Economic Reforms and Employment Relations: Changing Paradigms in a Globalizing Context
This research paper authored by noted economist Dr. B.Vidyadhar Ishwar MSc. PhD (LSE), Aston University, UK, is presented here with his permission, and is not edited. The feature picture shows him speaking at the event organised by EFI with WeSchool.
The State (government) plays an important role in setting the blueprint of employment relations (ER) and deciding the rules of the social and economic exchange between employers, workers and trade unions. Economic policies of the state have an overarching effect on labour market policies, firm level practices and employment relations outcomes. This paper primarily aims to discuss the broad trends in economic policies in the context of globalization that have shaped the trajectory of employment relations across major developed and developing countries. Given the wide scope of the topic, it would be difficult to encapsulate fine-grain details of specific economic policies and their impact on employment relations at national, industry and firm levels. However, I hope the discussion that follows will enable the readers to identify trends and patterns of people management practices within their own employment and industry sectors that flow from the policies pursued by the state. I hope this paper opens avenues for further dialogue that will lead to more robust policy debate and practical considerations on people management.
State and Employment Relations:
The state plays at least three major roles in employment relations. First, the state is an economic manager. Second, the state as a legislator regulates the product, capital and labour markets. Third, in most countries around the world, the state is the largest employer (public sector employment). As an economic manager, the state typically focuses on wages in the labour market, inflation or cost of living and, taxation policies. For instance, the state can set the minimum floor of wages through National Minimum Wage or Living Wage policies. In the UK for instance, there was no national minimum wage up until 1998. It was only in 1999 that the then Labour Government introduced a National Minimum Wage which has since been revised in line with cost of living and in 2016, the Conservative Government introduced the mandatory National Living Wage for workers aged 25 years and over. Workers under the age of 25 would continue to receive the statutory minimum wage. In April 2019, the UK national minimum wage was set at £7.70 per hour and the national living wage at £8.21 per hour. For under 18 years and apprentice wage is much lower at £4.35 and £3.90 per hour respectively.
There has historically been a degree of resistance from employer associations towards setting statutory minimum wage. It has been considered as an artificial distortion in the free market when the conventional wisdom is that the market should decide the price of labour. The Confederation of British Industry and several Chambers of Commerce in Britain argued that government intervention in setting wage levels would result in increased unemployment as employers can ill-afford such wage rises and will either stop recruiting workers and/or will reduce their existing workforce levels thus exacerbating joblessness. So far, we have not witnessed such damaging effects of statutory wage policies on employment either in Britain or in the USA and more recently in Germany which only ever introduced national minimum wage policy in January 2015. If at all anything employment levels have risen after introduction of statutory minimum wages and living wage policies. There is a good reason for that rise. Workers are not just producers of goods and services they are also consumers of goods and services. Hence when we increase wage levels, we are effectively increasing their disposable income which then stimulates greater consumption and demand for products and services. An increase in demand for goods and services stimulates the demand for labour thus increasing employment levels. That said, there are certain sectors of the economy which are more sensitive to wage rises than others. For e.g. care homes for senior citizens or nurseries for children which have typically relied on low waged workers. In these niche sectors, the impact of wage rises could be somewhat amplified but at an aggregate level there was no adverse effect of statutory minimum wage policies on employment.
In India too, the national sample survey office (NSSO) data released by the government of India shows no adverse impact of wages on employment for all phases of economic reforms starting from 1993-94 up until 2011-12. Even after disaggregating the data by types of employment i.e. ‘regular waged employment’ and ‘casual employment’, there is no indication that rising wages have worsened unemployment. To the contrary, we see an inverse relationship whereby rising wages are associated with fall in unemployment. This resonates with the findings on wages and employment in several developed economies of the West.
State policies on taxation and inflation can also have an impact on the production costs and consumption of goods and services. This can consequently affect employment levels, wages and terms and conditions of employment. In Britain both employers and employees have to pay a ‘social tax’ called the National Insurance Contribution (NI) which goes towards public services like health care, education and community services. Employers in the UK pay 13.8% which is higher than employee contribution of NI (around 12% for income above £166.00 per week up to £962 per week). During the recent global economic recessions from 2008 until 2013, several employer organizations in the UK lobbied the government to waive the employer contributions of NI to allow that money to be invested in businesses. State also pursues ‘incomes policies’ such as, offering greater relief on personal income tax levels while wage levels remain constant. Thus effectively, allowing workers to carry home larger proportion of their salary after tax. Corporate tax on profit is another area that needs discussion as to whether reduction in corporate tax results in better employment outcomes at national, sectoral and firm levels. This could be of particular interest where employees are offered share ownership schemes and benefit from dividends on those shares where corporate tax burden has been reduced.
The conventional argument on wages is that rising wages create inflationary pressures on the economy which could then lead to a vicious cycle of increasing cost of living and higher demand for wages which is unsustainable. Nevertheless, governments as large public sector employers have often held wages back in the public sector to curtail inflationary pressures on the economy while keeping interest levels on credit low. In the UK, the state employs around 5.5 million workers across central and local governments, health, education and social care sectors. Since 2010 when the Conservative government came to power in coalition with the Liberal Democrats, a 1% wage cap was imposed on all public sector workers. This was deemed necessary to reduce the structural deficit (government debt) and, accrue what is euphemistically known as ‘efficiency savings’ in the public services. Needless to say, the private sector employers followed the public sector wage trends in enforcing wage freezes. It was only in 2018 that the Conservative government abolished this wage restraint policy on over 5 million public sector workers. However, no additional funds were made available by the state to public sector enterprises to pay higher wage rises to their employees. This money is to be found through existing budgetary allocations. In most cases, the pay rises that UK public sector workers got were below inflation and were effectively pay cuts.
Finally, the state can influence employment relations outcomes by its regulatory interventions in the product, capital and labour markets. For instance, de-regulation of product markets can intensify competition by allowing entry of private domestic and foreign firms into the country. More enterprises in the market can create greater employment opportunities and perhaps better wages and terms of conditions for workers. However, increasing product-market competition also means that employers can no longer take profits for granted and likewise, employees can no longer take wage rises and bonuses for granted. At least in theory, intensifying competition should create a more fertile ground for labour-management cooperation or ‘social partnership’ which could result in mutual gains i.e. higher productivity for employers, better job security, investment in skill training and higher wages for employees. Better access to institutional capital on favourable interest rates and with repayment terms which are of longer duration is known to result in positive employment relations outcomes in coordinated market economies such as Germany, Netherlands and the Scandinavian countries. On the other hand, over-reliance of firms on stock markets & private equity to raise revenue is often associated with relatively poor employment outcomes in terms of job security, investment in long term training, career prospects and wages for non-managerial grade workers. Thus, what type of capital ecosystem the state promotes can have a bearing on employment relations outcomes in the country.
The role of the state in regulating labour markets is a highly contentious topic particularly in emerging economies which have witnessed a race to the bottom when it comes to individual workers’ rights, collective representation and welfare. Here the Left-wing political parties have consistently argued that global multilateral institutions such as the World Bank, IMF and WTO coerce the governments of developing countries to open up their domestic markets to international competition and at the same time limit their abilities to protect workers rights and provide public services & welfare through imposition of structural adjustment programmes. The advocates of globalization on the other hand argue that states that follow the World Bank and IMF guidelines witness better outcomes in terms of GDP growth, employment levels and wage rise. More profitable firms, leading to higher employment and rising wages are essential for the state to raise its tax income. This tax can then be ploughed back into targeted welfare policies for sub-groups of population who are most in need of state support. There is a considerable body of research evidence on both sides of these arguments and it then becomes a matter of one’s political ideology as to which evidence to consider more or less credible and hence worthy of incorporating into practice. The bottom line is that all governments make conscious policy choices and are not entirely prisoners of multilateral bodies. The choices that states make ultimately decide – who gains and who loses, how much, how soon and, at whose expense. Electoral politics and clientelism play a major role in the regulation versus de-regulation agenda.
Shift in Political Landscape and Changing Paradigms of Employment Relations:
The 1980s and early 1990s were periods of economic slowdown in many countries around the world particularly the liberal market economies such as the UK and USA. This was a period of rising unemployment, rising cost of living, high interest rates, falling stock markets and increase in industrial conflicts i.e strikes, lockouts and closures. It was during this period that the political landscape changed radically with the electoral losses suffered by the Labour Party in the UK and the Democrats in the USA. The Conservative Party came to power in 1979 in the UK under the premiership of Mrs Margarete Thatcher and in the USA, the Republican Party was led to electoral victory by President Ronald Regan. Thus, both major western economies witnessed a rise in the fortunes of right-wing political parties and the demise of left parties. This was also the period that witnessed an acceleration in the global regulation of international trade through negotiations on the General Agreement on Tariffs and Trade (GATT) culminating in the setting up of the World Trade Organization (WTO) in 1994-95. There was greater urgency on part of developed countries to access international markets particularly in the developing world through reduction of trade barriers and social dumping clauses attached to export of goods and commodities from the ‘third world’ to the ‘first world’. Increasingly there was a link established between global trade and access to foreign aid which the developing countries were dependent on. Aid and loans became conditional on access to product and capital markets and availability of cheap labour. National governments in the developing world were required to reduce their debt, cut down spending on public goods and welfare and open ‘protected markets’ to foreign competition.
This shift in political landscape had major implications for employment relations. In the USA the Republican government locked horns with major labour unions like the Air Traffic Controllers union and the industrial conflict resulted in the unions losing the dispute. In the UK, the Thatcher government engaged in a protracted industrial dispute over closure of public sector coal mines with the militant National Union of Miners and deployed the entire state machinery to defeat the union. These were major victories for the right-wing political parties and enduring losses for the left-wing parties and their affiliated unions. There was a paradigm shift in the economic policies of the newly elected right-wing governments which marked a clean break from the historical policies of state intervention in labour markets. All economies are cyclical in nature. There are periods of economic prosperity and periods of economic downturns. Historically, during periods of economic downturn, the state would step in by injecting substantial funds into the economy to create jobs in the public sector. This could be through investments in major infrastructure projects, health and education etc. The underlying rationale for such state intervention was to create jobs in the public sector during recessionary periods. Increased waged employment in the public sector will in turn create jobs in the private sector by stimulating the demand for goods and services and eventually, the economy will get back on its feet.
The new economic paradigm followed by countries such as the UK and USA under the leadership of right-wing governments was to refrain from injecting funds into creating public sector jobs during times of economic downturn. Instead, the emphasis now was on making supply of labour easier for the private sector employers. This entailed government policies such as non-interference in statutory wage determination, lowering employment protection for workers, and weakening trade union rights on strikes and collective bargaining. The rationale behind these policies was to facilitate the ‘ease of doing business’ by making the labour markets more flexible which will in turn incentivize employers to hire more workers. Successive governments have followed these policies not just in the UK and USA but in many countries across the global north and south until the present day. Even the Labour Party that came to power in the UK in 1998 under the leadership of Prime Minister Tony Blair did not reverse any of the anti-union laws passed by its predecessor Conservative government although it did make progress on other fronts such as introducing national minimum wage and bringing in a rather soft-touch union recognition law.
The employment relations policies in the co-ordinated market economies such as Germany and Netherlands followed a different trajectory. Here the emphasis was on post-war nation building through industrial peace and social partnership which continued even during times of economic recessions. The German model often referred to as the ‘Rhine Model’ of industrial relations offered opportunities for national and industry level bargaining thereby taking wages out of competition, emphasis on job security which meant that employers had greater incentive to invest capital into employee skill development as they could recoup this investment over a longer period of time through increased productivity. German employers also more likely to offer their employees opportunities for career progression within the internal labour markets of the firms. At collective levels, trade unions had the rights of co-determination and veto on employers’ corporate plans and played significant roles in setting criteria for selection of employees for redundancies where job cuts were inevitable. The state mandated that such criteria for job cuts or redundancies must take into account social indicators such as age and disability and not just performance criteria. Institutional credit was made available to German companies on long term repayment terms. Cumulatively, these economic and employment relations policies of the German state encouraged employers to focus on skill development of their employees aligned with product-market strategies of innovation, differentiation and focusing on niche high value consumer segments. Although it is worth noting that the German industrial relations model of social partnership has been diluted by successive governments since the mid-2000s onwards, it still retains its hallmarks of social dialogue and partnership with greater rights for labour when compared to liberal market economies such as the UK, USA or Australia. It is perhaps in this context that we should note that the German economy recovered much faster from the global financial meltdown of 2008 when compared to other major economies such as the UK or the USA. Coordinated market economies also tend to have a higher level of social welfare. For example, the unemployment benefits for workers in Netherlands & Denmark who have lost their jobs due to redundancies and firm closures are substantial and longer term allowing sufficient time to those workers to find suitable alternative employment.
On the whole, the change of orientation in national economic policies are reflected in the employment relations policies at industry and enterprise levels. Back in the 1970s and to some extent in the 1980s, the discourse was about ‘job security’ for workers. Following the winds of globalization and intensifying competition in the 1990s, the discourse shifted from job security to ‘employment security’ which meant that an employer can no longer guarantee the same job that a person was originally hired for but would offer alternative employment within the internal labour market of the firm if the original job no longer existed. In the following decade, with the growing emphasis on flexible labour markets ‘employment security’ was replaced with the policy prescription of ‘employability’. This meant that an employer can no longer offer an employee any long term security of employment within the firm but would endeavour to invest in generic skills training that would enable the employee to find alternative jobs in the external labour market in the event of job cuts or redundancies.
The employability agenda soon became a contentious territory and remains so. The fundamental question is who should invest in employability of individuals and at what stage? Should the state through its education system impart necessary skills to make individuals employable in the industry? Or should it be the employers who have the ‘duty of care’ to ensure long term employability of their workers? Or, is it the worker who is responsible for investing time and money into his/her employability? The employability debate has taken centre stage in the light of technological advances in Artificial Intelligence and Robotics which are replacing human effort at various stages in the production process and service delivery. Employability is now being replaced with the concept ‘income security’ through basic minimum income. Here again state polices run into troubled waters and uncharted territories – what should be the ‘basic minimum’ and, should it be universal or targeted to certain sub-groups of population? These questions relating to employability, generic training and basic minimum income have wider implications for state policies on taxation, wages, educational provision and social welfare.
I will briefly illustrate the outcomes of neo-liberal economic policies for workers in the USA and some of the advanced economies of the G20. In doing so, I focus first on wages versus profits as a percentage of GDP and then, on labour productivity & wage rises.
Wages and Profits as a percentage of GDP in the USA
The figure above illustrates data from the US Federal Reserve and shows that workers’ wages and salaries as a percentage of GDP have been falling since 1970s. There was some recovery in wages between 1995 to 2000 but subsequently the downward trajectory of wages has largely continued. Corporate profits as a percentage of GDP on the other hand though volatile have shown a resilient rise since the 1990s with a sharp fall in 2010 but a steady and remarkable recovery since then until 2018. What is most disturbing is the yawning gap between corporate profits and wages between the period 2010 to 2018 a period that coincides with the global financial crisis – when profits have continued to rise but wages have fallen through the floor. A classic explanation could be workers are earning less because they are less productive. The figure below on average wages and labour productivity in selected G20 economies from 1999-2013 dispels this myth.
As illustrated in the figure above, labour productivity in many advanced economies has been several times higher compared to real wages. Here again, I draw your attention particularly to the period starting from 2008 up until 2013 which covers the period of global financial crisis. Labour productivity substantially increased from 2009 to 2013 whereas real wages largely stagnated or showed only a marginal rise. The gap between labour productivity and real wages is astounding and raises serious questions about the role of the state in setting the rules of the game: who gains, how much, how soon and at whose expense?
Employment relations policies should not be seen in isolation. Instead they should be analysed in the wider context of state economic policies. Governments make conscious and deliberate policy choices on the economy which have substantial ramifications for employment relations and people management policies. None of these policy choices are ‘value neutral’. The national budget statements are a classic example of the ‘values’ that governments espouse. They demonstrate the priorities of the state. Equally, they indicate the ability of the stakeholders such as employers, unions and civil society groups to influence the state’s decision-making process. At a global level we are witnessing a paradigm shift in employment relations policies with some variations at national and federal levels within countries. While multilateral agencies such as the IMF or World Bank do influence state policy choices, it would be an overstatement to suggest that national governments are entirely subservient to the dictates of multilateral agencies. Electoral considerations play an equally important role in policy making. The type of economy in which a firm operates i.e. liberal versus coordinated market economy tends to have a significant impact on employer choices of people management policies.
This paper is based on my keynote speech delivered at the event organized by the Employers Federation of India (EFI) in Mumbai on 26 April 2019. I wish to express my sincere gratitude to all the participants and co-panellists in the seminar whose valuable contributions have helped in writing this paper. I special thanks to Mr Vineet Kaul and Mr Vijay Padate from the EFI and to our mutual friend Mr Vivek Patwardhan for organizing this event. The views expressed in this paper are entirely my own and do not represent those of the EFI. I would welcome readers’ comments and am contactable on email@example.com
Excellent educational share