from the Latin stereotype. Legislation exists
which would apparently segment the labour force, such as the high level
of non-wage costs (90 per cent of nominal wages). However the particular
institutional framework for severance pay creates an incentive for high
voluntary labour turnover among the relatively low paid. Additionally the
slow rates of processing labour disagreements in court creates an incentive
for workers to forgo the benefits of a 'signed contract' and reduces non-
wage labour costs of firms. Thus the labour market is extremely fluid.
Camargo (Chapter 2 in this volume) comments on the lack of incentive to
Edward 1. Amadeo and Susan Horton 31
invest in training within the firm, which may have adverse effects in the
long run on productivity.
How do different labour market institutions affect productivity? We
have seen that different institutions lead to different kinds of flexibility,
whether in wages or employment, in mobility within the firm or via the
external labour market, and to variations in the way in which the costs of
flexibility are borne by different groups of workers. Section 1.2 argued
that less government intervention in the labour market does not necessarily
imply greater productivity growth, and that simply sweeping away legisla-
tion and institutions is simplistic. The ILO (1995) argues that 'the world's
three most successful economies, the US, Japan and Germany, all have
vastly different institutional systems of wage determination, union density,
level of bargaining, coverage rates of bargaining and pattern of economy-
wide co-ordination' (p. 148). The ILO (1995) also examines a number of
specific institutions. For example, they look at the success of easing re-
strictions on hiring temporary workers in a number of countries, and con-
clude that in France and Germany hiring did not increase, and although
hiring of temporary workers increased in Spain and accounted for the
majority of new jobs since 1975, temporary workers also accounted for a
disproportionate number of those entering unemployment when their
contracts expired.
The studies here would support the same conclusion. Of the OECD
countries, Japan has had the highest rate of productivity growth, but the
labour market is very far from the atomized competition of neo-classical
theory. According to the ILO (1995), the USA and Europe had virtually
identical rates of output growth over the 1980s. In the USA this took the
form of lower labour productivity growth but higher employment growth -
so greater labour market flexibility did not buy anything in terms of higher
labour productivity. The only difference is that the poor in the USA were
working, whereas in Europe they were subsisting on unemployment
Figure 1.2 gives trends in output per worker in manufacturing (in
domestic currency) for the three Latin American countries in this book.
Figure 1.3 gives trends for several OECD countries. (Trends for value
added are quite similar.) The figures show that in Chile output per worker
rose in the 1970s (but stagnated after 1982 and even during the high
growth period after 1986), and in Mexico rose after 1982. By contrast,
output per worker did not increase in Brazil, which is perhaps consistent
with the very fluid labour market and lack of investment per worker.
Clearly more work on productivity would be very important, particularly
going behind the aggregate statistics.
32 Labour Flexibility and Productivity
Figure 1.2 Real output/worker, Brazil, Chile and Mexico, 1970-90, domestic
currency, manufacturing, 1985 = 100

~ 40
1970 72 74 76 78 80 82 84 86 88 90
--- Brazil -+- Chile -+- Mexico
Source: UNIDO

Figure 1.3 Real output/worker, Canada, UK and USA, 1970-90, domestic cur-
rency, manufacturing, 1985 = 100


on 60
~ 40
1970 72 74 76 78 80 82 84 86 88 90
--- Canada -+- UK -+- USA
Source: UNIDO


I. To mention the more important of these new approaches: internal labour

markets (Doeringer and Piore, 1971), efficiency wages (Shapiro and Stiglitz,
1984), implicit contracts (Azariadis, 1975), efficient contracts and mono-
poly union contracts (McDonald and Solow, 1981), insider-outsider
workers models (Lindbeck and Snower, 1986), and the J-mode firm (Aoki,
1984, 1990).
Edward J. Amadeo and Susan Horton 33
2. See Amadeo and Banuri (1991) for an analysis of the role of these factors in
explaining the differences between labour market responses to adjustment
processes in Asian and Latin American countries.
3. See Klau and Mittelstadt (1986) and Bell and Freedman (1987).
4. See Thereborn (1986) and Goldthorpe (1984).
5. Segmentation can be caused by cultural (race or sex, cultural barriers to
migration, for example), institutional (minimum wages laws, closed shops
clauses in labour contracts, etc.) and regional (prohibitive transport costs,
etc.) reasons.
6. See Aoki (1990) for an analysis of the factors determining the strategies of
Japanese firms.


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2 Brazil: Labour Market
Flexibility and Productivity,
with Many Poor Jobs
Jose Marcio Camargol


Labour market behaviour is of great importance to the performance of the

economy. It affects the volume of employment created, the rate of unem-
ployment and of productivity growth, the degree of conflict between
agents, the amount of investment in training and qualification, and many
other important variables which, together, determine the economic per-
formance of a country or region. Much of the behaviour of these variables
is largely related to what labour market economists can 'labour market
flexibility.' Flexibility itself is directly linked to the costliness of the ad-
justment to different economic conditions. If there were no adjustment
cost, adaptation to external economic changes would take place instanta-
neously, and labour market flexibility would not be an issue. But adjust-
ment costs are high and pervasive. So, adjustment takes time and
flexibility will not be complete.
Labour market flexibility has many dimensions. Firms can adjust their
labour force by reducing or increasing real wages, firing or hiring new
workers, training and re-training the labour force, and changing the struc-
ture of production and/or occupational structure. Workers can be trained to
execute different tasks so as to be able to adapt themselves to changing
economic conditions inside the firm, instead of being fired in the event of a
change in demand, or they can be trained in very specific skills so as to be
more productive in the task they perform. These are options which are
open to firms and workers. Which option will be taken win depend on the
costs, for firms and workers, of the choices being made.
The cost of adjustment, and thus the degree and dimensions of labour
market flexibility, will depend on a large set of factors. One factor which
is of great importance in determining the cost of adjustment is the institu-
tional structure which regulates labour market behaviour. Formal and
informal rules which determine the structure of the labour contract, the

38 Brazil
incentives created for agents and for organizations such as workers'
unions and employers' organizations, the degree and the cost of enforce-
ment of rules and contracts, all playa very important role in determining
the adjustment costs and thus the degree and dimensions of labour market
The objective of this chapter is to analyze labour market flexibility in
Brazil. We will show that real wages vary widely and the turnover rate is
very high in the Brazilian labour market. At the same time, the unemploy-
ment rate is relatively small and adjusts fast to changing economic condi-
tions, and the rate of job creation is high. These facts suggest that in the
real wage and firing and hiring workers dimensions, the Brazilian labour
market is very flexible.
We show that these results are a consequence of the labour market insti-
tutions which regulate the Brazilian labour market. These institutions
create incentives for short-run labour contracts and very weak links
between workers and employers in the employment working relationship.
Firing costs are relatively small and there is a monetary premium for the
worker when separation occurs. On the other hand, the fact that there is a
Labour Court which has the last word in all conflict resolution, at the
individual and collective levels, does not generate enough incentives for
negotiation and bargaining between firms and workers at all levels.
The incentives for short-run labour contracts and the disincentives to
negotiation also have negative consequences. The most important are the
low degree of investment in training at the firm and the resultant low degree
of qualification of the labour force and a tendency to a non-cooperative
capital-labour relation. On-the-job training is concentrated in very specific
and indispensable training, as the probability of separation is very high
and neither workers nor employers are willing to pay for more specific or
general training.
Also, given the incentives to non-compliance, enforcement is difficult
and costly. As most of the disputes end up at the Labour Court, millions of
demands have to be heard each year and the time needed for solving
labour disputes can run to years. All these together result in a picture of a
labour market which generates a large number of jobs, but of low quality
and low productivity and a low qualified labour force. Unions are import-
ant social actors, but most of their activity is directed to national politics
and conflict (although some change has occurred since 1974). As workers'
qualifications are low and very specific, flexibility in the sense of occupa-
tional changes to adapt the labour force to changing economic conditions,
mainly technology and demand, is very small.
Jose Marcio Camargo 39
The chapter is organized as follows. In Section, 2.2 we discuss the insti-
tutional structure which regulates Brazilian labour market. In Section 2.3,
we show how this structure generated the kind of labour market flexibility
described above and the results in terms of job creation, low unemploy-
ment rate, short-run labour contracts, low job quality, little investment in
training and low qualification of the labour force. In Section 2.4, we draw
our conclusions.


Institutions are important determinants of labour market performance.

They reduce uncertainty and transactions costs, increase the reward to
some activities and reduce those of others. In a wealth maximizing
economy, they generate incentives to agents' behaviour and affect in
important ways how the labour market will behave. Thus, the analysis of
which incentives are created by labour market institutions is an important
step in understanding labour market behaviour in a country or region. This
is the objective of this section.
The core Brazilian labour market institutions were introduced in the
1930s and in the 1940s, and consolidated, in 1943, in a Labour Code
named 'Consolida~iio das Leis do Trabalho' (CLT). The CLT is a very
comprehensive set of laws which regulates almost all aspects of the labour
contract in the country. The Code provides for the existence of individual
and collective labour contracts and creates a special branch of the judi-
ciary, the Labour Court, which is responsible for conflict resolution at the
individual and collective levels.
The driving ideological principle of CLT is the idea that direct negotia-
tions between employers and workers are an important source of conflict
between these agents and, eventually, social conflict. To avoid this non-
desired result, a special branch of the judiciary, the Labour Court, was
created, to intermediate the relations between these agents, and solve all
capital-labour disputes. So, all labour conflict resolution is, in the end,
turned into a question of courts' decisions and not of bargaining power.
But this also means that minimum working conditions have to be trans-
formed into law so as to provide the Labour Court with the necessary
legitimacy to pronounce sentence and, at the same time, protect workers
against undue exploitation by the employers.
Since worker protection and conflict resolution are a function of the
Labour Court, workers' unions lose their main source of mobilization and
40 Brazil
their main function. Thus, the structure of labour unions and employer
organizations was designed to be a social organization whose main func-
tion was to cooperate with the State to implement national economic and
social policies. If unions were to have little importance to rank and file
organization and mobilization, financing of unions' activities should
be made at the national level. A tax, of one day of work per year and a
percentage of the firms' revenues, was introduced to finance workers' and
employers' organizations, respectively. To avoid competition between
different unions, which could be a source of mobilization and conflict,
monopoly of representation by occupational categories at the city level was
introduced, and collective contracts were made binding for all workers, in-
dependent of union affiliation. Being so protected by law, State controls
over union activities were very stringent. With this structure, unions were to
be much more involved in national politics than in labour disputes.
Between 1943 and 1995 important changes were introduced in the
Labour Code. At the individual contract level, two were of great import-
ance. First, firing conditions were changed in 1966, reducing firing costs
and increasing flexibility. Second an unemployment insurance system was
created in 1986, financed by a flat revenue tax on all firms. The unem-
ployment insurance system was reformulated in 1989 and turned into an
important protection mechanism for unemployed workers whose previous
job was a legal, signed contract one. Besides these important changes,
many others were introduced in 1988, with the writing of the new
Constitution. Many workers' rights were created and inscribed in the
Constitution, making it more difficult to change them (see below).
At the collective contract level, many important changes also occurred
through time. The most important were the reduction, and eventual elim-
ination in 1988, of state controls over unions. This was a direct conse-
quence of the change in the union movement towards rank and file
mobilization, which was the workers' response to the authoritarian, anti-
labour, regime of 1964-75. Also important was the introduction of wage
adjustment laws in 1965.
But, before we turn to the analysis of these institutional changes, it is
necessary to understand the structure of the Labour Code and discuss how
this institutional framework affects the structure of the labour contract and
labour market behaviour.

2.2.1 The Individual Labour Contract

Brazilian labour legislation requires that each worker has an individual

and a collective labour contract. All workers must have a booklet, issued
by the Ministry of Labour, where all the conditions of his/her individual
Jose Marcio Camargo 41
labour contracts over the working life must be registered. Non-registered
individual labour contracts are illegal.
All individual (and collective) contracts must obey a set of rules which
determine minimum working conditions for all workers. Collective con-
tracts can only improve over those rules. They include, among others, the

• maximum length of the work week (48 hours before 1988 and 44 hours
after 1988);
• maximum length of the work day (8 hours for normal shifts and
6 hours for uninterrupted shifts);
• maximum overtime hours (2 hours a day);
minimum wage;
• minimum remuneration for overtime work (after 1988,50 per cent of
regular wage, before 1988,20 per cent of regular wage);
• 30 days of paid vacation per year of work;
a vacation bonus of 1/3 of the regular wage (introduced in 1988);
• special conditions for night shifts;
• a l3 th wage (1/12 of the December wage times the number of months
the worker was employed in the firm during the year, or 1/12 the wage
of the month the worker was dismissed, if that happens during the
year, times the number of months worked in the firm in that year) paid
half when the worker takes his vacation and half in December of each
year, or when he is fired (introduced in 1962);
protection against dismissal for pregnant women;
• a 4 month maternity leave for the mother (3 months before 1988);
• a 5 days paternity leave for the father (introduced in 1988);
• a wage complement proportional to the number of children in the
family, calculated as a percentage of the minimum wage (family
• I month previous notification of firing; during this month the worker
can take 2 hours a day from his work time to look for another job;
• the right to have the dismissal fund deposited by the firm, (created in
1966, 8 per cent of the monthly wage);
• a fine of 40 per cent of the dismissal fund, paid by the firm and appro-
priated by the worker, if the firing was for non-justified reasons;
unemployment insurance (introduced in 1986);
special conditions for child work;
special conditions for dangerous work.

In principle, all these conditions must be fulfilled by all individual

labour contracts. Given the large number of restrictions and the high cost
42 Brazil
for the firms of complying with them, we should expect a relatively rigid
labour market in Brazil. We will show that this is not the case. Five factors
are responsible for this apparent paradox. First, the cost of all restrictions,
except the minimum wage, is a proportion of the wage paid by the firm.
So, if the real wage is flexible, the total real labour cost is also flexible.
Second, although these restrictions are inscribed in the law, and some even
in the Constitution, they can be negotiated at the Labour Courts. This
makes the non-wage labour cost flexible, for the firm, even if the real
wage is rigid (which we will see, is not the case). Third, the firing cost is
relatively low. Fourth, there are incentives for workers and employers to
not comply with the legislation by not signing formal contracts or by not
complying with all limitations imposed by the legislation. And fifth, but
very important, there is a monetary incentive for dismissal, if the worker
can find a new job quickly. Let us analyze each of these factors in turn.
Non-wage labour costs amount to approximately 90 per cent of the total
wage. This includes paid vacation, social security contribution by the
employers (20 per cent of the nominal wage) and the costs of all the condi-
tions enumerated above. In addition, there are four payroll taxes: one to
finance a national training institution directed and managed by the em-
ployers' organizations; a second to finance social services' organizations
to workers and employer; a third to finance an organization to provide
economic services to the employers and a fourth to finance formal educa-
tion by the Ministry of Education. From the total non-wage cost, 55 per
cent is appropriated by the worker as indirect wages, 28 per cent goes to
the government to finance social security and formal education and 17 per
cent goes to employers' organizations to finance training, and social and
economic services to workers and employers.
The social security contribution could, in principle, be appropriated by
the workers, when retiring or through limiting access to the national health
system to formal workers and their families. But, since 1989, access to the
national health system became universal, and all workers acquired the
right to a minimum pension of one minimum wage when reaching 65
years of age, regardless of contribution to the social security system. So,
after 1989, for workers receiving close to the minimum wage, the social
security contribution by individual workers became a tax on income,
appropriated by the State.
The above composition suggests that when a worker is hired in a signed
contract job, his/her effective wage is 155 per cent of the negotiated
nominal wage, while the labour cost for the firm is 190 per cent of the
nominal wage. As 35 per cent of the labour cost is not appropriated directly
by the worker or the employer, there is an incentive for both not to comply
Jose Mdrcio Camargo 43
with the legislation and to share this difference among themselves. If the
contract is not signed, the employer can pay a higher wage to the worker
and still have a lower labour cost than if the contract is signed, provided the
cost of evasion is smaller than the cost of not signing a legal contract.
A second important point is that when negotiating a legal contract, the
worker bargains over the nominal wage plus the indirect wages he will
receive. Thus, market wages will reflect all the labour costs which are
appropriated by the worker, not only his/her nominal wage. This means
that the rigidity of non-wage labour costs does not make total real labour
costs rigid, provided real wages are flexible.
This is not true only if the market wage is smaller than 1.9 times the
minimum wage. In this case, as a legal contract cannot pay less than the
minimum wage, rigidity of nominal wages provides a rigid floor for real
labour costs. In this case, the only way to make labour costs flexible is
through illegal labour contracts.
Flexibility comes also from the fact that these non-wage labour costs
can be negotiated at the Labour Courts. The process can be described as
follows. Any time a worker feels the employer is not respecting all the
provisions of his/her individual labour contract, or the provisions of
the law, he/she can file a complaint in the Labour Judiciary against the
employer. Once it is done, the Court Official calls the employer and the
worker to a conciliation audience. During this audience the Official asks
the employer if he/she has a counter-proposal to the worker's demands. If
the employer makes the counter-proposal, the worker can accept it or not.
If accepted, the complaint ends. If not accepted, the audience is called off
and the dispute goes to a labour Judge for a sentence to be pronounced.
Once the Judge publishes his sentence, the loser can appeal the result. The
appeal will then be judged by a hierarchical superior tribunal. The final
sentence can take years to be issued.
This system creates an incentive for the worker to sue the employer in
the Labour Court upon dismissal. As employers know they will be sued,
they have a strong incentive not to comply with the legislation and/or with
the conditions of the labour contract. Thus, while employed, the worker
accepts the working conditions decided by the employer, even though
he/she may think the conditions are not fair. Upon dismissal (which the
worker may force, if he/she thinks it will be easy to find a new job), the
worker starts a complaint in the Labour Court against the employer. In
the conciliation audience, the employer presents a counter-proposal. As
the process is lengthy, the worker has an incentive to negotiate with the
employer, accepting a counter-proposal, even if it does not comply with
all the legal conditions of the labour contract.
44 Brazil
Estimates made by a Labour lawyer4 show that the average time
between the worker filing the complaint and the Court calling for a con-
ciliatory hearing is 47 days. If there is no solution at this level, the
average time for a decision at the next hierarchical level increases to
15 months. If the process goes through all the hierarchical chain, the
average time for conclusion is 4 years. It is not surprising that of the
almost 2 million demands which arrive at the Brazilian Labour Court
each year, 80 per cent end at the conciliation stage, never going to trial.
In this sense, even the minimum working conditions inscribed in the law
are not minimal, since they can be negotiated through the process
described above.
This process has many consequences. First, it makes the non-wage
labour cost flexible. Second, there is an incentive for non-compliance
with the legislation. Third, it is difficult to build a cooperative relation
between workers and employers, since there is no space for negotiation
at the firm level and the negotiation occurs only when the labour con-
tract is broken. Fourth, there is an incentive for short-run labour
contracts, as this is the only way workers have bargaining power to
make employers comply with the law and/or with the contracts provi-
sions. Finally, the cost of contract enforcement, the structure of the
Labour Court, is very high. The average cost of a process at the Labour
Court was R$ 749,00 or (US$ 832) in 1994, which corresponds to 7.5
minimum wages (Silva, 1995).
The incentive for short-run labour contracts and for illegal, or non-
signed, contracts is reinforced by two important institutions, the severance
payment and the unemployment insurance mechanisms. Let us start with
the unemployment insurance.
All workers with a signed contract job are eligible for unemployment
benefits when unemployed, provided that tenure in the last job was 6
months or more. The value of the benefit varies between 1 and 4 minimum
wages, depending on the wage of the worker in the last 3 months of
his/her last signed contract job. The benefit is received for 4 months. The
system provides no mechanism to check if the worker is employed in an
informal job and d0es not require any time commitment from the worker,
during the period he/she is receiving the benefit. As there is no check of
the worker's unemployment status, a negotiation between employer and
worker can develop so as he/she can be fired from a signed contract job
and recontracted by the same or another employer illegally, without
signing the labour contract, during the period the worker is receiving the
unemployment benefit. In this case, he/she can receive the benefit and, at
the same time, receive a wage from the employer. The employer does not
have to pay the social benefits and the worker has an increase in real
Jose Marcio Camargo 45
income. Again, the incentive is higher, the smaller is the cost of evasion
by the employer.
There is no direct information on the importance of this incentive to
non-legal contracts, but given the large coverage of the unemployment in-
surance system, it can be very powerful. Table 2.1 shows the percentage
of signed contract workers fired during the period 1989-93 who received
unemployment each year.
Table 2.1 shows the increasing importance of the unemployment benefit
system for legally hired workers. In 1993, more than 77 per cent of the
signed contract job workers fired during the year received unemployment
benefit. The same source used to construct Table 2.1 shows that the
average value of the benefit corresponds to half the average wage of the
fired workers. Thus, not only is coverage high, but the value of benefits, as
compared to the wage of the fired worker, is also relatively high.
During this same period, the share of workers with illegal, non-signed,
contract jobs increased in all metropolitan regions of the country. In Sao
Paulo, the most industrialized region and where the share of signed con-
tract jobs is the highest, the non-signed contracts share in total employ-
ment increased from 14 per cent in 1987 to 20 per cent in 1993. The
increase in Rio de Janeiro, Belo Horizonte and Porto Alegre, metropolitan
regions for which there is information, were of similar magnitude as in
Sao Paulo (see Urani, 1994, p. 49).
If the unemployment benefit system creates incentives for non-signed,
illegal, labour contracts, the severance payment system (Fundo de
Garantia por Tempo de Servic;o or FGTS) generates incentives for short-
run labour contracts. Before 1966, to fire a worker the firm had to pay
I month's wage for each year of work in the firm, the calculation being
made based on the last wage received by the worker. After 10 years in the

Table 2.1 Brazil: number of formal workers fired and % of these workers
receiving unemployment benefit,
monthly averages, 1990-93

Year No o/workers Fired (A) No o/Workers Receiving Benefit (BIA)

(B) (%)

1989 529,225 100,586 19.0

1990 595,221 233,516 39.2
1991 543,037 246,987 45.8
1992 451,177 321,041 71.2
1993* 460,954 355,289 77.1

Note: *Monthly average of the period January-October, 1993.

Source: Ministry of Labour, Law 4923.
46 Brazil
same firm, severance payment doubled. In 1966, this system was substi-
tuted by an individual capitalization fund, which is composed of a monthly
contribution of 8 per cent of the worker's wage. This fund is capitalized,
in real terms, at a annual rate of interest of 6 per ce~t. When the worker is
fired without cause, the firm pays fine of 40 per cent of the worker's con-
tributions and the amount accumulated can be appropriated by the worker.
This change had two important results. First, a firing cost was trans-
formed into an employment cost. After the change, the firing cost became
the 2 hours a day the worker can use to look for another job during the
month after receiving the advanced notification of firing (this represents
24 per cent of the cost of the worker), plus the 40 per cent fine on the capi-
talization fund. For a worker with 1 year of tenure, the firing cost repre-
sents 64 per cent of the monthly wage and it increases by 40 per cent of
the monthly wage for each additional year of tenure. Thus, for a worker
with 2 years of tenure in the same firm, the firing cost will be (0.24 + 0.40
+ 0.40), i.e. 1.04 times the monthly wage. Also very important is the fact
that there is no non-monetary restriction to dismissal in Brazil and there is
no rule which forces the return of the worker to the firm if there is a
conflict over the firing. Only in very specific cases can very strong labour
unions affect the firing policy of the firm, and effectiveness is very small.
Workers continuing in employment can only receive the accumulated
severance pay upon retirement or to build a house. Upon dismissal,
however, they can access their contributions plus the employment fine.
The total revenue of a worker with a I year tenure in the firm, upon dis-
missal, would be (I month's wage accumulated in the fund, plus the
40 per cent fine), i.e. 1.4 times the monthly wage. With 2 years of tenure,
the revenue is (2 months accumulated in the fund plus the fine), i.e. 2.8
times the monthly wage.
These two institutions, the unemployment benefit and the severance
payment combined, means that there is a premium for being fired and for
having non-signed contracts during the period the worker is receiving the
unemployment benefit. The premium is higher the lower is the real wage
(the higher the time discount rate) i.e the less qualified the worker. This
fact can make being fired a desired outcome for the worker, particularly if
the economy is growing and the labour market is tight. In this case, he/she
receives a monetary gain in the present instead of investing on the job
through training, increased productivity and wages in the future. Thus, we
should expect that workers would force, or try to negotiate, their firing
with employers, during growth periods, to receive the premium. As the
employers know this will happen, they do not invest in training as the risk
of losing the investment due to separation is very high. The final result is
short-run labour relations, low training and qualification and low wages.
Jose Marcio Camargo 47
Table 2.2 Brazil: number of workers fired by firms and number of voluntary
separations, monthly average 1991-95

Year Fired Voluntary Total new Employment

by the firm separations hires index *

1991 524,822 152,576 687,019 99.80

1992 485,44~ 99,668 579,611 97.05
1993 476,104 113,129 657,628 97.99
1994 483,031 134,523 706,121 99.98
1995 590,969 194,824 898,514 102.20

Note: *January 1990 = 100.

Source: Ministry of Labour, Law 4923.

Evidence of the importance of this incentive is scanty and difficult to

find. But one piece of evidence can be seen in Table 2.2. In Table 2.2 we
show the evolution of the number of workers fired by firms and the
number of separations voluntarily decided by the workers during the
period 1991-5. This is an interesting period since between 1990 and 1992
the economy was going through a recession period and the level of em-
ployment was declining, while during the period 1993-5 the economy was
growing and the level of employment increasing. We should expect that
the number of fired workers would increase during the first period as com-
pared to the second, while the number of separations would present the
opposite behaviour, if Brazil's labour market behaved like that in other
As the data show, voluntary separations have the expected behaviour,
but the number of workers fired by firms, on the contrary, increases with
the growth in the level of employment, during 1994-5, as compared to the
previous recessionary period. This is indirect evidence that the process
described above may be an important source of incentive to separations in
Thus, although the Brazilian labour market is very regulated, it does not
imply that the labour market is rigid. This is because most of the regula-
tory apparatus .is directed to increasing, not to reducing, flexibility.

2.2.2 Collective Labour Contracts

Individual labour contracts are complemented, in the Brazilian legislation,

by collective labour contracts. Every worker must be represented by a
union, (although not affiliated to it), which negotiates collective labour
contracts for the entire occupational group in a given city. Collective
48 Brazil

contracts are binding for all workers of the respective occupational cate-
gory, regardless of whether or not they are affiliated to a union. Collective
contracts are negotiated in a non-synchronized way, by occupation at the
city level, on an annual basis.
As the unions are financed through a 1 day per year tax on wages and
the collective contracts negotiated by unions are binding independent of
affiliation by the worker, there are few incentives for workers to affiliate to
unions and for union officials to get rank and file support. Until 1964
unions were mainly a political agent on the national political scene. This
scenario changed with the military coup of 1964 and the anti-labour
government that followed.
As unions lost their space in the political arena, they turned to rank and
file mobilization to retain some power, although there was strong repres-
sion of the labour movement during this period. This was an underground
process, which exploded in the second half of the 1970s with the begin-
ning of the re-democratization process in the country. A new workers'
movement developed, which became known as the 'new unionism'. The
main characteristics of this movement is the independence of unions from
the State and support from rank and file mobilization.
As the degree of protection was reduced with the introduction of the
FGTS in 1966, conditions of work deteriorated and were turned into an
important issue in collective bargaining 5 The promulgation of a wage law
by the military Government, which stipulated the nominal rate of adjust-
ment of all wages in the economy in 1966, combined with the repression
of collected bargaining, created a de facto centralization of the wage deter-
mination process in the country. This law was intensively used by the
Government in the period 1964-74 as an anti-inflationary instrument,
reducing real wages of those workers whose wages were dependent on
collective bargaining, mainly blue collar workers. All this combined to
generate a very combative and conflictive labour movement.
Given the importance of the Labour Court, and thus of legislation, in the
capital-labour relation, the same social groups which were active in
the new union movement decided, in 1981, to constitute a political party
(the Partido dos Trabalhadores or PT) to represent their demands at the
Legislature. In 1983, a Central Union (Central Unica dos Trabalhadores or
CUT) was created, with national coverage. The growth of the Central
Union was rapid. In 1984, at the first CUT congress, it had 937 affiliated
unions and in 1988 1157. All sectors (the public sector, industry, services,
and rural unions) were represented in the Central.
As with individual contracts, all collective bargaining disputes end up
in the Labour Courts. This also creates a situation where the weaker side
Jose Marcia Camargo 49
in the dispute can always ask the Court to intervene in the process from
the start, preventing development of effective collective bargaining. On
the other hand, as unions are organized at the occupational level and by
city, and collective bargaining is non-synchronized over the year, each
occupational category having its negotiation in a given month of the year,
macroeconomic coordination of this process is very difficult. As the em-
ployment policy by firms is entirely decided by management, each union
will try to get the highest wage adjustment possible, to avoid losing
income in case the other unions bargaining later get better nominal and
real wage terms. As the incentive to negotiate is very small, all disputes
end-up in conflict, before the Courts can even be called to intervene. The
result has been an intense period of labour disputes.
Although the changes in the labour movement were very important,
with the changing international economic conditions in the second half of
the 1980s and beginning of the 1990s and the adverse incentives created
by the institutional structure discussed above, the growth of this labour
movement slowed and it is going through a difficult process of re-
structuring and adaptation. But it is still growing and is the most import-
ant, the most active and organized voice of labour in the country.
Finally, as individual working conditions are very much defined in the
law, and the law can only be negotiated at the Labour Court, most of the
collective bargaining is related to nominal wage adjustment, although
some changes have occurred after 1975, with the 'new unionism'. All
these create incentives to non-cooperative capital-labour relations, and
few incentives for productivity growth.



The description and analysis of Brazilian labour market legislation in the

previous section points to conditions which favour a very flexible labour
market, but a flexibility which creates strong incentives for very short-run
labour contracts and low investment in training and qualification. This
section shows that this is exactly the way Brazilian labour market
behaves. 6
During the 1980s and early 1990s the Brazilian labour market suffered a
series of exogenous shocks. The sequence of shocks started in the late
1970s with the increase in the international price of oil and in the real
international interest rate. The result was a sharp increase in the balance of
payments deficit. To cope with the balance of payments deficit several
50 Brazil
policies were implemented. Policies to reduce the level of effective
demand (through strict monetary policy), a devaluation of the real ex-
change rate and greater protection against foreign competition were intro-
duced. After 1985, a series of price control and freezes was implemented
to reduce the rate of inflation, all of them unsuccessful. Finally, in the
early 1990s, there was a freeze in financial assets which resulted in a
strong demand shock in the economy.? Table 2.3 shows the most import-
ant macroeconomic variables of the Brazilian economy during the period
1974-92. The choice of periods follows the sequence of external and
policy shocks described above. All these shocks had important effects on
the labour market and how the market reacted to them is an important
indication of its degree of flexibility.

2.3.1 Employment Flexibility

One important indication of the degree of flexibility of the labour market

to adapt to exogenous shocks is how the rate of open unemployment
varies. If the rate of unemployment is relatively stable and does not vary
much with the shocks, it is a sign that the labour market is flexible. This is
evidence that most of the adjustment is absorbed by real wage variations.
If the rate of unemployment increases, the labour market is rigid.
The rate of unemployment in Brazil is very low and its variation is quite
small, if compared to international standards. Although the shocks
described above were very frequent and of large magnitude, the rate of
open unemployment varied from a low of 4.13 per cent to a high of
7.55 per cent of the labour force, during the 1980s (see Table 2.4). Also,
the period of adjustment does not seem very long. The rate of unemploy-
ment increased from 6.63 per cent in 1981 to 7.55 per cent in 1983 and
declined rapidly to 3.89 per cent in 1986.
Thus, if we take the evolution of the rate of open unemployment as an
indication of the degree of flexibility of the labour market, the Brazilian
labour market looks quite flexible.
Other indications of the degree of flexibility of the labour market are the
duration of unemployment, the length of the labour contract and the turn-
over rate of jobs. Table 2.5 shows the duration of unemployment in Brazil
in the years 1981, 1983, 1986 and 1990. The 1983 and 1990 years were
characterized by relatively high unemployment rates, while 1981 and 1986
are low unemployment years. As can be seen from Table 2.5, even in the
worst unemployment year, 1983,27 per cent of the unemployed became
unemployed for less than 1 month. In 1990, this percentage grew to 37 per
cent of the unemployed. The percentage of workers who became unem-
Table 2.3 Brazil: macroeconomic behaviour, 1974-92

Period Rate 0/ Rate 0/ Trade Current Gov. M2 Real

growth 0/ inflation balance account experullGNP GNP exchange
GNP (goods) (%) (%) rate

1974178 6.70 38.0 -2.45 -6.21

1979/80 7.92 93.7 -3.06 -12.00
1981/2 -1.86 97.5 0.68 -14.34 12.16 18.73 91.30
1983/4 0.88 217.4 9.48 -3.70 10.84 9.98 111.36
1985/6 7.42 150.1 10.18 -3.00 12.91 12.45 105.26
1987/9 2.41 1078.7 14.98 0.75 16.07 7.46 84.84
199012 -0.40 1038.2 12.54 -2.58 18.43 9.11 62.73

Notes: Rate a/Growth a/GNP - Percentage average annual rate, per period.
Rate 0/ Inflation - Percentage average annual rate, per period.
Trade baLance (goods) - US$ billion, annual average per period.
Current Account (balance a/payments) - US$ billions, annual average per period.
Real Exchange Rate - 1980 = 100.
Source: Urani (1994), pp. 7-8.

52 Brazil
Table 2.4 Brazil: open unemployment rate, 1981-9, %

Year Rateo!

1981 6.63
1982 5.82
1983 7.55
1984 6.73
1985 5.10
1986 3.89
1987 5.06
1988 4.98
1989 4.13

Source: PNAD/IBGE.

Table 2.5 Brazil: duration of unemployment 1981, 1983 , 1986, 1990, %

Duration! 1981 1983 1986 1990


Less than 1 month 32.5 26.5 37.5 25.0

Between 1 and 2 months 10.0 11.0 14.7 10.4
Between 2 and 4 months 15.0 15.8 15.0 17.0
Between 4 and 12 months 27.3 27.1 21.0 30.0
More than 12 months 15.1 18.0 12.3 17.5

Source: IBGEI PNAD, various numbers, in Urani (1994), p. 45.

ployed for more the 12 months was never above 18 per cent, and in 1990,
this percentage was 17.5 per cent. Thus, long-run unemployment is not a
very important characteristic of the Brazilian labour market.
The length of the labour contract is also an indication of flexibility.
Actually, in Section 2.2 we showed that Brazilian labour market institu-
tions tended to create incentives for very short-run labour contracts.
Table 2.6 shows the average duration of the legal, signed contract, jobs in
Brazil, in 1991. Table 2.6 shows the data for the economy as a whole and
for the industrial sector, which is the sector with the highest percentage of
signed labour contracts and the most unionized. For the economy as a
whole, 24.4 per cent of the labour contracts were for less than 6 months, in
1991, 38.3 per cent were for less than 1 year and 52.8 per cent less than
2 years' duration. For the industrial sector, the corresponding numbers
were 23.5 per cent, 37.8 per cent and 53.1 per cent. Thus, not only is the
Jose Marcio Camargo 53
Table 2.6 Brazil: duration of jobs, whole economy and industrial sector, 1991,

Duration Industrial sector Whole economy

ofjobs (cumulative) (cumulative)

0.0-2.9 months 11.87 (11.87) 13.31 (13.31)

3.0-5.9 months 11.63 (23.50) 11.06 (24.37)
6.0-11.9 months 14.25 (37.75) 13.93 (38.30)
1.0-1.9 years 15.36 (53.11) 14.44 (52.74)
2.0-2.9 years 11.11 (64.22) 9.55 (62.29)
3.0-4.9 years 12.68 (76.90) 11.54 (73.83)
5.0-9.9 years 12.27 (89.17) 12.87 (86.70)
10 or-more years 10.57 (99.74) 12.82 (99.52)
not a vailab Ie 0.26 (100.0) 0.48 (l00.0)

Source: RAIS( 1991)

labour contract in Brazil relatively short, even when compared to countries

with relatively flexible labour markets, as the USA, but also the industrial
sector does hot differ significantly from the other sectors of the economy
in this variable.
Turnover rates are also very high. Table 2.7 gives an indication of the
degree of turnover in the Brazilian economy in the period 1989-93.
Table 2.7 shows, on the average, what percentage of jobs experienced a
change of workers over the year. Of course, it does not mean that
39.66 per cent of jobs in 1989 experienced a change of workers since,
most probably, there were jobs which changed workers more than once
and entered more than once in the statistics. It is in this sense that the
figure is an average for the economy. As can be seen from the data,

Table 2.7 Brazil: turnover rates, 1989-93

Year Monthly Annual

Average Average

1989 3.49 39.66

1990 3.26 38.20
1991 2.69 35.75
1992 2.26 28.05
1993* 2.73 32.81

Note: *January-October, 1993.

Source: Ministry of Labour, data from Law 4923.
54 Brazil
between 28.05 per cent and 39.66 per cent of the jobs changed workers
each year during these years.
All the above points to a very flexible labour market, at least on the
employment dimension. One last evidence of the high flexibility of the
Brazilian labour market is the high number of jobs created. During
the 1980s, the number of jobs in the Brazilian economy grew by 3.5 per
cent a year (much higher than the average rate of growth of the population,
2.1 per cent a year), while the rate of growth of GDP was 1.5 per cent a
year, on average. This represented 1.85 million new jobs created
each year. Between 1981 and 1990, total employment increased from
45.5 million to 62.1 million workers. 8

2.3.2 Real Wage Flexibility

The low unemployment rate, low duration of unemployment, low duration

of labour contracts and high turnover rates suggest that most of the exoge-
nous shocks were absorbed through real wage variation. Thus, we should
expect a high degree of flexibility of real wages. To analyze this aspect of
flexibility, de Barros and Mendon<ra (1994) estimated wage curves for the
different segments of the market.
The wage curve is an equilibrium relation between the level of the real
wage and the rate of unemployment proposed by Blanchflower and
Oswald (1994). It is expected that the higher is the rate of unemployment,
the smaller is the equilibrium real wage. The more flexible is the real
wage, the higher, in absolute terms, is the variation of the real wage in re-
lation to the rate of unemployment. Blanchflower and Oswald estimated
wage curves for many industrialized economies and concluded that, when
the rate of unemployment is close to 5 per cent of the labour force, the
dasticity of the wage curves is -2 per cent. In other words, to have a
reduction in real wages of 2 per cent, the rate of unemployment would
have to increase by 1 percentage point.
For the Brazilian labor market, wage curves of the type

log w(u) =C - Q.U

were estimated, where w is the real wage, U the rate of unemployment and
Q and c are estimated parameters. The value of Q gives the elasticity of the
real wage to changes in the rate of unemployment. Wage curves of this
kind were estimated for the six Metropolitan regions (Sao Paulo, Rio de
Janeiro, Belo Horizonte, Recife, Salvador and Porto Alegre), for different
educational and age groups and for workers with and without signed con-
Jose Marcio Camargo 55
tracts and for self-employed workers. (see de Barros and Mendon~a,
These estimations show that, for the market as a whole, the estimated
value of a is -5. It is higher for the period 1985-7 (-8) and lower for the
periods 1987-9 and 1991-4 (-2). For the period 1982-94, the value of the
parameter varies between -3 and -5 for all educational and age groups,
except for the 35-49 age group with 5 to 8 and 9 and more years of
schooling, for which the value of the parameter is between -8 and -13,
respecti vely. Finally, the estimates of the slope of the wage curve for self-
employed workers vary between -4 and -6, for workers without signed
contracts between -1 and -4 and for workers with signed contract from
-1 to -2.
What these data show is a relatively high degree of real wage flexibility
in the Brazilian labour market, if compared to the international standard.
The segment with the smallest degree of flexibility, as measured by the
value of this coefficient, is as flexible as the American and Canadian
labour markets.
A more direct, although theoretically less rigorous, way to get evidence
of real wage flexibility is to look at the behaviour of the real wage. If we
observe the evolution of the real wage in Brazil, we cim see that it varies
widely through time. All segments of the labour market had relatively high
variations in real wages during the 1980s (Table 2.8). The wages of signed
contract workers declined by 22.7 per cent between 1982 and 1984 and

Table 2.8 Brazil: real labour income, by labour market segments, 1981-90
(1981 = 100)

Year Workers Workers Self-employed

with signed without signed workers
contracts contracts

1981 100.00 100.00 100.00

1982 102.52 106.96 95.32
1983 81.51 81.34 85.90
1984 79.21 83.07 84.46
1985 90.26 96.76 98.51
1986 \09.31 138.75 153.75
1987 92.29 \03.\0 107.49
1988 96.10 98.00 98.52
1989 \02.39 114.10 128.87
1990 81.07 \09.92 100.15

Source: PNAD/IBGE.
56 Brazil
then increased by between 1984 and 1986. The non-signed contract
workers' wages declined by 18.7 per cent during the recession period
between 1981-3 and then grew by 70.6 per cent from 1983 to 1986.
Finally, the self-employed workers' incomes were reduced by 15.5 per
cent between 1981 and 1984 and increased sharply by 82.0 per cent
between 1984 and 1986. The variations after 1986 are relatively smaller,
probably because the economy was relatively more stable during this
period, but still very substantial.
The data presented so far show the high degree of flexibility of the
Brazilian labour market in the employment and real wage dimensions.
Although these are necessary conditions for labour market flexibility, they
are not sufficient. A segmented labour market can have low unemploy-
ment rate and still be rigid, in the sense that it is possible to increase
productivity and output just by transferring workers from one segment to
the other. Thus, flexibility is also related to lack of segmentation. The
question we should turn to now is how segmented is the Brazilian labour
market and if it is segmented, why it is so, if real wages and employment
are so flexible.

2.3.3 Flexibility and Segmentation

Although the Brazilian labour market is very flexible in the employment

and real wage sense, it is also segmented. On average, 52 per cent of the
employed labour force has a signed labour contract job (the formal labour
market), 25 per cent has a non-signed contract job and 23 per cent is self-
employed. Also, since the end of the 1980s, the last two segments in-
creased their participation in total employment. 1o Workers with signed
contracts have access to all legal protection in the working relation
(minimum wages, maximum working hours, paid vacations, pensions,
etc.).11 Self-employed and without contract workers do not have access to
legal protection. These two last segments are called the informal segment
of the labour market, although their behaviour differs. As Urani (1994)
argues, the majority of the self-employed workers opted for this condi-
tion, which means that the relative size of this segment is, in large part,
defined by the supply side of the market. On the other hand, the majority
of the non-signed contract wage earners are demand rationed, in the sense
that they accept a non-signed contract job simply because the demand for
signed contract workers is not big enough to incorporate all the labour
This means that there is some rigidity in the formal labour market which
prevents these workers from being employed in this segment. If that is so,
Jose Marcio Camargo 57
it is important to examine why the Brazilian labour market is segmented if
even its formal segment is so flexible, as we showed in Sections 2.3.1 and
There are at least two kinds of rigidities which could generate this be-
haviour in the labour market. First, if the non-wage labour cost is too high,
informality could be a way to make the labour market more flexible. But
this is only a problem if there is real wage rigidity and/or if the non-wage
labour cost is a fixed amount and not a percentage of the wage of the
worker. If wages are flexible, and the non-wage labour cost is a percentage
of nominal wages, real labour cost could be made flexible through the
variability of real wages. Another kind of rigidity which could generate
segmentation is that coming from the efficiency wages hypothesis, related
to issues of recruitment, retention and motivation of the labour force.
As real wages and employment are flexible segmentation can be related
to the absolute level of the minimum wage and/or to the institutional
setting of the Brazilian labour market. We argued in Section 2.2 that at
least part of the segmentation is a result of incentives embodied in the
legislation on non-signed contracts jobs. The incentives come from the un-
employment insurance mechanism and from the fact that an important
share of the non-wage labour cost is appropriated by the state and by the
employers' organizations, and not by workers and firms individually.
Another possible source of rigidity is the size of the minimum wage. As
non-wage labour costs represent 90 per cent of the nominal wage, if the
market wage is smaller than 1.9 times the minimum wage, it can generate
rigidity. If that is so, we should expect that most of non-signed contract
workers would receive less than 2 minimum wages. Based on the Monthly
Employment Survey, Amadeo and Camargo (1995) show that, on the
average, 50 per cent of the metropolitan wage earners without a formal
labour contract earn more than this threshold (2 minimum wages). In the
most developed region of Sao Paulo, this percentage reaches 54 per cent.
These data suggest that the level of the minimum wage cannot be seen as
the sole determinant of the degree of informality in the country, since it is
not a binding constraint to the formalization of labour relations.
In their paper, the authors argue that, besides the institutional frame-
work, there are important efficiency wage arguments which, combined
with the low evasion cost, could be considered to explain the size of the
non-signed labour contract segment in the Brazilian economy. Thus,
although it is impossible with the available information to determine how
much of the segmentation is a result of a relatively high minimum wage as
compared to the market wage in some markets, there is evidence that
suggests that other factors are of at least equal importance.
58 Brazil
2.3.4 Flexibility and Human Capital Investment

The above sections have presented a picture of a labour market where real
wages very widely in relation to the rate of unemployment, labour con-
tracts are of short duration and unemployment rates are very small. All
these suggest that the cost of firing and hiring, for workers and employers,
is quite low in the Brazilian economy. Actually, we showed that in certain
economic circumstances (when the economy is growing), there is a
premium for the workers in being fired.
One result of these characteristics is an increase in the cost of on-the-job
training and qualification, be it formal or informal, since the probability of
losing the investment made is very high due to the high probability of
separations. This is true for workers and employers. If training costs are
high, investment in training will be small. Firms will invest only what is
strictly necessary for the workers to do their task and workers will not be
willing to invest in technical training related to the firms' technology and
The low level of investment in training would tend to reduce the inter-
nal flexibility, the degree of adaptability of workers and firms to changing
economic conditions and technology through changes in occupations
inside the firm and in the structure of production. This dimension of flex-
ibility is directly related to the volume of human capital investment
through training and qualification made by firms and workers on the job.
Based on the analysis of the previous sections, we should expect very
little flexibility on this dimension. But this would also mean a low degree
of qualification of the labour force, low productivity and low wages. Valle
(1994) analyzes this aspect of labour relations in Brazil. He did a survey of
the biggest 1000 firms in the country. He sent questionnaires to these 1000
firms, looking for information on different aspects of the working relation
which relates to the degree of labour input flexibility and human capital in-
vestment. From these 1000 firms, 254 answered the questionnaire. He then
visited a sub-sample of the firms and asked more specific questions on the
more relevant issues. Some important results can be reported from this
More than half (55.5 per cent) of the firms in the sample sold their
production to both the internal and the external markets, and 2.4 per cent
only to the external market. Also, 24.8 per cent of the firms produced only
for the internal market, but intended to export a share of production in the
near future. This is a sign that the sample is mainly composed of relatively
modern and large firms, since about 81 per cent of them had international
business links.
Jose Marcio Camargo 59

The required level of education and training was very small. For
57.1 per cent of these firms, the workers' minimum educational require-
ment is 4 years of formal education, 33.9 per cent declared that no techni-
cal knowledge was demanded from the workers and 31.1 per cent declared
that only very specific technical knowledge was demanded. Although the
requirements were relatively low, 63 per cent of the firms declared that it
was difficult to find the desired professionals in the market. Turnover rates
were considered small by the firms, but in the interviews, it became clear
that 'small' represented a 11.6 per cent turnover rate over the year. In
other words, the firms considered that to rotate 11.6 per cent of all its
workers in the period of one year was a good ma~power policy.
The research tries to characterize the relative importance of four differ-
ent dimensions of competitiveness for the firms: quality of the product,
price of the product, degree of innovation carried by the firms and degree
of flexibility of the production line. The results are interesting. For the
firms whose production is directed exclusively to the internal market, the
price dimension is the most important, while for the firms which have
some link to the international market, the quality dimension is dominant.
On the other hand, the more firms are directed to the international market,
the more they value the four competitive dimensions presented to them.
Innovation and flexibility are the two least important dimensions for all
types of firms.
The degree of insertion in the international market is a very important
variable in determining the way firms relate to their employees. Firms
which are linked to the international market prefer to reallocate their own
worker when a new vacancy appears (74 per cent of the firms analyzed)
rather than looking at a new worker in the outside market, while a smaller
share of those firms which produce only for the internal market have this
preference (65 per cent).3
Of those firms which produce for the external market, 7.3 per cent do
not provide any training to their labour force (as compared to 11.4 per
cent for the entire sample) and 29.1 per cent provide only very specific
training (as compared to 34.3 per cent for the entire sample). The share of
these firms which offer both specific and broad technical training to their
labour force reaches 53 per cent (as compared to 43 per cent for the entire
sample). Thus, firms which export a share of their output tend to give a
higher value to training than those firms which sell only to the internal
market. This is to be expected since the international market tends to be
more demanding in terms of quality and costs.
Technology is also an important factor in determining attitudes and
labour relations. For those firms where labour is the main cost of production,
60 Brazil
turnover is higher and investment in training is smaller. Among these
firms, 19.5 per cent never invested in a training programme (as compared
to 11.4 per cent for the entire sample), while 11.4 per cent offered only
very specific training (as compared to 9.8 per cent for the sample). Also,
70.5 per cent of these firms were planning less training in the future than
in the past (as compared to 61.0 per cent for the sample).
Workers' attitude toward training, at least as perceived by managers,
depends also on technology. In firms where labour is the main cost of pro-
duction, 48.8 per cent of the managers said their workers had very little
interest on training of any kind, as compared to 26.4 per cent for the entire
sample, and 7.3 per cent declared workers had no interest at all (as
compared to 2.8 per cent for the sample). According to these managers
41.5 per cent of their workers had a high interest in being trained (as
compared to 70.5 per cent for the sample).
The same behaviour is observed regarding to formal education. For the
managers of these firms, 17.1 per cent of their workers did not have any
interest in basic education (as against 2.8 per cent for the sample), 68.3 per
cent showed little interest (as compared to 45.3 per cent for the sample)
and 12.2 per cent showed high interest on formal education (as compared
to 51.6 per cent for the sample).
Valle also shows that there is a close correlation between firms which
prefer their own employees to fill new vacancies and those firms which
provide technical training, as opposed to firms which prefer to look for
new employees in the external market and do not provide (or provide only
very specific) training programmes to workers.
Valle concludes from these findings that, for most firms, 'the turnover
rate is so high that it is difficult for them to find workers with even the
smallest specific human capital in the labour market. This forces them to
provide very simple and specific training to their own labour force'
(p. 34). This explains the fact that 11.4 per cent of the firms do not provide
any training programme for their labour force, 34.4 per cent provide only
very specific training programmes 43.0 per cent have both specific and
more general training programme, and 65 per cent of the firms declared
that no training or only very specific training is required by them.
Based on these results, partial as they may be, it can be concluded that,
even among the biggest Brazilian enterprises, on-the-job training is not
considered an important factor. Very specific and simple training is the
main human capital investment on the job and broad training or knowl-
edge is not a very valuable characteristic. The data also show that to be
linked to the external market (exports) and to have a less labour-intensive
technology creates incentives for the firms to invest in their labour force
Jose Marcio Camargo 61
and for the labour force to be more interested on training. But even these
firms invest relatively little on training in the Brazilian economy.
As training is very limited, the worker tends to leave the job as soon as
another employment opportunity appears in the market. Thus, high turn-
over rate generates a high degree of workers' dissatisfaction, low invest-
ment in training and low productivity (Valle, 1994, p. 34).


This chapter discussed labour market flexibility in Brazil. It showed that

the Brazilian labour market is quite flexible, in the sense that the rate of
unemployment is low and varies little as compared to the size of the
economic shocks. The duration of unemployment is short and the rate of
creation of jobs is high. Also, real wage flexibility is relatively high, as
compared to other countries for which there are comparable estimates.
It is argued in the chapter that this is a direct consequence of the institu-
tional framework which regulates the Brazilian labour market. The institu-
tions are designed so as to create incentives for workers and firms to have
short-run employment relations. The firing cost is low and the worker re-
ceives a monetary premium when he is fired. This generates very high
turn-over rates and reduces the cost of real wage variations for firms and
workers. At the same time, this framework creates high costs to invest-
ment in training and qualification of the labour force, due to the high
probability of losing the investment made as a consequence of the high
probability of separations.
Although the Brazilian labour market is very flexible, it is also highly
segmented. We argue in the chapter that this puzzling result, the high
degree of flexibility and segmentation, can be a result of three different
factors. First the relatively high level of the minimum wage plus non-wage
labour costs, as compared to the market wage in some occupations.
Although this can explain part of the problem, there is more to be
explained. About half of the workers with a non-signed contract job
receive a wage which is greater than the minimum wage plus the non-
wage labour cost. The second explanation is based on the incentives
created by the institutions for non-signed contract jobs. These incentives
are a result of the low evasion costs combined with the existence of a tax
on wages which can be shared between employers and employees, and an
unemployment insurance programme which is unable to check if the
formally unemployed worker is not working in a non-signed contract job.
The third reason is related to efficiency wages arguments.
62 Brazil
These results are confirmed by a survey carried out with 254 Brazilian
firms. The results of this survey show that Brazilian firms demand very
little training from their employees and on the job human capital invest-
ment is concentrated in very specific training, with no general training
being offered in the market. As the firing cost is small and the hiring cost
is very flexible, investment in on-the-job training and qualification is high,
due to the high probability of separations. Thus, the labour market adjusts
through hiring and firing and real wage variations and not through (re)-
training and (re)-qualification of the labour force. The final result is a very
flexible labour market, with a low rate of open unemployment, flexible
real wages and a low qualified labour force. Many jobs are created but
these are jobs of low quality, low productivity and low wages, while few
good quality and high productivity jobs are generated by the functioning
of the labour market.


I. This chapter was originally written for the project Labour Flexibility,
Productivity and Adjustment, financed by IORC. The author acknowledge
the financial support of this institution. The author is also grateful to the
very helpful comments to an original version of the paper made by the
participants of the project workshop held at the University of Toronto. In
particular, E. Amadeo, A. Berry, A. Handa, M. Gunderson, S. Horton,
G. Indart, G. McMahon and F. Zapata provided very important suggestions
during the discussion and in written form. Their suggestions greatly im-
proved the quality of the chapter. Any errors that persist in the analysis are
not in any way their fault.
2. This chapter is based on the articles: Amadeo and Camargo (1994), de
Barros and Mendon~a (1994), Urani (1994) and Valle (1994); all these
papers were written for the project Labour Flexibility, Productivity and
Adjustment, financed by lORe.
3. This section is based on Amadeo and Camargo (1995).
4. See Antonio Alvares da Silva, 'Projeto de reforma constitucional (II),
Institui 0 juizado Especial de causes trabalhistas', 7° Congresso Brasileiro
de Direito Processual do Trabalho 24-27 July 1995, Congressos LTr (1995).
5. See L. Abramo L, '0 Resgate da Dignidade', MA dissertation, FEAlUSP
6. This section is based on Barros and Mendon~a (1994), Valle (1994) and
Urani (1994).
7. See Urani (1994), pp. 12-18.
8. See Amadeo et at. (1994).
9. The definition of the unemployment rate for worker with and without signed
labour contracts is based on the origin of the worker in his/her last employ-
ment. The non-signed contract unemployment rate, for example, is the un-
Jose Marcio Camargo 63
employment rate of those workers whose last employment was a non-signed
contract job.
10. The share of non-signed contract jobs in total employment grew from
13.4 per cent in 1987 to 15.4 per cent is 1991, the share of the self-
employed increased from 18.7 per cent in 1987 to 22.8 per cent in 1991 and
the share of the signed contract jobs declined in the same period from
56.3 per cent to 51.6 per cent of the total employment.
II. For a complete list of the workers legal rights, see Amadeo and Camargo
( 1995).


Amadeo, E. and Camargo, J.M. (1992) 'The Brazilian labor market in an era of
adjustment', in S. Horton et al., Labor Markets in an Era 0/ Adjustment,
Washington DC, Economic Development Institute, World Bank.
Amadeo, E. and Camargo, J.M. (1993) 'Labor flexibility, productivity and adjust-
ment', PUC-Rio (mimeo)
Amadeo, E. and Camargo, lM. (1994) 'Institui~oes e 0 mercado de trabalho no
Brasil', PUC-Rio (mimeo)
Amadeo, E., and Camargo, J.M. (1995) 'Regulation and flexibility of the labour
market in Brazil', Department of Economics, PUC-Rio, Discussion Paper 335.
Amadeo, E., Camargo, J.M., Gonzaga, G., de Barros, R.P. and Mendon~a, R.
(1994) 'A natureza e 0 funcionamento do mercado de trabalho Brasileiro desde
1980' IPEA, Discussion Paper, 353.
Barros, R.P. de and Mendon~a R. (1994) 'Flexibilidade do mercado de trabalho
Brasileiro: Uma avalia~iio empfrica' mimeo.
Barros, R.P. de, Mello, R., Pero, V.L. and Ramos, L. (1992) 'Informal labor rela-
tions: a solution or a problem?', IPEA (mimeo)
Bivar, W. (1993) 'Estimativas da dura~ao media do desemprego do Brasil',
Pesquisa e Planejamento Economico, 2 (August)
Blanchflower, D.C. and Oswald, AJ. (1994) The Wage Curve, Cambridge MA,
MIT Press.
Blinder, A. (1991) 'Maintaining competitiveness with high wages', International
Center/or Economic Growth, Occasional Paper, 26.
Camargo, J.M. and Barros, R.P. (1991) 'As causas da pobreza no Brasil: porca
miseria', Perspectivas da Economia Brasileira, IPEA.
Emerson, M. (1988) 'Regulation or deregulation of the labor market?', European
Ecollomic Review, 32, pp. 775-817.
Klau, F. and Mittelstadt, A. (1986) 'Labor market flexibility', OECD Economic
Studies, 6. Ministry of Labour, Law 4923. PNADIIBGE (various numbers).
RAIS (1991).
Ramos, C.A. (1992) 'Flexibilidade e mercado de trabalho: modelos e te6ricos e a
experiencia dos pafses centrais durante os anos 80', IPEA, Discussion Paper, 271.
Shapiro, C. and Stiglitz, J. (1984) 'Equilibrium unemployment as a discipline
device', American Economic Review, 74, pp. 433-44.
Silva, A.A. (1995) 'Projeto de reforma constitucional (II): Institui 0 juizado espe-
cial de causas trabalhistas', 7° Congresso Brasileiro de Direito Processual do
Trabalho (24-27 July), Congressos LTr.
64 Brazil
Tachibanaki, T. (1987) 'Labor market flexibility in Japan in comparison with
Europe and the US', European Economic Review, 31, pp. 647-84.
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de mao de obra' (Mimeo).
3 Labour Flexibility: The
Case of Chile l
Pilar Romaguera, Pablo Gonzalez,
Alejandra Mizala and Cecilia Montero


How the labour market has responded to changes in the macroeconomic

environment has been a question central to the Chilean experience,
especially during the 1970s and 1980s, due to the strong structural adjust-
ments, economic cycles and the social costs involved in such processes. In
the 1990s, concern for labour flexibility has shifted towards topics less
related to the social costs and towards those more centered on com-
petitiveness and economic growth.
The concept of labour flexibility has been used frequently in recent
years, especially in the debate over the influence of labour market institu-
tions on country 'performance'; however, it has had various inter-
pretations. These have ranged from the ability of real wages to clear the
labour market, to more complex interpretations of the variables which
determine the capacity of these markets to adapt. The analysis of labour
flexibility in this chapter, based on the case of Chile, follows the approach
suggested in Chapter I of this volume, namely a concept which integrates
both labour market (employment, wage and mobility) and labour input
Economies react to external shocks by adjusting each of the labour flex-
ibility components to a greater or lesser degree, partly determined by the
existing institutions, labour policies and firms' management styles. This
Chilean study tries to coHect and put together the different dimensions of
the flexibility concept. This is necessary both for an overall view of labour
market trends, and because the transformations undergone by the Chilean
economy have meant that the relevant elements of the labour flexibility
concept have changed over time.
In order to examine how labour flexibility requirements have changed
over time, we start the analysis by presenting a macroeconomic frame-
work in Section 3.2 analyzing the impact of stabilization and structural
adjustment programmes on the labour market, as weH as the pressures on

66 Chile
this market caused by the current economic growth. We emphasize flex-
ibility in employment and wages, and find that employment fluctuations
have been a major element of labour market flexibility during the 1970s
and 1980s, when the economy had to absorb two strong shocks and
the ensuing recessions. Wage flexibility also played a role, especially
during the second period, when wage behaviour was less regulated by
government rules.
Section 3.3 begins a deeper analysis on the issue of sectoral mobility. It
has been a traditional hypothesis in Latin American that the informal
sector has acted as a employment buffer during recessions; however the
Chilean experience does not support this view; i.e. the informal sector has
more of a structural character, and wage differentials (after controlling for
human capital) are small. Additionally, we examine the historical growth
of the labour supply and its current level of elasticity, which could be an
important factor in potential employment growth. This is more a concern
for the future than for the past, i.e. for expansion than for recessions, and
wage elasticities seem significant specially for the female labour force.
Institutional and legislative characteristics are important determinants
of flexibility, and Section 3.4 deals in detail with the norms and regula-
tions which exist in Chile, and the changes they have undergone in recent
decades. Section 3.5 gives details of one of the institutional aspects which
should influence both labour productivity and the ability to acquire new
skills; namely the training systems which exist in Chile. In spite of the
strong adjustments that the economy underwent, unemployment insurance
and retraining programmes - labour policies very close to labour flex-
ibility aspects - are of recent concern.
Section 3.6 takes the analysis further to the level of the firm and its
strategies for increasing flexibility; for this purpose the chapter makes use
of a case study centred on dynamic firms in the non-traditional exports
sector. So, finally our concern turns to the labour input flexibility compo-
nent; a component that does not seem important in the past, but that
appears as an incipient worry from the 1990s on, when competitiveness
and economic growth required labour flexibility.



In recent decades the Chilean economy suffered two significant recessions

- in 1975 and 1982 - as well as structural adjustments deriving from
Pilar Romaguera et at. 67
macroeconomic management associated with the reforms carried out in
the 1970s and the external shocks of that period.
An analysis of the 1970s and 1980s helps us to understand how the labour
market adjusted to macroeconomic cycles. Relevant questions in relation to
flexibility include: Were real wages downwardly flexible? Did labour supply
playa pro-cyclical or anti-cyclical role? Was there a sector that acted as
buffer in the face of falls in employment resulting from the recessions?
From the standpoint of the 1990s, the questions and challenges faced by
the economy are different and so are the flexibility requirements of the
labour market. The economy has grown at an average rate of 6 per cent
per year over the last 6 years, open unemployment has fallen about 5 per
cent reaching historical levels of frictional unemployment and the integra-
tion of the economy into external markets has been intensified. This re-
quires the Chilean economy to be able to raise productivity in order to
compete successfully in international markets, solve the problems caused
by a loss of competitiveness in certain productive sectors and increase the
participation of the secondary labour force in the labor market.
Section 3.2 reviews the macroeconomic performance of the past two
decades and the challenges this has meant for labour market flexibility,
basically in terms of employment and wages. The issues of sectoral mobil-
ity, as well as entry into and exit from the labour force, will be analyzed in
Section 3.3.

3.2.1 Economic Cycles and Structural Adjustment

During the 1970s important reforms were carried out in the Chilean
economy including deregulation of domestic markets, liberalization of
foreign trade and opening up the capital account of the balance of pay-
ments, as well as fiscal reforms and a liberalization of the domestic
financial market. 2 Furthermore, in 1975 an anti-inflationary policy was put
into effect which produced a significant reduction in aggregate demand as
a result of restrictive monetary and fiscal policies. This policy implied a
fall in GOP of 12.9 per cent together with a rise in unemployment to
14.9 per cent that year (see Table 3.1).
The liberalization and stabilization policies carried out during the period
1975-82, implied drastic changes in economic relationships with the rest
of the world and in the role played by the market, and culminated in the
second biggest crisis in Chile's recent economic history. In 1982 GOP fell
by 14.1 per cent and open unemployment increased to 19.6 per cent. The
1982 crisis is basically explained by the seriollsness of the macroeconomic
68 Chile
Table 3.1 Chile: economic indicators, 1970-94

Year GDP growth Employment Unemployment Participation

(%) (000) rate (%) rate (%)

1970 2.1 2766 5.7 5.7 45.6

1971 9.0 3.8
1972 -1.2 3.1
1973 -5.6 4.8
1974 1.0 9.2
1975 -12.9 2650 17.3 14.9
1976 3.5 2777 18.1 12.7
1977 9.9 2820 17.7 11.8
1978 8.2 2981 18.4 14.2
1979 8.3 3003 17.5 13.6
1980 7.8 3257 15.7 10.4
1981 5.5 3277 15.6 10.8
1982 -14.1 2943 28.0 19.6 47.2
1983 -0.7 3101 30.3 16.8 47.2
1984 6.3 3170 24.4 15.4 46.8
1985 2.4 3372 21.4 13.0 47.5
1986 5.7 3770 16.0 10.8 50.8
1987 5.7 3902 12.2 9.3 50.9
1988 7.4 4091 9.0 8.3 51.9
1989 9.9 4304 6.3 52.6
1990 3.3 4391 6.0 52.6
1991 7.3 4423 6.5 52.3
1992 11.0 4606 4.9 52.6
1993 6.3 4860 4.6 54.5
1994 4.2 4904 5.9

Note: Total unemployment rate inc1udes people involved in emergency

employment programmes.
Source: Base on figures from the Central Bank and National Institute of
Statistics (lNE).

imbalances existing at a time of unfavourable external conditions, im-

balances which in large part were caused by economic policy in the
second half of the 1970s, centred on reducing inflation, to the neglect
of the external balance.
Although the magnitude of the two recessions was similar in terms of
the fall in the level of economic activity, the first occurred in a context of
significant structural changes involving changes in relative prices and
sectoral shocks, whereas the second took place at a time when most of the
structural transformations had been completed, and had more of the
characteristics of an aggregate shock. 3
Pilar Romaguera et al. 69
During the years 1982-9, in response to the 1982 crisis, modifications to
the economic reforms and changes in the rules of economic policy were im-
plemented. In the early years of the period (1982-4) the State had to
abandon neutral economic policies in order to come to the aid of a bankrupt
entrepreneurial sector. After that, the period 1985-9 was characterized by
the imposition of a new orthodox strategy, with an emphasis on long-term
reforms, but with a greater degree of economic regulation and pragmatism
than had been the case in the 1973-82 period. During this second period the
economy entered a sustained recovery, becoming strong after 1986.
The Chilean economy came to the end of the 1980s with a higher rate of
economic growth and lower unemployment than before the 1982 crisis.
Inflation, although higher than in 1981, was low by Latin American stan-
dards. However, it is important to point out that in the adjustment process
carried out there was differential treatment between different economic
agents, with large subsidies given to high income groups and zero, or
reduced, subsidies to a significant per centage of the unemployed. As a
consequence of this, a progressive deterioration in the distribution of
income occurred (Meller, 1992).

3.2.2 The Labour Market: Employment and Wage Flexibility?

The adjustment and restructuring processes that we have briefly outlined

had significant impacts on employment and incomes.

The Pro-cyclical Behaviour of Employment

Up to the middle of the 1970s, the Chilean economy had had historical
rates of unemployment of around 5 per cent. After the 1975 recession un-
employment rates rose by a factor of three and stayed at high levels
throughout the rest of the decade, in spite of the recovery in GOP. The fall
in the level of employment between 1973 and 1975 amounted to 8 per
cent, which, together with an increase in labour supply, generated a 10 per
centage point increase in unemployment. 4 This increase in unemployment
occurred despite the maintenance of labour legislation relating to cause of
dismissal, although the interpretation of legal norms does seem to have
been more favourable to employers in a context of repressed union activ-
ity.s In this period not only was there an increase in unemployment rates,
but also a change in the sectoral composition of employment, most notable
being the fall in the share of industrial employment, which declined from
25 per cent of total employment in the period 1966-72 to 17 per cent by
1975. In addition, employment in the commercial and financial services
sectors increased (see Figure 3.\).
70 Chile
Figure 3.1 Chile: sectoral employment. 1966-93

Agric. and fishing Mining -+-
22,'::======--' 3.5 r---.!======~---'

" 3

~ 2.5
~ 2
12 +.-..............................-..............................-.......-1
1966 687072 74 76 7880 82848688 90 92 69 72 75 78 81 84 87 90 93
Year Year

-+- ManufaclUring -+- Trade

30~==============~ 20 .-~======---,
~ 25 ~ 18
j 2U
Ii 17
~ 16
II: 15
15 14
10~+H~H+""""+H~H+""""~ ~...............~>-++.......................>-++~

1966 69 72 75 78 81 84 87 90 93 1966 69 72 75 78 81 84 87 90 93
Year Year

-+- Elect gas and water I -+- Conslruclion

1.2 9~=:::::::::=~---,
1.1 8
!l 0.9
!l 6
Il. 7
Ii U.8 ~ 5
~ U.7 ~ 43 ................. .
1l.5 2
0.4 1~+H>-++++++HH++++Tr++++HH
1966 69 72 75 78 81 84 87 90 93 1966687072 74767880828486889092
Yeilr Year

Finan. -+-
serv. I-+- Social and commun. serv.1
::. 5 a 36
~ 4.5
~ 4
~ 3.5
J 32
2-4<.......H++-H......-++<>-+++++++++H 24+H+H+H+H+H+H~~H+~
1966 69 72 75 78 81 84 87 90 93 1966 69 72 75 78 81 84 87 90 93
Year Year

I -+- Trunsp. and comunic. I -+- Total I

10 5000'-~========~---'
"eo 4500
~ 3500
5 ~~>-++++++++""""""'>-++++++H
1966 69 72 75 78 81 84 87 90 93 69 72 75 78 81 84 87 90 93
Year Year
Pilar Romaguera et al. 71
From 1976 output began a gradual recovery; however growth was asso-
ciated with only a slow recovery in employment. In 1981, when economic
recovery reached its peak, the open unemployment rate was 10.8 per cent,
or 15.6 per cent when people in emergency employment programmes are
included. The persistence of high rates of unemployment in a period of
economic recovery is a phenomenon which gives rise to a first question
concerning the type of flexibility ruling in the labour market, and one to
which we will return later. 6
In 1982 the Chilean economy suffered a new recession. Between 1980
and 1982 the number of people in work fell by 13.3 per cent, which led the
open unemployment rate to reach 19.6 per cent in 1982 or 28 per cent
when those in emergency employment programme are included. Among
the reasons for the large impact of this recession on employment, two can
be singled out. First, this recession was characterized by a high number of
company bankruptcies (810 firms); second, from an institutional point of
view, a new Labour Code was in force, which facilitated dismissal
procedures and reduced compensation costs.
From 1984 onwards a recovery in output began, which since 1986 has
been associated with a significant increase in employment. In 1989 the
economy returned to historical rates of open unemployment of about 6 per
cent. From this moment on, the problems of employment gradually began
to change, from problems of high unemployment levels to ones of job
quality and later to those of potential labour shortage.
The trends described indicate a strongly pro-cyclical behaviour of the
total unemployment rate. The emergency employment programmes did
indeed play an important role in absorbing unemployment, but open un-
employment was also strongly affected by the recessions and adjustment

Were Real Wages Flexible?

Although the two recessions saw significant increases in unemployment,
the behaviour of real wages was different in each crisis (see Figure 3.2). In
the 1975 recession, real wages were depressed as a result of the intense
inflationary process of the period 1972-3: in 1974 real wages were 40 per
cent below their 1970 level. 7 After faIling moderately by 3 per cent in
1975, they began to recover thereafter and in 1981 regained their 1970
Wage trends throughout this period were strongly influenced by institu-
tional mechanisms of wage determination. In the 1974-9 period wages
varied according to obligatory readjustments in the public sector, partially
72 Chile
Figure 3.2 Chile: index of real wages, general and public sector, 1970-94,
December 1982 = 100




...... General
60 -0- Public sector
,... ,...'<t ,...v;;
N 00

Source: Based on lNE data, deflated by corrected CPl (1970-78).

or totally indexed on past inflation. Salary indexation in conditions of

falling inflation was a determining factor in the recovery of real wages
from 1974 on. However, wage increases cannot be explained by this factor
alone; an' example of this is the growing differential that was being gener-
ated between private and public sector remuneration in the period
1974-1981. Private sector salary increases can also be explained by the
effects of trade liberalization on wage differentials and by efficiency-wage
considerations: companies in the modern sector were paying their workers
rising wages, above market clearing levels, despite the high unemployment. 8
Wage regulations were altered in 1979 with the implementation of the
Labour Plan, and in 1982 when compulsory indexation was abolished for
collective private sector contracts. The de-indexation measures, together
with a reduction in the minimum wage,91ed to falling wages as the principal
means of fighting unemployment, although the employment response came
only slowly. Indeed, in at least two years falling real wages coexisted with
unemployment rates above 20 per cent. On the other hand, the stagnation of
real wages between 1983 and 1987 was without doubt a factor which
contributed to the Chilean economy's increased competitiveness. 10
Due to institutional changes, wage determination also changed over
time. Until 1979 the absence of legislation (prohibition of collective bar-
gaining) rigidified the labour market because this paradoxically imposed
an institutional wage determination; after 1982, on the contrary, a greater
market influence is seen in the fixing of wages.
Estimates of a Phillips-type curve arc presented in Table 3.2, showing a
greater flexibility or responsiveness of wages to market conditions in the
period after 1982, even though wage contracts and indexation mechanisms
Pilar Romaguera et al. 73
Table 3.2 Chile: nominal wage equations, 1976-93 (dependent variable:
quarterly variation in industrial wage)

Illdepelldellt 1969-79 1983 -93

variable (1) (2) (3)

Constant 0.010 (3.17) 0.009 (1.29) 0.118 (7.56)

R, 0.0955 (11.72) 0.730 (8.25) 0.108 (2.99)
UN, -0.043 (-0.69) -0.040 (-3.17)
P,-I 0.017 (3.84) 0.157 (5.22)
R2 adj 0.845 0.899 0.464
Sample size 26 26 42

Note: MCO estimates; Rt: public sector wage adjustment at time t; Pt-I:
accumulated inflation lagged by one quarter; UNt : unemployment at time t.
Equation(3) was estimated using CORC method, Rho = -0.488 (-3.58). T ratios
are given in parentheses.

continued to be a strong determinant of wage behaviour. As can be seen,

unemployment influenced wages significantly only in the post-1982
period. Complementary estimates stress that nominal wages closely fol-
lowed the government's readjustment policies up to 1979, thereby
fulfilling Cortazar's (1983) centralized 'model'. Between 1979 and 1982
there was a transition phase and from 1982 onwards the public sector
ceased to be a leading sector in wage determination (Mizala and
Romaguera, 1995a).
To sum up, the Chilean economy showed significant rises and falls in
real wages during the 1970s and 1980s; however, it is not clear that this
behaviour was always in response to market conditions. The evidence
tends to indicate that wages adjusted more flexibly in the 1980s than
during the previous decade. 11


The labour market adjustments in the Chilean case involved not only
changes in employment levels, but also changes in the composition of em-
ployment between sectors, particularly a decrease in industry and an
increase in services (see Figure 3.1). Section 3.3 analyses two more
specific aspects of labour mobility that are important in the Chilean expe-
rience: labour supply response to the demands of economic growth, and
labour mobility between the formal and informal sectors.
74 Chile
3.3.1 Labour Supply

The supply response of labour over the economic cycle acts to attenuate or
accentuate unemployment problems. In Chile, one observes a very
moderate response to the crisis of 1982 in both total and gender-specific
participation rates, although the decline in the participation rate was more
significant for men than for women. We do not have sufficient information
to analyze the effects of the previous recession, in 1975; however, it can
be seen that in spite of the recovery of output between 1976 and 1981,
participation rates did not increase l2 (see Figure 3.3).
Once the economy began to recover - especially after 1984 -
participation rates increased significantly for all groups of the population;
although the most significant increase was in the female participation rate
occurred from 1991 on. Thus, the clearest trend seen in terms of supply is
the increase in participation rates of recent years.
It should be pointed out that Chile has low participation rates compared
both with developed countries and the recently developed Asian countries.
And although female participation rates have grown recently, their levels
are still below those of OECD countries in the 1960s.
In order to investigate the potential responsiveness of participation
rates, supply equations were estimated based on cross-section data for
1992. The (uncompensated) wage elasticity is 1.07 for men and 1.88 for
women, indicating significant elasticities in both cases but, as was to be
expected, higher in the case of women. The analysis also indicates that for
men adjustment is stronger in hours worked, while for women, adjustment
via the number of persons employed explains 78 per cent of the total
change in supply (see Table 3.3}.

Figure 3.3 Chile: labour force participation rates, 1976-93

1976 78 80 82

Source: INE data (October-December survey).

Pilar Romaguera et al. 75
Table 3.3 Chile: breakdown of labour supply, 1992

Wage Change
elasticity ill labour supply due to:
(uncompensated) Entry/exit Hours

Men 1.07 42.6% 57.4%

Women 1.88 78.3% 21.7%

Source: Author's own estimations based on 1992 CASEN Survey data.

In sum, the short-run supply response has been moderate in recessions,

with only small falls being seen in participation rates. In this sense, the re-
sponse of labour supply has been moderately pro-cyclical, with the dis-
couraged-worker effect predominating. Significant incorporation of other
household members into the labour market, in order to alleviate the fall in
family income, has not been seen. In the longer run, potentially there
seems to be a high degree of flexibility on the supply side of the labour
market, mainly in terms of the incorporation of female workers, a
phenomenon which has been visible most recently.

3.3.2 The Informal Sector

The conventional wisdom for Latin America is that the informal sector
has played a buffer role by absorbing a significant part of the unemployed
during recessions. 13 However, in the case of Chile it has been argued that
the response to fluctuations in economic activity may have occurred
largely through changes in formal sector employment and in the rate of
open unemployment. 14
The heterogeneity of the informal sector also causes a certain ambiguity
in predicting its behaviour in response to economic cycles. Thus, if in the
informal sector a productive segment, with an integration/subordination
relation with the formal sector of the economy, coexists with a segment of
displaced workers who have no other work alternatives, then one might
expect either a pro-cyclical or an anti-cyclical behaviour in response to
output fluctuations.
Table 3.4 summarizes different estimates of the size of the informal
sector; depending on the definition, it represents between 21.5 per cent
and 42 per cent of urban employment.
The figures suggest a certain stability in the size of the informal sector.
In order to investigate its behaviour in more detail we examine longer time
76 Chile
Table 3.4 Chile: estimates of the size of the informal sector, 1980-92
(at the national level as a percentage of non-agricultural employment)

1980 1985 1990 1992

(I) INE (1992) 32.2

(2) MlDEPLAN (1992) 22.3 21.5
(3) PREALC (1993) 42.1 43.5 41.9 42.0

Note: Definitions: (I) Self-employed, excluding professionals, unpaid family

members and employees in firms with fewer than 5 workers. (2) Definition (I),
excluding those contractually employed in trade and services. (3) Self-employed,
unpaid family members and employees in firms with fewer than to workers.

series for the non-wage informal workers, a sub-set comprising the major-
ity of the informal sector for which there is information, comprised of self-
employed workers and unpaid family members.

The Informal Sector as Buffer?

The informal sector seems a structural phenomenon in the Chilean
economy which did not fulfil a significant 'buffer' role. In the 1957-94
period the informal (non-wage) sector's share of employment, only varied
between 25 per cent and 20 per cent, with the single exception of 1993
when it fell to just below 20 per cent (Mizala and Romaguera, 1995c).
Correlation analysis confirms the hypothesis that although employment in
the informal sector was more stable than the rest of the economy, its
behaviour has been more pro-cyclical than anti-cyclical. 15
This analysis is complemented by data at the national level for the
period 1977 to 1993, which are presented in Figure 3.4. 16 Figure 3.4
clearly shows the falls in employment associated with the 1982 crisis and
the stagnation caused by the slower growth of 1990. The cycles are
directly reflected in increases in the total and open unemployment rates.
However, the informal sector does not show a significant response to
them: its share of non-agricultural employment varied between 21.8 per
cent in 1977 and 25.2 per cent in 1985.

Wage Differentials
Table 3.5 presents information on differences in income between formal
and informal workers, based on CASEN survey data. 17
The monthly incomes of workers in the informal sector were 30 per cent
Jess than those in the formal sector, estimated as per centage differences
Pilar Romaguera et al. 77
Figure 3.4 Chile: employment, unemployment and informal sector, 1977:
1-1993: I, quarterly figures








40 Informal sector (non-wage), %

1977:1:2:3:4 78:1- Year 1993:1

Source: GarcIa (1995), based on INE data; unemployment rates are open and total
(with emergency employment programmes).
Note: Employment is non-agricultural and excludes emergency employment.

between arithmetic means, and 40 per cent estimated using geometric

means, for the year 1990. This differential drops significantly when we
control the estimates for differences in worker characteristics. Thus,
monthly incomes of workers with similar human-capital characteristics
working in the informal sector were 20 per cent lower than those in the
formal sector, a difference that falls to 19 per cent when further controlled
according to the worker's sector of activity, using geometric means.
These differentials are even smaller when hourly income is examined.
Thus, although the income differentials between these two sectors seem to
be important at first sight (30 per cent), they are reduced significantly once
we consider that informal workers have a smaller endowment of human
capital and work fewer hours on average (9 per cent). Estimates for 1992
show a slight increase in the differentials in favour of formal workers.
The fact that these differences in income are moderate may explain the
sustained importance of the informal sector in recent decades. However,
the differentials widened slightly between 1990 and 1992, which is
78 Chile
Table 3.5 Chile: wage differentials between formal and informal workers,
1992, %

1990 1992

Monthly Hourly Monthly Hourly

(I) % Differential -0.296 -0.165 0.356 -0.336

based on
arithmetic mean
(2) % differential -0.404 -0.325 -0.405 -0.328
based on
geometric mean
(3) = (2) + -0.205 -0.126 -0.221 -0.142
controls for
human capital
(4) = (3) + Controls for· -0.192 -0.089 -0.212 -0.112
sector of activity

Note: The dependent variable is the logarithm of the income from work. The
values in the second row were obtained from a regression in which the dependent
variable is the logarithm of wages and the independent variable is a dummy
(formal/informal sector). The third row adds as independent variables, human
capital variables (education, experience, experience squared, sex and interaction
variables). The fourth row adds to the previous regression dummies for sector of
Source: Authors' own estimates based on 1990 and 1992 CASEN survey data.

consistent with figures showing a slight decrease in the size of the infor-
mal sector in recent years.
In sum, although the impression existed that - as in other Latin
American countries - the Chilean informal sector had played a buffer role
in recessions, the evidence supporting this hypothesis is weak and aggre-
gate figures show a stability in the size of the sector. In this sense our
results stress the structural character of the informal sector and indicate
that entry to (and exit from) this sector has been less fluid than expected.
Even though incomes in this sector are inferior to those in the formal
sector, the size of the differential is moderate, once differences in worker
characteristics are controlled for.


The changes in labour legislation and how they relate to the increased
macro flexibility that has been observed in the Chilean case are examined
Pilar Romaguera et al. 79
in more depth in this section. IS We first present a brief outline of labour
policies in the past two decades, then examine in more depth the cha-
racteristics of the labour market's regulatory framework.

3.4.1 Labour Policies

The high level of. unemployment which characterized the Chilean

economy from the mid 1970s until the end of the 1980s made it necessary
to implement specific policies of labour absorption. During this period
labour policy was basically reactive and supportive, seeking to mitigate
the supposedly transitory effects of high unemployment. As we have com-
mented, one of the principal mechanisms for reducing unemployment was
the emergency employment programme.
In 1975 the Emergency Employment Programme (PEM) was set up,
giving participating workers a remuneration close to the minimum wage in
return for carrying out unskilled work. In 1982, in response to the high
rates of unemployment the Employment Programme for Heads of
Households (POJH) was created, which established different subsidy
bands depending on an individual's qualifications. Despite the fact that the
value of the PEM subsidy fell both in real terms and as a per centage of
the minimum wage overtime, the number of workers affiliated to this pro-
gramme remained high until 1986. An additional policy response was a
subsidy to manpower hiring, a kind of measure which is still used in the
geographical extremities of the country, but whose impact on job creation
has been smaIl. 19
A final policy measure implemented in the 19808 was an unemployment
subsidy, financed by general national funds. The effective coverage of this
insurance has been reduced, partly due to the difficulties involved in
getting access to it (for example, being on the borough unemployment
register), and additionally due to its low monetary level. At the present
time, it amounts to one-quarter of the gross minimum wage for the first 6
months of unemployment, falling by one-third during the next 3 months
and falling to half its initial value in the final 4 months. It is estimated that
less than half of the potential beneficiary population actually collect the
subsidy (EcheYerria, 1993):
The policies mentioned, (emergency employment programmes, hiring
subsidies and unemployment subsidies) were the central policies for
stimulating employment and alleviating the effects of unemployment. The
hiring subsidy and the emergency employment programmes were dis-
continued towards the end of the 1980s, when the economy began its
period of sustained recovery.
80 Chile
During the mid-1970s new programmes for skills improvement began
to be implemented which, as we shall see later, encouraged training in the
private sector by means of a tax allowance. But, throughout the period of
structural adjustment and high unemployment, such programmes had little
effect. In addition, labour re-training programmes - which would have
more directly influenced the flexibility of the labour input in an economic
restructuring context - did not begin to be developed until the start of the
As was mentioned in the previous section, wage policies are perhaps
what experienced most transformation during these two decades. In the
period prior to 1974 there was an indexation policy, which was quite
widespread in both the private and public sector, collective bargaining in
parts of the private sector and the fixing of wage increase for the public
sector and that part of the private sector not negotiating collectively. From
1974 automatic wage increases and collective bargaining were suspended,
and it was the government that decreed general wage increases for both
the public and private sectors. In July 1979, with the issuing of the new
Labour Code (Plan Laboral), collective bargaining was allowed once more
in the private sector, while public sector wages remained subject to read-
justments decreed by law, with the latter being extended to the private
sector not negotiating collectively. Later, in June 1982 the Labour Code
was modified: the compulsory indexation of collective private sector con-
tracts was discontinued, and public sector wage increases ceased to extend
to the private sector not subject to collective bargaining. The policy of
wage de-indexation was aimed at reducing manpower costs and encour-
aging wage flexibility and job creation in the private sector.
Another set of important reforms introduced in the 1980s were changes
to the pension and health systems. Reform of the pension system, on the
one hand, lowered contribution rates and, on the other, directly linked each
worker's contributions to his or her future pension. Workers who entered
the labour force after 1981 were obliged to go into the new private pension
system, by affiliating to a Pension Fund Manager (AFP). The reform of the
health system created private Health Insurance Managers (ISAPRE), but
the public health system, to which the majority of workers continued to
belong, was also maintained.2° The reduction in wage costs and the greater
flexibility brought to the labour market by the changes in labour laws and
the elimination of institutional wage-setting influenced the increase in
employment in the economic recovery after 1983, as was mentioned in the
previous section.
In the 1990s the emphasis of labour policy changed significantly, due
both to the changes in the economic context, to which we have referred,
Pilar Romaguera et al. 81
and to political changes, with a democratic government taking office in
March 1990. Policies during this period were aimed at changes in labour
legislation to improve workers' negotiating power as well as a greater
concern for systemic flexibility, especially with respect to training pro-
grammes and unemployment insurance. With regard to protection against
unemployment, the present system consists of an unemployment subsidy -
which, as we have mentioned, is underutilized - and a system of com-
pensation for dismissal, of which we will give details later, but which has
been criticized for the inflexibility and disincentives to job creation which
it engenders. In 1993 the government presented a proposal for an unem-
ployment insurance scheme which would set up a compulsory individual
saving mechanism to cover the contingency of redundancy, which could
be complemented by a system of credit. Although there is a consensus in
the country on the need to establish some form of unemployment insur-
ance, the government's proposal has not yet found sufficient support in
the business and union sectors.21
Another measure which has sought to give greater flexibility to the
system is the streamlining of the role of Municipal Placement Offices
COMC), whose function is to detect vacancies in firms in the area and put
companies in contact with workers looking for employment; about 25 per
cent of the country's municipalities have an OMC. The demand for this
service was significant in the period of high unemployment; however, the
number of vacancies and placements did not respond positively. Also, in
recent years there has been a revival both in the number of workers
registered and in vacancies, but this has not been reflected in a higher per
centage of placements.
Another specific labour policy put into effect during 1990s is an
increase in the supervision of labour laws. Between 1990 and 1994, the
budget of the Labour Directorate grew by more than 100 per cent and its
staff by 55 per cent. From 1990 onwards there has been steady growth,
with increases of 101 per cent in the number of employers inspected and
115 per cent in the number of employees benefiting from such action. In
1993, this latter variable represented 22.8 per cent of the labour force.

3.4.2 Labour Regulation Framework

Four stages can be distinguished in the Chilean labour market's regulatory

framework in recent decades, deriving from the different government
philosophies. In the first period, up to 1973, the prevailing legislation was
protective and complex, due to the diversity of special rules. There were
supply restrictions through permits to carryon certain activities and other
82 Chile
special privileges relating to jobs in ports, graphics, bakeries, hotels,
among others.
A second period corresponded to the years 1974-8, when there was de
Jacto deregulation as a result of the strong political repression of union
leadership, and the banning of collective bargaining (with strikes there-
fore being made unlawful). Nevertheless, in this period the rules of pro-
tection regulating individual labour contracts were maintained, and the
State intervened directly in the control of wages, as we have described.
However, during this period there was a low rate of supervision of the
legal provisions relating to compliance with the rules on individual labour
A third period corresponded to the years 1978-90, where the reforms
deregulating the labour market were consolidated little by little. In 1978
'severance' was reintroduced; that is, dismissal without cause was permit-
ted, but with severance payment of I month's wages for every year of
service, without limit. In this period the permit system and special rules
for certain groups of workers were abolished. The 1979 Labour Code
once more legalized collective bargaining, union activity and strikes,
although substantially modifying certain aspects as compared to the
pre-19741egislation. 22
The regulatory approach in this period sought to strictly limit the
influence of union activity in the firm - reflecting a fear of political activ-
ity among social organizations - and give greater relevance to market
mechanisms in wage-setting. The changes worked towards giving less
power to organized labour and more power to employers: the right of in-
dividual striking workers to withdraw from the strike and return to work
after 30 days was authorized, the employer was allowed to terminate
labour contracts or replace workers after 60 days' strike, or even imple-
ment a lock-out. In this period, the effective deregulation of labour
relations was consolidated, with direct State intervention in collective
bargaining processes and compulsory wage increases being finally
With the return of democracy, some of the rules on individual labour
contracts, as well as those relating to collective bargaining and general
union organizations, were modified. The guiding principle for these
changes is to balance effectively the excessive power given to em-
ployers by the 1980s legislation, without slipping back into the extremes
of protectionism of the 1970s, and favouring bipartisanship; that is, the
resolution of conflicts and agreements between each firm and its
Pilar Romaguera et al. 83
The Individual Labour Contract and Labour Costs
The regulation of labour relations in Chile is set out in detail in the Labour
Code, and compliance is supervised relatively efficiently by autonomous
agencies. According to the 1990 CASEN survey, nearly 70 per cent of
workers are covered by work contracts. 23 The most widespread form of
contract in Chile is of indefinite duration. It is with this in mind that the
rules on the termination of labour contracts call for notice and the payment
of compensation in the case of dismissal for reasons not attributable to the
worker, as we will explain later. In the case of sub-contracting, which
appears to be a growing practice in the productive sector, the legislation
extends the employer's subsidiary responsibility towards subcontracted
workers when the work is carried out inside the contracting firm.

Termination of the Labour Contract The legislation in Chile upholds the

employer's right to decide when to hire and when to terminate a worker's
contract, requiring only the specification of cause and, in cases which
proceed, a period of notice and the payment of compensation.
A severance payment of I month per year of service, with an upper
limit of II months, and 30 days' notice 24 is the procedure when dismissal
occurs due to (i) the needs of the firm, including rationalization or mod-
ernization in the firm, changes in market or economic conditions or worker
unsuitability, and (ii) written notice of dismissal by the employer, only for
workers in private houses and those with administrative responsibilities.
As a way of making the compensation system more flexible, in 1992
'all-risks .insurance' was introduced: this legislation allows the parties,
from the beginning of the seventh year of a labour contract, to replace
compensation according to years of service with an all-risks insurance by
which the employer has to pay at least 4.11 per cent of taxable pay into an
AFP account in the name of the individual worker. However, this legis-
lation has hardly been used. 25
The legislation does not contemplate the possibility of reinstatement as
is the case in other countries of the region, except where the worker has
appealed to a tribunal, a mechanism which has significant costs in terms of
a deterioration in labour relations inside the firm and in terms of wages
accured while the worker was out of the firm. The possibility of worker re-
instatement was considered in the previous legislation (law from 1966,
which remained in force until 1978), but there was the option of not rein-
stating the worker provided the employer paid compensation of I month
per year of service without limit. Another rigidity established by the
84 Chile
pre-1978 legislation was the need to obtain permission from two ministries
if more than 10 workers were to be dismissed in the same calender month.

Special Rules Regarding Women and Young People In the case of

female workers, the legislation stipulates maternity leave of 15 days prior
to the birth and 90 days thereafter, as well as special leave connected to
the illnesses and feeding of children younger than I year old. These rules
are considered successful in terms of fulfilling objectives such as reducing
the infant mortality rate. Income not earned by women during leave
periods is paid by the State, thereby avoiding higher direct labour costs.
However, there are other costs which derive from turn-over costs and
'vertical segregation', since the benefits to firms of hiring women of
child-bearing age in management positions, or giving them training for
promotion, are reduced.
As well as this, firms where 20 or more women work are obliged to
provide daycare facilities (for children from 0 to 2 years old). This rule
imposes a strong disincentive to hiring women in medium-sized firms, and
the cost of doing so in medium sized and large firms probably redounds on
the beneficiaries themselves in the form of lower pay. One way to elimi-
nate this legislative bias, while at the same time preserving the principles
it is intended to protect, would be to replace the provision by a flat tax on
each worker, independent of gender and firm size. A similar discrimina-
tion has been corrected precisely by making family allowances a charge
on social security, whereas previously they had been the employer's
responsibility, thereby artificially raising the costs of hiring people
according to their number of dependents.
There are few rules regarding the employment of young people. They
include a lower minimum income and the possibility of being hired under
a contract of apprenticeship. The rate of youth unemployment is more than
twice that of other workers, and considerably higher in marginal urban
sectors. Rather than give incentives to hiring young people through a
relaxation of the rules, in Chile a choice was made to design training
programmes especially oriented towards young people of scarce means.
These are described in the following section.

Labour Costs Labour costs have experienced a considerable fall since

the reforms to the social security system. The old social security system
had degenerated into a multitude of different sub-systems for different
industries and occupations, with contribution levels including health
reaching between 51 per cent and 59 per cent, much of which was the
employer's responsibility. With the new social security system, the cost
including health is around 22 per cent of gross earnings.
Pilar Romaguera et al. 85
At present, the AFP system's administrative costs have been a matter
of controversy especially due to the high incidence of expenditure on
advertising and sales agents. The employee's health contribution has
also been the subject of debate, with different alternatives being sug-
gested aimed at making the per centage deduction from earnings (7 per
cent) more flexible.
In the system for workplace accidents and work-related illnesses, the
basic contribution rate is 0.9 per cent of remunerations. An additional rate
of between 0 and 3.4 per cent is added to this depending on the activity
category, as well as a surcharge which varies according to the firm's
effective claims record. The main criticism of the mutual system is its lack
of competition, for its uncompetitive structure is thought not to ensure an
optimal contribution rate. Severance payments, as mentioned previously,
also generate a contingent liability whose expected value can also be
considered explicitly as a cost.
A final component of labour costs is the legal bonus, which has to be
paid by the end of the legal year if the firm makes profits, and which can
be a significant component of labour costs. However, the bonus, due to its
form of payment, should not be considered a non-wage cost, as it is in-
corporated directly into wages. .
The Challenge of Modernizing Labour Legislation in the Public Sector
Public sector workers, unlike their private sector counterparts, are gov-
erned by an Administrative Statute; they normally have a defined staff
career and employment 'stability'. In other words, to be dismissed they
would have to commit a serious offence and to have gone through the nec-
essary proceedings. As well as this, they receive wages whose level and
readjustments are defined by law.
It is estimated that the legislation in this sector 'rigidifies' the adminis-
tration of sectoral resources, and although its impact on the overall flex-
ibility of the economy may be limited, it probably has a very negative
effect on the efficiency of the sector. Examples of such rigidity are rules
concerning the hiring of staff, where vacancies must be filled by staff from
the next level down; an unwieldy system of qualifications; difficulties in
rationalizing the structure of public services as this requires passing a law
in the National Congress, etc.

Regulation of Collective Bargaining and Union Membership

The actual regulations are governed by the principle of union freedom:
membership of a union is voluntary and personal; and union organizations
do not require prior authorization to be set up, apart from complying with
86 Chile
their own statutes and the need to represent at least a certain per centage of
the workers in a given firm.
Legislative changes during the 1990s have tried to reverse a diagnosis
of union repression, with modifications to rules such as limits on union
cards, the non-recognition of general unions, restrictions on financing
possibilities, etc. Sanctions for anti-union practices were also raised, the
number of complaints which could be taken to tribunal was increased, and
the procedures streamlined.
Union membership is quite heterogeneous between the sectors of the
economy, varying from 66.9 per cent and 59 per cent mining and electric-
ity, gas and water, respectively, to 7.4 per cent in the community, social
and personal services sector and 8 per cent in agriculture. In other words,
there is a relatively lower membership rate in sectors with smaller firms,
or those which are dispersed or difficult to control. It should be pointed out
that the services sector includes the public sector, both centralized and
decentralized, whose officials are not allowed to join unions, although
recently the right to set up staff associations has been recognized and

Regulations on Collective Bargaining Although the law established the

possibility of negotiations reaching beyond the individual firm, through
mutual agreement of the parties concerned this, due to the weight of his-
torical tradition, has only occurred as a rare exception (large-scale fishery
firms and bakeries). The legislation which prevailed between 1979 and
1990 explicitly prohibited this. Collective bargaining by industry normally
tends to strengthen the union, since grouping together a larger number of
workers makes the union stronger financially and tends to add to its
negotiating power. The biggest problem in collective bargaining at the
industry level is the lack of coordination that can be produced between
the wages agreed on and each firm's ability to pay.
The minimum duration of a collective agreement is 2 years, and there is
no legal maximum. Despite the fact that this regulation could be seen as
rigidifying labour flexibility - since unexpected shocks can occur which
necessitate an adjustment in wages - firms appear to value a period of
stability in which there cannot be negotiations.

Coverage of Collective Bargaining and Strikes The number of workers

covered by collective instruments has stabilized around 10 per cent of the
labour force. It should also be mentioned that there has been an increase in
less formal collective agreements over and above contracts arising out of
collective bargaining.
Pilar Romaguera et al. 87
The cost of strikes during 1993 was 314 246 man-days, which means
that, per worker, approximately half an hour was lost during the year. This
compares favourably with more developed countries, where the urgency of
social claims is less.
A pending issue is the analysis of the coverage of collective
bargaining in medium-sized and small firms. At present there is a
project being discussed in Parliament which seeks to reform certain of
the rules on collective bargaining applied to medium-sized and small


Skills improvement is a key element in labour productivity and adaptation

of labour to changes in technology. This section examines the training pro-
grammes which exist in Chile and the role they have performed in terms
of labour market adjustments.
As discussed above, retraining programmes, needed to facilitate
workers mobility during adjustment periods, have been in place only since
the 1990s. The training system expanded significantly after the mid-1970s,
but is basically oriented to provide training capacity to semi-skilled and
skilled workers in medium and large firms.

3.5.1 The Training System in Chile

The main way in which workers have access to training in Chile is through
a programme which encourages firms to demand training through a tax
allowance, the Company Programme. 26 The State's direct participation in
training activities is more secondary and supportive than productive in
nature. There is no tradition in Chile of a strong presence of other agencies
in the training system: unions have had little involvement and entre-
preneurs have been involved to a certain extent by means of their profes-
sional associations, but this has centred only on certain very specific
activity sectors, such as the metal and mechanical sector and in technical-
professional schools.
The characteristics of the Chilean training system are therefore strongly
influenced by the Company Programme. The system is decentralized and
general (its design is not focused on specific sectors or groups of workers,
although the practical result may be different). There is a strong private
sector presence in the definition, organization and running of specific
training initiatives. Market mechanisms are used, with the State's role
88 Chile
limited to encouraging and supervising such initiatives, and with a design
which ensures the relevance of the training provided.
The number and type of training programmes has expanded since 1990.
However, the main one (the young people's training programme), main-
tains the central characteristics of decentralization, maximization of
private sector participation and the use of market mechanisms, although
this programme is focused on specific groups and involves State action in
its setting up, supervision and financing. In this sense it is a social pro-
gramme, of innovative design, which seeks to increase efficiency through
market mechanisms.
Figures on coverage based on data from household surveys indicate that
11.6 per cent of those in work declare that they have participated in train-
ing programmes during the past 3 years. These figures might put Chile at
an intermediate level in terms of training coverage, compared with inter-
national figures, although this is a very indirect measurement and subject
to comparability problems (see DECD, 1991).

3.5.2 Training Programme

Table 3.6 summarizes the characteristics of the training programmes

existing in Chile, which are sponsored or administered by the State.
Information on the extent of training in the private sector, not claiming tax
allowances, is not available, although this could be relevant in informal
training programmes inside the firm.
The Company Programme is the most widely used, accounting for more
than 90 per cent of all participants in SENCE (Servicio National de
Capacitaci6n y Empleo) programmes. This programme establishes a tax
allowance for firms which train their workers of up to 1 per cent of annual
taxable remuneration paid to their personnel or the sum of 3 minimum
wages if this is more than 1 per cent. To gain access to this benefit,
courses need to be previously authorized by SENCE and carried out by
recognized training organizations or organized by the firm itself.
The number of workers trained under the Company Programme has
risen significantly in recent years. Between 1990 and 1994 the number of
participants increased by 93 per cent, which meant an increase in the
number of workers receiving training from 6.1 per cent of the labour force
in 1990 to 10.4 per cent in 1994, excluding those working in community,
social and personal services.
The programme's most important shortcomings relate to the fact that
use of this tax allowance is still restricted: it is estimated that about 30 per
cent of its potential is being used annually; training activities benefit a
Table 3.6 Chile: training programmes sponsored or administered by the state

Characteristics Company Scholarship Apprenticeship Chile Joven Re-training coal

programme programme programme miners

Starting year 1976 1976 1998 1991 1992

Objective Promote Improve Facilitate Facilitate sociall Facilitate

training skills of insertion of employment reintegration
at the firm persons of young people integration of into
level scarce means, into work young employment
precarious unemployed coal miners
job situation
Beneficiaries Dependent Informal, Young people Young Coal miners
workers independent up to 21 unemployed (active or
in firms which unemployed years old preferably unemployed)
pay tax under workers, between 15 and and casual
category I young people 24 years miners
Income Tax looking old (pirquineros)
Law for the first
time job


Table 3.6 (Continued)

Characteristics Company Scholarship Apprenticeship Chile Joven Re-training coal

programme programme programme miners

Tax allowance Assistance Assitance Tax allowance Social Policy Financed by

Main up to 1% of programme for firms; Programme the State
features taxable State supervised by financed by the (Budgetary
earnings or financed, SENCE State (Budgetary Law);
3 minimum administered Law) and IDB; administered
wages by administered by bySENCE
if this is SENCE. coordinating and
>1% Selection of unit Labour other State
Supervised by beneficiaries Ministry; agencies
SENCE byOMCs run by private
in decentralized
Importance 92% 0.2% 1.1% 6.7% 0.0%
(% participants
in SENCE programme

Source: SENCE.
Pilar Romaguera et aJ. 91
very low percentage of semi-skilled and unskilled workers; and it is con-
centrated in large companies and certain sectors such as administration,
marketing and services.
Re-training programmes, aimed at enabling a worker to transfer to
another sector of production or firm, ought to be most closely linked to the
topic of labour flexibility. In the case of Chile, despite having suffered
sectoral shocks and structural adjustment, there is only one instance of a
government re-training programme, namely the one implemented in the
coal mining area (VIII Region}.27
In 1992, given the total loss of competitiveness in the coal mining
sector as a result of its high costs of production, ~ subsidy was established
for workers who were or had been working in this sector, including
miners themselves and casual freelance coal gatherers (pirquineros). A
beneficiary population of between 3000 and 5000 workers was estimated.
A survey containing information up to August 1993 shows that only
38.6 per cent of worker participants found work after taking part in the
programme, and half of these did so in self-employment. The results
suggest that the programme basically converted independent workers in
the coalmining sector into independent workers in other sectors, without
managing to retrain the ex-employees of the coal mining company.
The experiences of the labour re-training programme in the coal indus-
try point out the difficulties in implementing this type of programme in
situations of urgency, while at the same time highlighting deficiencies in
its design and implementation. Despite its shortcomings, the implementa-
tion of the programme did provide experience in the management of
different instruments (bonuses) as well as defining a series of elements
which should be taken into account in future re-training programmes.


This section explores in greater depth the topic of labour input flexibility,
examining labour flexibility strategies at the firm level, how firms adapt to
changing market conditions and external competition. First, this analysis
will enable us to examine how certain components of labour flexibility,
which have been analyzed more generally in previous sections, translate to
the micro, or firm, level, namely mobility and wage and employment flex-
ibility. Secondly, the analysis of management strategies makes it possible
to integrate these different aspects at the firm level and deal more
adequately with one of the dimensions of labour flexibility which we
mentioned in the Introduction, namely flexibility in the labour input.
92 Chile
In order to make the concept of flexibility more workable at the level of
the firm, we have specified both the components of a flexible strategy and
the possible sources of rigidity, emphasizing four areas: employment poli-
cies, wage policies, training practices and the influence of the institutional
framework. These elements, together with elements pertaining specifically
to management, will finally enable us to define a typology of firms with
respect to the tissue oflabour flexibility.
The restructuring scenario, discussed earlier, and the current economic
climate place Chilean companies on a search path for new margins of
flexibility, both to reduce production costs and to enhance product quality.
The question to be answered is how business strategies are being adapted
so as to achieve greater efficiency, and how the restrictions on labour
issues (economic, institutional, cultural) are being overcome.
There are numerous Latin American studies of how firms are respond-
ing to adjustment and the new competitive conditions in markets which
are increasingly open to the rest of the world. These studies emphasize
three types of reaction, similar to those enumerated by Porter (1980): the
defensive strategy, the offensive strategy and the innovative, change-
anticipating strategy.
On the basis of these results, it is to be expected that Chilean firms, in-
creasingly integrated into the international market, should deploy more
offensive strategies, with greater concern for flexibility as an input for
systemic competitiveness, and not only as a short-term resort in response
to market difficulties. But one must also take into account, following
Humphrey (1993), that competitive pressures widen the gap between firms
due to the big differences that exist in technological and management
capacity, not only according to size, but also by type of ownership and
management style (family firm, multinational).
It is important to ask whether, with greater exposure to competition
and the demands of external markets, the 'idiosyncratic' (or unrational-
ized) model, which was a feature of the import-substitution phase, is
weakened (Katz, 1993), and if a shift towards world-\Yide best practices
is occurring (Humphrey, 1993). The latter could translate into organiza-
tional innovations leading to an increase in the flexibility of human
capital as well as yearly training plans, just-in-time production,
multi functionality (multipurpose workers), and total quality (greater
involvement of personnel).
In Chile there is scant evidence on the determinants of flexibility and
the forms it adopts in terms of employment, wages and work organiza-
tion inside the firm. The most recent studies have had a technological
Pilar Romaguera et al. 93
3.6.1 Methodology and Sample

Case studies were carried out, using a methodology which allows dealing
with a large number of issues in a reduced number of firms; although this
favours a descriptive approach which takes advantage of the richness of0
large number of variables, the representativeness of the conclusions is
limited, and the analysis should take this shortcoming into account.
A total of 21 companies were considered, belonging to a dynamic chain
of production in six productive sectors. The sectors (and numbers of firms)
selected were mining (5), wood and furniture (5), printing (5) and clothing
(4), and in each sector a survey was carried out of different sized firms:
small (5), medium (8) and large (8). As well as this, two control cases
were included: a tyre company known for its experience in applying
advanced flexibility techniques, and a supermarket chain, with the object
of having a reference to what is happening in the services sector. In each
of the selected firms, semi-structured interviews were carried out with the
Human Resources Manager, or else with the person in charge of personnel
management (General Manager, Production Manager or Head of Plant).

3.6.2 Results of Case Studies

We analyze first the principal restrictions on labour issues of which firms

complain. Secondly, we explore in detail information on employment,
wages, training and labour legislation. Finally, we deal with the topic of
flexibility in the most general way, constructing a typology of manage-
ment strategies for responding to this issue. (For additional details see the
Appendix, p. 105.)

Principal Restrictions on Labour Issues

The survey made it possible to establish that the restrictions which persist,
and for which satisfactory solutions have not yet been found in the firms
studied, are few and are not considered serious. The most recurrent ones
are the rules on the hiring of women, manpower problems due to a scarcity
of technical skills and mistrust in labour relations. 2s

Rules on the Hiring of Women In the opinion of the interviewees the

labour rules restrict the entry of women into the employed labour force.
The obligation on the employer to grant maternity leave to a woman trans-
lates into higher costs (despite the fact that her remuneration is assumed
by the State) due to the need to hire a replacement. Equally, they imply
94 Chile
additional costs in terms of legal provisions regarding medical leave for
children's illnesses, the right to creche facilities, protection against
dismissal during pregnancy, etc.
It should be noted, however, that the average wage for women is below
that for men, according to official information, for which reason at least
part of these higher costs should be offset by the wage differential. On the
other hand, the case studies give rise to the impression that there are prob-
lems which go beyond those relating to legislation. Manual workers' re-
jection of women carrying out certain jobs, relations between the sexes in
the workplace, the risk of pregnancy for young women, among other
things, may also be limiting the incorporation of women into the formal
sector of the economy.

Scarcity of Technical Skills Another recurrent restriction is the lack of

formal training in certain intermediate jobs, such as primary machine
operator in the clothing industry or heavy machinery operator in mining.
This is a stratum of workers with medium level skills, who have a special-
ism acquired on the job or on internal training programmes, but not a
formal technical specialization. This problem arises in 66 per cent of the
firms in the sample and in all the productive sectors interviewed.
The solution that has been found is to offer a higher-than-market wage
in order to attract workers. This practice has led to higher turnover rates
which is a factor discouraging training. Although firms are conscious of
the need for a sectoral business organisation to develop professional train-
ing programmes, this long-term solution does not seem to be taking place.

Mistrust in Labour Relations The older firms, where union strength is

significant, live through the period of collective bargaining as if it were a
traumatic experience. Among management, union leaders and workers
alike there is mistrust of the other party's intentions of reaching a satisfac-
tory agreement. The origin of this mistrust seems to be in the past history
of highly conflictual labour relations. Indeed, the oldest firms, with more
mature executives, are the most susceptible in this sense. Managers of
newer firms have a more pragmatic and less ideological attitude, and
prefer to raise wage costs rather than face a strike.
When the date approaches for the collective contract to expire, the firm
prepares for a difficult phase. In order to avoid this situation some em-
ployers come out in favour of contracts of more than 2 years, or else anti-
cipate negotiations by trying to sign accords with the union or with groups
of workers.
Pilar Romaguera et al. 95
Employment: Turnover and Sub-contracting
Increase and Stabilization of Employment As a result of international
openness, the technical advances in production and the increased tightness
of the labour market, one might expect an incipient process to replace
manpower by automatic equipment. Although recent studies on technol-
ogical modernization stress the investment in new machinery and equip-
ment over the past 5 years (Geller, 1993; PREALCIILO/CIDA, 1993), the
current diagnosis is that the technological level in manufacturing industry
is heterogeneous, with a limited introduction of computerized equipment
(CLP and CAD) and a high level of technification in marketing and
relations with export markets (Castillo et al., 1994). Therefore, we are not
in the presence of an intensive process in which new technology is replac-
ing manpower on a massive scale.
In this survey, an increase in the level of employment can be observed
over the past 3 years in all sectors and at every skill level: 68 per cent of
the firms had experienced an increase in employment, which is consistent
with the macroeconomic data presented earlier.

Scarcity and Turnover As regards labour mobility, 40 per cent of the

firms reported a frictional type of turnover of about 5 per cent per year; the
remainder have quite varied rates, above 10 per cent in most cases, but
also as high as 400 per cent. Mobility stems both from firms' dismissal de-
cisions (due to faults and absences) and from voluntary resignations, de-
riving from the workers' alternative cost in a labour market which is quite
The highest turnover rates are found in firms using more flexible con-
tractual and remuneration systems, such as piece-rate, or with a significant
variable component in the wage. Another source of turnover is the need to
replace women (on maternity leave), although the employment of female
workers is only significant in the clothing sector in this sample.
High turnover rates have provoked an attempt to establish and improve
systems of recruitment and personnel selection, but these are in their

External Flexibility Through Sub-contracting Increasingly, firms try to

concentrate on the activities pertaining directly to their activity sector,
tending to sub-contract anything that third parties can do more efficiently.
The tendency to 'outsource' certain jobs stems both from a search for
ways to reduce costs and from the greater flexibility this allows in
responding to changes in demand.
96 ChiLe
Prominent among the mechanisms used for outsourcing are: sub-
contracting of manufacture (48 per cent of the firms, mainly printers and
mining companies); sub-contracting of productive services (67 per cent of
the firms, principally in mining); sub-contracting of manpower (less
common than the other forms of outsourcing, mainly occurring in the
graphics industry and mining); sub-contracting of general services (fairly
widespread in granting concessions for canteen services, security, and
The magnitude of the manpower sub-contracting phenomenon in
Chilean industry ought to place it in highly flexible situation. But these are
very precarious modes of operation, which are a long way from the new
trends towards 'virtuous' decentralized production such as producer -
supplier chains and the cooperation between firms in so-called industrial
zones (Pyke et aI., 1990; Spath, 1993). This may be explained by Chilean
industry's low-density productive fabric, the still incipient development
of producer services and the slow development of relations between
companies and suppliers in the post-crisis industrial fabric (Diaz, 1994).

Training: Externality or Investment?

As was pointed out earlier, although the number of firms using tax incen-
tives for training activities has grown in recent years, it still remains low.
This study reveals a paradox in that firms are aware of the shortage of
skilled manpower in the labour market, but they make little effort to
assume the costs of training.
Of the firms visited, 90 per cent had undertaken some sort of training
activity during the previous year, although 61 per cent of the total had
carried out training programmes in the workplace, which due to their
informal nature were not considered as 'official' training activities. This
result tends to confirm that companies give more training to their human
resources than official statistics, based on the use of the SENCE tax
allowance, would suggest.
Those surveyed generally had a positive impression of training both for
the firm (improved productivity, better labour relations) and for the worker
(easier promotion). In general there is a positive opinion about the incen-
tives represented by the tax allowance system. If firms do not make use of
it, it is because they consider the system somewhat bureaucratic, in that it
fixes the extent of coverage (hours) per person, and omits workers whose
monthly earnings are more than 10 times the minimum wage.
Various reasons seem to explain why training is not viewed as an in-
vestment: there is a low cultural valuation of education for work; there is
Pilar Romaguera et al. 97
an insufficient supply of training as well as deficient quality especially for
workers of medium-level skills; finally a lack of worker motivation is also

Labour Relations: Flexible Legislation

Analysis of Chilean labour legislation indicates that the reforms made in
the period 1990-93 to the rules on individual contracts and collective bar-
gaining introduced changes aimed at improving worker protection.
defining the conditions for the operation of unions and regulating the
processes of bargaining and strike action. without upsetting management
Judging by management opinions. the change in laws did not produce
any significant changes in the daily lives of companies and there is not a
negative attitude towards labour legislation. with criticisms being confined
to specific points such as obligatory union contribution (45 per cent held a
negative opinion) and the need for dismissal notice (38 per cent held
a negative opinion).
Although the survey did not deal with unions. both from individual in-
terviews and from the press it can be confirmed that the attitude of the
Confederation of Workers' Unions (CUT) is different. National union
leaders have consistently argued for the need to improve the coverage of
collective bargaining and the supervision of compliance with labour legis-
lation. Criticisms relate to the unions' weak bargaining power due to
obstacles to greater unionization and to entrepreneurial behaviour. The
present study provides only partial results on these issues. since it consid-
ers opinions only on the management side.

Legislation on Labour Contracts The firms in the sample indicate that

the provisions on notice and compensation raise the cost of firing. but they
prefer to internalize this cost rather than defer a dismissal decision. The
number of workers fired due to company needs (Article 161) represents
between 15 per cent and 25 per cent of all contract terminations. whereas
more than 70 per cent of these are due to employee failings (Article 159).
On this point there is controversy because union leaders and the Ministry
of Labour affirm that dismissals via Article 161 increase significantly in
periods following collective bargaining or the setting up of a union. This
would justify introducing changes in the law and ensuring union rights.

Legislation on Collective Bargaining In 70 per cent of the firms sur-

veyed there are one or more unions. with a very varied percentage of
98 Chile
membership. The unions' counterpart in the negotiations is the owner or
an executive; despite the tendency mentioned above towards rationalizing
management, in 48 per cent of the firms the owners still intervene person-
ally in negotiations with the workers. The wage issue dominates the nego-
tiations. In second place comes the demand for more social benefits
(bonuses and allowances). There is a resistance on the part of executives
to including other issues in negotiations with the workers.
About half of the firms in the sample had signed an agreement instead
of a collective contract either with the union or with a group of workers.
This figure is higher than the national average, where the collective con-
tract continues to be the principal instrument negotiated (73 per cent),
according to a study on labour norms carried out by the Ministry of
Labour (1994). However, the results of the present study coincide with the
trend towards an increase in agreements rather than the contracts which
result from collective bargaining.

3.6.3 Management Styles

Management strategies in relation to internal and external flexibility are

closely associated with productive patterns, and none of the variables ana-
lyzed in this study (technological level, size, sector, type of ownership,
etc.) can on its own explain the differences observed. This is not surprising
for a country in an economic context of industrial change, where there is
no long tradition in terms of management rationalization.
To illustrate the variety of situations, we have constructed a typology of
management strategies based on the set of variables analyzed (see Table
3.7). The situation is quite fluid, which indicates that firms are moving
towards a greater rationalization and the implementation of flexible systems.
For one thing, there are management strategies characterized by struc-
tural rigidity and hierarchical controls (Type I). This category includes tra-
ditional firms serving the domestic market, which export only marginally
and have no strategy for expansion. The partial incursion into export
markets has not been sufficient to modify a paternalistic management style
and a way of working which is reminiscent of the firm of the 1960s.
A second type of firm is breaking out of this situation on the basis of
greater specialization. More than a strategy, these firms develop patch-
work-like behaviour patterns where a bit of everything is done without
managing to stabilize the workforce (Type II). When concern for quality
and efficiency become priorities one sees partially flexible strategies
developed by personnel managers who are introducing instruments of ra-
tionalization (Type III). These are either firms that have experienced a
Table 3.7 Chile: labour flexibility, typology of finns

Job Manage- Labour Pay- Training Job Human Firms in

mobility ment relations ment orga- resources sample
style system nization policy (number)

TYPE! Stable Paternalistic Labour Basic 'On the Small Social Furniture (1)
workforce hierarchical presence wage job' scale benefits,
Traditional control as a + relations Graphics (2)
hierarchical Low rigidity bonus Worker Product of confidence Clothing (3)
finn degree of career mix
TYPE II High Lack of Conflic- Over Training Reduced Technification Furniture (2)
turnover coherence tive or time product of
Transitional non- mix management Graphics (1)
finn existent
labour Mining (3)


Table 3.7 (Continued)

Job Manage- LAbour Pay- Training Job Human Firms in

mobility ment relations ment orga- resources sample
style system nization policy (number)

TYPE III Low Rationalized Regulated Fixed Internal Quality Internal Mining (2)
turnover management collective wage training control promotion
Partially bargaining Graphics (2)
flexible Outsourcing Apprentice
firm of services ships Clothing (1)
Tyres (1)
TYPE IV Out-sourcing Worker Alternative Incentive Training Total Emphasis Mining (1)
of participation systems plans quality on
Firm services selection Supermarket (1)
consolidated Career and
in Career plans training Furniture (1)
flexible structure
systems Assessment
F acili tating performance
Pilar Romaguera et al. 101
high pace of growth in the past 5 years and which have modernized as
they have gone along, or they are recent firms which started with state-of-
the-art technology and more rationalized management methods, oriented
from the start towards an export market niche.
The most advanced firms as regards the implementation of flexibility
strategies are those where human resource management is highly profes-
sionalized and incorporates world-wide best practices (Type IV). In some
cases there is an external referent as they are subsidiaries of foreign com-
panies or joint ventures, and thus evaluated by international standards.


The results of this investigation highlight the fact that the biggest source of
rigidity seen among firms in the industrial sector is found neither in the
legislation nor in the labour market, but rather in backwardness in the
areas of administration and human resources planning inside each firm.
Although there is a trend towards professionalization both in management
functions and in staff administration, the firms are not very concerned
about the issue of human resource flexibility.
In general the firms analyzed seem to be very effective in the areas of pro-
duction engineering and marketing, but not so in terms of the processes in-
ternal to the firm (human resources, process re-engineering, etc.). With the
exception of the big companies, efforts to introduce new forms of work
organization do not figure in the plans of the small and medium-sized firm.
The results of this study also tend to confirm a certain technological
development or path in the firms, which begins when the market opens up
to competition, the moment in which the firm adjusts or 'rationalizes' in a
defensive way. When the firm starts to operate in export markets, it needs
to improve its higher level entrepreneurial capacities (marketing, finance);
this is the time when owners accept a delegation of functions to their chil-
dren or relations with higher education. Then comes technological upgrad-
ing in machinery and equipment, when pressure is on product quality,
Lastly, success in expanding markets begins to exhaust itself and a search
for internal flexibility through organizational changes begins; this final
phase still appears to be in very early stage in Chilean industry.


There have been radical adjustments in the Chilean labour market in

recent decades, the result of structural changes, stabilization policies and
102 Chile
the economic growth process itself. This, in turn, has meant that the most
relevant components of labour flexibility have varied over time, or the
~ays in which the labour market adjusts have changed.
Although there is no overall indicator which measures the degree of
flexibility, the analysis carried out tends to emphasize that the labour
market was more flexible in the 1980s than in the 1970s; on the other
hand, labour input flexibility was not an important component in past
decades and only appears as an incipient worry in the 1990s, when the
economy faces pressures deriving from growth and competitiveness.
With regard to labour market adjustments, the evidence underlines the
fact that wage flexibility should not be measured by the degree of variation
in real wages, but rather by their degree of response to market conditions.
In periods of sharp increases in inflation - such as 1972-3 - real wages
fell by 50 per cent, implying significant social costs. Then in the period
1976-81, real wages increased due to falling inflation and compulsory in-
dexation rules; however, wages were partly being determined institution-
ally according to government readjustments (indexed to inflation) and
were not responding to high and rising unemployment.
With respect to flexibility in employment, the Chilean experience has
shown that in crisis conditions the immediate response has been an
increase in unemployment; in this sense 'ejection' from the formal labour
market has been easy. The pro-cyclical behaviour of the unemployment
rate (both open and total) stands out clearly in the case of Chile.
The faster recovery of employment in Chile during the 1980s is consist-
ent with the idea that greater wage flexibility means less adjustment takes
place through employment, but it also is also clear that the dynamics of the
process are slow.
Labour legislation, in particular wage determination norms and the costs
of hiring and firing, seem to have played a positive role in the increased
labour market flexibility seen in the 1980s. Partly as a counterpart to this,
the challenges for legislation in the 1990s have been to afford greater
protection to workers. Other unresolved issues involve making human re-
sources in the public sector more flexible, empowering the secondary
labour force, and developing systems of remuneration which give incen-
tives to productivity.
Regarding the behaviour of the informal sector, the impression previ-
ously was that - as in other Latin American countries - the informal sector
in Chile has played a buffer role in recessions. There is only partial evid-
ence to support this hypothesis, and the aggregate figures show a strong
degree of stability in the sector. Our results stress the structural nature of
the informal sector and indicate that entry into it has been less fluid than
Pilar Romaguera et al. 103
expected. On the other hand, although incomes in this sector are below
those in the formal sector, the wage difference is only moderate when one
controls for differences in worker characteristics. The existence of small
wage differentials is an argument for the informal sector persistence.
The Chilean experience indicates that flexibility through employment
and wages, market-oriented flexibility, seems to have been more important
than other forms of flexibility, such as inter-sectoral mobility. The fact
that the informal sector has not acted as an employment buffer may be
partly explained because falls in aggregate demand also directly affect this
sector and because the emergency employment programmes have them-
selves provided a significant buffer in Chile.
The emergency employment programmes were one of the most import-
ant labour policies in past decades, at a time when other policies which
could have provided greater systemic flexibility to the economy as a whole
played no role at all. Such is the case with unemployment insurance pro-
grammes, manpower hiring incentives and retraining programmes.
Elements of labour policy which aim at greater systemic flexibility are
only seen in incipient form from 1990 onwards, partly as a tool for re-
conciling social demands and the need for development. Examples of this
are the empowerment of the role of the OMCs, the proposed unemploy-
ment insurance and programmes of labour re-training.
At the firm level, the results of the investigation highlight the fact that
the biggest source of rigidity is not in the legislation nor in the labour
market, but rather in backwardness in the areas of human resources admin-
istration and planning. The issue of human resource flexibility only seems
relevant for certain 'advanced' firms which are involved in highly compet-
itive situations, especially at an international level.
In this context, labour input flexibility does not seem to have been
relevant when the economy has faced negative shocks; in these situations
adjustment via employment and wages has tended to be favoured. The in-
teresting challenge to face arises from positive economic shocks and the
process of growth. Unless there is a change in the way the labour market
operates, the pressures of growth will probably translate into wage in-
creases, due to shortages of labour. In this scenario, firm-concerns with
labour input flexibility should increase.
Therefore, although the key element in labour flexibility in the 1980s
was wage flexibility, in the 1990s other components of flexibility ought to
be more important, given the need for competitiveness being faced by the
economy. Flexibility in employment via increases in labour supply display
a limitation with respect to the incorporation of female workers, both from
the viewpoint of legislation and in terms of company practices. Thus
104 Chile
again, functional flexibility is an interesting option, related to training and
management systems. The case studies tend to stress that flexibility in the
firm via organizational changes is in its infancy, and also that demand for
training is concentrated in only certain firms. In summary, the vision the
firms project is heterogeneous but one which displays, although in incipi-
ent form, the pressure which exists to find new forms of flexibility in the
labour market.
Appendix: Chile - Flexibility Strategies in 21 Industrial Firms

Productive Employment Unions Personnel Flexibility mechanisms Sources of Expectations

sector department rigidity of
Total \ Seasonali Women Quantitative \ Qualitative growth

(1) Clothing 650 0 520 Yes Yes Sub-contracting External Scarcity of skilled Stable
(national capita\) of operations training workers
Sub-contracting Bonuses for Legislation on
of services meeting targets female work
5% turnover
(2) Clothing 125 0 80 Yes Yes Sub-contracting External Scarcity of skilled Contraction
(national capital) of operations training workers
Sub-contracting Production
of services bonuses
16% turnover
(3) Clothing 45 6 29 No No Sub-contracting Production Scarcity of skilled Stable
(national capital) of operations bonuses workers
4% turnover Punctuality Scarcity
bonuses of professionals
(4) Clothing 530 230 Yes Yes Sub-contracting Internal training Scarcity of skilled Stable
(national capital) of operations External training workers
of services
6% turnover 0
Productive Employment Unions Personnel Flexibility mechanisms Sources of Expectations
sector department rigidity of
Total Seasonal Women
I I Quantitative I Qualitativ~ growth

(5) Furniture 210 0 15 Yes Yes Sub-contracting Internal training Stable

(national capital) of services External training
19% turnover Internal
(6) Furniture 93 0 16 Yes Yes Sub-contracting Internal training Scarcity of Stable
(national capital) of services External training employees
4% turnover Production (administration)
(7) Furniture 700 0 140 Yes Yes Sub-contracting Internal training Scarcity of Stable
(foreign capital) of operations External training employees
Sub-contracting Wide range of (administration)
of services bonuses
0.2% turnover
(8) Furniture 100 0 9 No Yes Sub-contracting Internal training Scarcity of skilled Stable
(national capital) of services External training workers
40% turnover Production
(9) Furniture 110 0 Yes No Sub-contracting Internal training Scarcity of Stable
(national capital) of services External training technicians
25% turnover Collective
(10) Printing 559 65 22 Yes Yes Sub-contracting Internal training Scarcity of skilled Stable
(national capital) of operations External training workers
5% turnover
Productive Employment Unions Personnel Flexibility mechanisms Sources of Expectations
sector department rigidity of
Total Seasonal Women
I I Quantitative I Qualitative growth

(11) Printing 44 0 6 No No Sub-contracting of External training Growth

(national capital) operations Bonus system
30% turnover
(12) Printing 45 10 12 No No Sub-contracting Internal training Scarcity of skilled Growth
(national capital) of operations External training workers
9% turnover Production
Sales bonuses
(13) Printing 62 8 0 Yes Yes 5% turnover External training Stable
(national capital)
(14) Printing 93 14 7 No Yes Sub-contracting External training Scarcity of skilled Stable
(national capital) of operations workers
of services
6% turnover
(15) Mining 1244 0 N/A Yes Yes Sub-contracting Internal training Scarcity of skilled Stable
(foreign capital) of operations External training workers
Sub-contracting Production
of services bonuses
2% turnover
(16) Mining 400 0 23 Yes Yes Sub-contracting Internal training Scarcity of skilled Stable
(national capital) of operations External training workers
Sub-contracting Production Automated
of services bonuses machinery skills
12% turnover

Productive Employment Unions Personnel Flexibility mechanisms Sources of Expectations
sector department rigidity of
Totall seasonali Women Quantitative 1 Qualitative growth

(17) Mining 210 0 2 No No Sub-contracting Internal training Scarcity of skilled Growth

(national capital) of operations External training workers
Sub-contracting Individual Scarcity of
of services productivity professionals
40% turnover bonuses
(18) Mining 71 4 8(?) Yes Yes Sub-contracting Internal training Stable
(national capital) of operations External training
Sub-contracting Bonuses for
of services meeting targets
20% turnover
(19) Mining 252 20 6 Yes Yes Sub-contracting Internal training Scarcity of skilled Stable
(foreign capital) of operations External training workers
Sub-contracting Quarterly Scarcity of
of services bonuses professionals
12% turnover Collective
(20) Types 900 250 225 Yes Yes Sub-contracting Internal training Scarcity of skilled Stable
(foreign capital) of services External training workers
16% turnover Merit system Scarcity of
(21) Supermarkets 1658 300 580 Yes Yes Sub-contracting Internal training Scarcity of skilled Growth
(National capital) to of operations Merit system workers
400 Sub-contracting
of services
40% turnover
Pilar Romaguera et al. 109

I. The authors gratefully acknowledge comments received in seminars at

CIEPLAN and IORC. as well as collaboration in the project design by
Dagmar Raczynski and Andrea Butelmann. The results of the present re-
search are presented in greater detail in Mizala and Romaguera (1995b.
1995c); Gonzalez (1995) and Montero (1995). Mizala and Romaguera also
acknowledge partial funding by FONDECYT. project 1940401.
2. For further information on the reforms implemented. see Foxley (1982).
Corbo and de Melo (1987). Edwards and Edwards (1987), and Meller
(1990). among others.
3. The labour effects of agregate vs sectoral shocks was originally applied by
Lilien (1982) to the US economy. For discussions in the Chilean context
see Sapelli (1990) and Robbins (1994).
4. The fall in public sector employment represented a 27 per cent reduction in
total employment.
5. The legislation included as a cause of dismissal 'company needs'. However.
what seems to have been modified was the ease of invoking this cause, the
feasibility for the employee to take court action and the compensation
payments which dismissal involved.
6. Explanations for this apparent puzzle range from an abnormal growth of the
labour supply to the inability of the economy to absorb the initial shock of
unemployment. together with labour-saving changes in the composition of
output, and wage rigidities.
7. In 1972 inflation reached 260.5 per cent and in 1973, 605.1 per cent. the
result of severe imbalances accumulated during the early years of the 1970s.
8. Data for these companies show an increase in remuneration of 135.7 per
cent between 1975 and 1981, contrasting with an increase of 75.4 per cent
in the INE's general remunerations index (Mizala and Romaguera. 1993).
Robbins (1994) argues that an effect of liberalization in Chile has been an
increase in wage differentials in favour of skilled workers.
9. Between 1974 and 1979 the minimum wage increased by 26 per cent in real
terms; between 1982 and 1988 it fell by 36 per cent.
10. During this period the real exchange rate increased significantly. making
possible a sharp expansion in exports. Between 1982 and 1988 the exchange
rate climbed by 89 per cent.
II. If the economy is flexible in the neo-c1assical sense (prices), then structural
adjustment processes. changes in the composition and orientation of output.
etc. should have been reflected in adjustments in relative wages. Allen et al.
(1994) argue that the structure of relative wages in the Chilean economy
has been flexible (at least more so than in Uruguay).
12. Estimates by ladresic (1986) show that there were no significant changes in
participation rates between 1973. 1974 and 1975. although these figures are
not comparable with those presented in our study.
13. See Tokman (1994).
14. See Infante and Klein (1993) and Garda (1993). In turn. adjustment in the
informal sector probably translated into fluctuations in income rather than
into changes in employment or hours worked. Cortazar (1983) examines
110 Chile
this point for the period 1966-81, although we believe his data do not
support the thesis that the informal sector acted as an employment buffer.
15. Linear regressions for formal and informal employment suggest the follow-
ing, where the values in bracket correspond to t-tests:
Formal employment = 131.7 + 1.887 GDP + 8.171 time; adj R2= 0.985; N= 35
(5;548) (14.435) (5.436)
Informal employment = 81.456 + 0.328 GDP + 3.358 time; adj R2 = 0.940 ; N = 35
(7.183) (5.237) (4.658)
16. We are grateful to Pablo Garda who kindly made this data series
available to us. The informal sector includes self-employed workers, ex-
cluding independent professionals, and unpaid family members. See
Garda (1995).
17. We take as an operational definition of the sector, the one used in govern-
ment statistics (MIDEPLAN): self-employed workers excluding profession-
als, unpaid family members, workers in goods-producing firms with fewer
than 5 employees, workers in commerce and services firms with fewer than
5 non-contractual workers.
18. Issues such as management methods, entrepreneurial strategies and training
systems are the subject of later sections.
19. It was implemented in 1975 and by 1976 it benefited 22 000 workers, while
PEM employed over 170000.
20. Reforms in the social security system greatly exceed the scope of this
chapter. For further details see Gonzalez (1995). There are few empirical
studies of the effect of these reforms. The shift in the financing of social in-
surance in Chile in the early 1980s apparently did not have important conse-
quences for labour market efficiency. The reduced costs of payroll taxation
to firms appear to have been fully passed on to workers in the form of
higher wages, with little effect on employment levels.
21. See Cort!1zar et at. (1995).
22. The effect of the Labour Code on pay deregulation was detailed previously.
23. It should be borne in mind that certain types of independent work do not
give rise to labour contracts.
24. The notice period can be replaced by the payment of I month's wages.
25. A special all-risks compensation rule was also created for workers in private
houses, which has had significant coverage given that such workers were
not previously subject to compensation for dismissal.
26. In 1976 the legal regulations for the recent training system were established,
and the National Training and Employment Service (Servicio Nacional de
Capacitaci6n y Empleo or SENCE) was set up. At present, a bill is being
discussed in Congress which would slightly modify the training and
employment statute.
27. At the present time a programme is also being developed for a small group
of workers in the textile sector and the Finance Ministry together with
SENCE have designed a general programme of re-training whose pilot
phase is expected to be applied in the coal mining area for those miners not
covered by previous programmes.
28. It should be remembered that the survey was carried out in the middle of
1994 and that the government has been promoting a new set of labour laws
Pilar Romaguera et al. III
which have been strongly resisted by entrepreneurs, but which, however,
could not be included in this study.


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4 The Paradox of Flexibility
and Rigidity: The Mexican
Labour Market in the
1990s 1
Francisco Zapata


The analysis of the links between labour flexibility and productivity in a

period of profound economic restructuring such as the one that took place
in Mexico between 1982 and 1994 is shaped by the specific, highly
idiosyncratic and historically determined characteristics of the Mexican
political and economic system. The weight of institutional determinants
(irrespective of determinants located in the shopfloor of the enterprise) in
the operation of the economic system and thereby on the labour market,
condition the process of modernization. At the same time, the country has
opened to the international market, privatized state owned companies,
reformed the fiscal system, removed subsidies for consumption, adopted a
series of rationalization policies in public administration and invested in
science and education.
There is a high degree of concentration of the decision making process
in the political sphere, centred in the awesome authority of the President,
in the direct intervention of the Ministry of Labour2 in all matters pertain-
ing to questions of salaries, employment, training and fringe benefits and
the participation of the labour movement in the institutions of the State.
This creates obstacles in the relationship between capital and labour, thus
making it difficult to analyze the Mexican situation in a general and
abstract framework. Thus, when addressing the relation between labour
flexibility and productivity in the Mexican case, it is inevitable that one
must be highly specific.
The problem becomes even harder when the two elements considered to
be central to the concept of labour flexibility, that is to say, labour market
flexibility and labour input flexibility are distinguished in this particular case
(see the Introduction to this volume, p. 12). If labour market flexibility is

114 Mexico
defined in terms of the degree to which the labour market is responsive to
changing demand and supply conditions, the Mexican case is quite flexible
if we look at the rate of unemployment, which has remained extremely
low in spite of the dramatic shocks that occurred in the economy in the
period 1982-94. As we will see later, this does not mean that flexibiliz-
ation has not taken place in the Mexican labour market: the problem is that
one has to look at the apparently rigid regulation of the labour relations
system and see how it allows for some flexibility that does not appear to
take place if one looks at the quantitative indicators. This is what we will
do when addressing the Mexican institutional system later in this chapter.
The same problem occurs when we consider the other element, labour
input flexibility, which is related to the degree of flexibility of the human-
capital endowment of workers and the potential rate of growth of labour
productivity. When we look at the training system we wi\1 see that, in spite
of having made many efforts to support economic restructuring, it still
only plays a limited role.
The question of how labour flexibility impacts on productivity is also
problematic, because even if the presence of a political will to promote the
latter has been present since 1992,3 its expression in concrete agreements
has been restricted to a very few companies. Productivity payments,
instead of reflecting real events in the production sphere, have been
granted from above through decisions made at the Ministry of Labour and
not through collective bargaining. 4 Productivity increases do not have a
link to the remuneration of work and derive more from the decrease in the
unit labour cost than from any flexibilization policy (see the PRO and
ULC columns in Table 4.1). In another instance of Mexican specificity,
there have been no efforts to establish real links between wages and labour
productivity, with the notable exceptions mentioned in n. 4.
We can conclude that the relation between labour flexibility and produc-
tivity is not governed by the economics of the firm. It is an understatement
to say that market possibilities and constraints, the way in which entre-
preneurs relate to their workers, the dynamics of unemployment or of real
wages or hours effectively worked, the structure of collective contracts
and the logic of strike activity are very distant from any economic calcula-
tion and much closer to links of a political nature, in the business, union
and governmental sectors (Zapata, 1995).
The explanation for these difficulties will be the keynote of this study
and will be addressed through the consideration of the process undergone
by Mexico in the period 1982-94. Section 4.2 focuses on the impacts of
the adjustment process and economic restructuring upon the labour market
arid productivity. Section 4.3 discusses the institutional determinants of
Table 4.1 Mexico: macroeconomic and labour force indicators, 1980-93

Year GDP GDP Open unemployment % lnjla- Min. Median PRO ULC
growth % per capita Men Women Total tion % wage wage (1980 = 100)

1980 8.3 4.9 3.8 5.9 4.7 29.8 -14.5

1981 7.9 5.5 3.5 5.6 4.2 28.7 -6.3
1982 -0.6 -3.0 3.9 4.9 4.2 98.8 -9.0 0.9
1983 -4.2 -6.5 5.3 7.6 6.1 101.6 -17.4 -21.0
1984 3.6 1.2 4.9 7.0 5.6 65.5 -5.6 -7.3
1985 2.6 0.2 3.6 5.8 4.4 57.7 -1.7 1.5 106.7 68.3
1986 -3.8 -5.9 3.7 5.3 4.3 86.2 -8.7 -5.8 104.3 66.1
1987 1.8 -0.5 3.4 4.8 3.9 131.8 -5.2 -0.3 107.1 64.7
1988 1.3 -0.8 3.0 4.5 3.5 114.2 -11.9 0.6 110.9 60.3
1989 3.3 0.9 2.6 3.6 2.9 20.0 -6.3 4.9 118.7 61.1
1990 4.5 1.6 2.6 3.0 2.8 26.7 -10.4 3.6 126.2 59.2
1991 3.6 1.5 2.5 2.9 2.6 22.7 -1.5 133.4 59.1
1992 2.8 0.0 2.7 3.0 2.7 15.5 141.3 60.3
1993 0.4 0.0 3.2 3.7 3.3 9.8 134.1 58.2

Source: GDP and GDP per capita: Inter-American Development Bank, Social Progress in Latin America, Washington, (1993); Open
unemployment (men, women and total): INEG!, Cuadernos de informacion oportuna, Mexico (1985,1989,1993, 1994); minimum
wage and median wage growth in %: Comisi6n Econ6mica para America Latina, Balance de La EconomEa Latinoamericana (all
years since 1980). PRO (productivity in manufacturing) and ULC (unit labour cost): INEG!, lndicadores de La competitividad de La
economEa mexicana, 5 (1994).
116 Mexico
labour legislation that have affected and continue to affect the dynamics of
this market; Section 4.4 considers training as a policy directed towards
flexibilization. We will conclude (Section 4.5) with some considerations
on the general questions addressed in this study with regard to the
Mexican situation.



4.2.1 Adjustment Process and Restructuring

Within the period under analysis (1982-94), Mexican GDP experienced

negative growth rates in 1982, 1983 and 1986 and low positive rates in the
other years (see Table 4.1). Real minimum wages decreased during the
entire period, falling in total by 60 per cent, median wages decreased less
but their level in 1994 was less than half of what they had been 12 years
before. Inflation levels reached their peak in 1987 and thereafter decreased
after the signing of an agreement commiting business, labour and the State
(Pacto de Solidaridad Econ6mica, 15 December 1987) to price and wage
control and other economic matters. Open unemployment fluctuated from
a minimum of 2.6 per cent to a maximum of 6.1 per cent of the popUlation
aged 12 years and more in a sample of 37 cities in the period 1982-94 (see
Table 4.1). This process is reflected in an increase in the concentration of
income and in a highly intensive use of manpower by poorer households,
through an increase both in the number of activities developed by its
members and in the number of household members receiving monetary
On the other hand, economic activity tended to have different rhythms
according to the market in which it was focused. Industries producing non-
durable goods for the internal market had low rates of growth; industries
focused on the international market such as the automobile industry or the
in-bond manufacturing industry ('maquiladoras'), located in the northern
border of the country, close to the USA,.grew at 10 per cent a year with
an employment growth rate of 17.3 per cent a year, on average. Motor
vehicle production and especially auto parts (engines in particular), in
spite of the stagnation of the domestic economy, increased by 28.6 per
cent in 1986, 10.5 per cent in 1987 and 24.8 per cent in 1988, essentially
as a result of external demand (Zapata, 1992). Thus manufacturing for
export replaced industry geared towards the internal market; at the same
Francisco Zapata 117
time, the privileged position of Mexico as an oil exporting country con-
tributed positively to limiting the impact of the restrictions of foreign
credit and the weight of the foreign debt payments. Financial services have
also grown significantly by increasing the volume of foreign savings
invested in the Mexican Stock Market. In addition, the State decreased
public spending and privatized state companies thereby obtaining more
than 27 billion dollars to finance social programmes in education, housing
and health, identified with the National Solidarity Program (Program a
Nacional de Solidaridad).
These events took place within a long-term context where urbanization
took place at a very rapid pace (at an annual rate of 2.6 per cent a year on
average between 1940 and 1980) and where the process of industrializa-
tion that had begun in the 1930s transformed the sectorial structure of the
economically active population, as can be seen clearly in Table 4.2. From
a predominantly rural labour force in 1940, the occupational structure
shifted to services, while employment in industry steadily increased from
12 per cent to 27 per cent in the period 1940-90. It is within this context
that events that took place in the 1980s must be placed.
The central fact of this period, which we will detail more shortly, has to
do with the informalization of the structure of non-agricultural employ-
ment, where self-employment has become the key factor. According to
data in Table 4.3, if one adds up the proportions for small-scale employ-

Table 4.2 Mexico: sectoral distribution of the economically active population

and sectoral employment growth %,1895-1990

Year Agricul- Growth Industry Growth Services Growth Total

ture rate rate rate (absolute) (ODDs)

1895 62.50 14.55 23.0 4.762

1900 61.53 -0.1 15.66 7.6 22.4 -2.6 5.131
1910 67.15 8.4 15.05 -3.8 17.8 -20.5 5.338
1921 71.43 6.4 11.49 -23.7 17.0 -4.5 4.884
1930 70.20 -1.8 14.39 25.2 15.4 -9.4 5.166
1940 65.39 -7.0 12.73 -11.5 21.9 42.2 5.858
1950 58.32 -10.8 15.95 25.3 26.0 18.7 8.272
1960 54.21 -7.0 18.95 18.8 27.2 4.6 11.332
1970 39.39 -27.3 22.95 21.1 37.7 38.6 12.995
1980 25.98 -34.0 20.35 -11.3 53.7 42.4 21.942
1990 22.60 -13.0 27.90 37.1 46.1 -14.2 23.403

Source: Instituto Nacional de Estadfstica, Geografia e Informatica (INEGI),

Estadisticas historicas de Mexico, (1985), vol. I, p. 251. Data for 1990, INEGI, XI
Censo General de Poblaci6n y Vivienda (1990).

Table 4.3 Mexico: the urban employment structure, 194~89

Occupation 1940 1950 1960 1970 1980 1989

Owners, managers, technicians 4.5 7.6 9.4 14.1 13.4 14.2

Office workers 8.5 11.3 12.9 13.4 16.7 15.7
Sales clerks 5.6 4.0 7.3 4.5 4.9 7.0
Small scale employers: all sectors 0.8 0.5 5.5 4.6 3.7
Self-employed and unpaid workers in commerce 20.8 14.5 11.8 7.5 4.7 10.3
Self-employed and unpaid workers in other sectors 17.1 13.7 8.7 10.6 11.9 11.7
Manual workers, industry 19.5 17.7 21.6 17.9 14.5 16.0
Manual workers, construction 3.3 5.4 6.4 5.8 8.3 2.6
Manual workers, transport 4.7 4.2 4.8 2.9 2.5 2.3
Manual workers, services 5.3 13.1 9.1 10.1 11.2 11.7
Domestic servants 10.7 7.7 7.5 7.7 5.3 4.8
Total (urban) 100.0 100.0 100.0 100.0 100.0 100.0
% working in agriculture 65.2 58.1 49.4 40.3 29.5

Source: Roberts (1992).

Francisco Zapata 119
ers, self-employed and unpaid workers in commerce and self-employed
and unpaid workers in other sectors, it is possible to see that between
1960 and 1970, after a twenty year period (1940-60) in which this
figure had decreased from 37.9 per cent to 21 per cent, it began to in-
crease, not to previous levels but in 1989 was equal to 25.7 per cent.
The correlate of this has been the decrease of formal employment,
especially in all categories for manual workers (industry, transport and
construction) with the exception of service workers which double in
proportion (Table 4.3).
These elements point to an important fact: the structure of employment
had already begun to change when economic restructuring began to take
place at the beginning of the 1980s. This sequence of events must be
carefully separated because the temptation to explain the transformation of
the occupational structure as a consequence of the process of economic
restructuring of the 1980s is commonplace. Mexico intensified its rhythm
of urbanization during the period of industrialization through import sub-
stitution (lSI) that took place between 1935 and 1976. In spite of the fact
that industrial employment grew as a consequence, the most notable and
unexpected result of the implementation of lSI was an increase in employ-
ment in the service sector and within it an increase in self-employment.
Thus, a very segmented labour market developed where horizontal mobil-
ity of labour between economic branches is not common and where it is
more frequent to find migration processes within each branch including
international migration to the United States, than between branches
(Garda, 1988; Gregory, 1986).

4.2.2 Impact on the Labour Market and on Unionization

If we focus on events induced by the process of economic restructuring

undertaken as a result of the debt crisis, we find that the impact of this
process on the labour market can be presented through the following
propositions, discussed in more detail below.

(a) The labour market is characterized by the stability of levels of open

unemployment and by an increase in the levels of informalization,
specially in the service sector (see Table 4.4).
(b) The economically active popUlation has grown as a result of the
increase in the number of people in households who search for remu-
nerated work and through higher feminization levels (23.5 per cent
of total economically active population were women in 1990) (see
Table 4.5).
120 Mexico
Table 4.4 Mexico: growth and composition of formal and informal employment
in the more urbanized areas, 1979-88, %

Sector Growth Composition

1979-88 1979 1988 1979 1988

Formal Formal Informal

Total more 2.4 100 100 100 100

urbanized areas
Extractive industries 2.4 1.4 1.3 0.3 0.1
Manufacturing 1.2 30.2 27.2 17.3 12.5
Construction -1.4 8.0 5.7 6.9 4.6
Electricity 0.6 1.1 0.9
Retail sales 3.2 12.7 13.7 41.6 40.5
Services 2.9 33.9 35.6 29.3 36.6
Transport and communications 4.1 4.7 5.4
Government 4.3 8.3 10.1

Note: Formal employment = salaried workers in non-agricultural activities.

Informal employment = self-employed workers and non-remunerated family
Source: Secretarfa de Programaci6n y Presupuesto (1980) and INEGI (1988).
Cited by Garda (1994).

(c) Public employment stagnated at the beginning of the 1990s after

having been an important buffer for unemployment for more than
two decades (see Table 4.3).
(d) Industrial employment tended to become concentrated in small and
medium-sized companies and the composition of employment by
firm size in manufacturing, retail sales and services gave way to a
highly atomized industrial structure (see Table 4.6).
(e) The spatial distribution of the working population changed and new
concentrations of industrial employment appeared in states such as
Aguascalientes, Estado de Mexico, Sonora, Coahuila and Chihuahua.
(f) More workers worked fewer than 34 hours a week, thereby pro-
ducing a decrease in the wages paid (see Table 4.7).
(g) The number of people benefiting from social security mechanisms, a
proxy for formal employment levels, stagnated, especially in the
period 1989-94.
(h) Some of the above caused an intensification of migration towards the
northern border and the United States.
(i) Most of the above had a blocking effect on the process of proletar-
ization that took place between 1940 and 1970. The rate of unioniza-
Table 4.5 Mex.ico: structure of the wage-earning economically active population, by sex., 1990

Indicator Men Women Total

1. Economically active population (EAP) 18,418,695 5,644,588 24,063,283

2. Salaried as % of total EAP 11,538,750 4,397,479 15,936,229
3. % of salaried over total EAP (2/1) 62.6 77.9 66.2
4. Blue collar non-rural, total 6,584,582 941,938 7,526,520
5. Blue collar non-rural, salaried 5,190,019 788,802 5,978,821
6. Blue collar non-rural, salaried who work in mining, manufacture, 3,096,871 765,423 3,862,294
electricity, gas, water and construction
7. % ofEAP who are blue collar non-rural 78.8 83.7 79.4
8. % of 6/4 47.0 81.3 51.3
9. % of 6/5 59.7 97.0 64.6
10. Personal services or administration 776,181 873,735 1,649,916
11. %ofIO/2 6.7 19.9 10.4
12. Unionized private salaried blue collar 2,595,009 394,401 2,989,410
13. Unionized public sector (est.) 776,181 873,735 1,649,916
14. Unionized private salaried white collar (est.) 2,307,750 879,495 3,187,245
Total (12 + 13 + 14) 5,678,940 2,147,631 7,826,571

Source: International Labour Office, Yearbook of Labour Statistics (1992).

122 Mexico
Table 4.6 Mexico: employment according to size of company, by sector,
1980-8, %.

Employed 1980 1985 1988

1-5 4.7 7.7 9.4
6-50 15.4 15.8 16.6
51-250 25.4 24.6 24.7
251 and over 54.5 51.9 49.3
Retail sales
1-5 25.0 21.1 21.7
6-50 28.8 26.8 28.1
51-250 23.4 29.1 29.3
251 and over 22.8 23.0 20.9
1-5 25.5 21.1 19.8
6-50 26.4 22.3 23.2
51-250 20.3 25.4 26.1
251 and over 27.7 31.2 30.9

Source: Garda (1993), pp. 208-9.

Table 4.7 Mexico: composition of employed population according to number of

hours worked, 1979, 1988 and 1994, %

Hours worked 1979 1988 1993 1994

Fewerthan IS 1.8 4.6 4.5 4.5

15-34 12.1 18.0 16.9 16.9
35-48 57.4 58.2 51.2 49.0
49 and more 28.6 19.3 23.5 23.4
Did not work 4.9 6.2
Total 100.0 100.0 100.0 100.0

Source: Secretarfa de Programaci6n y Presupuesto (1980) and INEGl (1988,

1994). 1979 and 1988 as cited by Garda (1993). For 1994, elaboration on the
basis of INEGl, Cuaderno de informacion oportuna, 256 (July 1994).

tion stagnated: indeed, when there are fewer blue and white collar
workers, there will inevitably be fewer unionized workers, especially
if the legal framework for the constitution of unions remains the
same. Let us examine these propositions in detail.

Concerning the issue of unemployment and informalization (Roberts,

(992), it is clear that the 4.4 per cent average rate of open unemployment
Francisco Zapata 123
for the last 12 years does not reflect the real problem of underemployment
and informalization. Also, it does not reflect the presence of pockets of
high open unemployment in places where layoffs linked to privatization of
steel, mining and communication state owned companies occurred in the
period 1989-91 (see Table 4.9).5 In addition, informalization increased in
the service sector, going from 29.3 per cent to 36.6 per cent in the period
1979-88. Given that the service sector is the one that has absorbed most of
the people that enter the labour market, this process will intensify. Also,
the degree to which employment in the retail sales sector is informal
(40.5 per cent in 1988) must be underlined (Garcia, 1993) (see Table 4.4).
Spccific studies on the informal sector in Mexi<;o have grouped informal
activities into categories: traditional productive units, activities which
meet the needs of the poor, subsistence activities aimed at those people in
middle and high income brackets, and disguised profitable activities. In
each one of these categories, particular processes are taking place that
modify the way in which they relate to productive activity, often replacing
the formal structure both in production service activities (Jusidman, 1992).
These studies have concluded, (a) that informal employment behaved anti-
cyclically during the 1980s as a large proportion of the population entered
the labour market; (b) that the relative importance of employment in occu-
pational categories associated with informality increased as occupation
categories linked to the formal sector lost importance because of economic
recession; (c) informal employment was not functionally related to the
performance of the economy and its growth seemed to depend more on the
inability of the economy to generate formal employment opportunities in
face of the dynamic growth of labour supply; (d) the growth of the net
participation rate seemed be more closely related to increases in labour
supply; (e) therefore, as long as not enough high paying jobs are generated
in the formal sector, the net participation will continue to increase and rel-
ative importance of the informal sector will continue to grow.
Within the aforementioned process, one has to note the growing femi-
nization of working popUlation in several activities. Women make up
more than 40 per cent of public employment where they tend to occupy
low paying occupations, such as secretaries or primary school teachers. In
the in-bond (maquiladora) industry more than 275 000 women work in
factories that have very precarious working conditions and that do not
have unions. Feminine employment is a related to family-based industrial
activity in the garment sector, self-employment of women in food prepara-
tion or knitting and sewing activities for the national and international
market as well as domestic employment (Gabayet and Lailson, 1990). In
general, because occupations do not require formal training or high levels
of education, skill levels of women workers are low.
124 Mexico
Stagnation of public employment has resulted in the elimination of the
role of bureaucracy as a buffer: from very intense rates of growth of this
population in the 1970s and most of the 1980s (see Table 4.8), the growth
rate was much more modest in recent years, and public employment actu-
ally decreased in the period 1989-91; from 2 097 200 persons in 1989 to
2 056 500 persons in 1991. In addition, in some of what were or still are
state owned enterprises, employment levels also decreased as a result of
the process of restructuring that these companies underwent before being
privatized (see Table 4.9).
Another interesting impact of adjustment and restructuring is shown
by the fact that industrial employment concentration has decreased:
indeed, the fall in the average size of manufacturing plants and the
absolute decrease in manufacturing employment from 1982 onwards has
resulted in an atomized industrial sector where medium- and small-sized
companies are increasing their participation in the employment of
the productive structure of the country (Rendon and Salas, 1992) (see
Table 4.9).
Spatial redistribution of manpower has resulted from the relocation of
production to greenfield sites,6 geared essentially to production for export.
A new economic space is being formed with important effects in the com-
position of the labour force, which has become younger, with relatively
higher education but not necessarily higher skill levels, and less aware of
the traditions of union organization.
The length of the working week has tended to decrease and in particular
the category of 35-48 hours worked went from 57.4 per cent of the em-
ployed population to 47.3 per cent in the period 1979-94 (see Table 4.7).
At the same time, the decrease in real wages, not only as a consequence of
inflation but also as a result of fewer hours worked and of the type of jobs
that people do, shows that the impact of adjustment has changed the
dynamics of the labour market (see Table 4.10).
At the same time, the number of people who benefit from social security
has tended to stagnate at around 55 per cent of the employed population
(see Table 4.8), including both the institutions that provide services for
public employees (lnstituto de Servicios Sociales y Seguridad Social de
los Trabajadores al Servicio del Estado - ISSSTE) and for workers in
private employment (Instituto Mexicano del Seguro Social - IMSS). One
can conclude from this figure that the other 45 per cent of the employed
popUlation does not benefit from social security, health services and other
facilities that ISSSTE and IMSS provide for the Mexican working people.
In absolute numbers, there are about 11.5 million people covered by social
security and 9-10 million people not covered by any kind of benefits.
Table 4.8 Mexico: numbers insured by public social security institutions, growth rates for insured and proportion of insured in
relation to employed and total population, 1982-91

Year ISSSTE IMSS Total Growth rate Employed % Total %

(000) (000) (1)+(2) % population (3)/(5) population (3)1(7)
(Dec.) (000) (000)
(I) (2) (3) (4) (5) (6) (7) (8)

1982 1,583 7,037 8,620 21,483 40.1 70,913 12.1

1983 1,650 7,059 8,709 1.0 20,995 41.5 72,118 12.1
1984 1,828 7,630 9,458 8.6 21,483 44.0 73,344 12.9
1985 1,857 8,132 9,989 5.6 21,956 45.5 74,591 13.4
1986 2,004 7,986 9,990 0.0 21,640 46.2 75,859 13.2
1987 2,095 8,757 10,852 8.6 21,867 49.6 77,149 14.1
1988 2,098 8,917 11,015 1.5 21,991 50.0 78,461 14.0
1989 2,097 9,926 12,023 9.2 22,297 53.9 79,794 15.1
1990 2,012 10,764 12,776 6.3 22,605 56.5 81,258 15.7
1991 2,056 11,433 13,589 5.6 22,922 58.8 82,631 16.3

Note: Both series of employed and total population are estimates based on data for census years. IMSS data include both permanent
and temporal employees insured as of December of each year.
Source: Columns (1)-(2): Carlos Salinas de Gortari, Tercer lnforme de Gobierno, Statistical annex, Poder Ejecutivo Federal (1991);
Column (3) & (5). INEGI, Cuadernos de informacion oportuna, Mexico (March 1994). eols (4), (6) and (7): author's calculations.

126 Mexico

Table 4.9 Mexico: employment in a sample of state-owned enterprises, 1977-91


Enterprise or sector

PEMEX Steel Electricity Mining Fertilizer Total

Year (oil)

1977 92 70 97 150 5 414

1978 96 77 112 160 8 452
1979 103 82 126 179 9 499
1980 113 83 137 182 10 526
1981 123 86 120 193 12 533
1982 134 86 113 206 13 552
1983 146 79 113 211 12 561
1984 143 79 124 217 13 575
1985 149 81 122 223 13 588
1986 156 61* 121 221 13 571
1987 179 66 120 224 13 602
1988 171 65 121 230 12 599
1989 165 62 117 230 II 585
1990 168 65 117 250 10 610
1991 171 61 115 250 9 606

Notes: PEMEX: includes both permanent employees as well as transitory

personnel in oil, gas and petrochemicals; Steel: includes all workers belonging to
the state sector and to the private sector; in electricity, mining and fertilizer
sectors, it includes permanent employees. temporary personnel. construction
workers and administrative personnel.
*Steel: the dramatic decrease in employment in the steel sector between 1985 and
1986 is the result of the closing of the company Fundidora de Hierro y Acero de
Monterrey in May 1986. The change from 1990 to 1991 results from layoffs at
Siderurgica Uzaro Cardenas-Las Truchas (SICARTSA). a steel mill located in the
state of Michoacan; Electricity: changes between 1988 and 1989 reflect layoffs in
the Compania de Luz y Fuerza del Centro which administers energy produced by the
Comisi6n Federal de Electricidad in the Federal District of Mexico City.
Source: Miguel De La Madrid (1987), Statistical Annex: Gortari (1992 Statistical

Table 4.10 Mexico: real wages, 1985-92

(1980 = 100)

Type of salary 1985 1990 1991 1992

Minimum wage 67.0 42.0 39.5 38.9

Industrial wage 72.0 60.8 63.2 69.0
Construction wage 84.8 62.8 58.4 55.5
Agricultural wage 72.2 46.3

Source: Elaboration of PREALC with official figures. See PREALC 1nforma, 32

(September 1993).
Francisco Zapata 127
Given the present dynamics of the labour market, it is likely that the
insured fraction has tended to stagnate since 1991.
Finally, migration towards the northern border and to the USA has
intensified due to the changes within the national labour market. Some
depressed areas of Mexico, such as the south and central areas where hig~
concentrations of Indian population exist are experiencing outward migra-
tion towards the north in increasing numbers.

4.2.3 Impacts on Productivity

The average annual rate of growth of productivity, as measured by the

Annual Industrial Survey was equal to 4.8 per cent for total factor produc-
tivity (TFP) and 3.3 per cent for labour productivity (LP) between 1984
and 1990. Given that the period in question was characterized by alternate
phases of stagflation and inflationary growth, this rate of growth of
productivity is significant because it took place with decreasing GDP
growth rates and increasing inflation rates? while in previous periods (in
the 1970s, for example) GDP growth rates were much higher and produc-
tivity levels did not increase as much.
Here, it is important to recall that in 1983 the Mexican government
began the process of liberalization of external trade that culminated in
1988 when all sectors of the economy became open to foreign competi-
tion. In addition, all through this period the Mexican currency devalued
strongly.s Thus, these factors would point to a direct relationship between
productivity growth and export orientation, competition with imports and
trade liberalization.
Sectors where TFP increases were more relevant are shown in Table
4.11. It is important to underline that auto assembly and auto parts manu-
facturing participated in the increase of productivity, achieving rates of
6.6 per cent a year between 1984 and 1990, because of the weight these
sectors occupy in the export sector. It is also important to mention that
productivity growth, as measured in the Survey, reflects what happens in
large enterprises of more than 500 employees where 19 per cent of the
establishments covered by the Survey are concentrated, representing more
than 68.6 per cent of the total value added. Small and medium-sized firms
have much weaker rates of growth of their productivity levels.
The interpretation of those results must not assume that important
changes have occurred in technology because that is not demonstrated by
case studies undertaken in a variety of economic sectors. More credible
factors that can explain those increases in productivity levels are improve-
ments in the economies of scale, changes in the type and quality of inputs,
in organization and in managerial techniques. Factors such as specific
128 Mexico
Table 4.11 Mexico: sub-sectors with highest and lowest growth of total factor
productivity and labour productivity. growth rates. 1984-90. %

Total factor Labour

productivity productivity

Sub-sectors with highest TFP

automobiles 18.3 18.4
animal food 11.7 11.3
canned fruit and vegetables 9.7 6.5
meat and milk products 8.4 5.7
glass and related products 7.3 3.9
other food products 6.9 8.6
automotive parts and bodies 6.6 6.3
non-ferrous metals 6.4 0.8
cement 6.3 2.6
paper and cardboard 5.8 4.2
basic iron industries 5.7 5.5
alcoholic beverages 5.5 5.3
other textile industries 4.8 2.5
metal furniture 4.6 4.7
Sub-sectors with least TFP
fertilizers -10.90 -11.3
metallic structural products -4.70 -4.8
transportation equipment -4.50 4.1
leather and footwear -3.80 -4.6
electrical machinery -2.10 -5.5
electrical equipment -1.80 -4.1
milled flour -1.50 -4.5
printing and editorial houses -1.10 -2.1
garments -0.80 -1.2
medical products -0.30 -D.7
basic chemicals -0.02 -1.6
plastic products 0.09 0.4
other wood industries 0.19 -3.3
soft drinks 0.30 -4.5

Source: National Institute of Statistics. Geography and Informatics. Annual

Industrial Survey. Mexico City (various years). as cited by Brown and
Domfnguez. The Developing Economies (1994).

policies of the government or use of productive capacity in the short run

can also help explain them.
On the other hand. the explanation for the poor productivity growth in
small and medium-sized firms can be related to the weakness of the links
to large companies. to the non-existence of sub-contracting networks. to
Francisco Zapata 129
the low levels of skill of their manpower and to the low priority given to
training, in contrast to what is happening in large companies. At the same
time, the absence of elementary managerial practices as well as the low
level of familiarity with new technologies makes these companies quite
inefficient and vulnerable to macroeconomic instability. Such instability
was typical of the period 1984-90 and has returned as a result of the
events of December 1994 that have again put this important group of
companies up against the wall, especially because they had become
indebted to the banks.
This apparent coexistence of two types of companies, the large and the
small and medium-sized, with very contrasting levels of productivity, is
worrying because the former explain only 35 per cent of total industrial
employment. This means that the presence of those large companies with
high levels of productivity and technology is not sufficient for the general-
ization of this model to the rest of the economy. In addition, the lack of
sub-contracting means that the efficiency of the large companies does not
trickle down to the others. Furthermore, employment has been shifting
away from large companies as a result of increasing automatization,
streamlining and use of microelectronics in administrative tasks.
This picture shows the dimensions of the impact that adjustment and
economic restructuring had on the Mexican labour market and on produc-
tivity. It appears that labour has become more flexible as a result of the
structural processes that began to take place in Mexican society before the
onset of economic crisis and economic restructuring, and that were re-
inforced by the crisis. Productivity increases are concentrated in the
largest companies where capital investment occurred in the period
1975-81. In those same companies divestment occurred during the debt
crisis period (1982-7) and restructuring (1988-94). A reduction in capital
assets took place due to the fact that in the previous period there was over-
capacity. In Brown and Dominguez's (1994) words, it is relevant 'to
characterize the period 1984-1990 in terms of an important reduction in
capital assets and in the number of hours worked as well as by a recovery
in the rate of growth of the value added in the final years' (p. 290). We
have now to go deeper and try to understand how the institutional frame-
work has exerted pressure to limit this flexibilization process.



The Mexican labour relations system has direct effects upon the form and
degree of adaptation of the capital-labour link to the changes experienced
130 Mexico

by the market, technology and the organization of production. How does

this labour relations system affect flexibility, and how does it impact on
business strategies that are geared to confronting accelerated competition?
One can state two hypotheses. First, the Mexican model of industrial re-
lations combines zones of rigidity in the protection of salaried workers,
with other zones where there is a large margin of state and business discre-
tion in the application of the labour law. Secondly, corporatist flexibility
allows for the use of competitive strategies that permit low labour costs,
casualization of employment, and the weakening of labour unions.
To discuss these hypotheses, we will explore the main characteristics of
the industrial relations model and the way in which it operates within the
Mexican political system. We will then analyze the legal factors pertaining
to rigidity and flexibility in the hiring and use of the labour force. Finally,
we will present the present state of the debate between capital and labour
with regard to the present institutional arrangements, and this will allow us
to illustrate the positions and expectations of social actors in relation to the
possibility of increasing labour flexibility.
The institutional recognition of the labour movement during the
Mexican revolution (1910-20) and the adoption of labour standards both
in the 1917 Constitution and in the 1931 Labour Law (Ley Federal del
Trabajo - LFT -- 1931) can be viewed as a case of anticipated institution-
alization given the limited economic development reached by Mexico at
the moment when it was implanted. These circumstances determined the
adoption of laws protecting workers inspired by the European paradigm of
the time, put in place by Bismarkian Germany. A complete catalogue of
rights was put into place including the 8 hour day, labour stability, protec-
tion of women and children, minimum salaries, profit sharing, right to
decent housing, safety and hygiene rules, and especially the rights to
organize unions, sign collective contracts and strike.
Later, as a result of the corporatist organization of the Mexican state in
1929 (creation of the Partido Nacional Revolucionario - PNR), the
Federal Labour Law was promulgated in 1931, which has remained the
fundamental text regulating labour relations until today. The close link
between the organization of the State and labour relations gave life to a
regulation model centered upon state intervention in the determination of
the feasibility of the satisfaction of labour demands and business needs.
From 1931 on, the scope of legal protection depended less on the leller of
the law and more upon the criteria of opportunity decided by the
Executive through the Ministry of Labour, created in the same year.
The characteristics of this model, tending towards the achievement of a
balance between capital and labour were: (a) legal protection for all
Francisco Zapata 131
salaried workers, through the limitation or outright elimination of busi-
ness discretion in decisions concerning the duration of employment or the
determination of conditions of work; (b) the strengthening of collective
action through the recognition of powers given to unions and the right to
strike, and state control of organizational action and demand presentation,
thus leaving a very limited margin to business intervention in the creation
of labour unions; (c) state intervention in favour of the weakest part of the
labour relation through the creation of a tripartite labour justice system,
closely dependent upon the Executive with very wide margins of discre-
tion, especially in the prevention of strikes and in the resolution of indi-
vidual and collective conflicts; (d) no participation of workers or unions in
the management and administration of enterprises was established.
However, the direct presence of labour unions in the Comisi6n Nacional
de Salarios Mfnimos (National Commission on Minimum wages) and in
the Juntas Federales de Conciliaci6n y Arbitraje (Federal Conciliation and
Arbitration Boards) was institutionalized from the beginning.1O
In spite of the fact that employers asked for other options of direct
social control, they finally accepted that they were not feasible, given that
the Mexican state obtained its legitimacy more as a consequence of its
revolutionary nature than as a result of the legal nature of these rules.
When formal alliances between the labour movement and the government
institutionalized themselves within the framework of an authoritarian
State, especially during the Cardenas presidency (1934-40), the former
could not counterweigh the mutual interest of the government and busi-
ness to promote industrial development and thereby subordinate it.
During the years of intense economic growth (1935-74), many areas of
protection were created, especially in state enterprises and in large private
companies where the contractual agreement of the Mexican revolution
was implanted.
At this point, it is important to mention that in the northern city of
Monterrey, one of the oldest industrial regions of Mexico, business suc-
ceeded (at about the same time that the official union movement was born,
1936) in creating a parallel union structure composed of independent
unions that did not respond to the corporatist movement of the rest of the
country (Pozas, 1993). These, so-called 'white unions' collaborated with
industrial relations executives in the organization of work, abstained from
striking and from resistance and adopted contractual flexibility with regard
to work practices. Problems with this scheme arose, in the 1980s, when
business tried to introduce flexible methods of payment without previous
negotiation with the white unions. These unions had to demand the consti-
tution of commissions for the definition and measurement of productivity
132 Mexico
and the resultant adoption of bonus payments, as complements to regular
State support for the labour movement and for the labour confedera-
tions linked to the official governing party (the Partido Revolucionario
Institucional - PRI, 1948, resulting from the previous Partido Nacional
Revolucionario - PNR, 1929 and Partido Revolucionario Mexicano -
PRM, 1938) explains this balance in the negotiating capacity of negotia-
tion between social actors. Nevertheless, there existed areas of open or
disguised transgression of the formal legality, tolerated by government and
unions, basically in medium-sized and small factories, where workers
were not as protected as they were in large factories, either state or private.
During the economic and political restructuring that took place in the
1980s and early 1990s within the framework of the new development
model (trade liberalization, privatization and production for the interna-
tional market), a new type of state intervention has begun to take shape.
This has been much more favourable to business interests but located
within the same legal framework that has operated since 1931. It encom-
passes the dramatic decrease in real salaries, the reformulation of collec-
tive contracts and the crisis of the labour movement. This new type of
state intervention has been implemented without changes in the labour law
and has benefited from corporatist flexibility resulting from the subordina-
tion of the official labour leadership to the State and from the existence of
the Economic Solidarity pacts. These pacts were signed regularly from
December 1987 to March 1995, when they ceased to exist given the
difficulties that arose between state, unions and entrepreneurs to agree
about common goals. The statist and corporatist characteristics of the
Mexican situation have thus been/useful to impose changes in labour rela-
tions that tend towards the implantation of a much less protectionist and
discretionary model than existed prior to 1982: less interference of unions
in horizontal and vertical mobility of labour, casualization of employment,
lower direct and indirect labour costs, etc. (Zapata, 1992).

4.3.1 Between Rigidity and Legal Flexibility

Employment Stability
The implementation of diverse forms of labour flexibility - employment,
salary, technical and organizational, temporal- depends on the degrees of
freedom allowed to business to manage institutional rules (legal and con-
tractual) relative to the hiring and use of the labour force. Employment
flexibility consists in the adaptation of the volume of work to the needs of
Francisco Zapata 133
the company in response to cyclical or structural variations of demand or
to technological changes. Its obvious consequence is the uncertainty it
creates for the worker with respect to the unstable character of employ-
ment. To limit this uncertainty, Mexican legislation proposes to guarantee
the worker stability in his job while work is available, introducing two
restrictions, one relative to working time (duration) and the other relative
to the legal rules that regulate the forms in which a layoff can take place,
where a justification has to be established. This form of regulation can be
considered as 'rigid' because it restricts the freedom to hire. Nevertheless,
the freedom of action on the part of business can be higher or lower de-
pending on how the laws are interpreted and depending on union pressure
for enforcement. In matters of layoffs, the present law allows for the exist-
ence of 14 specific causes and one general cause that can permit employ-
ers to legally fire a worker without responsibility for the company (Article
47 of the LFf). In addition, a layoff can be decided upon unilaterally by
the employer. Confronted with an unjustified layoff, a worker has the right
to opt for reinstallation instead of compensation but employers can also
opt not to do so in certain cases (Article 49). The law does not allow for
layoffs due to economic or technological events in the company, and in
this case readjustments of personnel can be decided by an agreement
between the union and the company. I I
This way of protecting employment stability has become very
inefficient. The tripartite integration and the dependency of labour tri-
bunals upon the executive allowed governments to implement policies
geared towards the flexibilization of the volume and quality of employ-
ment. The subordination and complicity of union leaders also contributed
to this. This is the way in which the apparent rigidity of the legal frame-
work can be superseded by practice.

Severance Pay
In Mexico, there is no unemployment insurance. However, there is an sev-
erance pay policy where workers can be compensated for the involuntary
loss of employment and at the same time employers are discourage from
using this mechanism when facing market turbulence. Workers laid off
without cause must receive 3 monthly salaries plus a seniority bonus, in
addition to the proportional vacation and yearly bonus. In cases where
there is a collective layoff, severance pay limited to the 3 salaries in addi-
tion to the seniority bonus. The high number of workers who lost their
jobs between 1982 and 1994, as a consequence of plant closure, economic
restructuring or privatization, indicates that this legal regime did not
134 Mexico
become obsolete. Layoffs and severance payments were facilitated by
business strategies centred upon the reduction of employment, without
need to reform the legal or contractual amounts.

Conditions of Work
The legal regime concerning conditions of work contains a series of
restrictions which limit the flexibility of salary, working time, technologi-
calor organizational flexibility. The law establishes minimum conditions
of work that cannot be renounced by the people involved nor by the labour
authority (Article 51). This is the reason why collective contracts can go
beyond minimum legal levels of protection. Given that legal protection is
practically non-existent in some specific areas, it is within collective con-
tracts that restrictions are implanted. The flexibilization strategy of the last
10 years had therefore to face the fact that the law was clear with respect to
the fact that collective contracts had to respect legal minimum requirements.
However many loopholes were found, such as the straight elimination of
contractual clauses, rewriting of clauses resulting in neutralization of their
purposes, 'offers to 'buy' some clauses with special one time payments, etc.

Salary Flexibility
This dimension of labour flexibility is understood as the adaptation of
salaries to cyclical fluctuations (inflation and productivity) and to external
shocks (terms of trade) and their variation as a function of the behaviour
of the company. In spite of the fact that existing minimum wages tend to
guarantee an adequate salary for the needs of reproduction of the labour
force, in recent years they have tended to become an instrument of adjust-
ment policies and of the economic integration to Canada and the USA
derived from the approval of the North American Free Trade Agreement
(NAFTA). This latter strategy made it imperative for the State to inter-
vene much more in this field. It is precisely because of this heightened in-
tervention by the State, and because of the strong imbalance between the
negotiating capacity of social actors, that real salaries have tended to
decrease, dramatically in the case of minimum wages (see Table 4.10).
But this has also taken place because the union leadership has opted for
the maintenance of its privileges in exchange for the imposition of the
policy of the Ministry of Labour upon working conditions. 12

Flexibility ill Working Hours

In spite of the fact that the working day can be freely determined by the
company, it cannot exceed the legal limits of 8 hours and the employer
Francisco Zapata 135
cannot modify it unilaterally. This means that the rigidity or flexibility of
the working day will depend essentially on the willingness of the worker.
Overtime is not compulsory by law despite the fact that the Mexican
Supreme Court has interpreted that workers must accept it if and only if it
has a direct relationship with the normal activities that they carry out.
Leavetime is also regulated, even if workers can be forced to work on
holidays through special agreements with the employer.

Technico-O rganizational Flexibility

This modality refers to the forms of administration and organization of
companies derived from the increase in the diversity and rhythm of change
in products, the intensification of international competition and the poss-
ibilities opened up by new technologies. It assumes the existence of
different forms of internal mobility of the labour force such as poli-
valency, job rotation, working groups and training-reskilling. At the same
time, it can be combined with some types of external flexibility, through
sub-contracting parts of the production process and through changes in
relations with buyers and suppliers.
On this subject, Mexican legislation is very flexible given that there are
no restrictions on work intensity, on the type of services provided by
workers, or on the way in which they can be provided. Given this high
level of flexibility, collective bargaining tended to introduce rigidity
factors, such as fixed definitions of jobs, tasks and places where work was
to be done. This is the explanation for the fact that in recent years collec-
tive contracts have been revised through the elimination of those clauses
that had regulated jobs and tasks at the shopfloor level.

4.3.2 Collective Rights

One of the distinctive characteristics of the Mexican labour relations

model rests on the coactive powers granted to labour unions, whereby
collective action was privileged as the main mechanism to obtain a
betterment of conditions of work and of defence of acquired rights.
Nevertheless, the juridical regulation of these powers and the arti-
culation of unions with the political regime tries to control the exercise
of these collective rights and to subordinate them to the limitations es-
tablished by governmental decisions. This explains why wage adjust-
ment policies and flexibilization of labour relations adopted by the
Salinas government (1988-94) looked at labour unions more as the
instrument of the implementation of these policies than as obstacles to
be overcome.
136 Mexico
We can conclude that the labour relations model itself creates the need
to maintain stable links between unions and the State as a condition
to guarantee not only labour govern ability but also the adaptation of
capital-labour relations to the requirements of the productive process.

4.3.3 The Debate on the Reform of Labour Legislation: Continuity

or Rupture of Corporatism?

After 1989, the business sector exercised various pressures to promote

changes in labour matters, giving emphasis to institutional rigidity as an
obstacle to the modernization of production. It also emphasized the new
conditions posed by the commercial context implemented by NAFTA to
promote flexibilization of labour institutions (US Congress, 1992).
The content of the reform proposals - also supported by some inde-
pendent unions such as the Frente Autentico del Trabajo (FAT) - assumes
that adjustments to the LFT can be capable of transforming the founda-
tions of the old regulation model to put a new one in place. The employ-
ers' propesal is centred on greater levels of discretion in the management
of labour relations, greater weight given to public liberties in contrast with
the coactive powers of unions, and the legal strengthening of the capacity
of the State to intervene in the prevention and resolution of labour conflict.
The position of employers points to the elimination of the need to maintain
stable links between the state and the labour movement.
In summary, depoliticization and individualization of labour relations
would be the main objectives pursued under a legal scheme devoid of
rigidities, that would leave behind all the disadvantages of 'corporatist
flexibility' .
In this debate, some progressive unions, such as those representing elec-
trical or telephone workers or the FAT, give emphasis to the modification
of those clements of the present model of labour relations that support a
corporatist labour union system. They would favour their replacement and
would involve the redefinition and limitation of the role of the state in the
world of work. This becomes a condition to achieve a really bilateral
flexible system of labour relations.
The proposals that have been publicized with regard to the reform allow
us to identify three main issues that are to be solved concerning capital-
labour relations The first has to do with the passage from corporatist trade
offs to legal flexibility. While the Confederaci6n de Trabajadores de
Mexico (Confederation of Mexican Workers or CTM, 1938) defends its
role as the only interlocutor of business in the changes that companies
Francisco Zapata 137
experiment today, employers aspire to a larger flexibility whose range of
applicability can be adapted to the real possibilities of medium-sized
and small companies. The second theme is individual liberties and col-
lective rights. Employers, represented by the Confederacion Patronal
de la Republica Mexicana (National Employers' Confederation or
COPARMEX) look for the redefinition of the collective rights. In particu-
lar, they seek to prohibit the application of the so-called 'exclusion clause'
(that involves the capacity of the union to have veto power over hired and
dismissed workers) with the purpose of eliminating the coactive power of
labour. They also seek to reduce the role of unions in the control of labour
dissatisfaction - manifested in the right to strike - and thereby strengthen
the labour authority. The CTM, on the contrary, defends the status quo
and refuses any change where legal tutelage, State intervention and
corporatism are closely interrelated. The third theme is concerned with ar-
guments about the tripartite system of labour justice. The COPARMEX
proposes to suppress the Juntas Federales de Conciliacion y Arbitraje
(Federal Conciliation and Arbitration Boards), given their evident inca-
pacity to deal with the ongoing changes. Independent unionism has also
questioned tripartism and there seems to be consensus in favor of the
establishment of a new judicial power that could guarantee its independ-
ence in relation to the Executive, and to end the joint participation of the
employers and the government in the labour movement.
From the pressures exerted by employers and from union resistance to
labour reform one can conclude that, (a) there is some realism on the part
of labour leaders with respect to the need to be careful in the introduction
of adjustments to the labour law because changes could go against
workers' interests; (b) employers recognize the very low political feasibil-
ity of adopting a radical solution to the question of flexibility; (c) neither
cmployers nor labour unions assign much importance to a larger degree of
participation of workers within the enterprise, which could allow present-
day confrontation to take a cooperative form and thereby permit a negoti-
ated flexibility, of a consensual nature.
Nevertheless, the possibility of keeping corporatism as a f1exibilization
mechanism of labour legislation has limits as the political process evolves
towards greater degrees of democracy. One can therefore conclude that
what is at stake in this scenario is not only, nor mainly, the degree of
institutional flexibility convenient for the challenges posed by the pursuit
of competitivity, but the type of articulation between the state and its
partners, whose forms and contents have been altered as a result of the
adoption of a new development model.
138 Mexico

Another institutional component of the efforts made to flexibilize labour

concerns the implementation of training programmes. Both as a mechan-
ism to increase the adaptability of labour to technological innovation and
as general policy for the generation of higher degrees of skill, the analysis
of training is an important part of this discussion. We here consider how
modernization of the technological basis of the Mexican economy neces-
sarily implies the adoption of training policies.
It is clear that the opening of the Mexican economy to the international
market in 1986 with entrance into the General Agreement on Trade and
Tariffs (GATT), the implementation of NAFTA in January 1994 and the
incorporation of Mexico into the Organization of Economic Cooperation
and Development (OECD) in October 1994, imply enormous pressures on
companies to rationalize their production systems through technological
innovation, relocation of personnel and acquisition of knowledge about
world trade. These challenges have increased the need to expand the
degree of labour market flexibility and to minimize the social costs of
salary losses, of unemployment and of the growth of the informal sector.
The organization of an official system of training has become a central
aspect of public and company policy.
Training is one important element in the provision of labour input flex-
ibility because it strengthens the probability of labour responsiveness to
change, and thereby increases productivity. This implies that as workers
become more skilled and more adaptive to changes in the environment
their productive capacity increases. In Mexico, training has been provided
internally and externally to the company, that is to say within the enter-
prise through the help of the Ministry of Labour as well as outside through
institutions coordinated by the Ministry of Education. Internal training has
been growing since 1988 given the need of companies to train and retrain
workers as part of the effort to increase productivity in a context of adjust-
ment to rapid liberalization. We will discuss training in the context of
technological innovation and its contribution to flexibilization in relation
to the State policies that have been put in practice in recent years.

4.4.1 Technological Innovation in Mexico

At the end of the 1980s, almost two-thirds of industrial companies had

low technological levels (of an artisan type), a quarter had obsolete
mechanization and only 8 per cent had modern technologies (Flores,
1990). Technological change took place mainly in modern companies, es-
Francisco Zapata 139
pecially in transnational companies geared for export. Globalization also
forced many companies to introduce new forms of organization of work
that would allow them to be more efficient. But this did not take place in
all companies, it took place only in a partial way.
On the other hand, the introduction of mechanisms of quality control
has been more common in foreign companies located in Mexico, although
Mexican owned companies also have introduced them, mainly motivated
by the need to respond to competitive pressures. But overall the diffusion
of these methods remains limited.

4.4.2 Adoption of New Technologies

The use of new technologies has increased in productive processes of

manufacturing and in design and administration, despite the limited
resources available. It is in automobile manufacturing where new tech-
nologies have been introduced on a large scale, accounting for more than
half of flexible automation equipment in the countryY The adoption of
flexible automation was stimulated by a combination of economic vari-
ables, derived from the contraction of the internal market, the climate of
trade policy that liberated imports and promoted exports and by the strate-
gies of industrial reorganization of transnational companies. These compa-
nies (especially American ones), in the so-called post-Japan era, included
their Mexican subsidiaries as one of their export platforms. In the realign-
ment of productive forces, national small companies are being left behind
because only large companies, and especially foreign companies, can
absorb the new technologies of flexible automation.

4.4.3 Production of New Technology

When at the same time that a group of manufacturing plants becomes au-
tomated, the general offices of a great variety of companies increase the
use of personal computers, in part because of low cost and also because of
simplicity in gathering and registering new information. The increase of
the domestic market also favours the local production of personal com-
puters. The increase in production of personal computers in Mexico has
been important, but the manufacturing of machinery and industrial
equipment based on microelectronics has nevertheless stagnated at low
levels because buyers prefer to import more reliable equipment despite
their higher prices. Some industrial companies opted to transform their own
machines by using robotics. Until now, there has been fast growth of
industries with forward linkages from microelectronics, in contrast with
140 Mexico
industries that manufacture components and capital goods assisted by

4.4.4 Impacts on the Structure of Occupations

The changing conditions of the competitive structures of markets and of

technology has had an impact upon internal occupational structures, modi-
fying the skill composition of manpower. That impact has been different if
companies use or produce new technologies or goods associated with new
technologies. Indeed, the use of new technologies in productive processes
in parallel to flexible reorganization and training of the labour force has
allowed companies to save more on engineers than on workers, especially
if the companies have undertaken training programmes.

4.4.5 Impact of Technological Change on Technical Education

Technological change has generated training demands to which the state

has responded through the creation of training centres, and tax incentives
to companies that create their own training facilities. The requirements of
new middle level technical careers has accentuated the need to introduce
new subjects in the curricula and for new modular ways in which to train
flexible technicians and polivalent workers. The relatively slow response
by public institutions has intensified in-firm training for technicians and
workers. This situation implies a clear imbalance in educational effort,
with unfavorable impacts on social and private costs.
Technological change has completely overtaken middle level technical
official education. Changes in curricula have been slow, with very cau-
tious revisions every two years; the interaction with the productive sector
has been minimal and inadequate. The economic limitations of public
schools, both in terms of teachers and equipment, have also had negative
consequences for the capacity of these schools to satisfy existing demand.
Some companies have introduced specific courses in their formal training
centres, have sent personnel to foreign countries or have asked the manu-
facturers of their equipment to provide training for their workforce. Some
companies have also used personnel who has benefitted from this type of
training to train new employees.

4.4.6 The Training Policy of the State

Enterprises are required by law to provide training. For this purpose there
is a system of committees at various levels, either tripartite or bipartite,
and some consulting services provided by the State. In addition, the State
Francisco Zapata 141
offers the services of training and technological studies. Training and
industrial technical education is organized around a National System
of Education and Technology, dependent upon the Subsecretarfa de
Educacion e Investigacion Technol6gica, or SEIT (directed by the
Assistant Minister of Education and Technological Research). SEIT
groups 10 public institutions that provide technical education at middle
and higher levels, in~luding postgraduate education.
This middle level technical education system produces professional
technicians and technologists who can obtain middle level jobs in the
productive sector, thus linking management to workers. For these inter-
mediate levels there is also the option to continue with higher education,
in engineering careers, for example, or to integrate themselves directly to
the production the process.
With regard to training for work, the government created the Sistema
Nacional de Capacitacion y Adiestramiento (National System of Training
and Skilling), that focused on the active participation of workers and em-
ployers in the formation, development and reskiIling of the workforce
within training centres. The structure of the system discards the idea of
scholarly and formal training because this would involve the separation
between the system and the real needs of the productive apparatus.
Training has been conceived as a participative process in the overaIl
formation of the worker.
In face of the need to expand the training programmes in a context of
productive restructuring and adoption of technological innovations, the
Ministry of Labour created, in 1984 a scholarship programme for training
for work (Programa de Becas de Capacitaci6n para el Trabajo or
PROBECAT) geared towards workers aged between 20 and 55 years who
had lost their jobs. 14 Recently, the package designed to face the crisis
opened in December 1994 as a result of devaluation reinforced this pro-
gramme to facilitate the reaIlocation of unemployed persons. Through this
mechanism, the State is trying to ensure that the training courses upgrade
the capabilities and skills of the unemployed, at the same time as pro-
viding them with a temporary income, equal to the minimum wage.
Training is thus linked to activities that present better chances of recovery
in the short and medium term.

4.4.7 Attitudes of Training Centres Towards Changing

Technological Conditions

Official training centres have substantial economic limitations, in terms of

both equipment and teachers. In careers related to computing or computer
programming, many centres do not have their own equipment or teachers
142 Mexico
dedicated full time to their tasks. In addition, very few teachers have post-
graduate training for middle level technical careers. The fact that many
teachers work on an hourly basis has had a positive effect, because they
have established informal channels of communication with the productive
sector. Through their teachers, students can relate to companies and keep
informed about technological changes that occur in the fields they are
focusing upon. This has permitted an easy incorporation of the graduates
of these training centres into industrial and services jobs, with few remain-
ing unemployed. Given the decrease in manufacturing jobs during the ad-
justment period and especially during the restructuring period, the fact that
these graduates have been able to find jobs has accelerated the demand for
this type of training.

4.4.8 Autonomous Training Centres

Some autonomous centres, affiliated to higher education institutions, also

provide teaching programmes in middle level technical training. They have
become an alternative to official centres but they are few in number: in 1985
very few offered training in computing. Some universities, technological
and polytechnic institutes also offer extra-curricular courses with the opera-
tion of computing centers for academic personnel in the productive sector at
various levels. These autonomous centres also face financial restrictions but
not as severe as the ones experienced by the official centres. Their biggest
problem concerns computer-assisted production equipment.
These centres design courses taking into account the requirements of
industrial companies and of services; these courses are evaluated
periodically to see if they continue to be relevant. New study plans are
registered with the Ministry of Education and teachers must dedicate at
least 30 hours a year to updating their knowledge. The exit of certified
teachers has not been very high because promotions, or personal commit-
ment to teaching, as well as the links to the productive sector allow them
to remain active in these activities. They have actively contributed to the
promotion of contacts for practical training for their students, the evalu-
ation of teaching programmes, the training of employees through special
courses in schools and in the companies and through the employment of
graduates. In general, these autonomous training centres offer advantages
in relation to the official institutions because they have better teachers,
better equipment and closer relations to companies. Nevertheless, it is im-
portant to mention that they have higher costs per capita than official
centres, something they try to solve through scholarships given to the best
Francisco Zapata 143
4.4.9 Attitudes of Companies Facing Changing Market Conditions

In the last 10 years, companies have had to train or re-train workers within
an increasingly competitive environment, where technological innovation
is more and more crucial. How have training strategies contributed to the
adjustment of companies to these challenges? Many companies have
created their own tr!lining centres, making a serious effort to train human
resources according to their needs. These private centres are part of large
conglomerates that provide services for the specific companies involved.
The companies contribute to the operation of the centres but they can
make their opinion felt concerning teaching methods, programme content
and teachers. The board of directors of these conglomerates require results
and decide what are the priorities in terms of knowledge to be taught.
Important cases where this type of facilities exist are the VITRO con-
glomerate in the city of Monterrey, SPICER, FORD, NISSAN and many
of the in-bond factories (maquiladoras) in the northern border of Mexico.
Also, Mexicana de A viaci6n (one of the two national airlines of Mexico)
and Telefonos de Mexico (TELMEX) have engaged in intense private
training programmes (Arena, 1994).
In 1991, TELMEX created the Instituto Tecnol6gico of Telefonos de
Mexico (Technological Institute of Telefonos de Mexico) where all
training activities of the company were concentrated. Between 1991 and
1992, the number of trainees doubled, each trainee took on average 9.4
These conglomerates have created apprenticeship schools and also
training centres geared towards new production techniques. Training is
also provided in organizational techniques as well as total quality
control (TQc) and just-in-time methods. They have also developed
training in computer assisted manufacture (CAM) and programmes
related to expanding the range of skills that workers can exercise in their
jobs (polyvalence). Some of them, especially the transnational compa-
nies, send some workers to be trained in their main offices in the USA
or Japan.
A large proportion of the manpower of these companies has undergone
training: for example, 25 per cent of the workforce of the Hermosillo plant
of the Ford Motor Company-Mexico has been trained in Japan or Spain
and every year this number grows (Covarrubias and Grijalva, 1994). The
nature of the productive process in these plants, highly automated, some-
times using robots, means that, in Ford, more than 78 per cent of the total
workforce is either semi- or fully skilled. Therefore, the new plants of
these companies have a workforce whose training levels are very high
144 Mexico

right from the start, a stark contrast to the manpower of the old plants of
these same companies in the country. This means that training is part of
the overall planning of the implementation of the new projects.
Cases such as NISSAN-Aguascalientes (a plant inaugurated in 1993)
are very good examples of this new facet of industrial expansion. A kind
of 'philosophy of collective production' has been developed, centred
around values such as honesty, respect, reciprocity, collaboration and
openness. These values are translated into specific objectives in production
terms such as work quality, responsibility, manual skill, productivity,
flexibility, capacity to participate in groups, care with regard to materials,
cleanliness of shops and production areas, hygiene, zero mistakes, statisti-
cal control of processes, etc. Personal evaluation is related to the type and
amount of remuneration and to promotion systems despite the fact that
polyvalence is given priority.
On the other hand, organizational innovations have contributed to the
achievement of high levels of productivity and quality. The fact that these
values become a part of the overall planning of production processes has
involved a new view about the role of manpower. Thus, managers have
had to learn new ways to involve themselves with the people with whom
they work. Supervisors, superintendents, middle level managers and
general line bosses have had to learn about the ways in which techno-
logical innovation can be incorporated into the normal operation of the
productive process. The results have been highly positive: a substantial re-
duction in defective products has taken place, and higher degrees of
control of productive contingencies. The changes in recruitment practices
and the formation of human resources means that people have higher
educational levels as well as higher formal training when they begin their
productive life. Initiative, responsibility and self-evaluation of quality
become a part of working life.

4.4.10 Training, Unions and Wages

Training has not been an important demand of unions. It figures in fourth

place after wages, fringe benefits and working conditions. In general,
training has been useful for workers but they do not see it as directly
related to their jobs: thus, in 1991 45.6 per cent of workers interviewed in
an evaluation surveyl5 thought that the courses they had followed 'outside'
the company did not have anything to do with the tasks they had to under-
take once working, while only 8.3 per cent of those workers that had fol-
lowed the courses 'in' the company said the same thing. This has to do
with the fact that training does not always lead to higher wages. It is not
Francisco Zapata 145
clear if wage increases derived from training are equal to the increase in
productivity that training produces.
In the same survey, it is indicated that 72 per cent of workers without
formal education earn less than 2 minimum salaries while among those
workers that have formal education or have undergone some type of train-
ing, only 54 per cent have that level of income. This is sti11 more pro-
nounced when workers have followed a middle level technical education:
only 43 per cent of those workers in this situation earn less than 2
minimum salaries. On the other hand, if the higher levels of income are
considered, the survey indicates that while only 0.7 per cent of the total
employed population earn more than 5 minimum salaries, more than 5 per
cent of those that have some degree of education or training are located in
that group. This, it is possible to argue that some formal education or
training has some impact on income earned by workers, in spite of their
subjective opinion.


As stated in the Introduction, labour flexibility and productivity are

notions that when applied to the Mexican case are determined by the ex-
tremely burdensome weight l6 of the nature of the economy and of the
political system of that country. There, the concept of flexibility acquires a
highly specific and idiosyncratic character. This means that the following
conclusions need to be read taking into account this caveat very seriously.
On the basis of data presented here, even if some indicators suggest in-
creasing labour market flexibility and labour input flexibility in the period
1982-94, their net impact in terms of the flexibilization of the Mexican
labour market is very ambiguous. Increasing informalization and segmen-
tation of labour markets, decreasing real wages, a falling proportion of
those people working between 35 and 48 hours, atomization of the size of
manufacturing industry, a growing economically active popUlation derived
from an increasing number of household members who work for money,
feminization of the labour market, increasing training facilities, decreasing
power of unionism, profound revision of collective contracts, stagnation of
public employment and of the number of people benefiting from social
security benefits and an increasing number of very localized pockets of
open unemployment, all show that flexibilization is going on. However, its
impact is more related to a re-formulation of the role of labour within the
political structure than to the design of a more efficient economy, con-
sidered in terms of the productive and flexible utilization of manpower.
146 Mexico
Thus, even if changes in the relation between the informal and the
formal labour markets could point towards f1exibilization and the intro-
duction of so-called productivity agreements could point to the moderniza-
tion of the mechanisms of the retribution of work, they do not appear to
modify the corporative agreements that govern life on the factory floor.
The rewriting of collective contracts by limiting the number of benefits to
the strict application of the labour law could point to the recapture by
managers and entrepreneurs of power in the administration of their com-
panies. It indicates a general weakening of the bargaining capacity of the
labour movement and a loss of position of the labour movement within the
corporative system. These processes have not yet reflected themselves in
increasing levels of efficiency of flexibility in the national economy.
Increased productivity, instead of reflecting higher labour flexibility or
technological innovation reflecting human-capital investments, is the
result of permanent layoffs and of increasing volumes of production being
transferred to the northern maquiladoras. This results in decreasing
benefits for the unionized popUlation, lower levels of training of
manpower and less horizontal mobility of the labour force.
The processes of adjustment and restructuring that have taken place in
Mexico since 1982 did indeed stabilize the economy by dramatically
decreasing inflation and opening the economy to the international market,
but at the same time producing an increasingly higher trade deficit (which
reached more than 28 billion dollars in 1994).17 The events of December
1994 testify to the fact that the economic policies followed from August
1982 to the present have not contributed to the modernization of the
Mexican economy and that what appears as f1exibilization is more related
to intensification of work, decrease in its remuneration and loss of negoti-
ating power both at the shopfloor and at the political level.
At the same time, the institutional environment is highly volatile and
subject to spasmodic pressures that sometimes tend to go in the direction
of the modification of the corporatist model of articulation between the
labour movement and the State and sometimes in the opposite direction.
Productivity increases are not derived from increasing technological
levels (capital assets decreased in the period 1984-90) or better training
but are only the reflection of an intensification of physical labour (the
example of the maquiladora programme is very eloquent in this respect),
with some notable exceptions in some sectors such as the manufacturing
of auto parts especially engines, automobile manufacturing, the assem-
bly of some types of computers, that are all geared to the export market
and where modern work practices have been adopted in the last few
Francisco Zapata 147
Therefore, productivity growth does not appear to be related to what we
could call a 'positive' flexibilization of labour. On the contrary, it is the
result of higher levels of direct exploitation of the labour force by spe-
culative businessmen and of subjection of the labour movement to an
irresponsible technocratic class.


I. This chapter was elaborated in EI Colegio de Mexico with financial support

of the International Development Research Centre (IDRC) of Canada and
on the basis of texts by Edur Velasco, Graciela Bensusan, Alfonso Mercado,
Marfa de los Angeles Pozas, Miguel Angel Ramirez Sanchez, German
Sanchez, Alejandro Covarrubias and Jesus Grijalva. It benefited from the
assistance of Pablo Casillas. All responsibility for the conclusions reached
rests with the author. It reflects discussions among all participants and com-
mentators at the seminars that took place at Guadalajara (Mexico) with the
sponsorship of the Departamento de Estudios Ibericos y Latinoamericanos
(DElLA) of the University of Guadalajara on 5-7 October 1994 and at
Toronto (Canada), with the sponsorship of the Department of Economics of
the University of Toronto on 15-16 June 1995.
2. It is to be noted that from December 1982 to July 1994 (almost 12 years),
Mexico had one single minister of labour, Dr Arsenio Farell Cubillas who,
in close collaboration with the minister of finance, managed the labour
effects of the adjustment programme, especially as it concerns the reshaping
of collective contracts, the blocking of strike activity that could compro-
mise the programme and last but not least the control of salary negotiations
within strict parameters.
3. Indeed, there is a National Agreement for the or Promotion of Productivity
and Quality (Acuerdo Nacional para fa Efevacion de fa Productividad y fa
Calidad ANPEC) signed in May 1992 by the representatives of the State,
the labour movement and the business community. But, paradoxically, in
negotiations undertaken in salary revisions of 1993 and 1994, the producti v-
ity component of wages was equivalent to an across-the-board figure,
applicable to all workers in the country, equal to 2 per cent of the total wage
which was taken to be the overall productivity increase in the Mexican
economy in the previous year, a result which is not founded on any
technical basis.
4. Events in December 1994 contribute to support the previous assertion. The
exceptions to this rule are the cases of Telefonos de Mexico, the privatized
telephone monopoly and the Compania de Luz y de Fuerza del Centro, the
public company in charge of electricity distribution within the Federal
District which have both signed productivity agreements with their unions,
going beyond what the Ministry of Labour has advised.
5. For example, dramatic reductions in employment in the steel industry (from
a total of 80 870 to 60 800 people between 1986 and 1991) can be explained
by massive layoffs in plants such as Fundiora de Hierro y Acero de
Monterrey and Siderurgica Lazaro Cardenas-Las Truchas.
148 Mexico
6. In Hermosillo (Sonora), where the Ford Motor Company in association with
Mazda built a new car factory, or in Aguascalientes where Nissan also built
a car factory, or in the state of MexiGo, near Mexico City, where Chrysler
and Ford have made large-scale investments in factories that export to
Canada and the USA.
7. From 1984-7 GDP grew at 0.15 per cent with yearly inflation rates reaching
a peak of 160 per cent in 1987. During the next 3 years GDP grew at 2.9 per
cent and inflation dropped to 30 per cent in 1990.
8. Formal devaluations took place in February, August and December 1982,
December 1987 and December 1994 while crawling peg devaluations took
place all through the period 1989-94 in an amount equal to 50 per cent of
the 1989 value of the peso.
9. For the expanded version of this theme, see Graciela Bensusan, 'Los
determinantes institucionales de la flexibilidad laboral en Mexico' , a report
submitted to the IORC Mexico project, EI Colegio de Mexico (1994)
10. Conciliation and Arbitration Boards also exist at the state level: there, their
role is restricted to industries that operate only within the states. In the case
of Federal Conciliation and Arbitration Boards, they cover industries of
federal jurisdiction which are those that operate in more than one state
or belong to strategic sectors such as oil, steel, communications, mining,
railroads, etc.
11. Many examples can be cited in recent years where this type of agreement
has been crucial for the privatization of state owned companies in steel,
mining and manufacturing.
12. One strike, at the Volkswagen plant, was solved through this type of 'behind
closed doors' procedure. Workers engaged in a wildcat strike to protest the
signing of a contract where modifications to bonus payments had been intro-
duced that had not been submitted to debate: the German company threat-
ened to get out of Mexico, the Minister of Labour intervened together with
the National Telephone Workers' Union Secretary General and forced the
union leadership to accept the repression of the strike and to impose the
contract as it was originally signed.
13. One of the plants where more automation, including robots, has been
introduced is at the Ford-Hermosillo factory of the Ford Motor
Company-Mexico. Volkswagen de Mexico, at its Puebla plant, has also in-
troduced automation in its motor production facilities.
14. Within this context, the Mexican government approved 700 000 scholar-
ships for urban and rural workers who are unemployed or who require
higher levels of skills for thier jobs: see Acuerdo de Unidad para superar fa
emergeflcia ecoflomica, January, 41994).
15. 'Encuesta Nacional de educaci6n, capacitaci6n y empleo', Instituto
Nacional de Estadfstica, Geografia y Informatica (lNEGI) and Secretarfa del
Trabajo y Previsi6n Social (STPS) (1991).
16. From the point of view of an analysis of flexibility framed in the neo-liberal
economics project.
17. Imports and exports have increased, particularly items for internal consump-
tion (especially coming from the USA) or of intermediate nature. There has
been an increasing penetration of the USA market by some furniture compa-
nies in the oil and petrochemical industries, manufacturing of metal prod-
Francisco Zapata 149
ucts, machinery and equipment, agricultural produce, cement and other


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5 Labour Flexibility and
Productivity in Canada:
Markets, Institutions and
Michael Baker, Morley Gunderson and
Susan Horton


Labour flexibility and productivity have become key interrelated in-

gredients of global competitiveness for high wage, developed countries
like Canada.. Without sustained productivity growth and high value-added
production, countries with high labour costs cannot hope to compete with
the growing competition from low wage countries.
The Canadian experience is of particular relevance to Latin American
countries facing trade liberalization and structural adjustments because it
lies 'in between' the more laissez-faire market-oriented model of the USA
and the more regulatory interventionist model of Europe and Latin
America. Changes in the Canadian labour market induced by trade agree-
ments with its more laissez-faire neighbour may provide lessons for other
countries contemplating similar arrangements. Canadian-US comparisons
are particularly instructive since even small differences in policy initia-
tives and institutional features of their labour markets can have substantial
effects on labour market outcomes - they are 'small differences that
matter', to use a phrase coined by one prominent study that analyzed these
differences (Card and Freeman, 1993).
Canada also has numerous similarities to many Latin American coun-
tries and these may be particularly relevant to countries contemplating
trade liberalization with the USA (Berry et ai, 1994). Canada has shifted
from a resource-based economy to manufacturing under the protection of a
tariff and non-tariff barriers (NTBs). It is heavily dependent on trade, most
of which is with the USA. The USA is also the main source of the sub-
stantial foreign direct investment (PDI) that prevails in Canada in the fonn
of branch plants of large multinationals. Since they mainly served the

152 Canada
smaller domestic market, they were often inefficient small-scale plants. As
such, they are undergoing substantial restructuring as Canada is now faced
with more global competition and trade liberalization, especially under the
Canada-US Free Trade Agreement (CAFTA) and the subsequent North
American Free Trade Agreement (NAFTA) that also includes Mexico.
Even within Canada there is considerable variation in the institutions
and policies across the different provincial jurisdictions, given that much
of the legislation in the labour area is provincial. Specifically, legislation
governing collective bargaining, employment standards, human rights,
workers' compensation and occupational health and safety is mainly
provincial, while unemployment insurance, social assistance (welfare) and
training are mainly federal, often with substantial provincial involvement
in administration and sometimes funding.
The Canadian experience with labour flexibility is outlined in four
major sections. Section 5.2 deals with background issues, emphasizing the
impact of the macroeconomic environment on labour market flexibility
and adjustment, and the feedback effects from labour market flexibility to
macroeconomic performance. Section 5.3 deals with wage structures and
mobility, including issues of wage polarization, public sector wages, geo-
graphic mobility and barriers to the internal mobility of labour. Section 5.4
deals with various institutional dimensions of the Canadian labour market:
unions, legislation and government policies and programmes. Section 5.5
deals with the issue of skills, focusing on human-capital formation at the
economy-wide level, and human resource and workplace practices at 'the
enterprise level. Section 5.6 contains brief conclusions.


Labour markets in Canada are not characterized by wage flexibility and

hence much of the adjustment to demand shocks occurs in the form of
employment changes and hence unemployment. Even within the quantity
component, however, there is a tendency for demand shocks to be ab-
sorbed by employment rather than hours' changes. To a degree, this lack
of flexibility in wages and hours reflects legal and institutional features of
the Canadian labour market: unemployment insurance; unions; seniority
rules; fringe benefits; and termination policies. This highlights a typical
tradeoff. These institutional and legal features provide a desirable degree
of protection. But they can also reduce the incentive for wage flexibility
and give rise to segmentation with some workers protected with high
wages and long hours, and with others buffering the demand shocks
Michael Baker, Morley Gunderson and Susan Horton 153
through unemployment and precarious work. Providing the proper degree
of flexibility to strike an appropriate balance in that tradeoff is one of the
most difficult policy challenges in the Canadian labour market today. In
this section we examine in turn supply and demand side changes affecting
the Canadian labour market, and the consequences in terms of the growth
of employment and unemployment, wages and productivity.
The Canadian labour market continues to be subject to a large
number of changes emanating from the supply side of the labour market
(Figure 5.l). Women continue to enter the labour force at a rapid rate so
that the dual earner family is now the norm and not the exception. The
labour force continues to age as the baby-boom population, born in the
late 1940s, is now reaching middle age. This 'bulge' in the population

Figure 5.1 Canada: participation rates, by age and sex 1975-93

(a) Males
(b) Females

100 , - - - - - - - - - - - - - - - - - - - ,
95 - - - - - - - - - -
~ 90
t;!< 85 t:-- ___________ _
';;' 80 - - - - - - - - - - __
f:l 75 - - 15-24
§ 70
·c 65 - - - - 25-44
II 60 - - - - 45...{i4
:Q 55
~ 50
0... 45
(a) 35 +-+-+-+-+-~~~~~~~_4_4_+_+_+-4
1975 77 79 81 83 85 87 89 91 93

100 .-----------------------------------~
~ 90
t;!< 85
';;' 80
f:l 75
a 70 - - 15-24
.g 65 - - - - 25-44
--- _----r-
- - - - 45...{i4
:Q 55
~ 50 ____ ~
~ 45 _--------
40 1-----
(b) 35 +-+-+-~~~~~~~~~~~~~~~~
1975 77 79 81 83 85 87 89 91 93
Source: CANS 1M database.
154 Canada
created adjustment problems of youth unemployment when they first
entered the labour market. They are now creating problems of blocked
promotion opportunities and skill obsolescence. Soon they will create
adjustment problems associated with retirement and pension issues.
Earlier retirement is becoming increasingly common, especially for males
aged 55-65, many of whom have been displaced from their regular job.
Immigration continues in large numbers, but with increasing difficulty in
assimilating into the labour market. As a result of many of these changes,
the Canadian labour force is becoming increasingly diverse especially
with respect to ethnicity and gender.
The Canadian labour market also continues to be subject to numerous
interrelated changes emanating from the demand side. Since the demand
for labour is derived from the demand for the firm's output, then pressures
that firms have been facing to be flexible and adaptable have been trans-
mitted to the labour market in the form of demands for a flexible and
adaptable workforce. Global competition has been paramount, especially
from low wage Newly Industrialized Countries (NICS). Trade liberaliza-
tion is occurring, recently associated with CAPrA and NAFTA. Further
extensions to South America, Central America and the Caribbean Basin
are being contemplated. Technological change has been dramatic, espe-
cially in the area of computers. Industrial restructuring has occurred, espe-
cially from middle wage, bluecollar manufacturing jobs to service jobs at
the polar extremes of the wage distribution: high wage 'knowledge-based'
managerial, administrative, professional and financial jobs on the one
hand; low wage personal service jobs on the other hand (Figure 5.2).
Deregulation and privatization have been common, subjecting employers
and their work forces to the pressures of greater competition. Associated
with these changes is an increase in the use of 'contingent workforces'
often involving precarious employment in various forms: sub-contracting;
limited duration contracts; permanent part-time work; on-call workers; and
temporary help agencies (Figure 5.3). These reflect the uncertainty of the
demand changes, as well as a desire to avoid the regulations that are
increasingly placed on the regular workforce.
From a labour market perspective, a key macroeconomic feature of
the environment is the legacy of two recent pronounced recessions
(Figure 5.4). The recession of 1981-2 was the most severe since the Great
Depression of the 1930s. The recession of 1990-2 was less severe, but
longer. Both left the economy with levels of unemployment that appear to
be ratcheted upwards from previous levels, raising the spectre of
permanently higher levels of structural unemployment (see Figure 5.4 and
Table 5.1). In addition, there have been unusually large amounts of under-
Michael Baker, Morley Gunderson and Susan Horton 155
Figure 5.2 Canada: composition of non-agricultural employment. 1975-93

70 OPublie admin.
40 III Manufacturing
30 ·Olher
1975 77 79 81 83 85 87 89 91 93

Notes: Other includes primary industries, construction. transportation, communica-

tions and utilities; CBPS is community business and personal services which in-
cludes business. educational. health. hospitality and miscellaneous services; FIRE
is finance, insurance and real estate.
Source: CANSIM database.

Figure 5.3 Canada: full-time and part-time employment, 1975-93

70 • Part-lime
60 C1Full-time
50 employment
1975 77 79 81 83 85 87 89 91 93
Note: Decomposition is for non-agricultural employment.
SOl/fce : CANS 1M database.

employment, especially in the form of involuntary part-time work. and

withdrawal from the labour force. Some of this may be related to very
restrictive monetary and fiscal policies. motivated by concerns over the
government deficit. which have reduced inflation currently to near zero
but with unemployment which equalled lOA per cent in 1994.
156 Canada
Figure 5.4 Canada: unemployment rates. by age and sex. 1975-93
(a) Males
(b) Females

24 ,-------------------------------------,
~ 22
~ 20
'i 18
e 16
E 14
E 10
12 /"--
S /'
-a. 8 ' , , , , , , , -::--.. - ----: . ' "

_ _ _ _ I
------_ ..
:5 4
o +_+_;-;--r-r-+-+~~~r_r_r_r_r_+_+_+_4
1975 77 79 81 83 85 87 89 91 93
(a) Year

24 ,-------------------------------------,
~ 22
~ 20
~ 18
e 16

c 14
-_/' ---------"""' -_--

:5 4
o2 +_+_+-;--r-r-+-+~~~~r_r_r_r_r_+_+_4
1975 77 79 81 83 85 87 89 91 93

Source: CANS 1M database.

The ratcheting up of unemployment after each recession has given rise

to the concern of 'jobless growth'; that is, the growth in output is increas-
ingly associated with less growth in employment. Whether the sustained
high levels of unemployment are due to less job creation associated with the
renewed growth, or simply slower growth in output, is empirically unknown
in Canada. Ironically, high productivity growth, which is desired for long-
run competitiveness and real income growth, also means less employment
growth associated with output growth. The Canadian experience contrasts
with that of the USA, where unemployment rates are now typically 3 to
4 percentage points below Canadian rates (Card and Riddell, 1993).
Figure 5.5 documents the stagnation of real wages in manufacturing and
the decline of the real minimum wage since 1977. 1 The wage and employ-
ment impacts of trade liberalization are difficult to disentangle from the
Michael Baker, Morley Gunderson and Susan Horton 157
Table 5.1 Canada: labour market characteristics of the population, 1980-90

Males Females

Year 1980 1985 1990 1980 1985 1990

Sample size 63411 66112 65978 63600 66848 66779

Survey week:
Employed % 0.82 0.79 0.78 0.55 0.58 0.64
Unemployed % 0.06 0.09 0.09 0.05 0.07 0.07
Not in labour % 0.13 0.13 0.14 0.40 0.35 0.29
Worked reference year % 0.81 0.79 0.80 0.49 0.63 0.69
UI income:
Received % 0.11 0.14 0.16 0.08 0.12 0.14
A verage benefit $3,107 $3,692 $3,608 $2,502 $2,842 $2,836
'Transfer' income
Received % 0.07 0.08 0.08 0.06 0.08 0.08
Average Benefit $4,040 $4,096 $4,275 $4,218 $3,931 $4,164
Worked reference year: 0.85 0.83 0.84 0.63 0.65 0.72
non agriculture
Self-employed % 0.09 0.\0 0.11 0.Q3 0.04 0.05
Paid workers % 0.91 0.90 0.89 0.96 0.95 0.95
Full year full-time 0.54 0.50 0.52 0.29 0.30 0.36
employment %

Notes: All statistics for population ages 16-64. Observations for Prince Edward
Island and the Yukon and Northwest Territories have been excluded. All currency
in 1985 dollars. Full year full-time workers work 40 weeks or more in the
reference year in (mostly) full-time non-agricultural employment at positive
Source: Canadian Censuses (1981, 1986, 1991).

myriad of other interrelated changes that occurred at the same time. This
is especially the case because much of the dynamic restructuring that
occurred was designed to enable firms to be more competitive in the
global economy and to attract capital. The same applies to many of the
macroeconomic and other policy initiatives pursued by governments.
In part reflecting this difficulty, there have been few studies that have
attempted to directly measure the wage and employment impact of trade
liberalization like the CAFTA and NAFTA. The limited evidence2 avail-
able suggests that the short-run wage and employment impacts on Canada
are likely to be small. In the longer run, given the higher labour cost in
Canada, there should be a shift to higher value-added production. Labour
market flexibility will obviously be important in that transition.
158 Canada
Figure 5.5 Canada: average real manufacturing wage and minimum wage,

12 ~-----------------------------.
~---- _ _- ______
~ 9
--- Real
~ 8
manufacturing wage
"" 7 - - - Real
5 minimum wage
1975 77 79 81 83 85 87 89 91 93
Note: The average hourly manufacturing wage includes overtime; the minimum
wage is an employment weighted average of provincial minimum wages each year
deflated by the CPI.
Sources: Manufacturing age; Statistics Canada; minimum wage: CCH Canadian
Ltd (1975-93), Labour Canada (1976-87 and 1989-93) and CANSIM database.

International comparisons of productivity are notoriously difficult

because they differ by level and by change, by the measure of productiv-
ity, by the time periods that are chosen, and by sector (especially manu-
facturing and non-manufacturing). Similarly, unit labour cost (wages plus
fringe benefits, adjusted for productivity and the exchange rate) are sensi-
tive to measurement issues associated with each of these components.
Canada's productivity performance in recent years does however appear to
have been rather unimpressive (refer back to Figure 1.3 in Chapter I, p. 32).


In industrialized countries like Canada, some key issues (especially of

policy concern) pertaining to wage structures and mobility include: wage
polarization and returns to education; public-private sector wage differen-
tials and the issue of public sector rents; male-female wage differentials
and the issue of gender discrimination; immigrant-non-immigrant wage
differentials and the issue of the assimilation of immigrants; regional wage
differences and the issue of mobility and wage convergence. Each of these
will be dealt with in turn, usually with a brief description of the underlying
causal forces and mechanisms at work, and then a brief discussion of the
empirical evidence. Since there is usually extensive empirical research on
each of these areas, reference will be made only to the main generaliza-
tions that emerge from the analyses, as well as to illustrative empirical
studies that also review the literature.
Michael Baker, Morley Gunderson and Susan Horton 159
5.3.1 Wage Polarization

As indicated previously, the interrelated forces of industrial restructuring,

trade liberalization and technological change have led to a shift from middle
income, blue collar manufacturing jobs towards service jobs at the pol~
end of the wage distribution. Import competition from low wage countries
has most adversely affected workers at the middle and lower middle part of
the wage distribution, in part because these are the 'tradable sectors'. If dis-
placed from their jobs, such workers tend to move down the occupational
spectrum, putting pressure on the lower wage jobs. Furthermore, the tech-
nological change that has been occurring (e.g. computerization) tends to be
skill-biased, putting a premium on the skills necessary to develop, produce,
market and manage the new technology. A related manifestation of the
wage polarization is higher returns to education (see Table 5.2).
Table 5.3 documents the decline in employment of both men and
women in manufacturing and the increase in the service sector, particu-
larly business services and miscellaneous services. For women the effect

Table 5.2 Canada: changes in the distribution of males' log weekly wages,

1980 1985 1990

Sample size 34096 33206 34330

Mean log weekly wage 6.248 6.219 6.208
University/High School graduate log 0.400 0.456 0.442
90/10 percentile log wage differential 1.146 1.267 1.281
75125 percentile log wage differential 0.550 0.632 0.637
75125 percentile log wage differential
1-10 years experience
High school graduates 0.558 0.654 0.655
University graduates 0.442 0.511 0.497
21-30 years experience
High school graduates 0.489 0.506 0.525
University graduates 0.486 0.445 0.493
Regression residuals
Standard deviation 0.555 0.592 0.670
90/1 0 differential 0.968 1.061 1.103
75/25 differential 0.467 0.501 0.518

Note: All calculations are for full year full-time non-agricultural workers (see
notes to Table 5.1). Regression residuals are from regressions of the log weekly
wage on controls for four education groups, seven experience groups and
province. High school graduates have no post-secondary study.
Source: Canadian Censuses (1981, 1986, 1990).
160 Canada

Table 5.3 Canada: full year full-time non-agricultural employment and weekly
earnings, by industry, 1980-90

Employment Average
weekly earnings ($)

1980 1985 1990 1980 1985 1990

Primary 0.04 0.04 0.D3 721 741 736
Manufacturing 0.28 0.27 0.23 572 584 583
Construction 0.07 0.06 0.07 604 536 562
Transportation 0.Q7 0.07 0.07 589 579 585
Communications and 0.05 0.05 0.05 665 700 686
Wholesale trade 0.06 0.06 0.06 563 542 573
Retail trade 0.09 0.09 0.09 481 457 455
FIRE 0.04 0.04 0.05 715 709 696
Education 0.06 0.06 0.06 694 630 645
Health 0.03 0.D3 0.03 515 702 715
Business services 0.03 0.04 0.05 644 542 570
Accommodation, food 0.02 0.03 0.03 375 348 338
and beverage
Miscellaneous services 0.03 0.03 0.04 512 460 477
Government services 0.11 0.10 0.11 638 637 656
Unspecified 0.02 0.02 0.03 480 459 500

Primary om 0.01 0.01 449 461 512
Manufacturing 0.16 0.15 0.12 334 344 371
Construction 0.01 0.01 0.01 376 334 360
Transportation 0.02 0.D3 0.03 394 394 401
Communications and utilities 0.04 0.04 0.03 431 488 482
Wholesale trade 0.04 0.04 0.03 156 348 379
Retail trade 0.10 0.09 0.10 302 291 305
FIRE 0.11 0.11 0.10 371 387 417
Education 0.11 0.10 0.11 519 390 426
Health 0.15 0.15 0.16 413 530 537
Business services 0.04 0.05 0.06 376 419 431
Accommodation, food and 0.05 0.05 0.05 245 238 244
Miscellaneous services 0.04 0.05 0.05 280 282 291
Government services 0.08 0.09 0.09 426 453 486
Unspecified 0.02 0.03 0.D3 351 323 345

Note: See notes to Table 5.1. FIRE is finance, insurance and real estate.
Employment data are the fraction in each industry.
Source: Canadian Censuses (1981, 1986, 1991).
Michael Baker, Morley Gunderson and Susan Horton 161
on earnings is mixed, since while average compensation is higher in busi-
ness services than manufacturing, it is lower in miscellaneous services.
For men, however, the effect is a decline in earnings, since in 1985 and
1990 both service sectors had lower average compensation than manufac-
turing. Table 5.4 provides clearer evidence of a decline in earnings for
both sexes, since earnings in both business and miscel1aneous services are
lower than in manufacturing, after controlling for the effect of observable
individual characteristics of workers. Therefore the trend out of manufac-
turing into service industries might be interpreted as 'bad' jobs replacing
'good' ones. The simulations of average log weekly earnings in Table 5.5
using historical measures of the industrial co~position of employment
provide some evidence of this trend over the 1980s.
The empirical evidence indicates that wage polarization has increased in
Canada (Table 5.2), but that the increase has not been as great as that
which occurred in the USA.3 The smal1er increase in polarization in
Canada probably reflects such factors as the greater increase in the supply
of higher educated persons keeping returns to education and pay at the
higher end of the occupational wage structure from rising rapidly
(Freeman and Needles, 1993) as wel1 as the greater degree of unionization
in Canada and the fact that unions tend to compress wage structures
(Lemieux, 1993). Interestingly, despite this difference, Kuhn and Robb
(1995) report that trends in weeks worked by individuals at different wage
declies are similar in the two countries: decreases in weeks worked and in-
creases in unemployment have been concentrated among the less skilled.

5.3.2 Public-Private Sector Wage Differentials

Empirical evidence (see Gunderson and Riddell, 1991 and Table 5.6) on
public-private compensation differences in Canada suggests the following
generalizations: (1) Public sector wage rents tend to prevail, being in the
neighbourhood of 10-13 per cent above private sector pay. (2) The premi-
ums are highest for women and low wage workers, highlighting a basic
policy dilemma in that curbing such wages will have a disproportionate
adverse effect on workers who are already relatively disadvantaged.
(3) Fringe benefit advantages are likely even greater, suggesting that the
total compensation premium is slightly higher than the wage premium.
(4) The pure premium is decreasing somewhat (for males) in recent years
in response to political pressure for public sector restraint and retrench-
ment. (5) There is often considerable volatility in public sector settle-
ments, with unusual large settlements in some years which tend to
162 Canada
Table 5.4 Canada: % deviation of the average weekly earnings in each industry
from the average for manufacturing (log weekly earnings
differential): full year full-time workers,
Canada 1980-90

Males Females

1980 1985 1990 1980 1985 1990

Primary 0.183 0.188 0.257 0.156 0.191 0.234

(0.018) (0.020) (0.024) (0.041) (0.046) (0.049)
Constmction 0.029 -0.072 -0.030 -0.096 -0.114 -0.093
(0.014) (0.016) (0.018) (0.036) (0.039) (0.038)
Transportation 0.031 0.007 0.046 0.066 0.083 0.009
(0.013) (0.015) (0.017) (0.027) (0.029) (0.031)
Communications and 0.101 0.159 0.137 0.112 0.264 0.223
utilities (0.018) (0.015) (0.018) (0.023) (0.025) (0.027)
Wholesale trade 0.195 -0.147 -0.043 0.159 -0.045 -0.036
(0.021) (0.014) (0.016) (0.052) (0.025) (0.026)
Retail trade -0.081 -0.210 -0.188 -0.090 -0.228 -0.220
(0.013) (0.013) (0.014) (0.021) (0.020) (0.020)
FIRE -0.164 -0.057 -0.025 -0.215 0.031 0.022
(0.012) (0.017) (0.019) (0.016) (0.019) (0.020)
Education -0.147 -0.069 -0.084 -0.203 0.080 0.076
(0.038) (0.020) (0.023) (0.053) (0.024) (0.024)
Health -0.068 -0.300 -0.229 -0.074 -0.041 -0.077
(0.017) (0.023) (0.025) (0.020) (0.020) (0.021)
Business Services -0.017 -0.019 -0.053 -0.037 -0.007 0.019
(0.016) (0.018) (0.018) (0.015) (0.023) (0.023)
Accommodation, food -0.447 -0.383 -0.379 -0.373 -0.257 -0.316
and beverage (0.044) (0.023) (0.024) (0.031) (0.026) (0.026)
Miscellaneous services -0.352 -0.288 -0.265 -0.262 -0.246 -0.246
(0.022) (0.019) (0.020) (0.022) (0.023) (0.025)
Government services -0.212 0.023 0.D71 -0.054 -0.054 0.170
(0.014) (0.013) (0.014) (0.014) (0.020) (0.020)
Unspecificd -0.138 -0.232 -0.132 -0.154 -0.215 -0.119
(0.024) (0.034) (0.029) (0.030) (0.044) (0.036)
F-test for stability F(28,101500) = 24.7472 F(28.63028) = 13.0173
across years

Note: See notes to Table 5.1. Differentials from regressions of log weekly wages
on education, experience (quadratic) and controls for marital status, urban area,
occupation, province and industry. The excluded industry is manufacturing.
Standard errors are in brackets.
Source: Canadian Censuses (1981, 1986, 1991).

dissipate over time. (6) The union wage premium itself is smaller in the
public sector compared to the private sector but proportionately more
workers in the public sector are unionized and therefore receive that
premium. Overall, unionization contributes to the public sector rent, but
Michael Baker, Morley Gunderson and Susan Horton 163
Table 5.5 Canada: simulations of changes in average log weekly earnings
related to changes in the distribution of employment
across industries, 1980-90

Males Females

1980 average log weekly earnings 6.2478 5.8008

1985 average log weekly earnings
Using 1985 industrial composition 6.2194 5.7997
Using 1980 industrial composition 6.2386 5.8451
1990 average log weekly earnings
Using 1990 industrial composition 6.2082 5.8269
Using 1985 industrial composition 6.2157 5.8297
Using 1980 industrial composition 6.2322 5.8840

Note: Results are for full year full-time workers. Predicted weekly earnings in
each year are the product of the current year's parameters and the current year's
mean values of the regressors, except for industrial composition where noted. The
values, therefore, give the predicted log weekly earnings that would have prevailed
had the industrial composition of the workforce stayed the same as in the specified
year. The regressions are described in the notes to Table 5.5. The standard errors for
the predicted log weekly wages are uniformly small (0.006 or less).
SOUfce: Canadian Censuses (1981, 1986, 1991).

Table 5.6 Canada: employment and weekly earnings and the private and public
sectors, 1985-90

Males Females

1985 1990 1985 1990

Sample size 15747 18638 9915 12348

Employment proportion:
Pri vate sector 0.79 0.81 0.76 0.78
Public sector 0.21 0.19 0.24 0.22
Weekly earnings ($):
Pri vate sector 534 562 331 357
Public sector 641 654 455 483
Log earnings
differential 0.132 0.096 0.118 0.129
(0.016) (0.017) (0.019) (0.018)
F-test for stability across years F(I ,34301) =2.36 F(I,22179) =0.15

Note: Log earnings differentials are from regressions of weekly wages on four
dummy variables for education, age (quadratic) and controls for marital status,
urban area, occupation, province, industry and sector. Note the definition of
education and the occupational and industrial classifications differ from those
available in the Canadian censuses.
Soufce: Survey of Consumer Finances (1986, 1991) Statistics Canada (1986, 1991).
164 Canada
through a higher degree of unionization receiving a smaller union wage

5.3.3 Male-Female Wage Differentials

Male-female wage differentials are as common in Canada as they are in

other countries. Empirical evidence on male-female wage differences in
Canada yields the folIowing generalizations. 4 (see Table 5.7): (1) OveralI,
women earn approximately 68 per cent (1990) of what men earn, when
fulI year, fulI-time workers are compared. (2) The earnings gap is declin-
ing slowly over time. (3) The gap is reduced after controlling for dif-
ferences in human capital and other determinants of earnings, but a
discriminatory gap still remains. Furthermore, many of the differences in
human capital and other determinants of wages may themselves reflect
discrimination. (4) Differences in the occupational and industrial distribu-
tion between men and women is a significant source of the pay gap. For
example, in 1990 controlIing for occupation and industry increase the
female-male earnings ratio from 0.69 to 0.76. (5) Factors arising from
outside of the labour market (e.g. household responsibilities, educational
decisions) have an important influence on the pay gap.

Table 5.7 Canada: male-female log weekly earnings differential. full year
full-time workers, 1980-90

Raw Specification 1 Specification 2

6.xs 6.f3s 6.Xs 6.f3s

1980 0.447 0.031 0.416 0.149 0.298

(0.005) (0.001) (0.005) (0.005) (0.007)
Female/male earnings 0.64 0.66 0.74
1985 0.420 0.028 0.392 0.137 0.283
(0.005) (0.001) (0.005) (0.005) (0.007)
Female/male earnings 0.66 0.68 0.75
1990 0.381 0.015 0.366 0.104 0.277
(0.006) (0.000) (0.006) (0.005) (0.007)
Female/male earnings 0.68 0.69 0.76

Note: Specification I only includes controls for education and experience

(quadratic). Specification 2 includes the full set of regressors listed in the notes to
Table 5.5. The female-male earnings ratio is calculated as exp(-diff). The
decomposition follows the method suggested by Oaxaca (1973).
Source: Canadian Censuses (1981. 1986. 1991).
Michael Baker, Morley Gunderson and Susan Horton t 65
5.3.4 Immigrant Wages and the Assimilation of Immigrants

Immigration has been an important source of population growth for

Canada, as well as for filling critical skill shortages. In fact, the readily
available supply of skilled immigrants has been mentioned as a possible
reason for Canada not having a more developed indigenous training infra-
structure. Immigration policy in Canada has generally been characterized
by an emphasis on skills and labour market criteria in determining eligibil-
ity. Immigration flows have been curtailed when unemployment was high
and encouraged when additional labour was needed, especially to fill
critical skills shortages.
In the 1970s and 1980s there was a re-orientation in immigration policy
away from skills and labour market needs, and towards more emphasis on
family reunification, human rights and humanitarian issues, especially for
refugees. There was also a shift in the country-of-origin away from devel-
oped countries (notably Europe and the USA) to developing countries
(especially Asia, Latin America and Africa). In the late 1960s, for
example, approximately 80 per cent of immigrants were from developed
countries and 20 per cent from developing countries. By the mid-1980s
that distribution was almost reversed, with 33 per cent from developed
countries and 67 per cent from developing countries.
Empirical evidence from Canada5 suggests the following generaliza-
tions on the earnings of immigrants: (I) When they first enter, immigrants
receive wages that are lower than otherwise comparable workers born in
Canada. (2) Over time, however, the earnings growth of immigrants is
more rapid so that within 15-20 years, their earnings had caught up to that
of otherwise similar Canadian-born workers. (3) For more recent cohorts
of immigrants, however, this assimilation into the labour market does not
appear to be occurring, although it is difficult to project their expected ex-
perience with a high degree of certainty. (4) The reasons for this recent
lack of assimilation have not been precisely established. However, it prob-
ably reflects a combination of factors: the shift away from skills orienta-
tion in immigration policy; increased discrimination as the composition of
immigrants changed towards more visible minorities; reduced absorptive
capacity of the labour market especially reflecting the legacy of prolonged
recessions; and the increased wage polarization which keeps many immi-
grants trapped in the low wage, entry jobs without being able to move up
the ladder into the middle wage jobs, many of which have disappeared.
This decline in the economic fortunes of recent immigrants is also evident
in the US data (e.g. Borjas, 1985).
166 Canada

5.3.5 Regional Wage Differentials and Internal Migration

Regional wage differentials are reasonably pronounced in Canada, given

the large geographic distances (Table 5.8 and 5.9). Furthermore, internal
migration is generally from low wage, high unemployment regions to high
wage, low unemployment regions. This implies migration from rural areas
to cities, and from poorer regions like the Atlantic provinces to wealthier
provinces like Ontario and British Columbia. The migration also reduces
the wage differential by reducing the supply of labour in the low wage
region and increasing it in the high wage regions (Vanderkamp, 1986).
The regression results in Table 5.10 indicate that interprovincial migra-
tion does respond to market forces (i.e. from declining to expanding
regions). Nonetheless, it may be significantly dampened by income main-
tenance programmes which are fairly generous in Canada. Unemployment

Table 5.8 Canada: full year full-time non-agricultural employment and weekly
earnings, by province, 198{}-90

Employment A verage weekly earnings

1980 1985 1990 1980 1985 1990

Newfoundland 0.02 0.01 0.01 $540 $535 $543
Nova Scotia 0.03 0.03 0.03 507 512 518
New Brunswick 0.02 0.02 0.02 517 530 528
Quebec 0.26 0.25 0.26 564 553 554
Ontario 0.39 0.41 0.40 593 602 620
Manitoba 0.04 0.04 0.04 540 547 530
Saskatchewan 0.03 0.03 0.03 569 547 528
Alberta 0.10 0.09 0.10 654 635 604
British Columbia 0.12 0.11 0.12 657 617 621
Newfoundland 0.01 0.02 0.01 232 344 369
Nova Scotia 0.03 0.03 0.03 333 363 352
New Brunswick 0.02 0.02 0.02 313 355 369
Quebec 0.26 0.25 0.25 383 371 388
Ontario 0.40 0.42 0.41 373 390 433
Manitoba 0.04 0.04 0.04 338 363 365
Saskatchewan 0.03 0.03 0.03 369 376 359
Alberta 0.10 0.10 0.09 387 409 393
British Columbia 0.11 0.10 0.11 412 405 396

Note: Employment data are the fraction in each province.

Source: Canadian Censuses (1981, 1986, 1991).
Michael Baker, Morley Gunderson and Susan Horton 167
Table 5.9 Canada: % deviation of the average weekly earnings in each province
from the average for Ontario (log weekly earnings
differential), full year full-time workers,

Males Females

1980 1985 1990 1980 1985 1990

Newfoundland -0.061 -0.082 -D.099 -0.046 -D.037 -D.046

(0.024) (0.027) (0.030) (0.033) (0.034) (0.036)
Nova Scotia -D.113 -0.119 -D. 149 -0.095 -D.031 -D. 164
(0.017) (0.019) (0.021) (0.024) (0.025) (0.025)
New Brunswick -D.082 -0.076 -D.095 -0.063 -0.021 -D.018
(0.019) (0.021) (0.024) (0.029) (0.028) (0.030)
Quebec --0.003 -0.054 --0.085 0.050 -0.017 --0.076
(0.007) (0.008) (0.009) (0.010) (0.010) (0.011)
Manitoba --0.066 -0.084 --0.109 --0.031 -0.059 --0.123
(0.015) (0.016) (0.019) (0.020) (0.021) (0.022)
Saskatchewan -0.012 --0.070 --0.146 0.047 -0.015 --0. 151
(0.017) (0.018) (0.022) (0.023) (0.024) (0.025)
Alberta 0.095 0.024 --0.053 -0.050 0.033 --0.096
(0.011) (0.011) (0.013) (0.014) (0.015) (0.015)
British Columbia 0.121 0.030 0.016 0.120 0.054 --0.056
(0.010) (0.011) (0.011) (0.013) (0.014) (0.014)
F-test for stability F(I 6, 101500) =9.2116 F( 16,63028) = 11.3449
across years

Note: The regression specification is described in the notes to Table 5.5. The
excluded province is Ontario.
Source: Canadian Censuses (1981,1986,1991).

insurance, for example, has regionally extended benefits, providing

benefits for a longer period of time in regions of high unemployment. This
encouraged people to stay in those regions, especially because they also
tended to be low cost areas. Regional development programmes are also
common, whereby depressed regions are given special assistance. This
differs from the USA, where regional wage differentials have declined
somewhat over time.

5.3.6 Employment Flexibility

Another dimension of labour market flexibility is the adjustment of

employment across industries and occupations in response to market forces.
One characteristic of a 'successful' market is that this adjustment is accom-
plished without intervening periods of excessively high unemployment. In
Table 5.10 Canada: interprovincial mobility, 1975-93

Mean net Regression results 0\

out Dependent Variable: Mean Net Out
migration Migration Population
(1) (2) (3) (4)

Newfoundland 0.0048 0.0052 -D.026

(0.0017) (0.009)
Nova Scotia -D.0002 0.00002 -D.026
(0.0017) (0.009)
New Brunswick 0.0004 0.0008 -D.026
(0.0017) (0.009)
Quebec 0.0026 0.0030 -D.Oll
(0.0017) (0.004)
Ontario -D.0004
Manitoba 0.0052 0.0056 -D.019
(0.0017) (0.009)
Saskatchewan 0.0047 0.0051 -D.013
(0.0017) (0.009)
Alberta -D. 0045 -0.0041 -D.017
(0.0017) (0.007)
British Columbia -D. 0060 -0.0056 -D.015
(0.0017) (0.007)
Unemployment Rate 0.029 0.0103
(0.015) (0.026)
Ln real manufacturing wage -0.028 -D.038
(0.004) (0.013)
Real GDP ($m) 0.444 -9.660
(0.820) (4.870)

Note: Column (1) is average annual net outmigration as a percentage of population for the period 1975-93. All regressions also
include a quadratic trend.
Source: CANSIM database and Statistics Canada.
Michael Baker, Morley Gunderson and Susan Horton 169
Figures 5.6 and 5.7 we examine the industrial and occupational mobility
of labour in Canada in the 1970s and 1980s. The measure of mobility is
the Index of Structural Change (ISC) used in AJlen and Freeman's chapter
8 in this volume, and the figures are comparable to those in the US study.
At I year intervals, the ISC for industries is slightly larger in Canada than
in the USA. For the period 1980-92 the mean for Canada is 1.08 com-
pared to 0.87 for the USA. It is difficult to determine whether this indi-
cates that the Canadian market is more flexible, however, since Canada

Figure 5.6 Canada: Index of Structural Change (lSC) for industries, 1971-93
and 1975-93

3.5 ,,
,, .. - ... I
--- I year intervals
3 \ - .. I

- - - 5 year intervals
o ~-+~~~~+-~-r+-~-r+-~-r+-~
1971 73 75 77 79 81 83 85 87 89 91 93
Note: The ISC is one-half the sum of the absolute values of the 1 or 5 year differ-
ences in the employment shares by industry multiplied by 100; the employment
data are for nine one-digit industries.
Source: CANSIM database.

Figure 5.7 Canada: Index of Structural Change (ISC) for occupations, 1977-93
and 1981-93

6 .---------------------------------~
3.5 --- I year intervals
\ --.
2 - - - 5 year intervals
o +_4_~~_+_+_+_+~--~~+_+_+_4_~~

1977 79 81 83 85 87 89 91 93
Note: The ISC is one-half the sum of the absolute values of the I or 5 year differ-
ences in the employment shares by occupation multiplied by 100; the employment
data are for nine one-digit occupations.
Source: CANSIM database.
170 Canada
has a more open economy and therefore is likely to experience larger
shocks than the USA. Likewise, while the ISC for occupations is again
higher in Canada (1 year intervals 1980-93 means: Canada 1.19, USA
0.75) this may be due to the fact that greater adjustment was required.



As with most countries, labour markets in Canada are strongly influenced

by institutional constraints. The most important of these pertain to unions,
legislation, and government policies and programmes.

5.4.1 Unions

Collective bargaining in Canada is decentralized with most negotiations

occurring at the enterprise level, usually between a single employer and
one or a few unions. When more than one union is involved they often
negotiate separately. More centralized agreements at the level of the
industry, province or national level are not common (Anderson, 1989).
There is also little corporatist bargaining at the political level between
unions and governments over social programmes or other elements of the
'social wage'. Unions in Canada, however, often officially support the
left-of-centre, social democratic party (New Democratic Party) that is
frequently in power at the provincial level, and can be influential at the
federal level.
Slightly over one-third of the/Canadian workforce is unionized, with
unionization being highest in the public sector at approximately three-
quarters of that workforce. Perhaps the most notable development in this
area is with respect to divergence in rates of unionization between Canada
and the United States (Riddell, 1993). In the mid-1960s those rates were
identical in the two countries at about 30 per cent. Since then, the rates in
the USA have declined steadily until they are currently at about 16 per
cent. In Canada, they have remained fairly constant at slightly over twice
that rate. While there is considerable debate over the reasons for that
divergence, there is general agreement that much of it can be attributed to
a legislative environment in Canada that is much more conductive to the
formation and retention of unions. Elements of that environment that
prevail in many Canadian jurisdictions include: the ability to be certified
through a petition of signatures of those who want to unionize as opposed
to requiring a vote; the ability of labour boards to impose contracts on
Michael Baker, Morley Gunderson and Susan Horton 171
employers who engage in unfair labour practices during organizing
campaigns; the general enforcement of unfair labour practices; restrictions
on the use of replacement workers during a strike; and legislation estab-
lishing collective bargaining in many elements of the public sector.
Of the Canadian workforce that is unionized, approximately one-third
are members of international unions based in the USA, down substantially
from almost three-quarters in the 1950s. For those who are still members
of international unions, there is generally greater local autonomy. There
have also been some important splits from the US unions, most notably
the separation of the Canadian Auto Workers from the US Auto Workers
in 1985. Whether this trend away from international unions and towards
Canadian-based unions will change as the product market in which unions
operate becomes more international is an open and interesting question.
Previous studies6 suggest that unions have generally raised the wages of
their members, probably by between 10 and 25 per cent. They have also
lowered the wage differential between skilled and less skilled workers and
hence have reduced wage inequality. Their impact on productivity is
inconclusive (Maki, 1983), although they probably restrict the flexibility
in how the firm utilizes its workforce and they appear to reduce the
profitability of firms (Maki and Merideth, 1986).
Historically, about 15 per cent of collective agreements were signed
after a strike, although that strike rate has been declining substantially in
recent years. By international standards, Canada has a high level of strike
activity, in part because it tends to have strikes of fairly long duration. It is
another open and interesting question as to whether strike activity will
continue to decline under pressure of greater international competition
when output from striking organizations can more easily be replaced.

5.4.2 Legislation

Most labour legislation in Canada is under provincial jurisdiction, with

only about 10 per cent of the workforce under federal jurisdiction, mainly
in areas like the federal government, transportation, communication and
banking. While there are a variety of ways of categorizing the legislation
that regulates the labour market, they are grouped here into four broad
areas: labour relations legislation that governs collective bargaining; em-
ployment standards that tend to set minimum standards; anti-discrimination
and human rights legislation; and workers' compensation and occupational
health and safety laws.
Labour relations or collective bargaining law establishes the regula-
tions that govern the formation of unions and the subsequent conduct of
172 Canada
collective bargaining, including dispute settlement procedures. These reg-
ulations are administered and enforced by quasi-judicial administrative
labour relations tribunals or boards that operate less legalistically than do
courts, but that have the legal authority to enforce the law. They are
subject to 'judicial review' by the courts, but the courts are generally loath
to overturn board decisions.
The labour relations laws establish, for example, the requirements for a
union to be certified as the exclusive bargaining agent for a group of
employees. They ensure that employers do not commit 'unfair labour
practices' especially when unions are organizing. The boards determine
the appropriate bargaining units (e.g.craft units, professional units, indus-
trial units) based on the 'community of interest' of the employees. They
establish limits on the collective agreement (e.g. maximum length usually
3 years). They specify union security provisions that unions can bargain
for, and they often require certain provisions (e.g.the dues checkoff
whereby employers are required to deduct union dues from the employees
and pass them to the union).
In Canada, strikes for purposes of gaining recognition of the union are
not allowed, nor are strikes during the term of the collective agreement,
although such 'wildcat strikes' sometimes do occur. As a quid pro quo for
prohibiting strikes during the term of the col1ective agreement, a griev-
ance procedure is required to handle disputes over the interpretation of
provisions in the collective agreement. When the contract expires, strikes
are allowed, albeit certain procedural steps are often required, depending
upon the jurisdiction: the assistance of a conciliation officer to help the
parties reach agreement; a vote of the membership on the employer's last
offer; and a 'cooling-off' period. In a few jurisdictions, management is
not allowed to use replacement workers to replace striking employees.
Separate legislation usually exists for workers in different elements of
the public sector - health, education, police, firefighters, and the civil
service. They often do not have the right to strike, in which case binding
wage arbitration is utilized. If they do have the right to strike, then certain
groups of employees are designated as essential, and not allowed to strike.
All Canadian jurisdictions also have employment or labour standards
legislation that usually sets minimum requirements in various areas.
Minimum wages were 37 per cent of the manufacturing wage in 1993, a
ratio which has been falling in recent years (the minimum wage ranged
from 34 to 49 per cent of the manufacturing wage over the period
Termination provisions also exist, usually in the form of advance notice
requirements for layoffs. There is wide variation in such requirements
Michael Baker, Morley Gunderson and Susan Horton 173
across the different Canadian jurisdictions, although they typically average
about one week of notice for each year of service, with maximums of eight
weeks of notice. Most jurisdictions also have much longer notice periods
(e.g. 8-16 weeks) for group terminations (usually of 50 or more employ-
ees, but sometimes of 10 or more). In practice, many employers simply
pay severance pay for the notice period. Notice is not required, of course,
if the termination inyolved firing for 'just cause'.
These minimal employment standards are usually exceeded in practice
in the union sector, and in most organizations, especially larger ones. They
are more often binding constraints for smaller employers albeit the law is
sometimes difficult to enforce in such environments. The same applies to
particular groups: domestic workers; farm workers; and homeworkers,
often in the garment trades, who sub-contract to do piece work in their
home. In general, however, employers take the legal requirements
seriously and enforcement is quite high, at least by many international
All Canadian jurisdictions also have some form of anti-discrimination
and human rights laws. They generally prohibit discrimination on various
grounds: sex, race, age, religion, national origin, marital status, disability,
and sexual preference. The discrimination pertains to all phases of the
employment relationship: recruiting, hiring, training, compensation, pro-
motions and terminations. Separate legislation also generally exists pro-
hibiting wage discrimination against women. When the laws were first
passed, usually in the 1960s, they tended to require equal pay for equal or
substantially similar work within the same establishment. In more recent
years, many jurisdictions broadened the scope of the legislation by requir-
ing equal pay for work of equal value. 7 (The term 'pay equity' tends to be
used in Canada, and 'comparable worth' in the USA.) The federal juris-
diction and the province of Ontario also have 'employment equity' legisla-
tion (affirmative action is the term used in the USA). The target groups in
Canada are: women; visible (i.e.racial) minorities; disabled persons; and
Aboriginal persons.
A few jurisdictions have also banned mandatory retirement policies as a
personnel policy or part of a collective agreement, essentially on the
grounds that it constitutes age discrimination. A more recent area of leg-
islative initiatives pertains to requirements on employers to 'reasonably
accommodate' the needs of disabled workers. In general, employers must
accommodate those needs by altering the workplace or the nature of the
job unless it imposes 'undue hardship'.
All Canadian jurisdictions have some form of occupational health and
safety legislation, setting detailed safety standards, accident prevention
174 Canada
procedures, exposure levels to hazards and toxic substances, and health
and safety labelling requirements. Enforcement is mainly through
inspections, with the inspector usually trying to mediate the problems.
Ultimately, they can order that the unsafe work not be performed, with
employers having the right to appeal to a tribunal. Criminal prosecutions
are possible but rare.

5.4.3 Implications of Legislation for Flexibility

Labour legislation can have opposing effects on flexibility and adapt-

ability in the labour market. On the one hand, it can decrease flexibility
by placing restrictions on how employers utilize their workforce
(e.g.hours of work and overtime regulations). It can also raise costs and
hence jeopardize competitiveness especially against countries where
labour costs are already low and labour laws are non-existent or not en-
forced. In some instances, the effects may be subtle and unintended,
such as when termination restrictions become expected quasi-fixed costs
at the hiring stage and hence encourage employers to work their existing
workforce long hours (to amortize those quasi-fixed costs) rather than
hire new recruits.
On the other hand, labour legislation can enhance flexibility and under
some circumstances it may even reduce costs. Labour relations legislation
can ensure the orderly and peaceful conduct of collective bargaining.
Legislation that provides a reasonable safety net may reduce worker
resistance to otherwise efficient changes like trade liberalization and tech-
nological change. Legislation that requires advance notice for layoffs may
enable the workforce to engage in early job search. Workers' compen-
sation legislation saves on expensive litigation costs that would otherwise
occur through the tort liability system since workers give up their right to
sue their employer in return for the 'no-fault' insurance aspect of workers'
compensation for injured workers. Occupational health and safety legisla-
tion can save on costly industrial accidents and diseases.
The net effect of legislation on flexibility and cost is therefore ulti-
mately an empirical proposition. While the positive aspects may offset
some of the negative aspects on flexibility and costs, it is unlikely they
would offset them fully, otherwise employers would not resist such ini-
tiatives so strongly. Probably the most reasonable generalization that can
be made is that, while there are some offsets, the regulations likely reduce
flexibility and increase costs. This must be balanced against their broader
social and equity objectives.
Michael Baker, Morley Gunderson and Susan Horton 175
5.4.4 Government Adjustment Policies and Programmes

Governments in Canada also have a variety of labour market adjustment

policies and programmes. This section outlines the unemployment insur-
ance scheme, the public employment exchanges which provide labour
market information, and some special adjustment assistance programmes.
In the next section 9f the chapter on skills and education, the adjustment
programmes that have a larger training component are outlined.
Unemployment insurance (VI) is the responsibility of the federal
government. It is financed by a payro\1 tax with employer and employee
contributions, the employer being slightly higher than the employee con-
tributions. By international standards, Canada's VI system is considered to
be fairly generous. In general, workers are eligible after between lO and
20 weeks of work (depending on economic conditions in the region). The
payments involve a replacement rate of 57 per cent of the previous earn-
ings in the job prior to being unemployed, up to a certain ceiling. These
can be col1ected for up to 50 weeks in regions of high unemployment and
for persons with a past history of continuous employment. There is also a
sma\1 worksharing component whereby agreements can be made with
firms for their whole workforce to receive unemployment insurance if they
are al1 'laid off for one day per week, as a way to avoid layoffs that would
otherwise be concentrated on a sub-set of the firm's workforce.
Women on maternity leave are also eligible for unemployment insur-
ance. Recently, there has also been some re-al1ocation ofUI funds towards
training and mobility (as part of the Labour Force Development Strategy
discussed below). By providing income maintenance during periods of
unemployment, conventional UI is genera\1y considered as slowing down
the adjustment process from declining sectors and regions and towards
expanding ones, albeit it obviously can provide the income support that
may be necessary for some groups to finance that transition.
Canada also has an extensive network of public employment exchanges
that general1y provide information on job vacancies as wel1 as available
workers. While these are important to facilitate matching vacancies and
the unemployed, they are used less frequently as a method of job search
than are methods such as direct contact with employers as wel1 as looking
at ads, mainly in newspapers. s Private employment agencies also exist,
although they tend to be used for higher level jobs. There is also some
evidence that informal methods of job search (e.g. contacting friends and
relatives and local employers) are more effective than more formal
methods like public and private employment agencies. To a certain degree
176 Canada
the public employment agencies are often regarded as a 'method of last
resort' on the part of both employers and employees, and as such they
sometimes have a negative stigma associated with their use.
A small number of special adjustment assistance programmes also exist,
although these are generally not well known and they do not constitute a
large component of government programmes to deal with labour market
adjustment. 9
In the labour area significant barriers exist to inhibit internal labour
mobility and the efficient allocation of labour, especially from declining to
expanding sectors in the past related to provincial jurisdiction over some
labour matters. Provinces often have different occupational licensing re-
quirements in the professions and trades, and they often have preferential
hiring practices, especially in the awarding of government contracts.
Declining regions can get preferential treatment in income security pro-
grammes and in regional development programmes and government
support. Education standards differ by province, as do employment
standards laws.
The federal government especially has tried to remove some of these
internal barriers to mobility and the efficient allocation of labour. As
well, there are efforts to harmonize standards and legislation, for
example in areas such as occupational health and safety. This is being
done in part to make it easier for employers who operate branches in
different jurisdictions.



There is general recognition that high wage countries like Canada will
have to compete on the basis of higher value-added production, often em-
phasizing specialized market niches and quality products. Furthermore,
human resources will be an increasingly important source of comparative
advantage, as other sources such as land, primary resources, low wage
labour and financial capital are increasingly available on a global basis.
Location advantages and technology are also becoming less important in a
world of reduced transportation and communications cost and easy tech-
nology transfer. For these various reasons, investment in human resources
takes on increased importance for competitive survival. This is true with
respect to education, government supported training, and the human
resource practices of firms at the enterprise level. 10
Michael Baker, Morley Gunderson and Susan Horton 177

5.5.1 Education

Education in Canada is under the jurisdiction of each provincial govern-

ment, with considerable control given to local school boards. As such,
there is often a lack of uniform standards and it has been difficult to link
education to national labour market needs and training (Gaskell, 1991).
On an international basis, enrolment rates and expenditures on education
are high, but there are problems in various areas: high drop-out rates;
mediocre scores in international tests in maths and science; and even basic
literacy problems (Economic Council of Canada, 1991, p. 123).
There is little direct streaming into purely academic and purely
vocational schools. This was more prominent in the 1960s, but there has
been a trend away from such direct streaming, in part because it was often
regarded as elitist. The streaming that does occur tends to be more
indirect, through specialization according to schools, programmes and
courses. Public education is common, with private schools being un-
common. The universities are also basically public institutions, with fairly
similar low tuition fees that are publicly subsidized. At the post-secondary
level there is also a Community College system that was designed to
provide more practically-oriented education, geared more to the needs of
employers. The 'institutional' component of government supported train-
ing is also often conducted through that system.
The Canadian education system is under strong pressure to change,
although there is certainly no consensus on the best direction for change.
Pressures for change include: more standardization of curriculum and
grades; upgrading in maths, sciences, and computer literacy; more empha-
sis on the practical diffusion and commercial application of basic research
knowledge; increased attention to adult education and lifelong learning;
and more emphasis on the basics to provide the foundation of general
education for subsequent lifelong learning and re-learning given constant
job change and the uncertainty of specific training needs in the future.

5.5.2 Training

Since government training is a joint federal-provincial responsibility, and

since considerable formal and informal training can go on in private indus-
try, it is extremely difficult to get a comprehensive picture of training in
Canada. One source indicates that federal training probably exceeds
provincial training by a small amount, and that government supported
training from both sources is about five times the magnitude of private
178 Canada
employer sponsored occupational training (Meltz, 1990, p. 300). This
occurs because government supported training is much longer, averaging
about 26 weeks compared to 3.5 weeks for industry training, and this more
than offsets the fact that more employees are involved in industry training
at anyone time.
On an international basis, government expenditure on training, at
0.37 per cent (i.e.about one-third of I per cent) of GOP, is higher than the
US percentage (0.07) and the UK percentage (0.16), but slightly lower
than France (0.44) and Germany (0.42) (OECD, 1995). Of those countries,
however, Canada has the highest portion of its GOP spent on unemploy-
ment insurance. With respect to private training, however, Canada ranks
lowest amongst the major industrialized nations - the USA, France,
Germany, the UK and Japan (Economic Council of Canada, 1991).
Training at the federal level is largely provided through the Canadian
Job Strategy Programme (CJS) that consolidated other programmes in
1985, and that involves other aspects of adjustment assistance in addition
to training (Employment and Immigration Canada, 1988). In 1989, under
the Labour Force Development Strategy (LFDS), the federal government
reallocated funds from the unemployment insurance system towards train-
ing and mobility under the Canadian Job Strategy Programme. I I This was
part of the policy to redirect support from passive income maintenance
programmes and towards more active adjustment assistance programmes.
Government supported training in Canada is continually being re-assessed,
and is currently under re-evaluation. Recent changes have involved the
following shifts in emphasis: away from direct government involvement
and towards decentralization with private sector employers as part of the
delivery system; away from institutional and towards on-the-job training;
and away from passive income maintenance of unemployment insurance
and towards more active adjustment assistance through training and

5.5.3 Human Resource and Workplace Practices at the Enterprise


In response to the increased competitive pressures they face in the inter-

national product market, Canadian employers have been dramatically
restructuring. Aspects of that process include: mergers and acquisitions
and consolidation of existing facilities to achieve the economies of scale
for world production; downsizing especially to save on labour cost; sub-
contracting and the formation of relationships with 'downstream' suppliers
arid 'upstream' producers; creating separate business units within the
Michael Baker, Morley Gunderson and Susan Horton 179

organization, with mandates to be profitable in order to continue their

existence; moves to a just-in-time delivery system to save on costly inven-
tories; and the formation of joint ventures and alliances with other organ-
izations, sometimes just for the life of a particular project.
All of these responses create pressures for flexibility and adaptability on
the part of the organization, and this creates pressures for flexibility and
adaptability on the part of the firm's human resource and workplace prac-
tices. These in turn have direct and indirect implications for the skill and
human resource requirements of the firm. Many of these workplace
changes have been instituted in response to the perceived success of
Japanese workplace practices in attaining flexibility and quality pro-
duction. Some of the trends observed are job enlargement and job enrich-
ment, employee involvement programmes to improve quality, more
flexible workweeks (flexitime, compressed workweeks and job-sharing),
as well as the growth of 'precarious employment' (sub-contracting, tempo-
rary-help agencies, and permanent part-time workers).
Unfortunately, systematic evidence is not available documenting the
precise extent of such changing human resource and workplace practices
in Canada. There is some evidence indicating that they are becoming more
prominent over time and that they are less common in Canada than in the
USA (Long, 1989). To a large degree this may reflect the higher degree of
unionization in Canada, and the fact that unions generally oppose many of
those flexible human resource and workplace arrangements.


Clearly the Canadian labour market is subject to a wide range of pressures

for flexibility and adaptability, and the labour market responses to those
pressures have important implications for productivity and competitive-
ness. This is true for the various dimensions analyzed in this study: macro-
economic issues; wage structures and mobility; institutions (namely
unions, laws and government programmes); and skill formation especially
pertaining to education, training and the human resource and workplace
practices of firms.
Flexibility in the labour market will be a key ingredient of future
productivity growth and hence competitiveness. Developing the elements
of a positive labour market adjustment strategy, including elements of
equity and fairness, continues to be a key policy issue. This is especially
the case because the new economic order under global competition, trade
liberalization, economic integration and greater capital mobility is likely to
180 Canada
be quite different than the world of the past. As such, policy responses
must also be flexible and adaptable. Policies that were appropriate in the
past may have to be re-assessed for the present and the future.
Developing a strategic policy response to the new economic order will
be particularly challenging because international competition and the
mobility of capital means that it is imperative for countries to pay attention
to the cost consequences of new policy initiatives. Costly policies may
lead to the loss of financial and plant investment, and the associated jobs.
This in turn can encourage competition amongst countries and regions
within countries to attract such investment by providing a low cost
regulatory environment.
Whether this will lead to the dissipation ofrent-seeking, excessive regu-
lation, or a 'race to the bottom' in terms of equity-oriented labour market
and social programmes remains an interesting and open question. The
same applies to the question of whether international cooperation to estab-
lish standards in this area will be simply thinly disguised protectionism or
the necessary political response to market failures to deal adequately with
broader social and equity issues. These are not new issues. But increas-
ingly they will be important issues with respect to labour flexibility and
productivity under global competition.


I. The real manufacturing wage in the USA declined over this period.
Minimum wages relative to average (manufacturing) wages followed
roughly similar paths in the two countries.
2. Gaston and Tretler (1994) estimate that the tariff reductions in CAFf A
should lead to short-run losses of 3.4 per cent in employment and 0.2 per
cent in wages. Fung and Huizinga (1991) estimate that the combined tariff
barrier and NTB reductions would lead to union wage reductions of about
2.5 per cent, but increase in non-union wages of 2.5-5.0 per cent. In a
review of over 75 different empirical studies involving II different method-
ologies, Gunderson (1993) concluded that the probable wage and employ-
ment impacts of the FfA and NAFfA would be small. In the longer run,
they are likely to be positive as the induced productivity improvements
increase real wages, although there will be greater wage polarization and
negative effects in particular sectors. Most of these studies involved the
wage and employment impact of trade liberalization in general (not of the
CAFfA or NAFfA), although some involved simulating the expected
impact of those agreements.
3. Economic Council of Canada (1990, 1991); Freeman and Needles (1993);
Picot et al. (1990).
4. This evidence is discussed in the international context in Gunderson (1989,
1994). Baker et al. (forthcoming) provide recent evidence for Canada.
Michael Baker, Morley Gunderson and Susan Horton 181
5. Baker and Benjamin (1994); Bloom, Grenier and Gunderson (1995).
6. Eleven Canadian studies are reviewed in Gunderson and Riddell (1993,
p. 396) with recent evidence given in Riddell (1993).
7. For a discussion of the Canadian legislation in the broader international
context see Gunderson (1994).
8. Canadian evidence on job search activity and its effectiveness is discussed
in Gunderson and Riddell (1993, p. 654)
9. These special adjustment assistance programmes in the context of trade
liberalization are discussed in Gunderson (l993a). They are currently oper-
ated by the Employment component of the federal department of Human
Resource Development Canada (HRDC).
10. These issues are discussed in more detail in Betcherman and Gunderson
(1990), Porter (1991), Prosperity Secretariat (1992), and Gunderson and
Verma (1992).
11. This is discussed in Employment and Immigration Canada (1989) and
Finbow (1993).


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Baker, M., Benjamin, D., Desaulniers, A. and Grant, M. (1995) The distribution
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Card, D. and Riddell, W.C. (1993) 'A comparative analysis of unemployment in
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6 Labour Market Flexibility
in the European Union
Robert M. Lindley


Labour market flexibility attracted considerable attention in Europe during

the 1980s, marked especially by the inevitable contribution to the debate
produced by the OECD (1986) and efforts by certain governments,
notably that of the UK, to put theory into practice. It was not, however, the
case that injunctions to flexible behaviour were being uttered for the
first time, nor that the evidence of inflexibility was particularly new.
Periodically since the Second World War, industrialists and government
ministers had turned to problems of 'irrational' wage bargaining and
restrictive working practices, inadequate occupational mobility, and geo-
graphical inertia amongst the labour force. Undue trade union power, lack
of investment in vocational education and training, and a distorted housing
market were regularly identified, respectively, as key contributors to these
three forms of market failure. Likewise, social scientists such as economic
historians, labour economists and industrial relations researchers, were
certainly not unfamiliar with the enormous divergences between theory
and reality when it came to dealing with labour markets.
What gave the flexibility debate more force and focus was the conjunc-
tion of several experiences which were mutually reinforcing in raising
concern over what kinds of labour market had been created and which
seemed to serve best the collective interests of the economies and societies
concerned: oil price shocks, technological change, chronic high unemploy-
ment in the European Community (EC), internationalization of the world
economy, regionalization of the European economy, the increasing skill
intensity of production, and a rising awareness of the implications of
ageing of the population.
However, in contributing to the main themes of this book, a chapter on
the 'European' situation cannot possibly cover fully the range of evidence
available, even restricting it to the 12 countries which comprised the
European Union (EU) during most of the last decade. Nor can it encom-
pass repeated comparisons with Japan and the USA. The emphasis is on

186 The European Union
how the issue of labour market flexibility has been handled, how it related
to the strategies put forward and partially realized for greater European
integration, and what the evidence indicates about the extent and forms of
flexibility among EU Member States. References to differences in labour
market regulation tend, inevitably, to be either sweeping or highly
selective;2 so are those to the meta and macro level labour market
performance indicators which relate to flexibility. The coverage does,
nonetheless, seek to capture the complex pattern of regulation amongst
EU Member States and the evidence of the EU's relationship with labour
market flexibility and ultimate economic perfOlmance.
Section 6.2 shows how the conditions of the 1970s and 1980s helped to
give impetus to the flexibility thesis. Section 6.3 reviews briefly the
European integration programme and characterizes the principal ways in
which labour market conditions are likely to be influenced by the approach
to integration and, in turn, themselves influence the course of integration.
Section 6.4 exarnines various aspects of flexibility, analyzing the regula-
tory constraints in operation, the perceptions of potential effects and the
behavioural evidence of their actual consequences. Section 6.5 examines
macro and meta level measures of flexibility where the emphasis is on
outcomes rather than mechanisms of regulation and response. The main
conclusions are given in Section 6.6.


What contributed to the simplicity, if not clarity, of the 'labour market

flexibility' message during the 1980s was the welcome embrace given to it
by those responsible for advising and deciding upon macroeconomic
policy. Attention was successfully turned away from the inadequacies of
international macroeconomic policy regimes towards advocating so-called
'microeconomic' measures. Only when inflation had been brought down
to much lower levels was the flexibility thesis re-visited in a more critical
light by some sections of this policy community.
The different ways in which the European countries coped with the oil
price rises of the 1970s served to highlight how labour market structures
and behaviour influence the path of economic adjustment to major shocks.
Unemployment in the EC doubled after the first oil price shock in 1974
and doubled again after the second shock in 1979, reaching almost 11 per
cent in 1985. Recovery in the late 1980s brought it down to 8 per cent in
1990 but the decade opened with a major recession which left unemploy-
Robert M. Lindley 187
ment over 11 per cent in 1994. There were, however, other ingredients in
the mix of economic change in addition to price shocks.
During the 1970s. the significance of microelectronic discoveries was
being increasingly recognized, not only for their potential effect upon in-
dustrial processes and products, but also for their potential to change the
existing pattern of comparative advantages among national economies.
The central concern was that the technological revolution was either
already manifest or just around the corner but would, regardless, amount
to another though more prolonged shock to the European economic
system. Moreover, the changes in industrial structure were likely to be
compounded by changes in occupational requ\rements: the new com-
petences needed, the reconstruction of skills and the reform of relation-
ships between conventional occupational groups. How would employing
organizations, industrial relations systems, and education and training
structures cope with this evolving situation? Would they impede change or
could they be re-designed to facilitate change? The need for flexibility in
the creation, deployment and continuing development of human capital
was seen to be paramount.
Concern about missing the benefits of new technology and invasive
competition from Japan, North America and the NICs (newly industrializ-
ing countries) mounted at the same time as did concern over the loss of
momentum behind European integration. The former seemed likely to fuel
the internationalization of the world economy, further changing the rules
and increasing the pace of the game, at a time when Europe appeared to be
having major difficulty coping with existing conditions. The nature of the
new technology, however, did actually strengthen arguments for European
'Microelectronic technology' began to be known as 'information tech-
nology' (IT) and then 'information and communication technology' (ICT)
as its fuller implications became understood. To the synergies between
innovation in products and innovation in processes were added synergies
between producers and suppliers and between producers and users. To
meet the challenges of international competition, producers needed highly
efficient and innovative suppliers to help them keep down costs and
promote high quality. They also needed highly efficient and innovative
users in order to have the kind of dynamic, receptive, domestic market
place from which to launch their products.
In the above world, it was argued, a larger liberalized European market
would be more likely to foster the strength needed for competing with
those countries with large sophisticated domestic markets which were
188 The European Union
already embracing new technology, dominating both its production and
utilization, i.e. Japan and the USA.
The enormous potential and anticipated pervasiveness of ICT intro-
duced a further factor: much greater uncertainty. Producers, suppliers and
users across Europe needed to be able to do business with each other to
maximum advantage. Linking up the best would spearhead Europe's com-
petitive regeneration, spread best practice more rapidly to other enterprises
and help to create a culture of high quality in which whole sectors and
groups of interrelated sectors would move up the value-added spectrum,
making them less vulnerable to low cost, low value-added foreign com-
petition. (Only later was the capacity for low cost, high value-added pro-
duction amongst the NICs fully recognized, especially in south east Asia.)
So to the conventional static and dynamic trade creation arguments for
lowering trade barriers were added the dynamic benefits from facilitating
the diffusion of a remarkable new technology with dramatic potential. The
need for flexibility in the markets for education, training and labour was
stressed. The pace of change would greatly exacerbate any tendency
towards structural unemployment. It was thus important to produce and
deploy the new or updated skills in the most efficient way possible.
A sense of burgeoning rationalization, re-structuring and recovery was
fostered in the certainty that the first two would be forced upon European
industry and the third was crucially dependent upon recognizing the
imperatives sooner rather than later. The response of the Community to
this situation is described below, but a further factor is worth mentioning
before doing so; this comes from the supply side of the labour market, in
contrast to the factors mentioned so far.
Already under fire from those who wished to reduce the disincentive
effects of social security and the fiscal burden it especially represented
when unemployment was very high, the European social welfare state was
expected to face an increasing pressure for reform because of the ageing of
the popUlation. The lack of labour market flexibility would make things
worse by discouraging the continuing deployment of older workers after a
period in which early retirement had greatly increased in some countries
as a temporary measure to 'reduce' unemployment. There was the possi-
bility of having created a new retirement norm when working life was, in
any case, being shortened because of the need for longer periods of initial
and continuing education and training. Removal of rigid constraints on
regular full-time employment combined with reducing legal restrictions
on temporary working could have the effect of promoting the continuing
employment of older workers engaged in a variety of flexible work
Robert M. Lindley 189
Other ways of reducing the dependency ratio of the so-called inactive to
the active population included increasing the labour force participation of
women. Again, beyond a certain point (which varies between countries
for socio-cultural as well as economic reasons), further increases will
depend on the capacity of the system to enable parents to reconcile prQ-
fessional and personal lives. A climate of flexibility in the employment
relationship is seen as a pre-requisite for this.


The full European integration strategy envisages completion of the Single

European Market (SEM), promotion of economic and monetary union
(notably via adoption of a common currency), and the development of
deeper political union. The re-Iaunching of the 'European project' in the
mid-1980s concentrated on the first of these stages with a date of the
end of 1992 for the removal of 'physical, technical and fiscal barriers'
to trade. The creation of a much wider product market not only pro-
voked intensified intra-EU trade but also a great deal of corporate activ-
ity involving fundamental re-assessments of business strategies. Foreign
acquisitions, licensing, joint ventures, creation of new subsidiaries
abroad, and greater investment in existing subsidiaries were all
The issue of labour market flexibility is then connected directly to the
issue of what kind of socio-economic environment will make one region
more attractive than another in a Europe with higher levels of cross-border
corporate collaboration, more foreign direct investment (FDI) and
more competitive organizational structures. At the same time, however,
European labour market flexibility as a whole was seen as a key factor in
competing with other regions outside the EU.
The lowering of barriers in the product market may make companies
take advantage of differences in labour market conditions with which they
may have already been familiar but did not by themselves justify exploit-
ing. Of course, some of these differences may result from different
degrees of competition in imperfect product markets and the sharing of
monopoly profits between employers and workers in the form of higher
pay and voluntary non-wage costs. Completion of the SEM should then
reduce distortions to competition in the labour market.
An examination of the large differences in labour costs and regulatory
conditions suggests that the labour market conditions do vary greatly, but
that not all these variations are at the cutting edge of locational decisions.
190 The European Union
In practice they often appear to be secondary. This is partly for the reason
that, compared to other intra-EO variations which bear upon locational
decisions, they are not as important, and partly because the variations
between EO Member States and other potential non-EO locations are
much greater, sometimes by orders of magnitude. 3 Walwei and Werner
(1993), for example, using survey results produced by Prognos, show that
the environment of economic regulations, market potential and political
and social climate were much more important than production costs and
even more so than the quality of labour.
Nonetheless, even if labour market conditions do not dominate
locational choices by transational corporations or companies intending
more modest degrees of internationalization, they can adversely affect
performance. A major concern amongst trade unions especially has been
the possibility that national governments with unfavourable mixes
of labour market regulation and costs from the employer point of view
will seek to alter their positions in the labour market rankings.
Competitive imperatives will then be cited as justification for this strat-
egy, whether the focus is on other EO nations or on competition from
third countries.
The resulting 'cost-cutting' scenario is then seen to carry with it the
danger that fierce competition via lowering labour standards will drive
down the quality of jobs without generating the unit cost levels which
can be achieved by the NICs. 4 Moreover, lowering the quality of jobs
takes the pressure off management to innovate and to move the company
up the value-added spectrum and hence increase its capacity to support
high quality jobs. The cost-cutting scenario is then one in which lower-
ing the quality of jobs leads to lowering the quality of labour (through
limiting incentives to train and be trained and generating efficiency wage
adjustments on the part of labour supply) and eventually quality of
This kind of labour market flexibility would seem to be a poor way of
trying to create a virtuous circle of high human capital, high productiv-
ity, high wages, profits and investment: the 'quality' scenario. Whilst
curbing monopoly power in product and labour markets is essential,
changes in labour market regulation beyond a certain point do not help
to achieve this; they merely make weak workers weaker. Achieving
the quality scenario, however, was seen to require a fundamental re-
assessment of the organization of the economy and its interface with the
wider society. In particular, there was a need for greater flexibility in an
era of rapid change.
Robert M. Lindley 191

Leaving aside the relationship between flexibility in capital markets and

product markets and flexibility in labour markets, the evidence on tl\e
latter may be collected in several ways. The first concentrates on catalogu-
ing the constraints under which the labour market actors operate, i.e. the
nature and extent of formal regulation, dealing with such aspects as:
recruitment and redundancy, hours of work, temporary contracts, health
and safety, equal opportunities, state and occupational pensions, social
security and related benefits, minimum wages, compulsory education,
access to and provision of education and training, and collective bargain-
ing in various fields.
The second approach examines the perceptions of the actors themselves
(e.g. through surveys and in-depth interviews), identifying the extent to
which they see that potential constraints are actually binding on their
behaviour and the consequences they claim do or might arise. The third
investigates the behaviour of the actors rather than their opinions, in order
to assess how much it reveals the influences of the regulations in force.
Finally, evidence may be obtained at meta and macro levels from the
study and modelling of certain phenomena which are seen to reflect
the extent of flexibility: the responsiveness of employment to output, the
amount of sectoral adjustment recorded, labour mobility, wage adjust-
ment, wage differentials, etc.
The above approaches complement each other and great care is needed
in relating evidence to the idea of flexibility in the labour market. The
experimental variation offered by EU Member States, even before the
accession of Austria, Finland and Sweden in 1995, is very considerable.
Comparisons are usually extended to include Japan and the USA as a
minimum. Recently, the South East Asian, so-called 'Tiger' economies
and New Zealand have begun to offer further extensions to the evidence
considered in the European debate. This section considers the first three
forms of evidence; the fourth is considered in the following section.

6.4.1 Regulatory Regimes

Studies of regulatory regimes first need to identify which part of

socio-economic space is covered by regulation. At the broadest level, this
also relates to that part of the activity of a nation which is deemed to be
within the production boundary for the purposes of measuring the size of
192 The European Union
the 'economy' and monitoring its development. Characteristics of the
black economy usually depend on identifying 'economic' activities which
go unrecorded for the purposes of defining the tax base and the amount of
activity recorded within it. The CEC (1988) study estimated the scale of
the black economy to lie very roughly within a range of about 3 per cent
for the UK to 30 per cent for Greece. Figure 6.1 shows the positions of
other EU countries along the spectrum.
It is a reasonable presumption that the impact of formal regulation of the
employment contract in those countries with substantial areas taken up by the
black economy will be significantly less than is the case in those countries
with relatively small areas of such activity. As will be shown below, some
countries with high levels of regulation also have large black economies. It is
a moot point as to how much household surveys such as the European
Labour Force Survey (ELFS) capture employment activity in the black
economy. Attempts to relate the relative degrees of regulation to features of
the labour market need to bear this in mind (see Section 6.4.3 below).
As regards legislative environments, Figures 6.2 and 6.3 capture some
of the differences in regulatory regimes governing the freedom of manage-
ment to deploy personnel in line with corporate requirements. The charts are
more or less self-explanatory, tending to show that the UK and Denmark

Figure 6.1 Europe: the size of the 'black economy', rough estimate

%35 .---------------------------------------------.
30 ...... ......... .......... ............................................................... .... ..... .... .
25 ................................ ..... ........................................ ... .. ... .... .. .... .

20 ................................................................................. .. .. .. .

15 ........................................ ........ ..... .. .. ... ..... ... .. .



% of : .0 Working population 0 GDP • Earnings
UK =United Kingdom =
F France
D =Germany B =Belgium
DK =Denmark P = Portugal
NL =Netherlands I=lIaly
IRL = lreland E=Spain
LUX =Luxembourg GR =Greece

Source: CEC (1988).

Robert M. Lindley 193

(where included) have by far the most de-regulated labour markets. Spain
tends to be among the most regulated whereas the other three poorest
economies usually either appear in the middle of the regulatory range
covered by the remaining Member States or move about within it.
The extent of labour market regulation derives from legislation, discre-
tion left to the courts, and strength of enforcement. Ambiguities in the

Figure 6.2 Europe: probation, redundancy and maximum hours

(a) Statutory duration of probation or qualifying period for blue collar work
(b) Time taken to carry out redundancy of a blue collar worker with 9 months'
Note: Covers redundancy through dismissal for economic reasons.
(c) Maximum statutory hours per year for a standard worker

140 , - - - -- - - - - - - -- - - - - - - ----,.....--.

120 +-----------------------------------------~

100 +----------------------------------------
~ 80 +-----------------------------------------~
~ 60+------------------~

40 +------------------------------------fi
20 +---------------~


7 r---------~========~--------~
6+--------------1 o Priority for vacancy
4 ~-____1ri'i'::i':;:;;;;:::o_l
~ 3 +------1

2 +-----~~-~----~---_+~r

194 The European Union
Figure 6.2


10 Ovenime

~ .. ,
3 I;~\
- ~~~
r-7ff ]
2 ,
~ ,~ - ~~;,;~
, ~.
~ 1~ ~i
I~ ,
,.~ J


. ' f',

r- '/1 tf
,~ r~
~ ~
o.l 'Ii'
,. • !'i I ;";~" " ' I
".-: "

....l o

L =Luxembourg NL = Netherlands
GR =Greece D = Germany
E= Spain P = Ponugal
F =France IRL = Ireland
B =Belgiulll DK = Denmark
1= Itllly UK = United Kingdom

I Maximum hours permitted without.
2 Estimates for 1989; maximum weekly hours have been reduced in Portugal.
Source: Wells (1992).

drafting of and inconsistencies between different instruments increase the

role of the courts and/or undermine the strength of enforcement. It is
difficult to pull together the different dimensions of legal provision and to
summarise their effects quantitatively. However, Grubb and Wells (1993)
have tried to reduce a highly multidimensional picture to one of a few key
dimensions. Their results are summarized in Table 6.1.
These results apply to the latc 1980s, by which time several countries
had sought to reduce regulation of the employment contract, at least to
some degree. The UK, which already began the decade with less regula-
tion than in other countries, introduced the most explicit policy on de-reg-
ulating the labour market as part of an overall strategy to increase its
In Britain, a case which stands out from the other EU Member States,
de-regulation of the labour market through several legislative initiatives
Robert M. Lindley 195
Figure 6.3 Europe: maximum duration for fixed-term contract and temporary
(a) Fixed-term contract
(b) Temporary work

60 ,--------------------------,----~~~~--_rr

50 r--------·-----------------,~~~rTI~~mm_cinn

40 r----------------------------r~

.sg 30 +------------H(tl;IH,~:t__"
20 t------------ili

10 -'--_.-J .~ ... L_""




l:30 r-----------------------------~~ri~~}-1~~~~~


E Spain NL = Netherlands
I = Italy F= France
GR =Greece IRL = Ireland
B = Belgium L =Luxembourg
0 = Germnny UK =United Kingdom
P =Ponugal OK = Denmark

Source: Wells (1992).

has weakened trade unions by undermining their capacity to organize, lim-

iting their ability to deploy their bargaining power by making them more
liable to legal action against them, and strengthening management prerog··
Table 6.1 Europe: labour market regulations; ranking of EU Member States

Individual dismissal Overall rankings

Regular Notice and Difficulty of Protection Fixed Temporary Working time

procedural severance pay dismissal against term agencies
inconvenience fornoJault dismissal contracts Maximum Flexibility
dismissals normal

Belgium 8.5 2 10 8 1 4 2 7
Denmark 11 6 9 10 10 7 1 10
France 5 7 6.5 6.5 4 9 5 4.5
Germany 3 10 4 5 3 6 3.5 6
Greece 6 5 5 4 5 2 8 2
Ireland 7 9 8 9 10 10.5 10 8.5
Italy 10 1 2 3 2 2 6 8.5
Netherlands 1 11 6.5 6.5 7.5 8 3.5 4.5
Portugal 4 3.5 1 1.5 6 5 9 1
Spain 2 3.5 3 1.5 7.5 2 7 3
UK 8.5 8 11 11 10 10.5 11 11

Note: The higher the ranking. the greater the degree of regulation.
Source: Grubb and Wells (1993). Tables 1-3.
Robert M. Lindley 197
atives in adjusting tenns and conditions of employment and reducing the
size of the workforce to match corporate requirements. In addition, trade
unions have gradually been excluded from political influence by reduc-
tions in opportunities for corporatism.
The government has altered social benefit regulations in ways which
have reduced the level of income support relative to what it would have
been under the previous social security regime and has increased the pres-
sure on unemployed people to engage in job search. It has abolished the
statutory minimum wage provisions operating in certain industries, having
previously already made them inapplicable to young workers. Finally,
through its stance on macroeconomic policy, the government has removed
any doubt about whether the State will act, in effect, as an employer of last
resort: unemployment has been allowed to rise to record levels.
The rankings given in Table 6.1 derive from data on individual elements
of the regulatory field concerned. This involves combining qualitative and
quantitative data. As an example, the construction of the separate indices
underlying the summary ranking for 'protection against dismissal' is given
in the left-hand part of the table. This shows how much the rankings of
differeqt elements of the dismissal regime can vary from each other and
from the overall ranking for this category.
Taking the rankings as a whole, it is easier to find countries that are low
rather than high on all categories: Ireland and the UK fit into the former
group, as would Denmark but for its maximum normal hours limit.
Strong regulation in one area does not necessarily apply to others. In
terms of dismissals and flexible contracts, Italy certainly records high
levels of restriction but its maximum normal hours limits are moderate
and flexible working limits low. Greece, Portugal and Spain limit the flex-
ibility of working patterns (shiftwork, night work, etc.) quite markedly but
not the maximum normal hours worked.
It is by no means easy to offer a coherent rationale for each country's
configuration of controls which would encapsulate cultural and economic
determinants. One can relate the history of regulatory developments, but it
is difficult to capture an underlying economic rationale for the relationship
between 'economy' and 'society' as represented in the organization of the
labour market. This problem applies all the more to attempts to classify
countries in distinctive models of the way socio-economic pressures are
regulated in order to resolve conflict and promote development. The most
striking example of such analytical difficulties is found in the final area
of regulation to be mentioned here, albeit briefly: the framework for
collective negotiation in the labour market. (Further reference will be
made to this in connection with wage flexibility in Section 6.5.)
198 The European Union
A summary of degree of labour market regulation and bargaining level is
given in Table 6.2.
Bringing these two dimensions of institutional regulation together
compounds major conceptual and measurement problems. For one thing,
the degree of regulation is assessed in the late 1980s, whereas the main
bargaining level is derived from a study whose principal aim was broadly
to compare the 1980s with the 1970s. Another point to note is that bar-
gaining often takes place at several levels within a negotiating phase,
whereas the classification focuses more on whichever level is the highest
in operation. So central bargaining for Greece encompasses a host of
sectoral bargaining activities.
Leaving the many caveats to one side, it is apparent that, by the 1980s,
the UK is most clearly definable and its position amounts to being the
most de-regulated and uncoordinated labour market in the EU. Much more
tentatively, Greece might be regarded as the most regulated and co-
ordinated labour market, at least on the basis of Table 6.2. However, its

Table 6.2 Europe: labour market regulation and collective bargaining level

Main bargaining level ill the 1980s

Degree of Celltral Sectoral Enterprise/plant

regulation in the
late 1980s

High (1-3) Greece Portugal

Moderate (4-8) Belgium b France
Low (9-11) Ireland Denmarko

Note: a Centralized bargaining during 1970s; b Sectoral bargaining during

1970s; c High degree of coordination; d Lack of coordination
Countries without notes had no change of bargaining level between the two
decades and engaged in only limited coordination. The ranking of countries
according to degree of regulation is based on the scrutiny of the legal framework,
summarized in Table 6.1.
Source: Table 6.1 above, together with Windmuller (1987) and DECO (l994b),
both as cited in DECO (l994a), Part II, Tables 5.9 and 5.14, and CEC (I 994a).
Robert M. Lindley 199
classification along the bargaining dimensions is not so firm and, along
the regulatory dimension, is potentially quite misleading, given the size of
the black economy noted earlier. Ireland appears as de-regulated but co-
ordinated, whereas there is no country that can be classified as regulated
but uncoordinated.
The significance of these portrayals of regulation in relation to co-
ordination for labour market flexibility is that they are dimensions of be-
haviour which may strongly influence the degree of flexibility but the links
are not as direct as is often assumed in the policy debate. High regulation
and coordination are neither necessary nor sufficient conditions for low
labour market flexibility. Whether the reverse is true is a moot point: is it
possible to have high flexibility without low regulation and coordination?

6.4.2 Employers' Perceptions of Regulatory Effectiveness

The regulatory regimes as characterized by legal provisions would lead us

to adopt a priori views about how these regimes impinge upon employers.
Focusing on the perceptions of firms about how their behaviour is con-
strained, we would expect those operating in Italy, Portugal and Spain and,
depending on the weighting given to different types of constraint, Belgium
and Greece, to complain most. By contrast, firms are likely to be least
troubled by regulations in Denmark, Ireland and the UK. The relative lack
of regulation of the employment relationship imposed upon management
in Britain alluded to earlier is well illustrated by Emerson (1988). In
surveys of employers across Europe, the UK comes at the bottom or near
the bottom of the ran kings of such indicators as:

(i) percentage of firms considering insufficient flexibility in hiring and

shedding rules to be an important obstacle to employing more staff
(Figure 6.4);
(ii) degree of importance of obstacles to the termination of employment
(iii) percentage of firms judging that there would be a positive employ-
ment impact from shorter periods of notice for redundancies and
simpler legal procedures;
(iv) percentage of firms considering that a reduction in redundancy
payments would have a positive employment impact;
(v) importance of regulatory constraints on temporary work and fixed-
term employment contracts and percentage of firms expecting a
positive employment impact from measures to facilitate temporary
200 The European Union
Figure 6.4 Europe: importance of hiring and firing laws as an obstacle to
employing more people

% of respondents who thought it:

lOO ~--~------~------------~r----------.
o Very important 0 Important


60 +-------1


UK =United Kingdom F = France

D =Germany E =Spain
B = Belgium NL = Netherlands
P =Portugal I = Italy
IRL =Ireland
GR =Greece

Note: Manufacturing industry, Denmark and Luxembourg were not surveyed; 1989
Ee survey adjusted for response.
Source: Wells (1992).

The UK not only usually comes bottom in the rankings of the above but
the range is enormous, covering roughly 20-80 per cent (where appli-
cable), and the UK is the one country which is low on every item
mentioned. Italy, in contrast, usually comes at or near to the top of all the
above rankings. Moreover, its extensive layoff or short-time working
regime contrasts with the complete absence of public provision in the UK.
France records high percentages under (i) and (ii) but is in the middle of
the range for (iii) and (v), and near the bottom with the UK and the
Netherlands for (iv).
Table 6.3 provides evidence relating to 1985 for the then nine EC
Member States: Denmark, Portugal and Spain are thus excluded. This
confirms that Italy and the UK are undoubtedly among the most and least
regulated labour markets, respectively, indeed, they look to be at the
extreme ends of the EU spectrum. Belgium and Ireland are more likely to
be counted as above and below average, respectively. The positions of the
Table 6.3 Europe: EC firms' opinions about regulatory constraints, 1985

Percentage offirms considering factor to be an important obstacle to employing more staff

Not enoughfiexibility in Shorter notice and simple Reductions in Measures facilitating

recruitment and dismissal procedures for redundancy payments temporary contracts

% (% 1989) rank % rank % rank % rank

Italy 83 (62) 1 88 1 78 1 63 3
France 81 (53) 2 48 6 22 8 53 5
Belgium 75 (46) 3 74 3 63 2 63 4
Greece 67 (51 ) 4 76 2 62 3 50 6
Ireland 68 (45) 5 35 8 33 6 47 7
Luxembourg 56 n.a. 6 54 5 52 4 69 2
Germany 56 (44) 7 63 4 46 5 74 1
Netherlands 51 (58) 8 47 7 12 9 32 8
UK 26 (27) 9 28 9 23 7 27 9
EC 60 n.a. 58 422 55
Portugal (42)
Spain (63)

Note: The survey excluded Denmark (both years) and Portugal and Spain (1985).
Source: CEC(1986, 1991) and Emerson (1988) (Tables 4,7,8, and 14).
202 The European Union
other countries do not, however, map easily from the degree of legal
restraint to the degree of perceived control.
However, a later survey enables comparisons to be made between 1985
and 1989 and these suggest that the regulatory burden as perceived by
employers has declined quite substantially in all countries except the UK,
where it has remained the same, and the Netherlands, where it has
Turning to the views of the main employers' organizations, the IOE
(1985) survey covers not only the three of the EU Member States omitted in
the CEC survey, but also the five EFTA countries (Austria, Finland, Norway,
Sweden, Switzerland), whilst excluding Greece. These results (Table 6.4)
confirm the positions of Italy and the UK; Denmark, Portugal and Spain fall
into line as expected on termination of employment and use of fixed-term
contracts; the same is true, more or less, of the use of temporary work agen-
cies, though here Portuguese employers' associations appear less concerned
than the legal framework might lead us to expect (cf. Table 6.1).

6.4.3 Independent Evidence of Regulatory Impacts on Employer


Where labour market regulations apply to particular aspects of employ-

ment, it should be possible to examine whether there is a discernible effect
on the working patterns concerned. Obviously, other factors will playa
part but, on the face of it, the incidence of temporary work, for example,
should be less in those countries where it is heavily restricted if not actu-
ally prohibited. Several studies have sought to connect overall regulation
with aggregate employment outcomes and the structure of regulation with
observed patterns of employment and working practices. Grubb and Wells
(1993) have gone further than any other authors in relating the degree
of regulation to labour market outcomes for specific characteristics.
Table 6.5 summarizes their findings.
Only a weak negative relationship exists between the overall extent of
regulation of employment contracts (i.e. employee or dependent worker
status) and the extent of total employment (including self-employment)
relative to the size of the population of working age. Excluding the out-
liers Denmark, the UK and Spain actually turns the relationship positive.
A moderate negative relationship is found between the ratio of employees
to the population of working age and the measure of overall regulation.
Self-employment, in turn, appears to be promoted by the presence of high
levels of regulation, even allowing for differences in industrial structure,
such as the size of the agricultural sector.
Table 6.4 Europe: opinions of national employers' organizations on regulatory constraints

Obstacles considered to be: Termination of Fixed-term contracts Temporary work

employment contracts

Fundamental France Belgium Belgium

Gennany Italy Italy
Italy Netherlands Spain
Serious Austria France France
Belgium Gennany Gennany
Ireland Luxembourg Netherlands
Norway Sweden Sweden
Minor Denmark Austria Austria
Finland Denmark Denmark
Finland Finland
Ireland Ireland
Insignificant UK Norway Luxembourg
Portugal Norway
Spain Portugal
Switzerland Switzerland

Source: Emerson (1988) using data from the CEC 1985 ad hoc labour market survey. IV
Table 6.5 Europe: Associations between labour market phenomena, regulatory strength and employment ~
Labour market Regulatory Association! Outliers'
phenomena measure

I Working above usual Overtime restrictions Very strong, negative

2 Temporary workers a Dismissal of regular Very strong, positive
workers Moderate, negative
Restrictions on fixed-term
3 Temporary agency Dismissal of regular Very weak, positive
workers a workers Very strong, negative
Temporary work agencies
4 Average usual hours Maximum normal hours Strong, negative
Overtime restrictions Very weak, positive
5 Part-time workersa Overall regulationd Strong, negative
6 Self-employed and Overall regulationd Moderate, positive
family workers b
7 Average normal hours Maximum normal hours Moderate, negative
8 EmployeesC Overall regulations d Moderate, negative
9 Dispersion of hours Flexible distribution of Weak, negative Belgium
about the mode hours
10 Incidence of night Night work restrictions Weak, negative Denmark
11 Total employment C Overall regulationsd Weak, negative Denmark,
UK, Spain
Table 6.5 (Continued)

Labour market Regulatory Association! Outliers'

phenomena measure

12 Incidence of weekend Weekend work restrictions Very weak, negative France, UK

work (positive, excluding

Notes: a as % of employees.
b as % of total employment.
c as % of population of working age.
d of employee work.
e Only for item II would exclusion of outliers not only strengthen statistical significance but also change the sign of the
fThe above classification is extremely rough, depending on visual inspection as well as the statistical significance shown.
Very approximate definitions of terms are gi ven below (note tha tso = 1, t9S = 2 and t99 = 3).
Description t statistic range
Very weak t ~ 1.0
Weak 1.0 < t ~ 2.0
Moderate 2.0 < t ~ 3.0
Strong 3.0 < t ~ 4.0
Very strong 4.0 < t ~ oc
Source: Derived from Grubb and Wells (1993).
206 The European Union
As regards the employee structure, the percentage of employees who
are working part-time is strongly negatively related to the measure of
overall regulation of employee work, so heavier regulation of employee
contracts appears to carry with it either a discouragement to organizations
to employ part-timers, or to individuals to seek such work, or a combina-
tion of both. It does not itself promote part-time employment unless it is
associated with a temporary contract.
The difficulty in dismissing regular workers is strongly positively linked
to the percentage of employees who are on fixed-term contracts; specific
restrictions on such contracts have only a moderate discouragement effect
on their incidence. In contrast, controls on the dismissal of regular workers
have little impact on the incidence of temporary agency workers; here, the
main factor is the degree of control on agency activity per se.
Turning to hours of work, the regulation of maximum hours has a
significant effect on average normal hours, though not strongly binding; its
effect on average usual hours is more substantial, though no significant
(negative) additional effect is attributable to restrictions on overtime. As
regards the patterns of working hours, restrictions on working hours
have the strongest effect of any regulatory measure, discouraging
working above usual hours. However, controls on night work have only
weak effects and those on weekend work appear to have no systematic
effect on its incidence. The dispersion of hours worked is only weakly
related to restrictions on the flexible distribution of hours, though Grubb
and Wells (1993) point to the likelihood of Belgium's major liberaliza-
tion in regulation in 1987 not having had its full effect by the survey
date in 1989; omitting this country would increase the association very
What can we conclude from these findings, bearing in mind that regula-
tion is only one factor in determining the structures of organizations and
sectors which underlie aggregate employment indicators? First, strong
statements about the relationship between degree of regulation and level of
total employment relative to popUlation of working age are not supported
by the data. Second, regulation is mainly likely to influence the structure
of employment and hours. Certain features of the pattern of employment
status and working hours are clearly influenced by regulations (incidence
of overtime, temporary workers, use of temporary agencies, and average
usual hours worked) even after allowing for the effects of the overall
regulatory climate which affects particularly part-time employment.
Sometimes it is the controls over regular employment rather than any par-
ticularly permissive stance on non-regular employment that foster the
latter. Finally, it seems that there is enough variation between countries
Robert M. Lindley 207

left unexplained to suggest that de-regulation of the labour market on any

grand scale could have minimal effects on employment compared with
those generated by other policy initiatives. This judgment is reinforced
when the aggregate performance indicators are examined.
However, even if de-regulation is likely to have very limited impacts on
the level of employment in an economy, it may have more impact on the
quality of employm~nt. Moreover, the evidence from surveys of manager-
ial opinion (Tables 6.4 and 6.5) suggest that there is a negative employ-
ment effect associated with the regulation of the labour market. Perhaps
managers confuse the benefits of being able to manipulate the structure of
their labour force and its profile over the cycle with creating more jobs.
We are left, though, with plenty of room for argument over both the
construction of the regulation indices and the use of rankings rather than
absolute measures. Improvements in the measurement of degree of regula-
tion may well help to improve the explanatory power of these simple
models and bridge the gap between this evidence and that of the opinion
surveys. But more attention will also need to be paid to the specification of
the questions in these surveys.



The notion of flexibility derived from neo-classical price theory is straight-

forward enough: it refers to the responsiveness of demand and supply to
changes in price and the responsiveness of price to relative movements in
demand and supply. The conventional debate about labour market flex-
ibility has been dominated by a somewhat narrower underlying perspective:
the freedom of demand side agents (i.e. employers) to vary their purchases
in accordance with need and to set prices freely in order to explore the
supply response and find an optimal strategy - in other words, the scope for
the buyers' prerogatives to be exercised. Suppliers' access to the market
and discriminatory pricing have been regarded as secondary issues.
There is a tendency to assume that lack of labour market flexibility is
caused by regulation, und'uly powerful trade unions combined with un-
competitive product markets, poorly designed income maintenance pro-
grammes, or badly organized support activities such as education, training,
the search for jobs, and the search for employees. As we have seen,
however, examining the first of these elements does not lead to unqualified
conclusions about impacts on flexibility and the consequences of this for
economic growth and unemployment.
208 The European Union
An alternative approach is to go to the more aggregate data which may be
used to create macro and meta level performance indicators. The ultimate
simplification is to take the rate of unemployment as a summary measure of
labour market flexibility, but this is like using the size of one possible effect
to measure one of several possible causes. It is being assumed that, if unem-
ployment is much higher in one country than another or at one time than
another, then labour market flexibility must be lower in one place or at one
time than another. Yet one market may be more flexible than another but dis-
equilibrium may be greater or persist for longer because more is demanded
of the market mechanism in the first place. So a labour market or configura-
tion of markets in one country may actually accommodate, for example,
much more macroeconomic policy failure or more structural change than
that of another country but still yield much higher unemployment. Failures in
other areas of the socio-economic system, or just bad luck, may then be the
principal sources of disparities rather than relative flexibilities.

6.5.1 The Deployment of Labour

Structural Change
Section 6.3 has already noted the view that more structural change is
taking place and this requires more flexibility in order to minimize its
effects on unemployment. Following this up with evidence, however, is
not quite as straightforward as it might seem. It is sometimes difficult to
stay in the mainstream of the analysis, avoiding the many tributaries
offered. In particular, in looking for real evidence, it is often forgotten that
changes in quantities and prices are not very informative unless the para-
meters of the demand, supply and wage adjustment functions are known.
Moreover, we need to recognize when the lack of flexibility may be due to
a slowness of response rather than a low degree of adjustment achieved
over the long term.
However, the fascination with quantities and prices does reflect the
intuitive appeal of a certain line of reasoning:

(a) if some countries are engaging in a lot of change in employment

structure, then perhaps so should others;
(b) so we might regard those countries which display low structural
change as being more likely to be less flexible than those that display
high structural change.

However, the interpretation of structural change indices, for example,

those based on sectoral employment (see Table 6.6), must allow for the
Table 6.6 Europe: the interpretation of structural change indices, 1960s-1970s

Ex ante Extent of ex post structural change

pressure for structural change: High Medium Low

High Aexible Responsive Inflexible

Medium 'Aexible' Responsive
Low Aexible/Responsive/

Growth rate 3.0~G 2.0~ G<3.0 1.0 ~ G< 2.0

Turbulence measures: 1.2~ T 0.8~T<1.2 O~ T< 0.8

1960s: G DK D,F
1970s: G DK D, F, I, J, NL, UK
T DK B, D, F, I, J, NL,
1980s: G DK, F, I, J, UK D,NL

Note: G is the average of the weighted standard deviation of annual growth rates (in logs) of sectoral employment. T is the average of
half the sum of the absolute annual changes in sectoral shares of total employment.D =Denmark, F =France, NL =Netherlands, I =
Ireland,G =Germany, J =Japan, B =Belgium.
Source: OEeD (1994a), Part I, Table 1.7.
210 The European Union
distinction between ex ante and ex post structural change. Some forms of
structural change may themselves reflect failures to compete because of
lack of flexibility. Precipitous declines in manufacturing employment
caused by inefficiency through restrictive working practices or failure to
attract suitably skilled labour because of narrow wage differentials hardly
amount to 'coping' with structural change, yet they would usually boost
the index. So ex post measures of structural change can be interpreted as
indicators partly of the task faced by the economy concerned and partly of
the amount of redeployment achieved.
Whilst a high level of ex post structural change does imply a high level
of flexibility (i.e. 'flexible' in Table 6.6) in order to achieve it, a low level
may either reflect low flexibility ('inflexible') in the face of high ex ante
pressure for structural change, a medium level of flexibility in the face of a
medium level of ex ante pressure ('responsive') or any of the three options
if the level of ex ante pressure for structural change is too low to offer a
test of the capacity for adaptation.
The fact that there do not seem to be great differences in the ex post
measures of structural change calculated from employment data for the
1960s, 1970s and 1980s (Table 6.6) does not necessarily suggest that this
has not been a cause of rising unemployment. It may rather imply that
these economies could deliver only so much sectoral employment re-
allocation because of inflexibilities in labour markets which were common
to all three periods. Unemployment then rises because the underlying
economic conditions called increasingly for more adjustment.
Yet when similar degrees of sectoral employment re-allocation are
recorded in economies as different as France and the USA during each of
the three decades (the USA was apparently less 'flexible' than France in
the 1960s), virtually regardless of the measure used and level of disaggre-
gation, it is difficult not to conclude that the 'flexibilities' of their labour
markets cannot be that different.
On the other hand, the indices do identify Denmark and, to a lesser
extent, the UK, associated with particularly low regulation of the labour
market as exhibiting the highest degree of structural change.

Labour Force Flows

If the scrutiny of employment stock data gives rather limited insight into
the extent of flexibility, perhaps the analysis of flow data would be more
productive. Of course, a similar problem of assessing the evidence arises
because of the distinction between ex post and ex ante movement, i.e. data
relate to actual mobility as opposed to the propensity to be mobile. But if
Robert M. Lindley 211

countries show very different scales of movement of the population among

activities, it is perhaps reasonable to argue that this has implications for
the extent of labour market flexibility.
Presumably in the context of labour market flexibility, the key indi-
cators needed are those which reveal purposeful movement in which the
population shifts from

• lower to higher value-added activities;

• jobs where there is little scope for training to jobs where individuals
will be able to enhance their human capital;
• employment into full-time education or training in order to increase
their productive power even more substantially (or delays initial entry
to employment in order to be better prepared);
• unemployment to employment;
• employment in sectors/occupations/geographical areas where the risks
of unemployment are higher to those where they are lower;
• employment in sectors, etc. with poorer working conditions to those
with better conditions.

Thus, the mere fact of there being a lot of movement relating to the
labour force, employment and unemployment is a rather poor indicator of
flexibility.s Fluidity does not necessarily imply flexibility. Some move-
ment might, indeed, seem to suggest a failure of the labour market
mechanism: very high turn-over at organizational level or gross outflows
and inflows at sectoral level may be due more to the inadequate personnel
policies of employers as much as to a well-judged balancing of the relative
costs of putting up with high turn-over compared with improving working
conditions and rates of retention. The same caveats attach to attributing
low job tenures and low service records with the same industries to
dynamic labour market responses.
We are not sure, therefore, of what to make of the facts that mobility in
and out of unemployment is over twice as high in Denmark and the UK as
in Italy and Spain, or that average job tenure is lower in the Netherlands
and the UK (7 or 8 years) and higher in France, Germany and Spain (about
\0 years), or that labour turn-over (as measured by the percentage of the
employed who had been in their jobs for less than a year) was highest
in Spain and the UK, followed by Denmark and France, and lowest in
Belgium, Italy and Greece, or that intersectoral mobility is highest in
Denmark, France and the UK and lowest in Belgium, Germany, Greece
and Ireland.
212 The European Union
In addition, the occupational stock and flow data for EU countries do
not permit satisfactory analysis either of ex post structural change or
ex post mobility. In the case of spatial labour market flexibility, the data
on geographical mobility are not sufficiently standardized for differences
in the sizes of the spatial areas used to allow us to reach much more than
very broad conclusions, such as that mobility is relatively high in the UK
and low in Italy.
Finally, if such data are to be used to indicate differences in labour flex-
ibility between countries, there would also seem to be a case for using
them to indicate how far flexibility has changed over time for the same
country. The results for the UK are especially noteworthy (Beatson, 1995).
Industrial and occupational mobility increased by about 50 per cent during
the last half of the 1980s and then halved by the mid-1990s, more or less
bringing it back to the same levels as a decade ago. Regional migration,
which is much less than industrial and occupational mobility, increased
more erratically and by a smaller degree but also fell back during the
1990s, actually dropping significantly below the mid-1980s' level.
The above results do not suggest a period of success for de-regulation
followed by one of failure; they reflect more the wel1 known impact of the
cyclical upturn fol1owed by the downturn upon the mobility of labour in
an economy. It is clear that more time must elapse before being able to
distinguish 'regulation' effects from cyclical effects. It would be exces-
sively purist not to conclude that the UK is probably the labour market
that exhibits the greatest extent of external labour mobility and this pro-
bably reflects a greater propensity for mobility. It is the link between
this propensity and the institutional and regulatory regime that is not
identifiable with present data.
The presentation of key stylized facts about labour force movements in
the EU cannot get round the problem of not having comparable informa-
tion on the parameters of models that seek to explain those facts.
Migration, mobility and turnover data are only now just becoming avail-
able in time series of sufficient comparability and length to support such a
mode\ling exercise, albeit using very simple specifications.

6.5.2 Employment-Output Responses

Flexibility from the perspective of the organization comes through the

ability to vary the use of and payment for labour services in line with the
optimal response the organization wishes to make to actual and anticipated
changes in the demand for its products. Labour services may be varied by
altering hours worked and/or the number of employees; Hart (1987) distin-
Robert M. Lindley 213
guishes such adjustments as operating at the intensive or extensive margin,
respectively. Alternatively, we might note that the former involves action
via the internal labour market of the organization, whereas the latter
involves the external labour market.
Desired changes in labour services are unlikely to require only the
adjustment of the amount of labour input but also some change to the use
of different types of labour. This may be handled internally through alter-
ing the pattern of hours worked amongst the various occupational groups,
or by external market operations via redundancy and recruitment. The in-
ternal option will be facilitated by developing a high level of functional
flexibility within the existing labour force. This requires appropriate
collective agreements on flexibility across different functions of the organ-
ization and across tasks and an effective capacity for retraining people as
required. The external option depends on there being an efficient external
labour market for the skills in question.
It is beyond the scope of this chapter to review the evidence on internal
flexibility. The relevant point in the present context is that different mixes
of internal and external flexibility may produce equally effective
outcomes. Comparisons of indicators of external flexibility cannot be re-
garded as conclusive in comparing overall system flexibility. There is,
though, another source of evidence which cuts across these detailed
considerations and simply focuses on the responsiveness of the labour
input to changes in output and wages, however the division between exter-
nal and internal market adjustment (i.e. concerning employment and
hours, respectively) is settled.
If we consider that the impact of a high propensity for labour mobility
should be to improve the capacity of employers to adjust employment
levels quickly to what is demanded, we might expect employment to be
most responsive to changes in output in the case of de-regulated labour
markets. However, recent results for the EU using the most comparable
data available and aggregating from sector-specific estimates (CE, 1995)
suggest that Italy has the highest long-run elasticity of employment with
respect to output, and Portugal, Spain and the UK have the lowest. In the
middle ground lie Belgium, Denmark, France and Germany with Ireland
on the high side (Greece is excluded and the Netherlands' parameters
were perverse). These results allow for changes in average weekly hours
worked for which the employment elasticities are particularly high in
Belgium, Denmark, France and Spain and low in Germany and Italy, with
Ireland, Portugal and the UK in the middle ground.
The above puzzle might be resolved by looking at short-term para-
meters and, indeed, they show a much smaller response of employment to
214 The European Union
output in the case of Italy (near zero) than for the UK. However, it is still
the case that Portugal and Spain are roughly as responsive as the UK -
France, Germany and Ireland are much more so.
A similar check to presuming that regulatory differences might be
expected to reveal themselves in a straightforward way via the response of
labour demand to economic variables is found when examining the
employment elasticity with respect to changes in the real product wage.
OECD (1994a) findings show that, whilst technology and industry struc-
ture do not differ dramatically and might be expected to yield similar long-
run elasticities, the speeds of adjustment vary greatly (Table 6.7).
Moreover, it turns out that the UK is slower to respond than France or
Germany, having a median lag of four years, twice that of those countries.
So, despite its much more de-regulated labour market, the key price effect
is slower to work. On the other hand, Italy has a long-run elasticity of half
that of the UK and a slightly slower speed of adjustment.
Estimates of sectoral real product wage parameters are also available
from the CE (1995) study cited earlier. These give rather different results.
At the country level, the weighted long-term elasticities are similar to each
other, being lower for France, Germany and the UK than the OECD
findings whereas that for Italy is about the same (Table 6.7). These kinds
of discrepancy are not unusual in econometric work of this kind in which
changes in data, sample period and model specification can lead to quite
large changes in parameters and country rankings. Nonetheless, they
suffice to provide a further caution against assuming that the degree' of
regulation in a labour market will show up directly in the responsiveness
of sectoral employment to such variables as output and wages.

Table 6.7 Europe: responsiveness of labour demand to real product wages, 199

Long-term employment elasticity Median lag (years)

CE(1995) DECD (1994a) DECD (1994a)

France -D.7 -1.0 2

Germany -D.6 -1.0 2
Italy -0.6 -D.5 5
UK -DA -1.0 4
Sweden n.a. -D.9 7
Japan n.a. -0.8 3
USA n.a. -1.0 I

Source: DECD (l994a), Part II, Table 5.1; CE (1995), Table B I.

Robert M. Lindley 215
6.5.2 Wage Flexibility

The final macro or meta level indicators of labour market flexibility

concern the responsiveness of wages to economic conditions. Without this
response, the potential for labour demand and supply adjustments which
help ultimately to reduce unemployment will not be triggered, however
large are the relevant price elasticities in the demand and supply functions. 6
It is possible to examine changes in the wages structure in great detail,
comparing the degrees of dispersion in wages of different sectors, occu-
pations, geographical areas; variations among employers within these
groups; and variations among individuals.
The main considerations are:
• the institutional arrangements for determining pay and other working
• the forms of payment adopted;
the utilization of different forms and their relative importance in the
financial and non-financial benefits obtained from work;
• the aggregate profile of nominal and real wages;
the structure of wages and working conditions;
• changes in wages and working conditions;
• models which seek to explain the principal stylized facts.
Only in the UK has there been significant reduction in the extent of
collective bargaining, though in the last half of the 1980s some did occur
in the Netherlands. In France and Portugal, the coverage of employees ac-
tually rose. By 1990 about 45 per cent of employees were covered in the
UK compared with 70 per cent or more in most other EU countries.
The limited data available on modes of payment suggest that no EU
country particularly outstrips others in the use of schemes which relate
pay more closely to the performance of the organization or the individual
employee. If anything, France, Luxembourg and the UK seem to use
profit-related pay more than is the case in other Member States (over
25 per cent of the employed are in such schemes), but Belgium, Ireland
and the Netherlands are not that far behind (CEC, 1986). The very partial
evidence on trends suggests that performance-related schemes are increas-
ing their coverage.
Examination of earnings dispersion among EU countries is dominated
by the marked increase during the 1980s observed for the UK along sec-
toral, occupational and regional dimensions. Looking at the mid-1970s -
mid-1990s, little change was actually observed in sectoral dispersion
except for Italy where there was a major reduction from a level that was
216 The European Union
higher even than Belgium, Germany, Ireland and the UK towards the low
level associated with Denmark. International data for subsequent years are
not sufficient to determine what has happened to dispersion; nor is there
convincing evidence of an increase in the responsiveness of sectoral wage
differentials to sectoral labour market conditions for those countries with
relevant data over the 1970s and 1980s.
As regards differentials relating to occupational or educational levels,
these are very difficult to construct for reliable comparative analysis. A
narrowing of both appears to have occurred in the 19708 followed by some
widening in the 1980s, again more noticeable in the UK than elsewhere,
with German differentials remaining stable and those for France and the
Netherlands actually narrowing (DECD, 1994, Chapter 5). It is not known
how much the differentials may have changed their degree of responsive-
ness over the 1980s.
Regional wage dispersion in the EU has been at its greatest in France,
with little change during the 1970s or 1980s. More generally, regional dif-
ferentials tended to narrow in the 1970s; during the 1980s, this was re-
versed to some extent, most of all in the UK but not for Germany. Note that
the most striking difference among EU countries is that, whereas for France
and the UK, regional wages are negatively related to regional unemploy-
ment, in Germany and Italy the relationship is positive (OECD, 1990).
However, 10hnes and HycIak (1989), estimating regional Phillips curves
for three countries, show that regional wage elasticities with respect to un-
employment are higher in Germany compared with Italy and the UK.
For regional industrial labour costs, the cost-unemployment relation-
ship is negative for France, Italy, Spain (particularly strong) and the UK,
whilst being insignificant for Germany and strongly positive for Portugal.
The regional labour cost range is especially high in France and Portugal
and low in Germany and the UK. Basically, whether differentials widened
a lot or a little, more in one period than another and or more or less than
might have been expected according to past determinants of such changes,
cannot be established well enough for EU Member States.
Finally, turning to the responsiveness of aggregate real wages to labour
market conditions, this may be examined through the relationship
between, for example, the real product wage or real wage and unemploy-
ment. The former is summarized in Table 6.8, showing that France,
Germany and Italy have similar long-run rates of response which are three
times that of the UK (and the US) but have slower adjustment speeds.
In the case of the real wage, an opposed to real product wage, its res-
ponsiveness to unemployment also varies considerably between countries,
as shown in Table 6.9. Those with a particularly high level of responsive-
ness of real wage growth to short-term unemployment also have relatively
Robert M. Lindley 217
Table 6.8 Europe: responsiveness of real product wages to unemployment,

Long-term real product wage Median lag

semi-elasticity (years)

France -3.5 1.5

Germany -3.0 4.0
Italy -3.5 2.0
UK -1.0 1.0
Sweden -10.0 2.5
Japan -5.0 3.0
USA -1.0 1.0

Source: OECD (1994a), Part II, Table 5.2.

Table 6.9 Europe: wage flexibility in the EU, 1972-92

Semi-elasticities of real wage growth with respect to Long-term

unemployment unemployed as
% of total

Short-term Long-term Total

unemployment unemployment unemployment

Belgium -1.32 -0.53 -0.78 59

Denmark -0.84 -0.21 -0.66 26
France -0.77 -0.16 -0.58 34
Germany -1.72 -0.54 -1.26 39
Greece -0.92 -0.16 -0.62 49
Ireland -0.62 -0.20 -0.39 60
Italy -1.21 -0.44 -0.54 58
Netherlands -1.34 -0.45 -0.99 48
Portugal -\.09 0.13 -0.62 30
Spain -0.46 -0.14 -0.34 44
UK -0.68 0.00 -0.54 35
Sweden -1.60 0.74 -1.59 n.a.

Notes: a Unemployment greater than 12 months-1992 ELFS.

n.a. = not available.
Sources: OECD (1993), Tables 3.1, 3.2 and 3.5; CEC (1994a), Graph 172.

high, though smaller. responses to long-term unemployment (LTU):

Belgium, Germany, Italy and the Netherlands (note also a similar result
for Sweden where the impact of LTU is especially marked). For the other
countries, not only are both elasticities low but the ratio of long-term to
short-term elasticities tends to be smaller: Denmark, France, Greece and.
218 The European Union
notably, the UK with a zero LTU elasticity. The ratios for Ireland and
Spain are somewhat higher, akin to those for the responsive group of
countries whereas the LTU elasticity for Portugal is actually positive.
Other things being equal, we might expect LTU to be a higher proportion
of total unemployment in those countries where its existence has a lower
relative impact on real wage growth. This does not, however, appear to be
the case. Belgium, Ireland and Italy recorded LTV at about 60 per cent of
total employment in 1992 whereas Denmark, France and the UK with lower
ratios of the two elasticities have much lower proportions of LTV.
As with the employment elasticities in the previous sub-section, the
results of estimating wage models do depend greatly on specification, data,
etc. Overall, as Beatson (1995) shows, certain rankings seem to recurr.
Generally, the UK shows the least flexibility and Germany the most.
France is more flexible than the UK but rarely comes above Germany.
Italy is erratic, though usually above the UK.
Changes in wage flexibility over time have also been explored by a
number of authors. The results are somewhat mixed. Chan-Lee et at.
(1987) conclude that less wage inflation took place in the first half of the
1980s than would have been expected; the case is not a strong one even
for the UK where it is at its best. Moreover, Poret (1990) finds no change
for the UK, though some evidence of a structural break for France, and
Anderton et at. (1992) suggest that for the decade as a whole there is no
effect for UK but observe one for Italy.


Assessments of the international economic situations surrounding the EU

seem to imply that not only must labour markets respond to certain com-
petitive imperatives but they must respond in particular ways. The latter
constitute a mode of behaviour called 'flexibility'.
However, previous sections have shown that while the issue of labour
market flexibility has been much debated, it is still true to say that we lack
a clear enough view of (1) the concept of flexibility, (2) its measurement,
(3) the extent of flexibility, (4) its determinants, and (5) the impact of dif-
ferent approaches to and different degrees of flexibility on the economy.
Several general points emerge from the scrutiny of European evidence:

(a) a 'fluid' labour market is not necessarily a flexible market;

(b) the analysis of prices and quantities without knowing the parameters
of the models implicitly intended to explain their movement is liable
to confuse if not actually mislead - overall these sorts of facts,
Robert M. Lindley 219
including measures of labour mobility, yield much less than their
apparent 'relevance' seems to promise;
(c) having a competitive national labour market almost certainly means
having flexible external labour markets and probably means having
flexible internal labour markets;
(d) but a flexible national labour market may be achieved by a mix of
different degrees of external and internal flexibility;
(e) high static flexibility (relating to current labour allocation) may not
foster high dynamic flexibility - the former's potentially negative
impact on the quality of the employment relationship could deter the
fostering of learning and adaptability;
(f) in determining which mixes offer good options from which to
choose, the relationship between regulation of the labour market and
coordination of collective bargaining is very important;
(g) unfortunately, the problems of measuring international differences in
both regulation and coordination are substantial, being conceptual as
well as statistical;
(h) the use of ordinal rather than cardinal measures may simplify the
measurement problem but involves a significant loss of information
and can complicate interpretation.

However, the measurement of regulatory effort is in its infancy and

there is a strong case for persevering so that its multidimensional character
is captured more effectively. In parallel with this, the scope for measuring
aspects of labour market behaviour in the form of model parameters,
allowing for changes in them over time, should increase with the accumu-
lation of more comparable data, produced more regularly. In addition, the
passage of time during which some of the de-regulation initiatives of the
1980s and early 1990s might be expected to work their way through and
which will increase the scope for separating cyclical from long-term
effects should strengthen the basis for analysis.
Some technical advances are required, nonetheless. Limiting the quanti-
tative analysis of labour markets under institutional constraints to that
which can be handled through econometric analysis only is too narrow an
approach. Experiments need to be made with simulation techniques
derived from operational research rather than economics. Particular con-
sideration should be given to whether or not micro-simulation models are
needed in order to explore the impacts of different regulatory regimes
upon the dynamics of labour market stocks, flows and prices.
Turning to the evidence relating to EU labour market flexibility per se,
as it unfolds, the expectations that might follow from the initial analysis of
regulatory differences become progressively qualified. The regulatory
220 The European Union
frameworks in place in different Member States suggest that the best
conditions for flexibility arise in the Denmark, Ireland and the UK and the
worst arise in the poorer countries of southern Europe. This picture is
modified greatly, when taking into account:

(i) rules derived from (i) direct regulation, (ii) statutory underpinning
of collective negotiation and (iii) purely voluntary negotiation among
the social partners at whatever level;
G) the socio-economic space within which compliance is sought and
achieved (i.e. the effects of the informal economy and compliance
'gaps' within the formal economy);
(k) the extent to which labour market constraints prove to be critical
factors in decision making in practice (e.g. how far labour market
differences determine the spatial distribution of investment rather
than other differences);
(I) the diverse pattern of degrees of regulation and coordination such
that the extents of regulatory efforts in different areas are not as
highly correlated as might be expected (this comes on top of the
effects of (j) above);
(m) the interplay of different regulations such that sometimes 'flexible' pat-
terns of work are promoted mainly by the restrictions imposed on
regular employment rather than those which facilitate the flexible form;
(n) regulation may affect mainly the structure of employment rather than
the level;
(0) the nature of collective bargaining and the relative importance of
insider-outsider considerations (derived partly from different
concentrations of unemployment) may be more important for the
level of employment.

As a result of these different effects, together with the impact of other

parts of the policy regime not considered here (such as social security and
minimum wages), it is clear that the relationship between labour flexibility
and de-regulation is not a direct one. There is scope for different strategies
which do not require all EU countries to embrace the same approach to
regulation and collective bargaining. In particular, de-regulation, as the
case of the UK illustrates only too clearly, is no guarantor of flexibility.


1. I am especially grateful to Edward Amadeo and Sue Horton for their helpful
suggestions and patience during the preparation of this chapter. I should like
to thank my co-contributors to this book, Gary McMahon of the IDRC, and
Robert M. Lindley 221
other participants at the Guadalajara and Toronto conferences on the
project for their comments. My thanks are also due to William Wells (UK
Department for Education and Employment) for permission to use his data
in preparing some of the charts relating to European labour market regula-
tion and to Terence Hogarth of the IER for periodic discussions of compara-
tive labour market issues. The UK Economic and Social Research Council
provided research assistance for part of the work reported in this chapter
(grant no. L-113-25-1018 'Human Resource Regimes and the Single
European Market').
2. Little, for example, is said of equal opportunities, the regulation of
minimum wages and provision of social security benefits.
3. Hourly industrial (manufacturing and construction) labour cost ratios of
roughly 6 to I, adjusting for differences in industrial structure, can be found
within the EU: Germany and Portugal being at the two extremes (Zighera,
1993). The average for the 12 EC countries during the late 1980s was
4~ times that for Portugal, 3 times that for Greece and 50 per cent higher
than the Spanish average.
4. By contrast with no 3, average manufacturing labour costs in the EC are
about 3 times higher than those of the old NICs (Hong Kong, Korea,
Singapore and Taiwan) but between 10 (Malaysia) and 30 (Indonesia) times
higher than new NICs (which also include the Philippines and Thailand)
(Petit and Ward, 1995).
5. Mobility within the labour force is only one way of achieving a net change
in the deployment of labour; differentiated rates of initial entry to and retire-
ment from the labour force (plus temporary exit and return during working
life) provide another mechanisms. The scope for using the latter mechanism,
however, has probably contracted with declining youth cohorts, increasing
recourse to extended education and training prior to entering the labour
market, and a marked increase in early retirement stimulated by strategies
for coping with high unemployment amongst older workers during the


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Paris X-Nanterre).
7 Labour Flexibility and
Productivity in Japan
Neantro Saavedra-Rivano and
Hideki Imaoka


For a long time the Japanese economy has been a source of wonder and
puzzlement. Its performance has been remarkable while at the same time
its practices and institutions seem to differ markedly from those existing in
other developed economies. These feelings have certainly something to do
with the fascination that the Japanese culture and society generally inspire.
Perhaps in no other area of economic activity are these societal and cul-
tural aspects as important as in the working of labour markets and in the
makeup of labour practices at the firm level. Observers of the Japanese
labour markets have been in particular impressed by its low rate of unem-
ployment which, in spite of a prolonged economic crisis, has remained
consistently below the 3 per cent mark. In addition, labour relations seem
to be, at least when measured by the number of days lost as a result of
strikes, much more harmonious than in other advanced countries. A third
feature that impresses outside observers is the level of cooperation that
seems to exist at the level of the firm and that finds its expression in
sophisticated practices such as the quality control circles (QCCs). Some of
these practices have been applied, with relative success, to other countries,
both developed and developing.
These observations have impressed on many observers the perception
that Japan is unique. In this, they are supported by many Japanese who
also believe that their culture, history, and environment have produced a
society that is not only unique but also unreadable by foreigners. The
'culturalist' school of Japanese labour relations was thus born,) and from
the beginning it recognized two main characteristics that were to be associ-
ated with the Japanese way: the lifetime employment system (shuushin
koyou seido) and the wage seniority system (chingin nenkou joretsu). The
former refers to the understanding that employment will normally last for
the whole useful life of the employee. Associated with this is the total
commitment of employees to the fortunes of their enterprise, in such a way

226 Japan

that the relation between employers and employees goes beyond the con-
tractual type of relations that would be usual in other countries. The latter
refers to the relation between time of service (which often is related to age)
and levels of wages as well as of rank within the enterprise. Besides these
two, there are some other particular features of Japanese labour markets. In
the first place, trade unions at the shop level (rather than industry-wide
federations or national confederations) are the most significant labour
organizations from the point of view of labour negotiations. Secondly, and
also in relation with this, labour negotiations are synchronized and take
place every year during the spring year. This is the famous spring offen-
sive, or shuntou. 2 In the third place, a large portion of the annual income of
workers takes the form of bonuses, usually paid twice during the year, in
June and again in December. Finally, the rate of female participation in the
labour markets is lower than in other developed countries.
The popularity (particularly in the West) of the culturalist school has
lasted until now, in spite of the mounting criticism of many economists. In
particular, most Japanese labour economists disagree with the explana-
tions offered by the culturalist school for the specific performance of the
Japanese labour markets. We will discuss these arguments in the next
section. However, in spite of a very basic disagreement, most Japanese
economists would accept that, at least to some extent, the preceding fea-
tures differentiate the Japanese system of employment from that of other
developed countries.
The controversy surrounding the proper characterization of the Japanese
system of employment must be of course placed within the context of the
ongoing debate about the relative merits of the Japanese and American
economic systems as well as about the future of the relations among both
countries. Some of the questions being asked about the Japanese system of
employment are also asked about other particularly Japanese economic
practices and sound familiar: Is Japan different? If so, is it changing? Is
change necessary to the survival of Japan in the new international environ-
ment? The issue of adaptation to new internal and external realities is of
utmost importance.
Let us finally place this characterization within the context of current
economic conditions. As is well known Japan has endured for the last four
years an acute recession, which followed the longest expansionary period
of the post-war, the so-called Heisei boom (1987-90). The productivity
and GDP growth columns in Table 7.1 tell this story. They show, in addi-
tion, the relatively small variation in the unemployment rate, albeit the
latest figures for 1995 place this indicator at around 3.1 per cent. It can be
finally noted that, in spite of large drops in productivity during the current
Table 7.1 Japan: basic data on the economy and labour market, 1980-93, %

Year GDP growth Unemployment Productivity Real wage Nominal wage Rate of inflation
(rate of growth) (rate of growth) (rate of growth)

1980 3.6 2.0 6.3 -1.6 6.3 7.7

1981 3.6 2.2 2.4 0.4 5.3 4.9
1982 3.2 2.4 0.9 1.5 4.1 2.8
1983 2.7 2.6 3.9 0.8 2.7 1.9
1984 4.3 2.7 8.5 1.4 3.6 2.3
1985 5.0 2.6 4.4 0.7 2.8 2.0
1986 2.6 2.8 1.9 2.3 2.7 0.6
1987 4.1 2.8 5.7 2.2 1.9 0.1
1988 6.2 2.5 11.5 3.0 3.5 0.7
1989 4.7 2.3 5.9 1.9 4.2 2.3
1990 4.8 2.1 4.0 1.5 2.7 3.1
1991 4.3 2.1 2.5 0.2 3.5 3.3
1992 1.1 2.2 -5.4 0.1 1.7 1.6
1993 0.1 2.5 -1.6 -D.5 0.7 1.3

Source: Ministry of Labour, Japan (1994a).

228 Japan

recession, the real wage rate has suffered a very small erosion. These
numbers confirm the casual observation that the current recession,
however long and deep, has not unduly strained labour conditions.



Let us start by presenting the basic facts on the Japanese labour force, and
for this purpose we will refer to Tables 7.2-7.4.
In 1993 the labour force was composed of some 66 million people. As
is well known, unemployment is comparatively low in Japan, and in 1993
only 1.7 million people were out of a job, corresponding to a rate of open
unemployment of 2.57 per cent. Some 80 per cent of all engaged persons
were employees, the vast majority in non-agricultural sectors. If we
exclude public servants, we can see that more than 72 per cent of employ-
ees work in firms with fewer than 500 workers, and that more than 54 per
cent of employees work in firms with less than 100 workers. These figures
express well how important small and medium firms are in the Japanese
economy and labour market. The well known and large firms, which we
might identify with those firms employing at least 1000 workers, account
for about 21 per cent of all employees in the private sector. If anything, the
importance of the small and medium-sized firms has increased in the last
20 years. While the total number of employees increased by about 42.8
per cent in this period, the number of those employed in firms with more
than 500 workers increased by 39.1 per cent, and that of those employed

Table 7.2 Japan: composition of the labour force, 1975-93, million people

1975 1980 1985 1990 1991 1992 1993

Population 111.6 116.8 120.8 123.6 124.0 124.3 124.7

Population over 15 84.4 89.3 94.7 100.9 102.0 102.8 103.7
Labour force
Total 53.2 56.5 59.6 63.8 65.1 65.8 66.2
Persons engaged 52.2 55.4 58.1 62.5 63.7 64.4 64.5
Proprietors 9.4 9.5 9.2 9.0 8.6 8.4 8.1
Family employees 6.3 6.0 5.6 5.2 4.9 4.6 4.2
Employees 36.5 39.7 43.1 48.4 50.0 51.2 52.0
Open unemployment 1.0 l.l 1.6 1.3 1.4 1.4 1.7
Participation rate (%) 63.0 63.3 63.4 63.3 63.8 64.0 63.8

Source: Ministry of Labour, Japan (1994a).

Neantro Saavedra-Rivano and Hideki Imaoka 229
Table 7.3 Japan: persons engaged, by size of firm and sector, 1975-93, million

Firm size and sector 1975 1980 1985 1993

Non-agricultural sectors (employees) 36.2 39.4 42.9 51.7

1-4 2.8 3.2 3.4 3.9

5-29 9.2 10.3 10.9 13.0
30-99 5.4 6.2 6.7 8.2
100-499 5.1 5.7 6.5 8.4
500-999 1.6 1.7 2.0 2.9
more than 1000 7.6 7.4 8.2 9.9
Public servants 4.5 4.9 5.0 5.3

Manufacturing (private) (employees) 11.4 11.4 12.4 13.7

1-4 0.4 0.5 0.5 0.5

5-29 2.7 2.8 2.9 3.0
30-99 2.1 2.2 2.4 2.6
100-499 2.2 2.2 2.6 2.8
500-999 0.7 0.7 0.8 1.0
more than 1000 3.3 2.9 3.3 3.7

Retail and wholesale trade (private) (employees) 7.1 8.3 9.1 11.2

1-4 l.l 1.2 1.4 1.4

5-29 2.6 2.9 3.1 3.5
30-99 1.1 1.4 1.5 1.8
100-499 1.0 1.2 1.4 1.9
500-999 0.3 0.4 0.5 0.7
more than 1000 1.0 l.l 1.3 1.8

Services industry (private) (employees) 4.6 5.5 6.9 10.1

1-4 0.7 0.7 0.8 1.0

5-29 1.5 1.9 2.2 3.0
30-99 0.9 1.2 1.4 2.1
100-499 0.8 l.l 1.4 2.2
500-999 0.2 0.2 0.3 0.6
more than 1000 0.5 0.5 0.7 1.2

Source: Ministry of Labour, Japan (l994a).

in firms with more than 1000 workers increased by a mere 30.3 per cent.
Another observation that can be drawn from these data is that the pro-
portion of workers employed in the manufacturing sector (and also in
the public sector) has decreased steadily, while those employed in the
230 Japan
Table 7.4 Japan: modality of employment, by gender and age group, 1987 and
1992, % of total in each group

Managing Regular Part time Arubaito Other Total

positions positions

All workers 6.7 74.9 10.1. 4.1 4.2 100
15-24 0.3 81.6 2.9 13.0 2.2 100
25-34 2.2 85.9 6.2 3.1 2.6 100
35-54 7.5 73.3 14.2 1.8 3.2 100
above 54 18.9 54.2 10.4 3.7 12.9 100
Male 8.5 83.2 0.7 3.3 4.2 100
15-24 0.4 81.5 0.7 15.3 2.0 100
25-34 2.6 93.2 0.3 1.8 2.1 100
35-54 9.5 86.3 0.3 0.9 3.0 100
above 54 21.9 57.1 2.9 3.3 14.7 100
Female 3.6 60.6 26.3 5.5 4.0 100
15-24 0.1 81.6 5.2 10.6 2.4 100
25-34 1.4 70.4 18.4 6.0 3.7 100
35-54 4.1 50.5 38.4 3.3 3.6 100
above 54 12.2 47.5 27.1 4.3 8.8 100
All workers 7.6 72.4 11.3 4.8 3.9 100
15-24 0.5 78.5 2.6 16.5 1.9 100
25-34 2.5 84.8 6.7 3.2 2.7 100
35-54 8.5 71.5 15.7 1.7 2.6 100
above 54 18.5 52.7 13.8 4.0 10.9 100
Male 9.6 81.4 1.0 4.0 3.9 100
15-24 0.7 78.5 0.7 18.3 1.7 100
25-34 3.1 93.0 0.3 2.0 1.5 100
35-54 10.7 85.9 0.3 0.8 2.1 100
above 54 21.6 57.4 4.0 4.0 13.0 100
Female 4.4 58.3 27.5 6.0 4.0 100
15-24 0.4 78.5 4.5 14.5 2.2 100
25-34 1.5 70.2 18.1 5.4 4.8 100
35-54 4.9 48.9 39.5 3.1 3.5 100
above 54 12.5 42.9 33.8 4.1 6.8 100

Source: Ministry of Labour, Japan (1994a).

retail and wholesale trade and in the services sector has increased
Let us look now into the various modalities of employment. In addition
to managing positions and regular employees, the two most important
other modalities are part-timers and 'arubaito'. Even though part-time
employees are not regular employees, do not belong to the firm union, and
Neantro Saavedra-Rivano and Hideki Imaoka 231
have a tenuous contractual relation, in some cases they can work many
hours. In principle, part-time employees may work as many as 35 hours a
week. The proportion of part-time employees is higher in Japan than in
most other developed countries, and it has shown an increasing trend at
least in the last 20 years. It is also to be noted that few male workers prac-
tice this modality, while on the other hand female workers adhere to it
widely, a pattern that has only changed slightly in recent years. This fact is
related, of course, to the division of social activities within the family.
Women usually take up jobs, either regular or part time, early in their
adult life. They often quit after marrying or giving birth and, when the
children grow up, may return to work, most often as part-timers.
'Arubaito' (from the German arbeit) refers to work contracted by the
hour or the day. This modality is widely practised in restaurants, gas
stations, and similar non-career building occupations. As it can be seen
from the large proportion of workers in the 15-24 year old group that are
employed in this modality, students make up the largest contingent of
'arubaito' workers. We will see later that the fact that a relatively large
proportion of all employees belong to either of these two modalities is one
of the factors behind the flexibility exhibited by the Japanese labour
market during the recent recession.
With these facts and figures in mind, let us proceed to an examination of
the two features most often associated with the Japanese employment
system, namely the lifetime employment system and the wage seniority
system. As noted above these are considered by the culturalist school to be
the defining, and in particular unique, characteristics of the Japanese
employment system. As such, they have attracted the attention of critics of
this school, most of them well known Japanese labour economists. 3
Ideally, the lifetime employment system implies that workers enter em-
ployment at a given firm immediately after graduation and remain in that
firm until the age of retirement. Empirical studies of the degree to which
this ideal approximates actual conditions have looked at two sorts of
surveys. One is to ask employees whether they have or have not been
working in the same firm· since graduation. Surveys of this type, rather
predictably, yield very low proportions of lifetime employees. According
to Tachibanaki (1984), and using data for the years 1979-80, as few as
9.8 per cent of male employees in the 50-54 year old age group belong to
this category. Even for male employees in the 30-34 year old group the
proportion is only 33.4 per cent. Rates for female employees are much
lower. The survey also shows that lifetime employment becomes more
common the larger the size of the firm and the higher the educational level
of the employees. This type of survey, however, can be criticized as it in-
232 Japan
terprets the concept of lifetime employment too literally. The point of the
culturalist school, which this literal interpretation would miss, is that cor-
porate employment in Japan is highly cohesive (see, for more details on
the concept of cohesiveness, Imaoka, 1989). A second type of survey asks
employees how long they have stayed with the same firm. As a matter of
fact, these data appear, with a great degree of disaggregation, in the yearly
Census on Wages (Chingin Sensasu) compiled by the Ministry of Labour
of Japan. Comparable data are not compiled so systematically in other
developed countries, but still some comparisons are possible on the basis
of existing statistics. Table 7.5 presents the result of a comparison between
Japan and the USA conducted by Tachibanaki (1984) with data for the
years 1977-8. Substantial differences in length of service are apparent, es-
pecially for female workers and for male workers less than 54 years old.
The fact that length of service is relatively low for employees older than
54 years is due to the mandatory retirement age (usually 60-63 years) that
is prevalent in large firms, which induces many employees to move rather
early to other positions. Table 7.6, which displays more recent data for
Japan, shows that length of service patterns have not changed much for
workers in the 30-64 year old group, while for other age groups the trend
is for a decrease in length of service.
Koike (1988) did another comparative study, in his case between Japan
and the countries of the European Community (EC) (at that time, Belgium,
Britain, France, Italy, Luxemburg, the Netherlands, and West Germany).
The survey, however, dealt with a rather different question, namely the
composition by length of service of the male labour force in manufactur-
ing. Koike found that, when looking at the aggregate figures, the pro-

Table 7.5 Japan: length of service in the same firm: Japan, 1977 and the USA,
1978 (years)

Japan (1977) USA (1977)

Age Males Females Males Females

16-19 2.12 2.12 0.96 0.83

20-24 4.17 3.62 1.83 1.65
25-29 7.12 5.88 3.13 2.82
30-39 12.37 9.10 5.95 4.11
40-54 19.52 15.32 11.93 7.34
55-64 19.38 19.27 16.74 11.18
above 64 21.28 22.14 18.33 12.36

Source: Tachibanaki (1984).

Neantro Saavedra-Rivano and Hideki lmaoka 233
Table 7.6 Japan: length of service in the same firm, 1977-93

1977 1985 1993

Age Males Females Males Females Males Females

16-19 2.1 2.1 1.1 1.0 1.0 1.0

20-24 4.2 3.6 2.7 2.8 2.5 2.5
25-29 7.1 5.9 5.4 5.4 5.0 5.0
30-39 12.4 9.1 11.1 7.9 10.2 8.1
40-54 19.5 15.3 17.7 10.0 18.7 11.0
55-64 19.4 19.3 15.1 14.5 18.3 13.6
above 64 21.3 22.1 12.1 14.5 11.6 15.3

Sources: Tachibanaki (1984), Imaoka (1989) and Ministry of Labour, Japan

(I 994b).

portion of Japanese workers with more than 20 years of service (data from
1970-1) was consistently lower than that for European workers (data
from 1972). The comparison became even stronger when the figures for
Japanese employees of large firms were used, albeit in the case of the Ee
only aggregate data were available. From this analysis Koike concluded
that claims to the effect that lifetime employment is a Japanese character-
istic are misplaced. Koike's analysis, however, seems to be incomplete. In
order to reach conclusions about the cohesiveness of the employment
structure, from data on the composition by length of service of the labour
force, additional comparative data on the age structure of the labour force
would be needed. This kind of data is not presented nor discussed in Koike
(l988) and it seems not to be available.
Let us move on now to the second feature, the wage seniority system.
Again ideally, this means that wage levels as well as rank within the firm
are in direct relation to the length of service in the firm. Empirical
verifications of this feature, in practice, consist of measuring wage differ-
entials by age. This is due, of course, to the difficulty of collecting both
consistent global statistics on rank within the enterprise and associative
data of wage rates according to length of service. The hypothesis to be
tested, then, is that about the existence of a strong positive relation
between age and wage level. Data for the year 1993 and collected in
Figures 7.1-7.3 indeed confirm this hypothesis for workers up to 54 years
old, and also show that the relation is stronger for male workers. The fact
that wage levels start to decrease after this age is consistent with the fact,
noticed above, that employees at this age start to move to other jobs with a
higher frequency. The hypothesis is maintained consistently when we
234 Japan
Figure 7.1 Japan: wage differentials, by age group and gender, 1993


[ 400
§ 350 .• •

• •

c 300
.~ 250
g,o 200 ••
. ....... All workers
• --- Male
I • ....... Female
~ 150 •
j 100
"" 50
o~-+----------~-+------+-~-+ ______ ~

Upto 17 25-29 40-44 55-59

Age group by age
Source: Ministry of Labour, Japan (l994b).

Figure 7.2 Japan: wage differentials, by educational level, male workers, 1993

600 • •
500 •
§ •• •
• . . . .
400 -+- University level

·. .
300- •I .• x x x -- Junior college
• ----- High school
~ x
200 I x -- Junior high school
~0 100
Upto 17 25-29 40-44 55-59
Age group in years
Source: Ministry of Labour, Japan (l994b).

Figure 7.3 Japan: wage differentials, by educational level, female workers, 1993

§ 500 • •
.5 400 • •
~o 300 • • • ....... University level



.. .. .. •

• .. .. •
---Junior college
....... High school
--Junior high school
~ 100
o~~-+-+ __ ~+-+-~-+-+ __ ~+- __ ~-+ ____~

18-19 25-29 35-39 45-49 55-59 above

Uf7to 20-24 30-34 40-44 50-54 60-64 64
Age group in years
Source: Ministry of Labour, Japan (I 994b).
Neantro Saavedra-Rivano and Hideki Imaoka 235
disaggregate by educational level. Sustaining this hypothesis proves only
one part of the second basic tenet of the culturalist approach, which in
addition maintains that this trait is unique to Japan. Koike (1988) did com-
parative analyses of the wages-age relation for Japan and the USA on the
one hand, and for Japan and the countries of the EC on the other hand. He
concluded that this sort of positive correlation between wages and age is
not unique to Japan and that it can also be found in the USA and the coun-
tries of the EC. However, the relation holds in those countries only for
white collar workers. Its validity also for blue collar workers could indeed
be considered a feature of the labour market which is unique to Japan,
which Koike termed 'blue collarization'.
From this brief survey we may conclude that the two principles of the
culturalist school appear to hold rather consistently. However, it is difficult
to conclude that they apply uniquely to Japan or that they derive from cul-
tural aspects. To some extent, the principles also hold in the labour forces
of other developed countries. The difference between Japan and other
countries, barring more conclusive evidence, seems to be one of degree.


7.3.1 Unions

One of the distinguishing features of the Japanese system of labour rela-

tions is that most trade unions are organized at the level of the enterprise,
and that it is there that the centre of trade union activities and decision
making power lies. Exceptions to this rule are the Seamens' Union and,
among public workers, the Teachers' Union and the Municipal Workers'
Union. 4 At the firm level, more than one union may be established, and
indeed some 13 per cent of all firms have two or more unions. Enterprise-
based unions are organized into sector-wide labour federations and these,
in turn, belong to labour confederations. Since 1987, and after a long and
difficult process of unification, there has been one major confederation of
labour grouping workers in the private sector, best known by its Japanese
acronym Rengo (Japanese Private Sector Trade Union Confederation). In
1993, its membership comprised about 62 per cent of all unionized
The role of trade unions is to represent its members at the time of labour
negotiations and also, in a more routine way, to manage day-to-day
relations between labour and management. Only regular employees can
be members of a union. In addition to part-time employees or employees
with fixed-term contracts, employees holding management or supervisory
236 Japan

duties are also barred from union membership. Trade unions flourished
after the end of the Second World War, and in 1950 about 46 per cent of
all workers belonged to a union. This coverage has decreased steadily
since then and in 1993 only 24.2 per cent of all workers were members of
a union. In spite of that, the coverage of trade unions is still much higher
in Japan than in the USA, although well below that existing in most
European countries. In general, the larger the size of the firms, the higher
the proportion of unionized workers. There are also important differences
depending on the sector of the economy. Public workers have the highest
rates of unionization, wholesale and retail trade has one of the lowest
rates, and manufacturing is slightly above the average. Table 7.7 gives
more particulars on this matter.
It is generally recognized that labour relations are more harmonious in
Japan than in most other countries. Table 7.8 provides some evidence to
this effect, comparing the number of workers involved and of days lost in
industrial disputes in Japan and some other developed countries. The fact
that most unions are enterprise-based may help in explaining this, as
most potential conflicts can be identified and handled at an early stage.
Another possible factor could be that labour negotiations are co-
ordinated, happening around March of every year (this is the famous
shuntou, or spring offensive), and that their results hold for a whole year.
An examination of the pattern of spring wage increases (Figure 7.4),
together with the observation above that unionization rates are higher in
larger enterprises, supports the hypothesis that unions have been suc-
cessful in obtaining higher wages for their members. This hypothesis is
also confirmed by an earlier albeit much more detailed study by Taira
(1970). He also noticed that this successful 'shuntou unionism' has as a
counterpoint the increase in the use by firms of non-regular workers, as
part-timers and 'arubaito'.

Table 7.7 Japan: union memberships. totals and selected sectors, 1980-93, %

1980 1985 1990 1991 1992 1993

All sectors 30.8 28.9 25.2 24.5 24.4 24.2

Agriculture 20.9 17.2 1l.9 1l.2 1l.5 10.7
Mining 47.2 48.7 42.3 42.2 30.7 34.4
Manufacturing 35.3 33.7 30.1 29.9 29.6 30.7
Wholesale and retail trade 9.4 9.3 9.0 8.8 9.0 9.1
Public employees 74.6 76.4 74.9 72.6 72.1 68.2

Source: Ministry of Labour, Japan (1994a).

Neantro Saavedra-Rivano and Hideki Imaoka 237
Table 7.8 Japan: industrial disputes in selected developed countries,
1979-90 (000)

1979 1982 1985 1988 1989 1990

Workers 449 216 123 75 86 84
Days lost 919 538 264 174 220 145
Workers 1021 656 324 118 452 185
Days lost 20,409 9061 7079 4364 16,996 5926
Workers 4608 2103 791 790 727 291
Days lost 29,474 5313 6402 3702 4128 1890
W. Germany
Workers 77 40 78 33 44 257
Days lost 483 15 35 42 100 364

Source: Japan Institute of Labour (1992).

Figure 7.4 Japan: Spring wage increases, 1981-92


~5 \

[J Large fi rms
Small firms
,•, ,\
- ~
r i

" " f
0- '" '"
00 00
00 00 00 00
00 0>


Note: Based on a sample of firms, al\ possessing at least one union; large firms
have at least 1000 employees and small firms have at most 300 employees.
Source: Asahi Shimbun (1993).

7.3.2 Legislation

Most of the legislative framework underlying labour relations derives

from laws enacted in the years immediately after the end of the Second
World War, and in particular bears the mark of the American occupation
authorities. Although labour legislation is quite complex, some of the most
238 Japan

important labour laws are: the Labour Relations Law (September 1946);
the Trade Unions Law (June 1946); the Labour Standards Law (April
1947); the Employment Security Law (November 1947), all of them sub-
sequently revised and updated. Both the laws on Labour Relations and on
Trade Unions establish the basic rules and institutions for relations
between labour and management. In· addition, the Labour Relations Law
establishes a Central Commission for Labour Relations and Commissions
for Labour Relations at local levels, to provide support for negotiations
between labour and management. The Labour Standards Law defines
working conditions, such as working hours, procedures for payment of
wages, general safety standards, and other standards relating to the work-
place environment. In addition to setting these standards, inspection
bodies are established and penalties for infractions are set.
Legislation aimed at employment stability and at alleviating the conse-
quences of unemployment is comprehensive. The Constitution of Japan
establishes that everybody who is willing and able to work has the right to
do so, and the Employment Security Law is explicit in its assignment to
the government of the main responsibility in maintaining equilibrium in
the labour markets. Bureaux of Employment Security are set at central and
local levels to take the necessary steps to this effect. Some of the activities
of these Bureaux are to channel information so as to match supply and
demand and to offer vocational training to displaced workers. On various
occasions, and according to the circumstances, special laws have been
enacted to strengthen this sort of activities by the government authorities.
The Employment Insurance Law (December 1974) set up a national
system of unemployment compensations. All regular workers of firms are
eligible to participate in this scheme, which is administered by the national
government. Operational and overall financial backing is provided by the
state, while workers and firms di vide equally a premium of 1.5 per cent of
wages. As of March 1993 some 32.8 million workers belonging to
1.8 million establishments were covered by this scheme which, through
the fiscal year of 1992 (April 1992-March 1993), paid almost 900 billion
yen (10 billion dollars) to 571,000 beneficiaries (monthly average). Part-
time and 'arubaito' workers, due to their type of working arrangements,
are rarely eligible for any unemployment compensation. During the fiscal
year of 1992 slightly less than 50,000 day workers (monthly average)
received unemployment compensation.
This brief discussion of labour legislation illustrates that Japanese
labour policies are active in promoting the level of employment and
regulating labour conditions. The government establishes annual and
Neantro Saavedra-Rivano and Hideki lmaoka 239
pluri-annuallabour plans, which contemplate measures to retrain workers,
provide relief for sunset industrial sectors, and so on. Emphasis has been
placed recently on the reduction of hours of work, and several measures
have been taken to this end. Through the working of labour legislation and
institutions, and the execution of labour policies, it can be judged that the
government provides an important contribution to the flexible operation of
labour markets.


It has long been noticed that the rate of unemployment in Japan is low if
compared with those of other industrial countries. In addition, it appears
that this variable is not very sensitive to business conditions. Even during
the current recession, probably the deepest in the post-war period, the rate
of unemployment has barely exceeded 3 per cent. Again, several factors
have been cited to explain that Japan is not so different, after all, from
other countries. Chief among them are the low rate of participation of
female and young people in the labour force, differences in definitions of
unemployment, and the relatively high proportion of people employed in
family and rural businesses (where employment is inherently more
stable). Even taking account of these factors it still remains, as Ito
(1992) convincingly shows, that the unemployment rate in Japan
is lower and less responsive to business conditions than in other
developing economies.

7.4.1 Comparative Analysis of Employment Adjustment

Following Ono (1989) we will proceed to analyze the main supply and
demand factors behind employment in several periods and across several
industrial countries. Emphasis will be on two generally recessionary
periods, 1973-76 and 1979-82, and the countries considered, besides
Japan, are Canada, the USA, France, West Germany, and the UK.
Let Q stand for real GDP, E for employment, H for hours per worker.
We can define. productivity a by the formula


If, in addition, we consider active labour popUlation F = {3N, where {3 is

the rate of labour participation and N is the popUlation 15-64 years old,
240 Japan

and define the employment rate e by e = ElF, we may combine all of these
relations into

e = Q/a{3HN

If we instead consider rates of change, we are left with the final expression

which provides us with a decomposition of employment into its demand

(a, Q, H) and supply ({3, N) factors.
Let us refer to Table 7.9 for the purposes of the international compari-
son, and consider first the period 1973-6, which roughly corresponds to
the first oil shock. For all countries subject to this analysis there were
drops in the employment rate and also in the number or hours worked (per
person). In addition the rates of growth of GDP and of productivity were
lower than in the previous period (1970-3). Thus, the behaviour of the
demand factors was not qualitatively different across these countries,
although the rate of growth of total labour hours (Q - d'), while positive in
Canada and the USA, was negative for all other countries, especially so
for W. Germany. Turning now to the supply factors, let us first consider N.
We see that its rate of growth had the largest drop in W. Germany and
Japan, and that it was low anyway in Japan and in the European countries
if compared with the values for Canada and the USA. But perhaps the
most interesting variable is the participation rate, which increased in all
countries except Japan and W. Germany. It can thus be seen that there
were many national differences regarding the behaviour of the supply
factors, with some similarities between W. Germany and Japan. In the
end, the superior performance of Japan, reflected in the very small drop of
employment observed during this period, seems to be due more to the low
growth of labour supply rather than to a particularly good behaviour of its
productive sectors.
Let us move now on to the period 1979-82, which is associated with the
second oil shock. Again, for all countries employment and the number of
hours per worker diminished while the rate of growth of GDP was also
lower than in the previous period, thus characterizing a recessionary
period. This time the rate of growth of productivity was lower for all coun-
tries except for the USA and the UK. The latter two were also the only
ones experiencing negative growth and, consequently, also those with the
largest fall in the employment rate. If we examine the factors coming from
the demand side, Japan was, during this period, the only country where the
Table 7.9 Japan: rates of change of the employment rate and of its explaining factors, 1973-85, % change in 3 year period

e Q a Q-a t3 H N

1970-3 0.13 20.40 10.26 10.14 3.59 --0.25 6.67
1973-6 -1.66 13.67 7.77 5.90 2.21 -2.27 7.62
1976-9 --0.34 12.54 2.79 9.75 4.11 0.26 5.72
1979-92 -3.84 1.71 1.99 --0.28 1.53 -2.84 4.87
1982-5 0.54 13.22 4.15 9.07 2.34 2.92 3.27
1970-3 0.06 13.08 2.84 10.24 2.24 2.6 5.68
1973-6 -2.96 2.93 --0.04 2.97 2.07 -1.47 5.33
1976-9 2.00 12.12 0.90 11.22 3.96 0.25 5.01
1979-82 -4.08 --0.46 1.91 -2.37 1.19 -3.23 3.75
1982-5 2.76 13.40 1.8 11.60 1.75 4.11 2.98
1970-3 --0.12 21.86 21.48 0.38 --0.38 -2.87 3.75
1973-6 --0.74 6.20 10.26 -4.06 -1.67 -4.34 2.69
1976-9 --0.10 16.40 10.35 6.05 1.76 2.13 2.26
1979-82 --0.28 11.55 9.05 2.50 0.74 --0.38 2.42
1982-5 --0.27 13.21 8.98 4.23 0.19 1.23 3.08


Table 7.9 (continuelf)

e Q a Q-a r3 H N
1970-3 -0.25 17.62 17.87 -0.25 0.14 -2.90 2.76
1973-6 -1.86 8.77 12.54 -0.37 0.49 -4.59 2.19
1976-9 -1.62 10.49 10.99 -0.50 0.78 -1.92 2.26
1979-82 -2.37 3.35 6.72 -3.37 -1.68 -3.19 3.87
1982-5 -2.38 3.39 7.02 -3.63 -1.92 -2.03 2.70
W. Gennany
1970-3 -0.45 12.26 13.60 -1.34 -0.94 -2.30 2.35
1973-6 -3.07 4.02 12.41 -8.39 -2.32 -3.21 0.21
1976-9 0.77 10.30 7.80 2.50 -0.70 0.68 1.75
1979-82 -3.59 0.88 4.67 -3.29 -1.77 -2.61 4.18
1982-5 -1.77 7.00 7.56 -0.56 -0.26 0.10 1.37
1970-3 0.02 13.08 12.75 0.33 0.88 -0.95 0.38
1973-6 -2.77 2.18 6.79 -4.61 1.38 -3.85 0.63
1976-9 0.24 6.97 3.65 3.32 0.58 1.00 0.50
1979-82 -6.33 -2.49 6.39 -8.88 -1.36 -2.97 1.78
1982-5 -1.04 9.97 4.69 5.28 1.37 3.06 1.89

Source: Ono (1989), chapter 12.

Neantro Saavedra-Rivano and Hideki lmaoka 243
rate of growth of total labour hours worked (Q - a) was positive. Total
labour hours fell the most in the European countries. In all countries hours
per worker fell, but by the least in Japan. The demand factors for the coun-
tries surveyed behaved thus quite differently during the period 1979-82
than in the first oil shock. As for the supply factors, we again notice differ-
ences. The Japanese rate of growth of working age population (N) was
again one of the lowest (together with that of the UK). The rate of labour
participation decreased in all European countries, rose slightly in Japan
and more markedly in Canada and the USA. The again superior Japanese
performance on employment is to be attributed this time to both demand
and supply factors.
What emerges from this interesting analysis by Ono is that, overall,
supply factors such as the rate of labour participation and the low growth
rate of the population are as, if not more important, than factors related to
the productive sector. It is these factors that are more clearly related to the
traditional characteristics of the Japanese system of employment, such as
the lifetime employment system. Although this can be seen as a blow to
the 'culturalist' theories of labour, we will see later that these theories may
find a new life in the explanations of the apparent adjustment of the labour
participation rate to business conditions.

7.4.2 Fluctuations in Employment and the Business Cycle

Similar findings to Ono's come from a study by Ministry of Labour of

Japan (l994a). They examine the empirical evidence on absolute and rela-
tive fluctuations in employment. Regarding absolute fluctuations in the
level of employment, we will distinguish two periods, 1963-75 and
1976-92, and use as a measure of fluctuation the standard deviation of
employment. Table 7.10 presents the results of such observations for
Japan and major developed countries. It can be seen that employment has
generally been stable, and that it became more stable during the second
period in France, Germany and Japan and less for the other three countries
of the sample. During the second period, Japan had the most stable level
of employment among major developed countries, except for France. 5
Table 7.10 also shows the correlation coefficient between the rate of
economic growth and rates of change in employment for-the same periods
and countries, a measure of relative stability of employment. Again Japan
exhibits the most stable situation, especially so during the second period.
The general observation in relation to these data is that, if anything, stabil-
ity of employment in Japan has become more marked after the first oil
244 Japan
Table 7.10 Japan: relation between economic growth and changes in
employment, 1963-92

Change in employment Correlation coefficient between

(standard deviation) economic growth and change in

1963-75 1976-92 1963-75 1976-92

Japan 1.25 0.80 0.449 0.019

USA 1.44 1.78 0.673 0.887
Canada 1.41 2.21 0.798 0.792
France 1.10 0.71 0.860 0.758
Germany 1.80 1.17 0.864 0.604
UK 1.19 1.97 0.428 0.649

Source: Ministry of Labour, Japan (1994a).

As was pointed out earlier, an important factor explaining stability of

employment in Japan arises from the way in which employment adjusts in
response to changes in output. At a first level, a change in total labour
hours worked will occur. At a second stage, it is useful to decompose this
figure as the product of total number of workers and of hours per worker.
A study from the Ministry of Labour of Japan 6 found that (1) adjustment
in terms of total labour hours is important in Japan, albeit smaller than in
most other countries; (2) the contribution of adjustment of per capita
labour hours is larger in the Japanese case than in most other countries;
and (3) the contribution of adjustment of employment in the Japanese case
is by far smaller than in other countries (see Figure 7.5).

7.4.3 Tools of Employment Adjustment and Income Effects

Let us explore now in more detail the instruments and methods used by
Japanese enterprises to deal with the question of employment adjustment.
A comparative survey conducted in 1988 by the Ministry ofInternational
Trade and Industry (MITI, 1988) noted that few Japanese enterprises
(1.8 per cent of those surveyed) resort to the firing of employees for the
sake of employment adjustment. The instruments favoured, when prepar-
ing long-term employment plans, are instead adjustment in the amount of
overtime (44.9 per cent) and in new hirings (37.7 per cent). On the other
hand, 21.1 per cent of enterprises surveyed in the USA resorted to the
firing of employees for the purpose of employment adjustment.
Neantro Saavedra-Rivano and Hideki lmaoka 245
Figure 7.5 Japan: effect of a I per cent increase in manufacturing output on
labour inputs


Ot - ---+-
- 0,1 Japan USA Canada France Germany UK

Source: Ministry of Labour, Japan (1994a), based on data from various sources for

A more recent survey, referring to the period October-December 1993.

found that the major instruments used by Japanese enterprises for the sake
of short-and medium-term employment adjustment were control of over-
time (26 per cent of enterprises surveyed), reduction or suspension of mid-
career hirings (18 per cent). transfer within the enterprise (11 per cent).
and transfer within the group of related enterprises (8 per cent). Table 7.11
presents in more detail the results of this survey and compares it to similar
surveys conducted in other recessionary periods, namely the first oil shock
(1975) and the high yen or endaka crisis (1986-7). As can be seen, manu-
facturing. and particularly the machinery-related sector, has always been
the most affected by the crises. At any rate, the promotion of early retire-
ment and outright firing of employees has been the policy of last resort. If
anything, the use of these instruments has lessened in the current recession
in comparison with past recessions. The service sector deserves special
consideration. It has been increasingly sensitive to the recessions and the
firing of employees has become more common, albeit still at very low
Overall, it can be said that the Japanese enterprises do not appear to be
willing to fire their employees for the purpose of employment adjustment.
They prefer to adjust their total labour costs by applying flexible labour
hours and flexible wage policies. Another dimension of the flexibility of
Japanese labour markets must also be highlighted, one that is internal to
Table 7.11 Japan: instruments for employment adjustment during selected recession periods, 1975-93, % of surveyed firms
Adjusting Reduce Transfers Reduce Extra Reduce part Temporary Early
firms extra hours new hirings holidays time closing retirement
workers and firing

First oil shock 71 54 23 50 16 20 5
Endaka crisis 40 26 20 12 4 6 3 3
Recent period 50 38 29 24 9 10 7 2
Equipment related
First oil shock 82 69 30 64 18 23 6
Endaka crisis 56 41 29 18 6 10 3 5
Recent period 65 52 39 34 12 14 8 3
Retail and wholesale
First oil shock 37 16 6 24 5 0 I
Endaka crisis 14 8 6 4 I 1 0
Recent period 27 17 9 14 3 4 0 I
First oil shock
Endaka crisis 15 5 3 5 4 0 I
Recent period 31 19 14 13 4 5 1 2

Note: Data for the first oil shock refers, in the case of manufacturing, to April-June 1975; and to July-September 1975 for other
sectors. For the endaka (high yen) crisis, in the case of manufacturing and equipment-related sectors, to October-December 1986; in
the case of retail and wholesale, to January-March 1987; and in the case of service, to January-March 1986. The recent crisis uses
data for the period October-December 1993.
Source: Ministry of Labour, Japan (1994a).
Neantro Saavedra-Rivano and Hideki Imaoka 247
the enterprise or to the group of related enterprises (keiretsu). The big
enterprises use often the instrument of transferring employees within the
enterprise or group of enterprises. In a study conducted over the year
19927 about the motives behind flows of personnel in workplaces, it was
found that 59.3 per cent of these movements were due to transfers to other
positions within the same firm, 5.2 per cent to transfers within the same
group of enterprises, 25.4 per cent were leaving the firm for contractual
reasons (retirement or end of fixed-term contract), and 10.1 per cent were
fired due to business conditions.
Undoubtedly all these tools of adjustment reflect on per capita labour
income. It is interesting to examine the increase in labour share that corre-
sponds to a 1 per cent increase in GDP and decompose it into its two
components, namely the increase in the level of employment and the in-
crease in per capita labour income. Such an exercise was carried out, by
the Ministry of Labour of Japan for the six major OECD countries. 8 In the
case of Japan it is found that almost 100 per cent of the labour share
increase is explained in terms of per capita labour income. Exactly the
opposite situation is found for Canada, while for the USA more than
90 per cent of the labour share increase is accounted for by increase in the
level of employment. For the other countries of the sample it is also true
than more than half of the change in the labour share must be attributed to
changes in the level of employment (see Figure 7.6).

Figure 7.6 Japan: effect of a I per cent increase in GDP on employment and per
capita labour income


- 0. 1 Japan USA Connda France Gennany UK

Source: Ministry of Labour, Japan (1994a), based on data from OECD for
248 Japan

7.4.4 Female Participation in the Labour Market

Let us look now more closely to the labour participation rate, in particular
the female participation rate. If we refer to Table 7.12 for the more recent
figures, we can see that the total rate of participation in the labour market
is quite stable, with a maximum variance of 2.4 percentage points. Both
the female and the male participation rates have separately a higher
variance (3.1 and 2.7 percentage points respectively), the male rate being
much higher than the female rate. Female participation has been increas-
ing while the male rate has declined slightly. These figures confirm the
general stability of the conditions in the labour market but they also indi-
cate that some changes are developing slowly, which tends to increase the
importance of women in these activities.
It has already been noted before that, during the period 1973-6, only
Japan and W. Germany exhibited a drop in participation rates. If this rate
is further examined to differentiate according to gender (see Table 7.13)
we find an interesting difference between Japan and the other countries
surveyed. While in all countries (including Japan) the participation rate
for males drops, the corresponding rate for females increases for females
in all countries except for Japan (and also for W. Germany, albeit the
figure is in this case insignificant). In addition, the fall in the Japanese
male participation rate is, except for the UK, the smallest. This is quite
striking and demands further examination.

Table 7.12 Japan: labour participation rate, by gender, 1980-93, %

Total rate Female rate Male rate

1980 63.3 47.6 79.8

1981 63.3 47.7 79.8
1982 63.3 48.0 79.5
1983 63.8 49.0 79.4
1984 63.4 48.9 78.8
1985 63.0 48.7 78.1
1986 62.8 48.6 77.8
1987 62.6 48.6 77.3
1988 62.6 48.9 77.1
1989 62.9 49.5 77.0
1990 63.3 50.1 77.2
1991 63.8 50.7 77.6
1992 64.0 50.7 77.9
1993 63.8 50.3 78.0

Source: Ministry of Labour, Japan (1994a).

Neantro Saavedra-Rivano and Hideki lmaoka 249
Table 7.13 Japan: change in the labour participation rate, by gender, 1973-76,
% change in 3 year period

13m f3, f3
Canada -0.78 7.71 2.21
USA -0.72 6.43 2.07
Japan -0.36 -3.89 -1.67
France -1.66 4.09 0.49
W. Germany -3.78 -0.06 -2.32
UK -0.06 4.54 1.38

Source: Ono (1989), Chapter 12.

It is generally considered that adverse business conditions may have

two potential effects on the labour participation rate. On the one hand, the
need, actual or expected, for supplementary income may drive new
entrants into the labour market. This effect will produce an increase in the
participation rate. On the other hand, the difficulties in getting a job, as
well as the usually depressed wages, may induce people to wait or simply
stay away from the job market. As the empirical evidence shows, in many
countries the disincentive effect is dominant for males while the opposite
effect is dominant for females. The case of Japan is different. The partici-
pation rate of males is little changed, while that of females goes down
sharply. This phenomenon has been analyzed by several Japanese authors,
among them Ono (1981), Higuchi et al. (1988), and Higuchi (1992). In
what follows we will make mainly reference to Higuchi's work.
The study by Higuchi compares female labour participation for Japan
and the USA. It attempts to explain the differences in behaviour by
looking at the differentiated effect of several possible factors that would
determine the female labour participation rate. The most important among
these factors are: level of education, place of residence (size of city), age,
family structure, number of children, and income of head of household.
The study finds that having higher education has a larger effect in the
female labour participation rate for the USA than for Japan. The second
factor, the size of the city of residence, has a similar effect in both coun-
tries, namely, the participation rate is lower for big cities'. The third factor,
age, is examined for the female population aged 30-44 years. Here we see
that, while in Japan the labour participation rate increases with age, the
contrary happens in the USA. The fourth factor, family structure, refers to
whether people live or not in nuclear families (including parents or other
relatives of the wage earner or spouse). As would be expected, females
living in nuclear families have a higher labour participation rate in both
250 Japan

countries. As for the potentially negative impact of children in female

labour participation, Higuchi found that this effect is much smaller in the
USA than in Japan: female participation rates were 36.8 and 17.1 per cent
in the USA (white people) and Japan respectively when the age of the
children was less than 5 years, and 51.7 and 28.7 per cent in the case of
children of more than 5 years of age. The final factor, income of the head
of the household, has as expected a negative impact on female labour par-
ticipation. However, this effect is much larger in Japan (with an elasticity
of -0.24) than in the USA (elasticity -0.09).

7.4.5 Bonus Payments as an Adjustment Tool

As said before, one of the peculiarities of the Japanese employment

system is the bonus payments, which are received by blue collar as well as
white collar workers. Paid twice a year (summer and end of year), they
rarely represent less than one-fifth of total annual remuneration and may in
some cases be equivalent to more than 6 months' wages. This peculiar
institution has been much studied and there are many interpretations of it.
One of the main issues is whether the bonus payments are used as an
adjustment tool or not. Casual examination of Table 7.14 seems to support

Table 7.14 Japan: change in bonus payments in manufacturing industry and

their relation to monthly wages, 1980-93, % no. of months

Summer End of year

Change No. of months Challge No.ofmollths

1980 10.0 1.48 7.3 1.67

1981 5.1 1.45 5.7 1.64
1982 4.4 1.40 3.1 1.58
1983 1.9 1.37 1.5 1.53
1984 3.1 1.36 3.8 1.55
1985 3.7 1.39 4.3 1.56
1986 1.5 1.38 -2.3 1.50
1987 0.3 1.36 2.6 1.52
1988 4.0 1.35 6.5 1.54
1989 8.5 1.42 8.6 1.61
1990 7.8 1.44 7.3 1.66
1991 4.5 1.54 2.2 1.71
1992 2.7 1.54 -0.9 1.65
1993 -2.0 1.43 -1.1 1.53

Note: Data for enterprises with at least 30 employees.

Source: Ministry of Labour, Japan (1994a).
Neantro Saavedra-Rivano and Hideki Imaoka 251
the existence of a pro-cyclical relation between the business cycle and
bonus payments, especially when the latter are measured in relation to
the monthly wage. This sort of result is maintained if one looks at data
for the whole economy, and also if firms are broken down by size. In all
cases we observe that the ratio of bonus payments to the monthly wage
goes down during a recession and that it increases during an expansion-
ary period.
Going beyond these observations, some authors (see, e.g., Weitzman,
1984) have asserted that bonus payments are the expression of a deep link
between employers and employees, what has been termed the 'share
economy'. In this view, the variation in bonus pay'ments is positively asso-
ciated with the change in profits. Ono (1989) put these ideas to an em-
pirical test. He estimated a regression with the rate of change in per capita
bonus payment as a function of the rate of change in per capita profits, the
rate of change of the consumer price index, and other independent
variables. As expected, positive relations were found for both variables.
The profit effect was not as strong for regular workers as for managerial
workers, and there was in all cases a strong relation between the rate of
change in bonus payments and the rate of change in the consumer price
index. A similar regression was run using instead the change in per capita
wages for regular workers. In this case, the relation with the rate of change
in profits was statistically insignificant, while that with the rate of change
in the consumer price index was high. This also confirms the common
view that wages are less flexible than bonus payments.


In this chapter we have reviewed several mechanisms of adjustment in the

labour market and their relation to the traditional practices associated with
the Japanese system of employment. The insensitivity of the unemploy-
ment rate to recessions, well documented during the first oil shock and
basically confirmed during the current recession, seems to be explained to
a large extent by adjustments in the female labour participation rate and in
labour hours. Average weekly hours of work went from 174.0 in 1990 to
159.4 in 1993. Both of these mechanisms of adjustment can be explained
in reference to the lifetime employment system. The low female partici-
pation rate may be due to the fact that the (male) head of household has a
secure job in most cases. The reduction in. labour hours is a rational
response to recession by firms (with government prodding), given the fact
that Japanese firms cannot easily alter the number of their employees.
252 Japan

Thus, the rigidity implied by the lifetime employment system is moderated

by the flexibility of adjustment in other variables.
An interesting illustration of the working of the lifetime employment
system comes from the evolution of productivity in the manufacturing
sector. Typically in Japan productivity goes below its trend line during a
recession and above it during an expansion. The opposite is typical instead
of the USA. This fact is explained by the different handling of their labour
forces. As it was well documented in the previous section (see, in particu-
lar, Figure 7.6), while it is common in the USA to layoff workers during a
recession, Japanese firms practice 'labour hoarding'. This practice, though
it gives some rigidity in the short term, has served the Japanese economy
well in the long run. As the current recession seems to be nearing its end,
there is no evidence that the behaviour of Japanese firms has changed in
any substantial way from this pattern.


I. Perhaps the best early work representing this school is that of Abegglen
(1958). See also Abegglen (1973), where his ideas were refined and brought
up to date.
2. It is important also to note, given its likely impact on the medium-term
flexibility of the labour markets, that all agreements are valid for only one
year and are thus bound to be revised one year later subject to changes in
business conditions.
3. The volume edited by Aoki (1984) is representative of these critics. The
work by Taira (1970) should also be mentioned, as well as that of Koike
(1988), which draws on many of his earlier writings. Dore (1973) must also
be mentioned, as a perceptive critic of the culturalist school.
4. Hanami (1979, 1989) provides detailed information on labour relations in
Japan, including the history of the Japanese trade unions.
5. Of course we must keep in mind that the rate of unemployment is much
higher in France than in Japan.
6. This analysis can be found in detail in pp. 169-72 of Ministry of Labour,
Japan (1994a). The period of analysis is 1984-91.
7. See Ministry of Labour, Japan (1994a), pp. 182-3.
8. See Ministry of Labour, Japan (1994a), pp. 174-5. The period considered is
1976-92 and statistical data from the OECD are used.


Abegglen, 1. (1958) The Japanese Factory, Glencoe, Ill. Free Press.

Abegglen, J. (1973) Management and the Worker - The Japanese solution, New
York and Tokyo, Kodansha International.
Aoki, M. (ed.) (1984) The Economic Analysis of the Japanese Firm, Amsterdam
North-Holland and New York.
Neantro Saavedra-Rivano and Hideki lmaoka 253
Asahi Shimbun (1993) Japan Almanac 1994, Tokyo, Asahi Shimbun.
Chuuma, H. (1994) Japanese Style of Employment Adjustment (in Japanese),
Tokyo, Shuueisha.
Dore, R. (1973) British Factory - Japanese Factory, London, George Allen &
Hanami, T. (1979) Labour Relations in Japan Today, New York and Tokyo,
Kodansha International.
Hanami, T. (1989) 'Conflict resolution in industrial relations', in R. Hanami and
R. Blanpain (eds), Industrial Conflict Resolution in Market Economies, 2nd edn,
Deventer and Boston, Kluwer Law and Taxation.
Higuchi, Y. (1992) Labour Participation Behavior and the Japanese Economy (in
Japanese), Tokyo, Touyou Keizai Shimpousha.
Higuchi, Y., Seike, A. and Hayami, H. (1987) 'Labour market: Changes in
male-female employment structure' , in H. Hamada, M. Kuroda and A. Horiuchi
(eds), A Macroeconomic Analysis of the Japanese Economy, Tokyo, University
of Tokyo Press.
Hosono, A. and Saavedra-Rivano, N. (1994) La Econom{a Japonesa sin Misterios,
Rio de Janeiro, Getulio Vargas Foundation.
Imaoka, H. (1989) 'Japanese corporate employment and personnel systems and
their transfer to Japanese affiliates in Asia', The Developing Economies, 27(4)
Ito, T. (1992) The Japanese Economy, Cambridge, Mass, MIT Press.
Japan Institute of Labour (1992) Japanese Working Profile - Labour statistics
1992-93, Tokyo, Japan Institute of Labour.
Koike, K. (1988) Understanding Industrial Relations ill Modern Japan, London,
Koike, K. (1991) Labour Economics (in Japanese), Tokyo, Touyou Keizai
Ministry of Finance, Japan (1993) White Paper 011 the Economy (in Japanese),
1993 edn, Tokyo.
Ministry of International Trade and Industry (1988) Japan. US - Japan
Comparative Survey on Enterprise Behavior (in Japanese), Tokyo Research
Committee on Enterprise Behaviour, MIT!.
Ministry of Labour, Japan (1990) Labour Laws of Japall- 1990, Tokyo.
Ministry of Labour, Japan (l994a) White Paper on Labour (in Japanese), 1994
edn, Tokyo.
Ministry of Labour, Japan (1994b) Census of Wages (in Japanese). 1994 edn,
Ono, A. (1981) The Japanese Labour Market (in Japanese), Tokyo, Touyou Keizai
Ono, A. (1989) Japanese Labour Traditions and the Labour Market (in Japanese),
Tokyo, Touyou Keizai Shimpousha.
Tachibanaki, T. (1984) 'Labour mobility and job tenure', in M. Aoki (ed.), The
Economic Analysis of the Japanese Firm, Chapter III, Amsterdam, North-
Taira, K. (1970) Economic Development & the Labour Market in Japan, New
York, Columbia University Press.
Weitzman, M.L. (1984) The Share Economy: Conquering stagflation, Cambridge
Mass, Harvard University Press.
8 Quantitative Flexibility in
the US Labour Market!
Steven G. Allen and Richard B. Freeman


The US labour market is widely viewed as a paragon of neo-c1assical

flexibility. Wages respond rapidly to changes in supply and demand, with
little institutional intervention. Firms hire and fire at will, with few
government or union restrictions. Spells of unemployment are short, and
unemployment benefits modest.
The conventional wisdom is that the flexibility of the American job
market explains why unemployment was lower in the USA than in Europe
in the 1980s and 1990s and thus that flexibility is the road to economic
virtue. The origins of this view can be traced to Lindbeck (1982) and
Giersch (1985), among others. This view continues to prevail in academic
and policy circles today, as indicated by the following quotes from a 1994
symptosium on unemployment sponsored by the Federal Reserve Bank of
Kansas City (1994):

It is a testimony to the flexibility of US wag('!s that the American labour

market was able to accommodate such large shifts without massive dis-
ruption. Correspondingly, if the same forces were trying to produce
similar results in other countries, it is not hard to believe that different
and less flexible labour market institutions could easily have responded
in ways that led to considerable unemployment. (Paul Krugman,
Professor of Economics, Stanford University)
Unemployment in the European Union is almost twice as high as in
the United States and four times as high as in Japan ... Our problem in
Europe is that we are hardly able to create jobs ... The core of the
problem is the bad functioning of the labour market. The market
is simply too rigid. (Franz Andriessen, Former Vice President,
Commission of the European Communities)
There is an implicit presumption in much economic commentary that
European unemployment has remained high, and employment low,
largely, or even wholly, because politicians and policymakers have been

256 The US Labour Market
too dumb to understand how markets work, or too subject to interest
group pressures. On the same level of debate, it can be argued that
reducing unemployment to low levels is a relatively trivial theoretical
exercise, provided you have no social and political constraints. John
W. Morley, Head of the Employment and Labour Market Policy Unit,
Commission of the European Communities.

Yet if one looks over a time horizon greater than the last 15 years, the
foundation for this view is less solid. 25 years ago unemployment rates in
the USA were between 5 and 6 per cent - several times larger than unem-
ployment rates in Europe, which ran between 1 and 2 per cent. For labour
market flexibility to explain this change, one of three things must be true:
either the US labour market became more flexible; or European labour
markets became less flexible; or the economic environment changed to
make flexibility a more important determinant of outcomes than in the
Moreover, as is now widely recognized, the benefits of US employment
growth have been accompanied by rising wage inequality and impoverish-
ment of the lower parts of the earnings distribution. The concentration of
these problems in the USA compared to Europe suggests that while flex-
ibility US-style might help cure some economic troubles, it exacerbates
others, and that while some forms of market flexibility might be socially
beneficial overall, others might not pass a societal benefit-cost test.
In this chapter we examine an aspect of flexibility that has received little
attention: the flexibility that shows up in quantitative reallocation of
labour. Since much of the virtue of price or wage flexibility is that it
induces changes in output or employment, we argue that quantitative flex-
ibility is as (or more) important an indicator of 'economic virtue' as price
flexibility, and thus deserving of greater analytic attention. We ask
whether quantitative flexibility has been faster or slower in the USA in
the 1980s-1990s than in previous decades; and whether it has been greater
or smaller than in other countries.
Our analysis provides little or no support for the view that quantitative
flexibility has increased in the USA. We reject the popular business press
reports that the past two decades have seen extraordinary shifts in jobs
among sector or occupation; exceptional job creation or destruction; the
growth of a huge 'contingent' workforce or of 'virtual' employees shifting
among jobs and employers regularly. Quantitative flexibility is no higher
than in the past in the USA.
Our analysis also provides little or no support for the view that the US
labour market has greater quantitative flexibility than European labour
Steven G. Allen and Richard B. Freeman 257
markets. Shifts of labour among most categories, such as across industry
lines, are quite similar. In addition, we note that labour market regulations
have increased in the USA in recent years, while regulations have been
eased in European countries. We conclude that the major area in which the
USA has shown great flexibility is in wages: relative wages have changed
more than in other countries, and real earnings have fallen for larger
segments of the workforce.


One definition of labour market flexibility would be an absence of external

constraints to price and quantity adjustments by firms or workers to
changes in market conditions. The constraints that get the most attention
are those arising from collective bargaining and government policies and
regulations. Unions raise real wages above market-clearing levels, with
consequences for employment. Governments regulate wages and quanti-
ties and enact payroll taxes that create tax wedges between take-home pay
and the user cost of labour.
The prevailing wisdom is that the USA has fewer constraints on market
determination of wages and employment than does Europe. Unions are
weak in the USA; marginal tax rates on labour income are lower; payroll
taxes are lower; government regulations of wage-setting are minimal; and
there are fewer restrictions on hiring and firing.
The extent to which external constraints affect responses to market
conditions depends, however, on the nature of contracts and transactions
costs. The presence of an external constraint in one part of a multi-
faceted contract need not prevent efficient adjustments. It may, rather,
redefine ownership rights, which according to the Coase theorem, does
not affect flexibility if transaction costs are low (Houseman, 1991;
Lazear, 1990).
Laws or union agreements that limit adjustments for which there is no
side-agreement would seem a priori to be inefficient. But not necessarily.
Many firms make explicit or implicit contracts with their workers that
reduce flexibility to make price and quantity adjustments in the future. Up-
or-out arrangements for partnerships or tenure, defined-benefit pensions,
and promises of lifetime jobs all reduce future degrees of freedom, pre-
sumably in return for improved overall employee performance. While
government or union constraints are presumably less amenable to change
than those between firms and employees, they also may be regarded as
more enforceable. This encourages long-term contracts that open the door
258 The US Labour Market
to market adjustments, say through training, that may otherwise be im-
possible to effectuate in an unconstrained market.
Even wage constraints have a more ambiguous effect on responsiveness
than is often recognized in the flexibility debate. Consider, for example,
payroll taxes, which are generally higher in Europe than in the USA and
thus viewed as a contributor to European joblessness. If firms are legally
obligated to pay a high payroll tax for pensions or health care, they are
likely to shift the cost back to employees through lower wages, with no
employment effects. Whether particular mandated payroll expenditures are
good or bad depends on the specifics, including the value employees place
on the goods or services funded.
Constraints on labour market flexibility may affect the speed at which
wages and quantities adjust to economic shocks and thus the time neces-
sary for a new equilibrium to be established. Although many economists
believe that small non-union companies adjust wages and quantities
most rapidly, we know of no explicit study showing this. In large non-
union companies and governments, wage schedules usually change once
per year. Indexed contracts permit more frequent adjustment but at the
cost of tying outcomes to a price index instead of to labour market
pressures. Individual workers must decide which offers to accept
and, depending on whether their expectations are in line with market
reality, their decisions will have a bearing on how rapidly wages change
as well.
Even when unfettered by unions or regulations, quantity adjustments in
organizations will vary with the type of jobs and internal policies. The
World Wide Web notwithstanding, no firm can aUract, hire, and train new
workers in nanoseconds. Absent an early-warning law, layoffs may be
abruptly announced to workers, but top management usually invests con-
siderable time and effort in deciding how many and whom to terminate.
On the supply side of the market, it takes time for workers to obtain the
education and training necessary for vacant positions. The more highly
skilled and specialized the workforce and jobs, the more time is needed for
labour skill adjustments. On the other hand, skilled workers may redeploy
themselves across geographic areas or sectors more rapidly than less
skilled workers.
Constraints on labour market flexibility may also affect the magnitude
of wage and quantity adjustments. 2 To focus on the magnitude of adjust-
ment, consider a simple market-clearing model. Let hi be the absolute
value of the elasticity of labour demand (i = D) or supply (i = S), ei be the
disturbance to either labour demand or supply, dL be the change in labour
Steven G. Allen and Richard B. Freeman 259
from the original to the new equilibrium, and dW be the corresponding
change in wages where

dW = (eo - e,)/(h o + hs)

dL = (h/(hD + hs))eD + (hd(hdhs))e,

Restraints or policies that reduce flexibility affect both the wage and
employment equilibrium values. Consider, for example, an external
restraint on employer ability to alter employment that reduces the elas-
ticity of labour demand. This would produce a smaller change in em-
ployment to a given shock and a greater wage adjustment. By contrast, a
constraint on the adjustment of wages will produce a greater adjustment
in employment. To evaluate arguments about flexibility in the context of
this model, it is necessary to examine both quantity and wage adjust-
ment.) In more complicated models that allow for firms to respond along
margins bey~md numbers hired and wages paid, the point is even
A final consideration in benchmarking a labour market's flexibility is
whether the market remains near full employment in the aggregate.
Despite the relative absence of constraints and magnitude of wage adjust-
ments, the USA would not be considered flexible (or flexibility would not
be considered virtuous) if unemployment rates had been 10 per cent or
more in the 1980s and 1990s. The ability of an economy to remain at full
employment can be interpreted as a signal of its aggregate responsiveness
to self-correcting market forces. But again, full employment is not equiva-
lent to flexibility; otherwise all the countries on the other side of the Berlin
Wall really would have been workers' paradises.


Virtually all analysts rate the USA high in labour market flexibility. What
is the evidence that justifies this rating?
We categorize the evidence along two dimensions: aggregate or macro-
economic outcomes and relative (microeconomic) outcomes; and wage or
quantity outcomes (see Table 8.1). The flexibility debate has focused on
three of the four cells: macroeconomic evidence on wages; macro-
economic evidence on quantities; and the microeconomic evidence on
260 The US Labour Ma1*et
Table 8.1 USA: types of evidence on labour market flexibility

Wage adjustment Quantity adjustment

Macro Real wage growth Unemployment

Phillips curve Employment growth
CycJicality of real wages Employment-population
Wage curve Capital-labour ratio
Micro Wage gap by education Index of structural change
Wage gap by experience Mobility
Wage gap by region Tenure with employer
Wage dispersion Employment-output elasticity
Industry wage structure Structure of unemployment

wages. We review briefly some of that evidence before turning to the

microeconomic evidence on quantities on which our analysis focuses.

8.3.1 Micro Wages

Changes in the structure of individual wages in the USA over the last 25
years are summarized in Freeman and Katz (1994, pp. 34-5) using data on
hourly earnings for full-time workers from the March Current Population
Survey (CPS). The wage gap between college and high school graduates
increased from 1963 to 1971 but then fell throughout the 1970s and rose
sharply throughout the 1980s. Returns to experience grew considerably in
the 1970s for college graduates but then declined modestly in the 1980s.
The payoff to experience for high school graduates changed little in the
1970s but grew tremendously in the 1980s. The wage gap between men
and women changed little in the 1960s and 1970s but narrowed remark-
ably in the 1980s. Finally, within categories of workers, the dispersion of
wages increased considerably in both the 1970s and 1980s.
Freeman and Katz compare the changes in the US wage structure to the
experience of ten other countries. Only the UK experienced a similar
widening of wage differentials. There was a modest rise in differentials in
Australia, Canada, Japan and Sweden; no noticeable change in France,
Germany and Italy; a modest fall in the Netherlands; and a large fall in
South Korea. Assuming similar shocks in supply and demand, the US
wage structure is indeed highly flexible. But Freeman and Katz also note
that the supply of college graduates increased massively in Korea and
more rapidly in the Netherlands than in the USA. At least part of the dif-
ferential experienced in relative wage adjustments reflects responses to
differential shocks, not differential responsiveness.
Steven G. Allen and Richard B. Freeman 261
Geographic wage patterns also indicate considerable flexibility in the
USA. Historically wages have been lower in the South than elsewhere, but
that wage differential has gradually eroded over time. Blanchard and Katz
(1992) regress annual average wage growth by state (for production
workers in manufacturing) between 1950 and 1990 on log wages in 1950
and obtain a slope of -0.01, indicating slow, but steady convergence.
Since the work of Stichter and Cullen, labour economists have stressed
the stability of the interindustry wage structure. In these and more recent
studies, stability has been defined as autocorrelation in average hourly
earnings for production workers. This does not mean that wage patterns
across industries are etched in stone. As Allen (1995) shows, the
coefficient of variation of wages has varied considerably over the last 100
years, falling from 1890 to 1920, rising in the 1920s and 1930s, sharply
dropping in the 1940s, and then steadily rising since the 1950s. The in-
terindustry pattern of earnings for non-production workers exhibits a great
deal more fluctuation over time than do the patterns for production

8.3.2 Macro Wages

Figure 8.1 shows the pattern of change in two series that describe pay per
hour in the aggregate economy: real average hourly earnings and real
hourly compensation. 4 Both series show that hourly pay rose rapidly in
the 1960s. Real average hourly earnings peak in 1973 and have declined
since; today they are lower than at any time since 1965. The hourly com-
pensation series paints a less stark picture, growing by 8 per cent in the
1970s and by 6.9 per cent since 1980, though these rates are also far below

Figure 8.1 USA: real wage indices, 1960-93, 1960 = 100

135 --0- Real hourly
130 compensation
125 -<>- Real average
120 earnings
1960 65 70 75 80 85 1990

Source: Economic Report of the President (1994).

262 The US Labour Market
the long-term growth of real compensation. The average hourly earnings
series pertains to production and non-supervisory workers, whereas the
compensation series includes supervisory personnel and includes fringe
benefits as well as direct pay. The increase in the relative pay of the highly
educated and the growth in employee benefits as a share of total compen-
sation in the 1970s and early 1980s accounts for much of the difference
between the two series.
Changing conditions in the aggregate labour market explain some of the
changing trends in wages. Average unemployment rates rose from 4.8 per
cent in the 1960s to 6.2 per cent in the 1970s and 7.3 per cent in the 1980s.
Productivity growth slowed in the 1970s and 1980s relative to the 1960s.
The size of the labour force received jolts from the entry of the baby boom
generation in the 1970s, the surge of immigration in the 1980s, and the
influx of women in both decades.
Does the USA exhibit greater responsiveness of aggregate real wages to
labour market conditions than other countries? While we are uneasy about
standard macro-wage regressions,5 extant studies do not, in general, find
that the USA is more responsive than other countries. For example,
Layard et at. (1991) estimated wage and price equations for 19 countries
to determine the degree to which real wages adjust to unemployment.
They find that wage rigidity is lowest in Italy, Japan and four countries
that were in the European Free Trade Area EFT A (Switzerland, Austria,
Norway and Sweden), whereas it is highest in Australia, Spain, Germany
and the UK. The USA and Canada fall in between, along with France.
OECD (1994, Vol. 2, p. 4) estimated the impact of unemployment on real
wages in 10 countries. The USA had the shortest lag but tied with the UK
for the smallest wage response. Wage flexibility at the aggregate level in
the USA is far from extraordinary in these models.
Blanchflower and Oswald (1994) explore the impact of unemployment
on wage-setting from a more micro perspective, focusing on patterns
across urban areas and industries. In all 15 countries they examine they
find that the elasticity of real wages to the unemployment rate is -D. 1. This
finding is remarkable because of its uniformity across a sample with in-
credibly diverse labour markets and labour institutions - unemployment
has the same impact on wages in the super-flexible USA as in ultra-
inflexible France.

8.3.3 Macro Quantities

Another reason why the US labour market is cited as most flexible is its
return to full employment after the oil and money shocks in the 1970s and
Steven G. Allen and Richard B. Freeman 263
1980s. Unemployment in the USA was higher than in the EC in 1970 and
was somewhat higher still in 1980. This situation reversed in the after-
math of the 1982-3 recession. In 1984 and 1985 unemployment fell in the
USA, whereas it levelled in the EC. Starting from a higher base, the 1990
recession pushed EC unemployment into the double-digit range.
The US employment record is even more impressive. Employment grew
more rapidly in the USA than in the EC (1.6 versus 0.5 per cent annual
growth), in part because of greater growth in the working age population and
increased labour force participation. But these supply indicators do not tell
the whole story. The employment-population ratio in the USA grew more in
the 1980s than in any other decade since the Second World War. In contrast,
employment grew by less than the working-age population in Europe.
As for output and productivity, output grew more in the USA
(2.6 versus 2.1 per cent annual growth), but productivity grew more in the
EC (1.7 versus 0.8 per cent). Because of these productivity gains, the USA
and EC enjoyed comparable growth in their overall living standards, despite
the superior US performance in job growth. Per capita output grew by
1.8 per cent in the EC in the 1980s versus 1.6 per cent in the USA and
Canada. When evaluating the payoff to labour market flexibility, the focus
will have to be in the areas of employment and distribution, not growth.
To summarize, there is a reasonable case from relative wage adjust-
ments, aggregate wage patterns, and aggregate employment to support the
conventional wisdom that the USA has a more flexible labour market than
Europe. But on closer examination, the case is 'thinner' than is recog-
nized. In terms of relative wage changes, the USA had a more rapid decel-
eration in the growth of the educated workforce than many other countries,
which contributed to the exceptionally large rise in education or skill dif-
ferentials. In terms of aggregate wage determination, macroeconomic
wage relations do not show the USA to be an outlier in adjustment to
'shocks'. It is on the aggregate quantity side - greater growth of employ-
ment and lower rate of unemployment - that the case for the flexible US
job market rests most heavily. Is this case supported by the missing
element in the flexibility discussion: the micro quantitative adjustment of
labour across disaggregated sectors or areas?


Quantitative flexibility in the labour market allows firms and workers to

adjust rapidly to economic shocks, reaching efficient resource allocation
quickly. There is no question that the US labour market experienced
264 The US Labour Market
sizable shocks in the 1980s and 1990s. Computers were introduced into
many workplaces. Financial restructuring eliminated many operations.
Many large companies cut the number of organizational layers, shedding
middle managers in the process. Product markets became more open to
international competition.
But were these shocks more severe than those in earlier periods?
Looking solely at the twentieth century, the labour market has coped with
other major changes: huge immigration in the 1900s and 191Os, the intro-
duction of assembly lines and mass production, the Great Depression,
increased participation of women, and two world wars. Over the long
run, moreover, there has been a shift from goods-producing to service-
producing industries, accompanied by a shift from production to non-
production employment. Labour (and capital) migrated from the Northeast
and Midwest to the South and the West.
To see whether quantitative adjustments in the labour market differed in
the 1980s-1990s from those in earlier years, we have examined the degree
to which employment moved across industries, occupations, and regions
in the USA. Our measure of reallocation is the Index of Structural Change
(lSC), which is half the sum of the absolute value of the change in the
share of employment in the relevant grouping. It gives the percentage
point change in the distribution of workers that would equate the distribu-
tion of employment in two periods. Large values indicate that the labour
market is subject to large shocks and that the labour market is adjusting
well to those shocks. Low values are more difficult to interpret. They
could mean that large shocks are taking place but the labour market is
adjusting sluggishly or that the shocks are small and the labour market is
making the appropriate adjustment.

8.4.1 Reallocation by Industry

We begin by examining the extent of reallocation of labour across one-

digit industries. 6 We use three different time scales: annual changes,
5 year changes, and 10 year changes. The annual change in employment
shares contains both a trend and a short-run component reflecting the busi-
ness cycle, measurement error, and temporary shocks. If the short-run
component has negative (positive) autocorrelation, calculations of this
statistic over I year time intervals will overestimate (underestimate) the
true amount of sectoral reallocation. For this reason, we calculate ISCs at
5 and 10 year intervals as well as for single years.
Figure 8.2 graphs our estimates of the degree of short- and long-run re-
allocation in the labour market in various periods throughout the twentieth
century. At I year intervals, there is nothing striking about the realloca-
Steven G. Allen and Richard B. Freeman 265
Figure 8.2 USA: ISCs for one-digit industries at 1, 5 and 10 year intervals,


10 '. ,
"" ,"' :11,
'II: I
j I' ,I "
, I 0'
!!l 6
:' ~, ,
iI, I,
, ' - - I year
, \ 't, I'
\I I , "0' I, , - - -5 year
" 'II I", , I,
4 , ' \' \ I , - - . - 10 year
," ,'o,!f-


1900 05 10 15 20 25 30 35 40 45 50 SS 606S 70 7S 80 8590


Source: Historical Statistics of the United States: Employment and Earnings.

tion of labour in the 1980s and 1990s. The mean value for ISC for
1980-92 is 0.866, not much different than the means for the 1950s
(0.893), 1960s (0.862), and 1970s (0.846). It is below the mean ISC for
the decades in the first half of the century. The most turbulent decade was
the 1940s (2.362), followed by the 1920s 0.871) and 1930s (1.659),
The biggest reallocation in recent years took place during the 1981-2 re-
cession, when 1.4 per cent (net) of the workforce changed sectors. In the
post-war period alone, larger reallocations took place in 1948-9, 1953--4,
1957-8, 1965-6, and 1974-5 than in 1981-2, All of these pale besides the
reallocations that took place in 1920-1 and the second World War, when the
net sectoral reallocation amounted to over 4 per cent of the labour market.
Over longer intervals also the 1980s and 1990s were not unusual in
terms of changes in employment shares by industry. The largest sectoral
reallocations took place after the First World War, during the Great
Depression, and during and after the Second World War. There is nothing
in Figure 8.2 to suggest any more sectoral reallocation in the 1980s and
1990s than in the 1950s, 1960s or 1970s.

8.4.2 Reallocation Among Establishments

Leonard (1987), Dunne et al. (1989) and Davis and Haltiwanger (1992)
have shown that there are sizable reallocations of labour among plants
within industries. The main sources of these flows are expansion and
266 The US Labour Market
contraction of employment in individual establishments and births and
deaths of establishments. In the Davis and Haltiwanger longitudinal data
set of manufacturing plants, there is a gross rate of job creation (the ratio
of employment growth in expanding and new plants to total employment)
of 9.2 per cent per year and a gross rate of job destruction (the ratio of the
decline in employment in contracting and dying plants to total employ-
ment) of 11.3 per cent per year in 1973-86. This implies a gross job
reallocation rate of 20.5 per cent per year.
Professor Steven Davis of the University of Chicago Graduate School
of Business kindly provided us with a revised and updated set of summary
statistics for manufacturing for 1973-88.7 This data set gives us a different
measure of labour reallocation to see if the 1980s stand out as a period of
turbulence on the quantity side. As can be seen in Figure 8.3, the average
rates of job creation, job destruction, and net job growth changed
markedly from the 1970s to the 1980s. The rate of job creation dropped
from 10.0 per cent for 1973-9 to 8.4 per cent for 1980-8; the rate of job
destruction grew from 9.2 to 11.1 per cent. The average rate of net job
growth correspondingly fell from 0.8 to -2.7 per cent.
Despite declining employment levels in manufacturing in the 1980s,
however, there is nothing unusual about the sum of the rates of job cre-
ation and destruction, which measures gross sectoral reallocation. The
average rate of job reallocation for 1973-9 is 0.192; it increased only
slightly to 0.194 in 1980-8. The decline in employment in this sample of
plants was accomplished by a decrease in the rate of job creation that was
almost exactly offset by an increase in the rate of job destruction. The
sizable increase in wage inequality could have been accompanied by
surges in both job creation and job destruction. It was not.

Figure 8.3 USA: job reallocation in manufacturing, 1973-88

! 0.15
'0 0.10 ......... Job creation
§ 0.05 ....... Job destruction
'f 0
--- Net job growth
1-{l·05 --it- Job reallocation

-{l.15 I I I I I I
197374 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Source: Davis et al. (1994).

Steven G. Allen and Richard B. Freeman 267
In sum, what we see is a shrinking of the manufacturing sector in the
1980s not markedly different from sectoral reallocations in the first half of
this century, and adjustments across enterprises that are not markedly
different in the 1980s than in the 1970s.

8.4.3 Reallocation by Occupation

Those who see technological change, especially computerization, as the

main shock of the 1980s-1990s might prefer an analysis that focuses on
occupations rather than industries or establishments. The trends in em-
ployment by occupation in the 1980s and 1990s are well known - firms
firms are using more professional and managerial workers and fewer pro-
duction workers. However, these trends are long-standing ones. The key
questions are whether they accelerated in the 1980s-1990s or are any dif-
ferent in magnitude than the decline in the share of farm workers and the
rise in the share of clerical workers that took place earlier this century.
Data on employment by occupation are available only for censal years
in the first half of the century. Long-run comparisons are inhibited by
changes in a occupational definitions implemented in 1983. To gain a
benchmark for the most recent experience, Figure 8.4 displays the ISC for
one-digit occupations for censal years from 1900 to 1980. The average
ISC across these eight decades is 7 per cent; ISC ranges from 9.8 per cent
for the 1940s to 5.9 per cent in the 1970s. The only recent to year period
that can be used for comparison is 1983-93 when the ISC was 4 per cent.
Figure 8.5 displays ISC at 1,5, and 10 year intervals since 1955. All three
charts show that the occupational shifts in the 1980s and 1990s were

Figure 8.4 USA: ISCs for I-digit occupations over 10-year intervals, 1910-80



5 ~----~------1-----~~----1-----~~-----r----~
1910 20 30 40 50 60 70 80
Source: Historical Statistics of the United States: Employment and Earnings.
268 The US Labour Market
Figure 8.5 USA: ISCs for I-digit occupations at 1-, 5- and lO-year intervals,

-+-1 year
----5 year
~ 4.00 A -6--10 year

0.00 +-+-+-f-HH-+-+-++++++-+-++-I-H~H-+-+-+-+-++++++-+-f+-l
1956 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92

Source: Historical Statistics of the United States: Employment and Earnings.

actually lower than those in the 1950s, 1960s, and 1970s. The means of
the 1 year ISC measure are as follows:

1955-9 l.68
1960-9 1.00
1970-9 1.02
1980-93 0.75

In sum, the recent years stand out as a relatively quiet period in terms of
changes in the occupational distribution, not a chaotic one.

8.4.4 Reallocation by Region

Technological change, increased trade, and other market developments

differentially affect areas of the country. Boston/Cambridge, Silicon
Valley, and the Research Triangle in North Carolina are academic centres
that have become' hotbeds of high tech, entrepreneurial activity. In the
early 1980s, the Great Lakes region became the 'Rust Belt', a hospice for
declining industries like autos, steel, and rubber. Given falling transporta-
tion costs, increased geographic mobility in the 1980s could have acceler-
ated the return to full employment.
Data on employment by state are available in censal years since 1900
(Figure 8.6); annual data date back to 1939. Figure 8.7 displays ISCs at 1,
5; and 10 year intervals. The peak period for geographic reallocation was
Steven G. Allen and Richard B. Freeman 269
Figure 8.6 USA: ISCs across states over IO-year intervals, 1910-90





1910 20 30 40 50 60 70 80 1990
Source: Historical Statistics of the United States: Employment and Earnings.

Figure 8.7 USA: ISCs across states over 1-, 5- and IO-year intervals, 1939-90


- 1 year
_ "'
- /
or "
\ --5year
/ \/" - - - lOyear


1940 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88

Source: Historical Statistics of the United States: Employment and Earnings.

the 1930s (l0.1 per cent); there also was considerable reallocation in the
1970s (6.6 per cent). In the 1980s, the rate of geographic reallocation
declined to 4.4 per cent, a level comparable to that in most other decades.
Once again, it is difficult to argue that the 1980s witnessed anything extra-
ordinary in terms of the reallocation of labour across sectors.

8.4.5 Interpretation

All the evidence examined thus far tells a similar story: there has been no
upswing in the reallocation of labour in the USA in the J980s-J990s
270 The US Labour Market
compared to earlier periods. Unless shocks to the labour market in the
1980s and 1990s were smaller than in earlier decades, this pattern is
difficult to reconcile with any claim that the labour market became more
flexible. Given increased shocks, in fact, it implies the opposite - that the
US labour market grew less flexible. Given a steady level of shocks, it
implies no noticeable change in stability.
The rough stability in quantitative adjustments that characterized the
1980s-l990s stands in sharp contrast to the great change in relative wages
shown earlier. How might we best explain this divergent pattern of price
and quantity adjustments?
One interpretation is that the large adjustments in relative prices
buffered the quantity side of the job market against exceptional shocks.
Changes in demand for workers that might have caused massive shifts in
employment did not do so because wages ameliorated the employment
adjustment. We would feel more comfortable about this explanation if it
were not also true that aggregate unemployment rose over 1980s, and that
(as we shall soon document) groups with large wage losses experienced
increased joblessness.
A second interpretation is that the wage adjustment was great because
the quantitative adjustments were overly sluggish. In this case, sluggish
supply responses - a slow movement of people out of industries or occu-
pations or skill groups with declining demand into those with increasing
demand - produced stable quantitative adjustments over time but
increased price adjustments.
A third interpretation is that the institutional forces that had maintained
the wages of less skilled workers - unions and the minimum wage - had
smaller effects in the 1980s than in earlier decades, so that even shocks
comparable to those in the past produced greater wage dispersion than in
previous decades, whereas these forces had no effect on quantitative ad-
justments. We would feel more comfortable with this explanation if it
were not also the case that unions and minimum wages were relatively
weak throughout much of the pre-1940s period.


Although the evidence on net changes in employment and gross flows of

employment among firms shows no surge of turbulence in the job market
in the 1980s and 1990s, it is possible that individual workers faced excep-
tional insecurity. An establishment can have the same number of employ-
ees in two consecutive years, but if an increasing number of them are
Steven G. Allen and Richard B. Freeman 271
temporary or contract workers, the employment figures will mask rising
flux for individuals.
The prevailing opinion in the business press is that there has been a
dramatic decrease in the amount of time workers stay with a particular
employer.s The impetus for this change comes from several sources. On
the supply side of the labour market is the increased share of women and
unmarried workers,. both groups of which have traditionally had much less
job attachment than married men. On the demand side, mergers, financial
restructuring, relocations, and downsizing have displaced many workers.
As a result of these changes, firms putatively now consist of a small core
of quasi-permanent employees and a large periphery of contractors,
consultants, temporaries, and part-timers.
However, there are also forces that keep employees at their current jobs,
even when they have the ability to switch to other positions that dominate
in terms of payor working conditions. The best known of these is the non-
transferability of health insurance across employers. Madrian (1994)
shows that fear of losing coverage because of pre-existing health condi-
tions, a phenomenon she terms 'job-lock', reduces voluntary turnover by
25 per cent among those with health coverage at the workplace. While
there is no evidence of a trend in job-lock, this phenomenon received more
attention in the policy arena in the 1980s and 1990s than in earlier years,
as indicated by the passage of the 1985 COBRA (Consolidated Omnibus
Budget Reconciliation Act) legislation. 9 The rising share of workers with a
working spouse or 'significant other' also may be a drag on mobility than
ever before both across and within employers. A larger share of the labour
force in the 1980s and 1990s consisted of dual-career couples.
The government no longer gathers establishment data on the extent of
gross labour turnover in the USA. However, since 1951 the CPS has asked
employed persons how many years they have been with their current em-
ployer. The Employee Benefit Research Institute (1994) recently compiled
these data, along with comparable surveys done by the Wyatt Company.
These data suggest that the current view of the job market as creating
weaker attachments between employees and firms is incorrect. Within
each age category displayed in Figure 8.8 (for men and women together),
tenure with current employer was greater in the 1983, 1987 and 1991
surveys than in the surveys taken in the 1950s through the 1970s. As one
might expect, the increase in tenure is rather small for those in the 25-34
bracket. This reflects increased schooling levels and the same sort of job
shopping behaviour that previous generations have exhibited. The largest
increase in tenure is observed among those in the 45-54 and 55-64 brack-
ets. The breakdowns by gender in Table 8.2 show that the increase in
272 The US Labour Market
Figure 8.8 USA: median years with employer, by age, 1951-91

10 --25-34
8 -<>- 45-54
6 -0-55-64
1951 63 66 73 78 83 87 91
Source: Employee Benefit Research Institute (1994).

tenure has been slightly larger for women than for men. This should not be
surprising, since a majority of women return to work shortly after child-
birth and a rising proportion of women are employed in occupations
previously dominated by men.
There are limitations to the data in Figure 8.8 and Table 8.2. First, they
relate to spells of employment that are in progress rather than to spells
that have been completed. Second, these measures are based on a sample
of employees rather than a sample of the population. These distinctions are
particularly relevant for older men, whose labour force participation rates

Table 8.2 USA: median years with current employer, by gender and age group,

1951 1963 1966 1973 1978 1983 1987 1991

Total 3.9 5.7 4.2 4.6 4.5 5.1 5.0 5.1
25-34 2.8 3.5 2.7 3.2 2.7 3.4 3.7 3.7
35-44 4.5 7.6 6.0 6.7 6.9 7.7 7.6 7.2
45-54 7.6 11.4 8.8 11.5 11.0 13.4 12.3 12.2
55-64 9.3 14.7 13.0 14.5 14.6 17.0 15.7 15.5
Total 2.2 3.0 2.8 2.8 2.6 3.3 3.6 3.8
25-34 1.8 2.0 1.9 2.2 1.6 3.1 3.1 3.2
35-44 3.1 3.6 3.5 3.6 3.6 4.6 4.9 5.0
45-54 4.0 6.1 5.7 5.9 5.9 6.9 7.3 7.3
55--64 4.5 7.8 9.0 8.8 8.5 10.5 10.3 10.4

Source: Employee Benefit Research Institute (1994).

Steven G. Allen and Richard B. Freeman 273
have declined throughout the last half-century. Conceivably, those who
had careers of short-term job attachments exited the labour force in the
1980s in larger numbers than in earlier decades. Since most of the increase
in tenure for men is found in the 45-64 age group, the data may overstate
the increase in tenure and possibly miss a downward trend for men
This problem can be overcome by examining the first waves of the
Retirement History Survey and the Retirement and Health Survey. Taken
in 1969 and 1993 respectively, these surveys contain sufficient retro-
spective data to permit the calculation of job tenure on one's longest job.
Table 8.3 reports the distribution of job tenure on longest job for workers
aged 58-63 in 1969, as tabulated by Quinn et of. (1990), along with tabu-
lations for workers aged 58-61 in 1993 that were kindly provided by
Professor Philip Levine of Wellesley College. If a 'lifetime job' is defined
as one lasting 20 or more years, then men nearing the end of their careers
were slightly more likely to have had a lifetime job in 1993 than in 1969.
We find that 57 per cent of men in 1993 had a longest job lasting 20 years
or more, compared to 55 per cent of men in 1969. Since many of these
men were still employed in their longest job at the time of the survey and
the group in the 1993 survey is somewhat 'younger' than the 1969 bench-
mark group, this comparison actually understates the increase in lifetime
jobs. The increased share of older men having long job attachments
reinforces our earlier conclusion that job tenure has risen.
While we believe that the bulk of the tenure evidence rejects the notion
that job attachments have grown weaker in the USA, the evidence is not
unequivocal, and there is some disagreement among analysts. Farber
(1995) stresses the lack of change in tenure, as do Diebold et at. (1994).

Table 8.3 USA: distribution of job tenure on longest job, male workers aged
58-63 in 1969 and aged 58-61 in 1993, %

Tenure 1969 survey 1993 survey

0-4 years 12 7
5-9 years 10 11
10-19 years 23 25
20-29 years 24 29
30-39 years 18 24
40+ years 13 4

Note: 1993: tabulations from the public use files of the Retirement and Health
Source: 1969: Quinn, Burkhauser and Myers (1990).
274 The US Labour Market
But Swinnerton and Wial (1995) find that retention rates fell between
1983 and 1987 and 1987 and 1991, especially among low seniority
workers. And even if tenure rates have not changed much, it is possible
that the labour market is experiencing a change in the impetus for job
shifts from quits to layoffs that makes workers less secure. Still, nothing in
the evidence as yet shows that the labour market has undergone the revo-
lution in the nature of work or of employee attachment to firms that the
popular press portrays.


Trends in the absolute adjustment of quantities do not necessarily tell us

what is happening to the relative flexibility of quantities to outside shocks.
If shocks were no smaller in the 1980s than earlier (as most analysts
believe), we could infer that flexibility has not increased. But if the shocks
were smaller, quantitative flexibility might have increased. In short, if we
are to assess flexibility, we need some infonnation on the magnitude of
shocks or on actual elasticities of response to shocks. In this section, we
examine evidence on employment responses to changes in output. Have
such responses changed in the USA over time?
The standard approach to examining the responsiveness of employment
to output is to estimate the following equation over monthly or quarterly


where E is the logarithm of employment, Y is the logarithm of output, and

a, band gj are parameters. 1O If a is estimated to be near 1, then employ-
ment is largely a function of previous employment, indicating sluggish ad-
justment. If a is well below I, then the influence of past employment
levels on current levels is obviously much smaller and, by default, the
impact of other variables is much greater.
The other indicator of employment flexibility is the sum of b and the
gjS. Typically these models contain a number of lagged output terms. A
value of b near 1 would indicate extremely rapid adjustment of employ-
ment to output. If b is well below 1, a number of lagged output terms
would have to be estimated to determine the sluggishness of the employ-
ment response. The sum of band 2g j indicates the long-run elasticity of
employment to output, a parameter that reflects both labour contracts and
labour productivity.
Steven G. Allen and Richard B. Freeman 275
Three recent studies have estimated (1) in such a way that the
coefficients for the 1970s differ from those for the 1980s. Abraham and
Houseman (1989) estimated a model that imposed the restriction that
a = 1, but allowed band gj to vary between 1970-7 and 1978-85. Over 1,
3 and 6-month horizons, they found that the elasticities of total employ-
ment and production employment changed little over time. But for an
entire year, the total employment elasticity increased from 0.717 to 0.842
and the production employment elasticity increased from 0.847 to 1.009,
which one could interpret as a moderate increase in flexibility. In a follow-
up study, Houseman and Abraham (1993) explore how the responsiveness
of male employment has changed relative to that of female employment
between 1970-9 and 1980-9 using monthly data. In the 1970s, female
employment was much more responsive to output than male employment
over 1, 3, and 12 month horizons. In the 1980s this difference vanished,
largely because male employment became more responsive to output. The
12 month elasticity for men increased from 0.670 to 0.914.
Hamermesh (1994) examined responsiveness over time by adding a
time trend and interactions between the trend and a, b, and gj in models
estimated over quarterly data for 1973:4 through 1988:3 for nine 1 digit
industries. He found a disparate experience by sector: the a coefficient
dropped by more than 0.1 from 1973:4 to 1988:3 in four sectors: mining,
non-durable manufacturing, wholesale trade and transportation, communi-
cations, and utilities; it increased by more than 0.1 in retail trade and
finance, while it changed little in construction, durable manufacturing and
services. Because retail trade and finance are the sectors with the lowest
levels of union density, Hamermesh concludes that the decreased flexi-
bility of employment in those sectors could reflect erosion of the employ-
ment-at-will doctrine (discussed in Section 8.7). His comparisons of band
gj also indicate decreased responsiveness of employment to output in the
1980s. In seven sectors the sum of band gj over a I year horizon declined.
In those sectors the average value of b + Sgj went from 1.012 in 1973:4 to
0.535 in 1988:3. In the other two sectors the estimates were negative,
precluding any before-after comparison.
In sum, the studies deliver a split verdict on the question of whether
employment has become more sensitive to output in the 1980s. We have
not tried to determine why the results from the Abraham and Houseman
studies are so different from those obtained by Hamermesh. The differ-
ences could be caused by aggregation (both temporal and industrial),
sample period, or specification. More critically, none of these studies takes
into account the 1990-1 recession. Houseman and Abraham (1993) note
that employment of non-production workers in manufacturing fell by
276 The US Labour Market
4 per cent from July 1990 to January 1992, not much less than the 4.9 per
cent decline in production employment in that sector. Further evidence of
the woes of white collar workers in both the 1990-1 recession and the
ensuing 'jobless recovery' is reported in Mishel and Bernstein (1994).
Although one must be careful in generating trends from half a business
cycle, this is the only quasi-persuasive evidence we have found that quan-
tity adjustments have become more flexible.


Most discussions of comparative flexibility between Europe and the USA

start with a fact that is beyond dispute - unemployment in Europe has
become considerably higher than in the USA. At least as important, we
believe, is the trend of unemployment in the USA over the last five
decades (as reported in the Economic Report o/the President):

1950-9 4.5
1960-9 4.8
1970-9 6.2
1980-9 7.1
1990-3 6.6

Unemployment has been rising in the USA, just as it has been in

Europe. The main difference between the USA and Europe is in the
magnitude, not the direction, of the trend.
It is important also to examine the structure of US unemployment or
joblessness, that is, whether the widened wage gaps between college
graduates and those with less education and between experienced men and
inexperienced men were accompanied with widening or decreasing job-
lessness gaps between those groups. If these wage trends reflect shifts
along labour demand curves (say, because of the weakening of unions or
minimum wages, or because of supply shocks), we would expect larger
increases in unemployment for college graduates or for experienced men
since the 1980s. If wages perfectly equilibrated in response to relative
demand shocks, on the other hand, we would expect to see no change in
the structure of unemployment rates.
Trends in unemployment by education can be traced since 1970. Figure
8.9 shows that in the 1980s, unemployment for men aged 25-64 steadily
increased for high school dropouts and high school graduates relative to
those with some college attendance or college graduates. The groups with
Steven G. Allen and Richard B. Freeman 277
Figure 8.9 USA: ratio of group to total unemployment rate, by years of
schooling, men 25-64, 1970-91


-0- Below
1.5 12
-<>- 12
-b- 13-15
16 or
0.5 more

1970 72 74 76 78 80 82 84 86 88 90

Source: Statistical Abstract of the United States.

the largest declines in real wages experienced the largest increases in

Examining the relation between wages and work activity in a different
way, Topel (1993) has used the CPS to examine the work activity of
adult men according to their position in the wage distribution (which
limits the sample to persons who work at least 1 week in the year). He
finds not only that those with low wages work less than those higher in
the income distribution but that the extent of joblessness grew more con-
centrated among low paid workers over time, despite their falling wage.
For instance, between 1967-8 and 1987-9 weeks of joblessness in-
creased by 8.5 weeks among men in the lowest decile of the wage distri-
bution but did not change for those in the upper four deciles (Topel,
1993, Table I).
Table 8.4 corroborates the Topel finding that hours worked declined
most among men with low wages from the 1970, 1980, and 1990 Censuses
of Population, which provide hundreds of thousands of observations.
Since persons in the lower wage deciles have suffered great losses in
wages, such wage flexibility ideally would have preserved if not increased
their amounts of work time. The opposite is true. It is difficult to reconcile
the evidence on time worked with the claim that falling real wages in the
USA are responsible for the relatively modest increase in unemployment.
If this argument were carried to its logical extreme, wages for high school
dropouts seemingly would have needed to sink to Third World levels to
have precluded any increase in their relative unemployment rate.
278 The US Labour Market

Table 8.4 USA: mean annual hours worked, by wage decile, male workers,

Wage 1970 1980 1990 Percentage

decile change 1970-90

IO 2133 1754 1693 -21

20 2268 1921 1940 -14
30 2293 2006 2026 -12
40 2192 2064 2076 -5
50 2204 2070 2096 -5
60 2170 2091 2132 -2
70 2146 2074 2100 -4
80 2085 2074 2085 0
90 2011 2032 2066 3
100 1742 1656 1776 2

Source: Tabulated from US Census of Population public use data files (1970,
1980, and 1990).

Data on unemployment by age, gender, and race are available annually

since 1948 (see Figures 8.10-8.12). Teenage unemployment is, on
average, three times higher than adult unemployment over this period.
Teenage unemployment trended well above this three: one ratio between
1963 and 1974, the years when the baby boom generation entered the
labour market. We see no difference in the ratio of teenage to adult male
unemployment between the 1980s and 1990s and the remainder of the

Figure 8.10 USA: ratio of group to total unemployment rate, men, 1948-93

2.0 -0- 16-19
-0-- 20 and over

1.0 ~><>¢-<><><><>¢<>¢.<><><>¢-¢...:>o<><><><~~~>¢-<>¢oO<>¢(>.C>¢<><><>'~

1948 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93
Source: Economic Report of the President (1994).
Steven G. Allen and Richard B. Freeman 279
Figure 8.11 USA: ratio of group to total unemployment rate, by gender, 1948-93



0.8 4+++-~I--I-"H-IH4-+4-++++~~H-IH4-++++++-l-I-IH-I-+4-++4+-l
1948 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93

Source: Economic Report of the President (1994).

Figure 8.12 USA: ratio of group to total unemployment rate, by race, men,

o. 9 r~~~~:>O()<Y><~>¢<>'<>-o¢~>¢¢"X>¢.o-o<l,<><><>o<I:>¢¢
0.5 4+~H-IH4-++-++++-H-IH-I-++++f+-'H4-++++H-IH-+-++++-++H
1948 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93

Source: Economic Report of the President (1994).

period since the second World War despite the decrease in teen wages
relative to adult wages.
The trends in wages by gender and race differ from those for education
or experience. The gender gap narrowed in the USA and the white-
non-white wage gap, which had been narrowing steadily throughout most
of the twentieth century, stayed constant in the 1980s. How did relative
joblessness change among these groups?
Female unemployment historically has been above male unemployment,
but this trend reversed in the 1980s. This coincides with the timing of the
decline in the gender gap in earnings, but we are unable to determine
whether this is a reflection of increased education and experience in the
280 The US Labour Market
female work force or a relative demand shift. There is no apparent trend in
relative unemployment rates by race over the last 45 years.
This evidence on relative unemployment rates shows how difficult it is
to tell a single simple story about real wage growth and joblessness within
the USA. Greater joblessness is associated with lower relative wage
growth for men and for workers who did not attend college. There seems
to be no connection at all between real wage growth in the 1980s and
1990s and relative unemployment by age or race.


The share of US private sector workers belonging to unions or covered by

collective bargaining contracts has been declining since the mid-1950s,
with the rate of decline accelerating in recent decades. In the 1950s, one-
third of non-agricultural workers were union members. Union density
dropped to 27 per cent in 1970, 22 per cent in 1980, and 16 per cent in
1990. Private sector unionization dropped to 10.8 per cent in 1993.
As unions and collective bargaining have declined in the private sector,
the government has enacted a plethora of laws protecting the employment
rights of workers as individuals. These include occupational health and
safety regulations, secure pension benefits, notice of plant closing and
layoffs, unpaid family and medical leaves, bans on discrimination for race,
sex, age, and disability, and so on. In addition, firms are required to take
affirmative action to remedy employment imbalances for certain groups
and most recently to change the workplace so that the disabled can be
readily employed. As a result, the presumptively laissez-faire US labour
market has today a complex and expensive set of protective legislation
that employers must administer, and that agencies or courts must enforce.
In this section, we review the growth of labour market regulations in the
USA and the business charge that it has impeded the efficient operation of
firms, which if true would imply a reduction in quantitative flexibility in
recent years.

S.S.l The Increase in Employment Regulations

Employment laws and regulations began to expand rapidly in the 1960s,

so that between 1960 and 1974 the number of Department of Labour regu-
latory programmes tripled. Among the major pieces of legislation were:
Equal Pay Act of 1963; Title VII of the Civil Rights Act of 1964; the Age
Discrimination in Employment Act of 1967; the Occupational Health and
Steven G. Allen and Richard B. Freeman 281
Safety Act of 1970; the Equal Employment Opportunity Amendment of
1972; the Rehabilitation Act of 1973; the Employment Retirement Income
Security Act of 1974; and the federal Mine Safety and Health Act of 1977.
In addition, Supreme Court rulings strengthened the hand of the govern-
ment in anti-discrimination and the federal government required that all
federal contractors develop and file affirmative action plans to eliminate
underutilization of women and minorities in their labour forces (Executive
Order 11246,1965 and 11375, 1967).
The growth of legal protections did not diminish during the
Reagan-Bush years. Congress continued to enact major legislation
targeted at workplace problems. These included: the Immigration Reform
and Control Act of 1986; the Employee Polygraph Protection Act of 1988;
the Worker Adjustment and Retraining Notification Act of 1988; the
Americans with Disabilities Act of 1990; the Civil Rights Act of 1991;
and the Family Leave and Medical Act of 1993.
In addition, courts in many states began to limit the employment-at-will
doctrine by providing legal protection for workers dismissed under some
conditions: for instance, discharge for refusing to violate public policy;
for an employer failure to carry out its own promises of job security; or as
part of a general doctrine in which employers are expected to treat
employees 'in good faith and fair dealing'. By the early 1990s, 45 states
had chipped away at the employer's right to dismiss workers at will.
Enforcement of these laws is pursued either through specialized admin-
istrative agencies or through court suits and juries or some combination
thereof. The agencies make thousands of rules to implement the legisla-
tion, so that the USA has developed an extensive web of workplace regu-
lations that requires considerable financial and human resources by
employers, the state and employees. In 1993 the Wage and Hour Division
of the Department of Labour received 46,000 employee complaints and
initiated 2300 court suits. The Occupational Health and Safety Agency
made over 60,000 inspections, leading to 9000 cases. It received over
10,000 complaints. The Equal Employment Opportunity Commission
handled nearly 90,000 employee claims of discrimination in 1993-61 per
cent more than in 1981. State fair employment practices commissions
were overloaded with cases as well.
But federal and state regulatory agencies do not have the resources to
enforce the laws in the millions of workplaces in the country. Since the
laws give workers statutory rights, much of the onus of enforcement falls
on the employees themselves and the court system. In the current US
labour relations system, when workers have problems with their employer,
they sue.
282 The US Labour Market
From 1971-1991 the number of employment suits in federal courts
increased by 430 per cent. This is not simply a matter of the USA becom-
ing more litigious. Employment cases (by which we mean cases dealing
with individual employment issues, not issues of collective bargaining)
made up 6 per cent of federal court cases in 1971 but 16 per cent of such
cases in 1991. While we do not have statistics for state courts, experts tell
us that the growth of court suits in those jurisdictions is, if anything, even

8.8.2 Does it Affect Flexibility?

The various forms of legislation, regulatory agency activity, and court

suits restrict what an employer can do at the workplace. The restrictions
may be socially desirable - Congress obviously thought so when it passed
the relevant legislation - but they are also costly to business. It is thus no
surprise that American business has complained about the costs and
restrictions placed on them by employment regulations. According to John
Read, Chairman of the National Association of Manufacturers' Committee
on Employee Relations

'the source of business' problems ... is the larger body of labour law
and regulation that pervades the workplace and the non-productive costs
it generates. The problem is not any particular law or regulation, but
their collective weight. And the cost is not so much the penalties, as the
litigious process and delay. (Testimony before Commission on the
Future of Worker-Management Relations, September 8, 1994)

Could it be that the unregulated American labour market is becoming

more regulated, at least along some dimensions, than foreign observers
recognise? Could these regulations be reducing quantitative flexibility?
We know of no study linking regulations to quantitative flexibility.
A priori, we would distinguish between two types of regulations. The first
are regulations that firms and employees could avoid or evade through
side-arrangements. A regulation that limits employer rights to fire people,
for instance, can be viewed as changing property rights to a job. By the
Coase theorem, the firm could make the appropriate side-payment to the
employee - an early retirement plan or golden parachute - and proceed
with the same adjustment as it would absent the regulation. The second are
regulations for which such side-payments are not feasible. A regulation
that requires a safe workplace, where OSHA inspectors check, is likely to
alter management investments or work patterns. In some countries, the in-
spector would be bribed, but in the USA this is not believed to occur very
Steven G. Allen and Richard B. Freeman 283
frequently. No one has classified US labour regulations into these two
types or tried to estimate their effects on quantitative flexibility (though
recall the Hamermesh comment given earlier about the effect of erosion of
employment-at-will on employment adjustments.)


Most discussions of comparative flexibility between Europe and the USA

start with a fact that is beyond dispute - unemployment in Europe has
become considerably higher than in the USA. J:he most recent data, re-
ported weekly on the second to last page of The Economist (21 December
1996), are as follows (per cent of active population):

USA 5.4
Britain 6.9
France 12.6
Germany 10.7
Italy 12.3
Spain 21.9

As noted, these differences reflect a sizeable upward trend in unemploy-

ment in Europe in the 1980s and 1990s, not a downward trend in US
joblessness. They have been accompanied by falling real wages in the
USA and constant or increasing real wages in European countries, and by
a greater increase in wage inequality in the USA than in Europe, save for
the UK. Have they also been accompanied by greater quantitative flex-
ibility in the allocation of labour in the USA?
Consider first the reallocation of labour across industries. European
countries, like the USA, have redeployed their workforce away from
manufacturing and into service sectors. From 1969 to 1989, OECD
statistics show that the ISC for the USA, based on 1 digit industry
classifications, is actually lower over this period than the ISCs for Canada
and various European economies: 12

Country Index of Structural Change, 1969-89

USA 11.3
Germany 15.0
France 17.2
UK 17.0
Belgium 16.3
Canada 13.3
284 The US Labour Market
Table 8.5 USA: indexes of structural change for selected countries, 19605,
19705 and 19805

1960s 1970s 1980s

Canada 1.2 1.0 1.0

France 1.0 0.9 0.9
Germany 0.9 1.0 0.6
Italy n.a. 1.0 1.1
UK 0.8 1.0 1.3
USA 0.7 0.9 0.9

Source: OECD (1994), Vol. 1, p. 15.

A breakdown of ISCs for each of the last three decades, reported in

Table 8.5, shows that the ISC for the USA is fairly close to the values for
Canada and European countries. It also shows no trend towards greater
adjustment in the USA or slower adjustment in Europe. What stands out in
both sets of data is the lack of support for the notion that the USA had
greater quantitative flexibility over this period.
ISCs by occupation and region are not readily available for European
countries, but GECD (1994, Vol. 1, Table 1.5) makes an instructive com-
parison of the changes in the occupational structure of France and the
USA. In both the I 970s and 1980s, the growth in the share of professional
and clerical workers in France was greater than in the USA; the share of
managers increased by about the same amount in both countries. The
declines in the shares of agricultural and production workers were much
greater in France than in the USA. In other words, France was able to
achieve a much larger micro-reallocation of labour across occupations
than the USA with a smaller change in its internal wage structure, though
with greater unemployment.
Houseman and Abraham (1993) have examined employment and
person-hours adjustments to output changes between the USA, Germany
and some other European countries, using (1) above. They find similar
long-term person-hours adjustments among the countries with, however,
Germany responding more with hours and less with employment than the
USA. This is an important difference but not one that indicates greater
quantitative flexibility.
The aECD has examined job tenure and turnover in Europe and the
USA, along with geographic mobility. In terms of tenure, the GECD data
(1993) show that the USA has lower rates of tenure than European coun-
tries, both in the aggregate, and after adjusting for the age of employees.
Steven G. Allen and Richard B. Freeman 285

In addition, the USA has higher rates of geographic mobility (DECO,

1994, vol. 2 Table 6.4); higher rates of job turnover (DECO, 1994, vol. 2,
Table 6.1), and accessions and separations in manufacturing (DECO,
1991a, Table 2.13). The trends in tenure, moreover, are in opposite direct-
ions in the USA and Europe. Tenure is increasing in the USA, but fell in
the 1980s in France, Germany, the Netherlands, Spain and the UK
(DECO, 1994, Vol. 2, Table 6.3). If tenure is viewed as a measure of
inflexibility, the USA is becoming less flexible relative to Europe!
Establishment-based data on job creation and job destruction indicate
the degree of labour market flexibility at a more micro level. DECO (1994,
Vol. I, Table 1.8) shows that the rate of job turnover in the USA is 23 per
cent of total employment. This is identical to the rate of job turn-over in
Italy and smaller than the rate in supposedly sclerotic France (27 per cent)
and Sweden (29 per cent). In contrast, the UK (14 per cent) and Germany
(16 per cent) have much less job turnover than the USA.
Where the USA does show markedly greater flexibility is the movement
of people between unemployment and employment. Dnly a small propor-
tion of the unemployed are out of work over one year compared to nearly
half the unemployed in Europe and Japan (DECO, 1990, Employment
Outlook 1990, Table 1.2). In any month the proportion of Americans who
leave unemployment far exceeds the proportion of Europeans who do so.
In 1988 46 per cent of Americans unemployed in a given month were no
longer unemployed the following month, in contrast to only 5 per cent of
Europeans. At the same time, however, the chance of entering unemploy-
ment in a given month is also higher in the USA than in Europe or Japan.
2 per cent of Americans became unemployed in a month in 1988
compared to 0.4 per cent of Japanese and Europeans.
With respect to business flexibility, the European Economic
Community (EEC) has asked European managers about factors that con-
strain their operations in the job market. In 1991 27 per cent reported that
'insufficient flexibility in hiring and shedding labour' was a very important
obstacle to employing more people. An additional 35 per cent reported
that it was an important obstacle. European firms in many countries must
give laid off workers severance pay and lengthy advance notice, and may
have to obtain the approval of works councils or government agencies
before making large-scale dismissals. Dnly in the UK, whose labour
market most resembles that of the USA, do most employers report that
flexibility is not a barrier to increasing employment. (CEC, 1991, No. 47,
Table 4, p. 81). We interpret this evidence as indicating that in fact the US
market is more flexible along some quantitative dimensions but that this
greater flexibility has not noticeably eased sectoral reallocations of labour.
286 The US Labour Market
As for changes in European flexibility over time, Europe's labour
markets have become more flexible in the 1980s compared to the 1960s or
1970s. The UK reduced replacement rates for unemployment benefits,
reduced union power, and tried to increase market flexibility. Spain intro-
duced temporary contracts. Other countries also sought to reduce impe-
diments to market adjustments.


This chapter has taken a broad-brush look at the neglected dimension

of flexibility in the US job market - adjustments of the quantity of
labour along various dimensions that we have placed under the broad
rubric of quantitative flexibility. Our main findings can be briefly

(1) Quantitative reallocation of the work force has not increased in the
USA in recent years.
(2) The groups that suffered great losses in real wages did not make
compensatory gains in reduced unemployment.
(3) Employment-output elasticities show no consistent pattern of
increased flexibility.
(4) Labour market regulations have become more extensive.
(5) Along some dimensions, the US labour market is quantitatively more
flexible than the European market, but the US reallocation of labour
across industries has been less than in Europe.

The overall pattern of results strongly suggests that there has been no
decrease in quantitative flexibility in the US job market. If, at the same
time, there has been no decrease in quantitative flexibility in Europe, the
only possible way quantitative flexibility might explain the differing per-
formance of the USA and Europe is if flexibility became a more important
economic attribute in the 1980s than in earlier periods. This may have
been the case. But we are more impressed with the fact that the differing
employment and unemployment experiences of the USA and Europe were
accompanied by differences in real wage adjustments. If falling real
wages, not some special quantitative flexibility, explains the job miracle in
the USA, the correct reading of US experience is not that the country
found a free lunch but that it paid for its good employment performance
with a weak wage performance.
Steven G. Allen and Richard B. Freeman 287

I. Thanks go to Steve Davis and Phil Levine for providing some of the data
used in this paper and to Daniel Hamermesh and Susan Houseman for
guiding us through the literature on employment-output elasticities. We
appreciate the research assistence of Mark Sisak and Darrin Curtis.
2. The distinction between speeds of adjustment and magnitudes of adjustment
can be most readily seen in terms of a simple lagged adjustment model in
which changes of employment are a function of lagged employment and
equilibrium employment. The speed of adjustment relates to the adjustment
coefficient on lagged employment. The magnitude of adjustment depends on
the effect of the exogenous variable under consideration on equilibrium
3. The need to examine both quantity and price data to make a proper assess-
ment of flexibility arguments can be illustrated in how we read the recent
increase in the gap in wages between high school and college graduates,
which is exceptional in the USA and the UK. This rise signals an absence of
constraints on wage adjustment. But if one of the underlying reasons for the
wage increase is that costs of college were increasing or entry to collegel
limited, less flexible quantity adjustments would also be a factor. This also
would be the case if internal firm training procedures make college and non-
college workers less substitutable in the USA or UK than countries such as
4. Both series are deflated by the CPI for all urban consumers. The use of
different price indexes, such as the personal consumption deflator, has a
modest impact on the magnitude of the drop in real pay levels or real pay
growth but does not radically alter the overall pattern in Figure 8.1.
5. In most cases, these regressions make wages a function of other macro
variables that are also endogenous, and lack any clear 'natural experiment'
variation to isolate routes of effects.
6. ISCs also were calculated for 2 digit industries using data from the National
Income and Product Accounts since 1947, with results similar to those
reported below for 1 digit industries.
7. These appeared in Davis et at. (1994).
8. In 1994 alone, Fortune has ran three cover stories heralding this trend. See
The End of the Job', (September 19, 1994); 'The New Deal: What
Companies and Employees Owe One Another', (June 13, 1994); and The
Contingency Work Force', (January 24, 1994).
9. Defined-benefit pensions also can induce job-lock, but the share
of employees covered by such pensions has declined in the 1980s and
10. The well-trained microeconomist will quickly note that (I) does not contain
the relative price of labour. This has become standard practice mainly
because the high frequency changes in wages are small relative to changes
in output and because of problems in measuring the price of capital.
II. See Commission on the Future of Worker-Management Relations (1994,
Chapter IV), for more detailed discussion of increased US regulations.
12. These data are calculated from OECD (1991 b).
288 The US Labour Market


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age Japan 226,250--1
Japan: female participation 249; Borjas, OJ. 165
length of service 231-3; Brazil 2, 37-64
wages and 233-5 employment flexibility 50--4
older workers in EU 188 human capital investment 58-61
USA: job tenure 271-3; informal sector 27,56-7
unemployment 278-80; and institutions see institutions
wages 235 macroeconomic variables 49-50,
Akerlof, G. 13 51
all-risks insurance 83 output per worker 31-2
Allen, S.G. 261 segmentation 56-7,61
allocative efficiency 17, 18 wages see wages
Amadeo, E. 27, 57 Brown, F. 129
Anderson, 1. 170 buffer: informal sector as 76
Anderton, 218 Bureau of Employment Security
Andriessen, F. 255 (Japan) 238
anti-discrimination legislation 173 business cycle see economic cycles
Aoki, M. 7,8
Apprenticeship programme (Chile) Camargo, J.M. 27,57
89-90 Canada 2, 151-83
Arena, E. 143 adjustment policy 175-6
'arubaito' workers 230,231 comparative analysis of adjustment
assimilation of immigrants 165 239-43,245,247
Austria 24 employment see employment
automation, flexible 139 institutions see institutions
automobile industry 139 labour market background 152-8
autonomous training centres 142 output per worker 32
skills 176-9; education 177;
Baker, M. 25 human resource and workplace
balance of payments 49-50 practices 178-9; training
Barros, R.P. de 54-5 177-8
Basu, P. 30 unemployment 24, 154-6
Beatson, M. 212,218 wages see wages

292 Index
Canada-US Free Trade Agreement Community College system (Canada)
(CAFTA) 152, 157, 180 177
Canadian Auto Workers 171 Company Programme (Chile) 87-91
Canadian Job Strategy Programme concentration of industrial
(CJS) 178 employment 120,124
Card, D. 151,156 conciliation audience 43-4
Castillo, M. 95 conditions of work
Central Onica dos Trabalhadores Brazil 41
(CUT) 48 Mexico 134
Chan-Lee, 218 Confederaci6n Patronal de la
childcare facilities 84 Republica Mexicana
children, number of 250 (COPARMEX) 137
Chile 2, 65-112 Confederaci6n de Trabajadores de
economic indicators 67-8 Mexico (CTM) 136-7
firms' labour flexibility Confederation of Workers' Unions
strategies see firms (CUT) (Chile) 97
labour mobility see mobility Consolida~ao das Leis do Trabalho
legislation and institutions 30, (CLT) (Labour Code) (Brazil)
78-87,97-8,102;labour 39,40
policies 79-81; regulation contingent workforces 154
81-7 corporatism
macroeconomic performance Mexico 130-2; debate on labour
66-73; economic cycles and legislation reforms 136-7
structural adjustment 67-9; neo-corporatist model 8-9,29,30
employment 69-71; wages Cortazar, R. 73
71-3 'cost-cutting' scenario 190
output per worker 31-2 court suits 281-2
training see training see also Labour Courts
unemployment see unemployment Covarrubias, A. 143
wages see wages culturalist school 225-6, 232
Chile Joven 89-90
city of residence: size of 249 Davis, SJ. 265-6
coal miners: re-training 89-90,91 demand, labour 154, 239-43
COBRA (Consolidated Omnibus Denmark 210,219
Budget Reconciliation Act) 1985 deployment of labour see mobility;
(USA) 271 reallocation of labour
collective bargaining Diaz, A. 96
Canada 171-2 Diebold, F.X. 273
Chile: firms' flexibility strategies dismissal see firing/dismissal
97-8; regulation 82,85-7 Domfnguez, L. 129
EU 198,215 Dunne, T. 265
USA 257-8
collective labour contracts early retirement 245, 246
Brazil 40,47-9 Echeverria, C. 79
Chile 98 economic cycles
see also labour contracts Chile 67-9; and employment
collective rights 135-6, 137 69-71; informal sector 75-6,
Comisi6n Nacional de Salarios 77
Minimos 131 Japan 243-4,250-1
Index 293
economic growth 243--4 USA 263; employment-output
Economic Solidarity pacts (Mexico) elasticities 274-6; regulation
132 280-3
economically active population (EAP) Employment Insurance Law 1974
see supply of labour (Japan) 238
education Employment Programme for Heads of
Brazil 60 Households (POJH) (Chile) 79
Canada 159, 177 Employment Security Law 1947
EU 216 (Japan) 238
Japan 234,235,249 employment standards legislation
USA 276-7 172-3
see also training employment-at-will doctrine 281
efficiency 9-10 equal pay 173
allocative 17,18 establishments see firms
EFfA countries 29 European Union (EU) 2, 185-223
Emergency Employment Programme comparison of USA with 263,
(PEM) (Chile) 79, 103 283-6,286
Emerson, M. 199 European integration and the labour
Employee Benefit Research Institute market 189-90
271 flexibility as a common cure 186-9
employers institutions 29,191-207
impacts of regulation on behaviour macro and meta level indicators of
191,202-7 labour market flexibility
perceptions and regulation 191, 207-18; deployment of labour
199-202,203 208-12; employment-output
see also firms responses 212-15; wage
employment flexibility 215-18
Brazil: flexibility 50--4 output growth 31
Canada: flexibility 167-70; regulation see regulation
structure 154, 155 unemployment see unemployment
Chile 102; firms' flexibility exclusion clause 137
strategies 95-6; pro-cyclical
behaviour 69-71 family allowances 84
EU: employment-output responses family structure 249-50
212-15; regulation and Farber, H.S. 273
202-7 Federal Labour Law 1931 (Mexico)
full 17,18,259 130
Japan: characteristics of Federal Reserve Bank of Kansas City
employment system 225-6, 255-6
228-35; comparative analysis female participation see women
of adjustment 239--43; firing/dismissal 15, 16
fluctuations and business cycle Brazil 40,46-7
243--4; tools of adjustment and Canada 172-3
income effects 244-7 Chile 81, 83--4
labour flexibility 12, 13-17 EU 193,196,197,199,200,285
labour market flexibility 11, 12; Japan 244-5,246
evidence of growth 22--4 Mexico 133
Mexico: stability 132-3; structure USA 281
117-19 see also severance payments
294 Index
firm size 16 Giersch, H. 255
employment in Japan 228-9 global economic order 179-80
Mexico: employment 120, 122; Goldin, C. 24
productivity 127-9 government supported training
firms 177-8
Canada: skills 178-9 Greece 197, 198-9
Chile and labour flexibility see also European Union
strategies 91-10 1, 103-4, Gregory, P. 119
105-8; labour relations 97-8; Grubb,D. 194,202,206
management styles 98-101; Gunderson, M. 161
restrictions on labour issues
93-4; training 96-7; turnover Haltiwanger, J. 265-6
and sub-contracting 95-6 Hamermesh, D.S. 275
and employment flexibility 16-17 Hart, R. 212-13
Mexico: attitudes to training head of household income 250
143-4 health insurance 271
reallocation of labour among Health Insurance Managers (ISAPRE)
establishments 265-7 80
see also employers health and safety legislation
fluctuations in employment 243-4 173-4
see also economic cycles health system 80
Ford Motor Company - Mexico Higuchi, Y. 249-50
143-4 hiring
France 29,31,200,284 Chile: rules 84, 93-4; subsidies
comparative analysis of adjustment 79
239-43,245,247 Japan: instrument for adjustment
see also European Union 244-5,246
Freeman, R. 151,161,260 regulation in EU 199, 200, 285
Frente Autentico del Trabajo (FAT) hoarding, labour 252
(Mexico) 136 Hoddinott, J. 22
Horton, S. 7, 30
Gabayet, L. 123 hours of work
Garda, B. 119 EU 193-4,196,197,206
GarcIa, N. 123 Japan 240-3,244-5,251-2
Gaskell, J. 177 Mexico 120, 122, 124, 134-5
Geller, L. 95 USA 284
gender Houseman, S.N. 257,275,275-6,
labour participation in Japan 284
248-9 human capital/resources
USA: job tenure 271-3; Brazil: investment 58-{j I
unemployment 278-80 Chile 99-100, 101, 103
wage differentials in Canada 164 enterprise-level practices in Canada
see also women 178-9
General Agreement on Tariffs and flexibility and labour flexibility
Trade (GATT) 138 12-17
Germany 29, 31, 284 see also skills; training
comparative analysis of adjustment human rights legislation 173
239-43,245,247,248 Humphrey, J. 92
see also European Union Hyclak,T. 216
Index 295
illegal/non-signed labour contracts Mexico 30, 129-37; collective
45,55-6,56,57,61 rights 135-6; conditions of
ILO 24, 25, 29, 31 work 134; employment
Imaoka, H. 232 stability 132-3; reform of
immigrants 165 labour legislation 136-7;
see also migration severance pay 133-4;
import substitution industrialization technico-organizational
(lSI) 119 flexibility 135; wage
incentives 14 flexibility 134; working hours
income distribution 69 134-5
indexation of wages 71-3,80 trends 28-32
Indices of Structural Change (ISCs) USA 28,257-9, 280-3
Canada 169-70,283-4 see also legislation; regulation;
USA 25,264-70; comparisons unions
with Europe 283-4 internal migration 166-7, 168
individual labour contracts international market 59
Brazil 40, 40-7 international unions 171
Chile 83-5 IOE 202
see also labour contracts Ireland 197,200,219
industrial employment concentration see also European Union
120, 124 Italy 29,197,200
industrial growth 116-17 see also European Union
inflation 71-2 Ito, T. 239
informal sector 5, 6, 26-7
Brazil 27,56-7 J-mode 8-9,29-30
Chile 66,75-8, 102-3; as buffer Japan 2,225-53
76; wage differentials 76-8 characteristics of employment
EU 192 system 225-6, 228-35
Mexico 27,119,120,122-3 composition of labour force 228
information asymmetries 13 economic indicators 226-8
information and communication institutions see institutions
technology (ICT) 187-8 labour market adjustment 239-51;
innovation 59 bonus payments 250-1;
strategy 92 comparative analysis 239-43;
institutions 17-19 employment fluctuations and
Brazil 30-1,37-8,39-49,61; the business cycle 243-4;
collective labour contracts female participation 248-50;
40,47-9; individual labour tools of adjustment and income
contracts 40, 40-7 effects 244-7
Canada 28-9,170-6; government tenure 25,231-3
adjustment policies and wages 24,247,251
programmes 175-6; job creation
legislation 171-4; unions Brazil 54
170-1 and job destruction in USA 266,
Chile 30,78-87,97-8, 102 285
EU 29, 191-207 job-lock 271
Japan 29-30,31,235-9; job security 16-17
legislation 237-9; unions see also tenure
235-7 jobless growth 156
296 Index
Johnes, G. 216 forms 257-9
Juntas Federales de Conciliaci6n y and labour flexibility 12, 13-17
Arbitraje (Mexico) 131,137 labour mobility see mobility
Jusidman, C. 123 labour plans 238-9
labour regulation see regulation
Katz,1. 92 labour relations
Katz, L.F. 24,25,27,260-1 Chile 99-100; flexible legislation
Klau, F. 22 97-8; mistrust 94
Koike, K. 232-3,235 Japan 236-7
Korea 7,260 legislation in Canada 171-2
Krugman, P. 255 Mexico 129-37
Kuhn, D. 161 Labour Relations Law 1946 (Japan)
Labour Code Labour Standards Law 1947 (Japan)
Brazil 39, 40 238
Chile (Plan Laboral) 71, 72, 80, labour supply see supply of labour
82,83 Lailson, S. 123
labour contracts Layard, R. 22, 262
Brazil 38,40-9,52-3; collective Lazear, E.P. 257
40,47-9; illegaVnon-signed legislation 17-19
45, 55-6, 56, 57, 61; individual Canada 171-4
40;40-7 Chile 30, 78-87, 97-8, 102
Chile: collective 98; individual Japan 237-9
83-5; legislation 97 Mexico 130; debate on reform
duration/length 13-15, 52-3, 195 136-7
EU 195,196,197,202-6 see also institutions; regulation
labour costs 4-5,6-7 Lemieux, T. 161
Brazil 42-4 length of service see tenure
Chile 84-5 Leonard, 1. 265
EU 216--17 Ley Federal del Trabajo 1931 (LFT)
see also wages (Mexico) 130, 136
Labour Courts 38, 39, 43-4 lifetime employment system 225-6,
labour demand 154,239-43 231-3,251-2
Labour Directorate (Chile) 81 Lindbeck, A. 255
labour flexibility 1-17 Lindley, R. 24
costs of labour rigidity 5-6 litigation 281-2
dimension of 3-5 see also Labour Courts
examination of concept 9-17 locational decisions 189-90
macroeconomics 6-7 Long, R. 179
models 7-9 longest job 273
Labour Force Development Strategy
(LFDS) (Canada) 178 macroeconomics 4, 6--7
labour hoarding 252 see also recessions; shocks
labour input flexibility 1-2,3, Madrian, B.C. 271
11-17 Maki, D. 171
labour legislation see legislation management styles 98-101
labour market flexibility 1-2, 3, manufacturing
9-11,18,19 output per worker trends 31-2
evidence 19-28 USA: job reallocation 265-7
Index 297
Margo, R. 24 Needles, K. 161
market-oriented model 7-8,8-9, neo-corporatist model 8-9, 29, 30
28-9,30 Netherlands 202, 260
maternity leave 84 see also European Union
Mazumdar, D. 22-4, 30 new global economie order 179-80
Meller, P. 69 'new unionism' 48
Meltz, N. 178 NISSAN-Aguascalientes 144
Mendon~a,R. 54-5 non-signedlillegallabour contracts
Merideth, L. 171 45,55-6,56,57,61
Mexicana de Aviaci6n 143 North American Free Trade
Mexico 2, 113-50 Agreement (NAFTA) 134,136,
adjustment and restructuring 138,152
116-19; impact on labour
market and unionization occupations
119-27; impact on productivity reallocation by in USA 267-8
127-9 structure in Mexico 140
economic indicators 115 offensive strategies 92
informal sector 27,119,120,122-3 oil shocks 240-3,243
institutions see institutions older workers 188
output per worker 31-2 see also age
training see training Olson,M. 8
wages see wages Ono, A. 239-43,249,251
microelectronics 139-40 Organization of Economic
migration Cooperation and Development
internal in Canada 166-7, 168 (OECD) 88,138, 178, 185,284
Mexico 120, 127 job turnover in EU and USA 284-5
minimum wages 57, 172, 270 wages and unemployment 214,215
Mishel, L. 276 Oswald, A.J. 22,26,54,262
mistrust in labour relations 94 output
Mittelstadt, A. 22 and employment in EU 212-15
Mizala, A. 73, 76 and employment in Japan 244, 245
mobility 18, 19 output per worker trends 31-2
Canada 167-70 USA 263; employmenHlUtput
Chile 73-8,95,99-100; informal elasticities 274-6
sector 26-7,75-8; labour overtime 244-5
supply 74-5
EU 208-12; labour force flows Pacto de Solidaridad Econ6mica
210--12 (Mexico) 116
labour market flexibility 10--11; part-time employment 230--1
evidence 19-28 participation rates see supply of
see also reallocation of labour; labour
segmentation; turnover rates Partido dos Trabalhadores (PT)
modalities of employment 230-1 (Brazil) 48
Morley, J.W. 255-6 payroll taxes 258
Municipal Placement Offices (OMC) pension system 80
(Chile) 81 per capita labour income 247
Municipal Workers' Union (Japan) see also wages
235 perception of regulation 191,
Murphy, K.M. 24,25,27 \99-202
298 Index
performance-related pay 216 race 278-80
personal computers 139 Read,1. 282
polarization, wage 159-61 reallocation of labour 256-7, 263-70
Poret, 218 among establishments 245, 246,
Porter, M.E. 92 247,265-7
Portugal 197, 202 EU 208-12
see also European Union by industry 264-5
Pozas, M. de los Angeles 131 by occupation 267-8
price, product 59 by region 268-9
pri vate sector USA and Europe compared 283-4
training 177-8 see also mobility
wage differentials with public sector recessions 6-7
in Canada 161-4 Canada 154-6
probation 193 Chile 67-8, 71
producers: suppliers, users and Japan 226-8
187-8 redundancy see firing/dismissal
productivity regional labour costs 216-17
Canada 158 regional wage differentials 166-7,
growth 12-17,17,18 216
Japan 252 regions: reallocation by 268-9
Mexico 114, 115, 146-7; impact regulation
of adjustment and restructuring Chile 81-7; collective bargaining
127-9 and union membership 85-7;
output per worker trends 31-2 firms' flexibility strategies
USA 31, 252, 263 93-4; individual labour
profits 251 contract and labour costs
Programa de Becas de Capacitaci6n 83-5; stages 81-2
para el Trabajo (PROBECAT) EU 191-207,219-20; employers'
(Mexico) 141 perceptions 191, 199-202;
Psacharopoulos, G. 24 impact on employers'
public employment exchanges 175-6 behaviour 191,202-7;
public sector regimes 191-9
Canada 172; wage differentials Mexico 130-7
with private sector 161-4 USA 257-8, 280-3
Chile: modernization of labour see also institutions; legislation
legislation 85; wages 71-2, reinstatement 83
73 Rend6n, T. 124
employment in Mexico 120, 124, Rengo (Japanese Private Sector Trade
125, 126 Union Confederation) 235
Pyke, F. 96 restructuring
Canadian firms 178-9
quality Mexico 116-29; impact on labour
Mexican firms and 144 market and unionization
product 59 119-27; impact on productivity
of workers 13-14 127-9
'quality' scenario 190 retirement 188
quantitative flexibility see United early 245,246
States re-training programmes 89-90,91
Quinn, J.F. 273 Riddell, W.C. 156, 161, 170
Index 299
right to manage contract 4 special adjustment assistance
Robb, L. 161 programmes 176,181
Robbins, D. 27 spring offensive (shuntou) 226,
Roberts, B. 122 236-7
Romaguera, P. 73, 76 stabilizations 6-7
see also structural change
Salas, C. 124 state intervention 130-2
scholarship programme (Chile) strikes
89-90 Canada 171,172
Seamen's Union (Japan) 235 Chile 82,86-7
sectoral mobility see mobility structural change 6
sectoral reallocations 264-5 EU 208-10
sectoral wage differentials 216 structural adjustment in Chile
segmentation 10-11,18,19,20 67-9
Brazil 56-7,61 sub-contracting 83,95-6
see also mobility Subsecretarfa de Educaci6n e
self-employment 55-6, 56, 117-19 Investigaci6n Technol6gica
SENCE (Servicio National de (SEIT) (Mexico) 141
Capacitati6n y Empleo) (Chile) suppliers 187-8
88,89-90 supply of labour
service sector 123 Canada 153-4
severance payments Chile 74-5
Brazil 45-6 Japan 239-43; female
Chile 82,83,85 participation 248-50
Mexico 133-4 Mexico 119, 121
shocks Sweden 29
Brazil 49-50 Swinnerton, K.A. 274
oil shocks and Japan 240-3, 243
USA 263-4 Tachibanaki, T. 231,232
shuntou (spring offensive) 226, Taira, K. 236
236-7 taxes, payroll 258
side-arrangements 282-3 Teachers' Union (Japan) 235
Silva, A.A. 44 technical education 140
Single European Market (SEM) 189 technical skills: scarcity 94
Sistema Nacional de Capacitaci6n y technico-organizational flexibility
Adiestramiento (Mexico) 141 135
skills technology/technological change
Canada 176-9 development path in Chilean firms
Chile: scarcity of technical skills 101
94; skills improvement EU 187-8
programmes 80,88-91 and training in Brazil 59-60
see also training and training in Mexico 138-40,
social security systems 141-2
Chile 80, 84-5 TELMEX (Telefonos de Mexico)
EU 188-9 143
Mexico 120, 124-7 temporary work 195,196
Spain 31,197,286 tenure
see also European Union Japan 25,231-3
Spath, B. 96 USA 232, 270-4, 284-5
300 Index
termination see firing/dismissal unemployment insurance
Topel, R. 277 Brazil 40, 44--5
total factor productivity (TFP) 127, Canada 166-7, 175
128 Chile 81
trade liberalization 127 Japan 238
Trade Unions Law 1946 (Japan) 238 unemployment subsidies 79,81
training unions
Brazil 38, 46, 58-61, 62 Brazil 39~O,47-9
Canada 177-8 Canada 162~, 170-1, 171-2,
Chile 80,84,87-91; firms' labour 179
flexibility strategies 96-7, Chile: firms' labour flexibility
99-100, 104; programme strategies 97-8; regulation
88-91; system 87-8 82,85-7
Mexico 114, 138~5; autonomous Japan 226,235-7
training centres 142; Mexico 136--7; collective rights
companies' attitudes 143~; 135-6; impact of adjustment
policy 140--1; technological on unionization 119-27;
innovation and 138~O, training 144-5; 'white
141-2; training centres' unions' 131-2
attitudes 141-2; unions and USA 170,171,270,280
wages 144-5 United Kingdom 24,29,210,285,
see also human capitallresources 286
transfers of employees 245, 246, 247 collective bargaining 215
see also reallocation of labour comparative analysis of adjustment
turnover rates 239~3,245.247
Brazil 38,53,59,60-1 de-regulation of labour market
Chile 95 194-7,198,199-200,202
USA 284-5 mobility 212
typology of firms 98-101 output per worker 31-2
see also European Union
unemployment 7 United States (USA) 2, 22, 24, 24-5,
Brazil 50, 52; duration 50--2 255-89
Canada 24, 154--6 age see age
Chile 25-6,67,68,69,71,102; Canada's dependence on 151
and wages 72-3 comparative analysis of adjustment
comparative studies 262 239~3,245,247
costs of labour rigidity 5-6 comparisons with Europe 263,
EU 24,186-7,208,210,263; 283-6,286
wage flexibility 217-18 employment--output elasticities
Japan 228, 239 274--6
labour flexibility 9, 15; evidence female labour participation
24,25-6 249-50
Mexico 114, 116; informalization forms of flexibility 257-9
and 119,122-3 institutions 28, 257-9, 280--3
USA 262; comparison with EU macro quantities 262-3
255-6,263,283,285; structure output per worker 31-2
276-80 productivity 31, 252, 263
Index 301
reallocation of labour 256-7, Mexico 26, 124, 126; flexibility
263-70 134; training, unions and wages
regulation 257-8, 280-3 144-5
tenure 232,270-4,284-5 minimum wages 57,172,270
unemployment see unemployment real wages: labour flexibility 12,
unions 170, 171, 270, 280 13-17; labour market flexibility
wages see wages 11,12,22-4,25-6
US Auto Workers 1(1 structures 24-5
Urani, A. 45, 56 USA 257,258-9,270,286;
users: producers, suppliers and comparison with EU 283;
187-8 macro 260, 261-2; micro
260, 260-1; structure of
Valle, R. 58-61 unemployment 276-8, 280
Vanderkamp, J. 166 widening differentials 27-8
voluntary separations 47 Walwei, U. 190
Weitzman, M.L. 251
wage curves 54-5 Welch, F. 24
wage seniority system 225-6, Wells, W. 194, 202, 206
233-5 Werner, H. 190
wages 'white unions' 131-2
Brazil 26, 38; labour contracts Wial, H. 274
42-3; real wage flexibility women 189
54-6 Chile: regulation 84, 93-4
Canada 156-7, 158-67, 158; employment in Mexico 123
immigrants 165; male-female Japan 226,248-50,251
differentials 164; polarization male-female wage differentials in
159-61; public-private sector Canada 164
differentials 161-4; regional work organization 135
differentials 166-7; unions workers' attitudes to training 60
171 working conditions see conditions of
Chile 102; real wage flexibility work
71-3; wage differentials working hours see hours of work
76-8; wage policies 80 workplace practices 178-9
costs of rigidity 4-5 World Bank I
EU 214-15,283; flexibility
215-18 young people 84
Japan 24,247,251
macroeconomics 6-7 Zapata, F. 114, 116, 132