The concept of “labour market flexibility” has been a key euphemism of the last quarter of the twentieth century. The most common interpretation of flexibility is the extent and speed of the adaptation to the market shock; the implication being that institutional and behavioural rigidities in labour market and enterprises slow price and quantity adjustment, as described in Schmid (1996). One significant point that we have to realise from the start is that a highly flexible system is also an unbalanced one, since it is susceptible to shocks that may be short lived or random.
Nevertheless we should realise that the term “flexibility” covers a range of practices, flexible organisation of the work place with shifting job designs and boundaries. Companies may look for several types of labour flexibility. The four main categories are: (1) Functional flexibility. This refers to a firm’s capability to accept, deploy and re-deploy the skills of labour across a wide range of tasks. This usually involves multi-tasking and self-sufficient teamwork, as well as the lack of rigid job demarcation lines.
The required recurring investment in training and retraining normally leads to long-term employment relationships. (2) Numerical flexibility. This denotes the ability of management to vary the amount of labour employed. This can be achieved by labour policies relying on hire and fire to adjust the volume of labour to changes in demand. A typical employment such as part-time and fixed-term workers, as well as the externalisation of work via subcontracting can enhance numerical flexibility. (3) Temporal flexibility.
This relates to changes in the number and timing of hours worked. On the one hand, flexibility in the average number of hours worked can be secured by practices such as overtime and short-time working. On the other, flexibility can be achieved by flexible working time arrangements, especially by the flexible scheduling of daily, weekly or annual working time. This may comprise flexitime systems, various forms of shift work, annual hour arrangements, etc. Certain types of A typical employment, such as part-time, and on-call arrangements can enhance temporal flexibility.
(4) Financial flexibility. This can be obtained by variation and differentiation of pay. Relative pay flexibility refers to the differentiation of pay between regions, industries, branches of industries, etc. Differentiation of pay between individual companies within the same industry can be achieved by decentralised pay settlements. Furthermore, a high share of variable pay on the total pay package by linking pay to some measure of individual, group or company performance, contributes to financial flexibility, as made clear in Beatson, M (1995).
There is on the other hand, no single model of enterprise flexibility, and much of the writing on labour flexibility has been criticised for over generalisation and for not locating this issue within the broader regulatory and institutional frameworks as articulated by Smith (1994). The kind of flexibility a company may search for in a particular country like Germany and Japan, and the extent to which this can be achieved, is largely influenced by the system of industrial relations, labour market regulations, vocational education and training systems (VET) and the characteristics of the specific labour markets.
The particular configuration of these factors makes it unlikely that companies can achieve a high level of all types of labour flexibility at once. In countries like Germany – which are characterised by strong labour market regulations, extensive and comprehensive training infrastructures, relatively centralised collective bargaining, and industrial relations systems that encourage VET and a co-operative culture – companies are generally able to obtain a high degree of functional, but less numerical and financial, flexibility as defined by Schmid (1996).
There is an additional way of looking at the issue. Systems and relations of production develop through eras of flexibility until the existing procedures and regulations become rigid and over complex. In the past, all labour systems have evolved through flexibility and more “rigid” or stable phases, the rigid collapsing into more flexible forms and flexible practices stabilising through the establishment and legitimating of norms and regulation, until these have fettered the development of production, as illustrated by Dore (1986).
Nevertheless, economist and international organisations have proclaimed that unemployment, low growth and inflationary pressures are due to labour market inflexibility and other forms of inflexibility. Little consideration has been given to the paradox. The initially low level of wages in eastern Germany would remain low, as many non-viable enterprises closed down and unemployment rose. Unemployment and low wages would give rise to two movements: Firstly, workers would move from eastern to western Germany in search of higher wage jobs to the detriment of existing east German enterprises’ profitability.
Secondly however, new investment would be highly profitable at low eastern wages and hence capital would flow east. By using real wage flexibility and employment adaptability, the Organisation for Economic Co-operation and Development (OECD) contrasted the German situation with Japan. In Japan real wage rates were found to be highly flexible, with a correspondingly small need for employment adjustment.
Therefore, in Japan, there is a common understanding that the Japanese labour market is more flexible than those of the other industrialised nations in Europe, like Germany, and it is this flexibility that has contributed to the lower the rate of unemployment and to provide a better macroeconomic performance. There is a widespread belief that the participation of a flexible labour force is effective in adjusting the labour supply. Specifically, the labour supply is increased when an economy is in boom, while it is decreased in a recession, as explained in Hamada and Kurosaka (1986).
The representative examples who propose that this flexibility helped to lower the number of unemployed people. This notion had been already recognised by many writers in Japan, and those workers are called ‘discouraged workers’, who lose their desire to seek jobs and are forced to retire from the labour market. Government and employers’ sources commonly emphasise that companies located in western Germany have traditionally been restricted in their pursuit of flexibility in staffing, working time arrangements and pay, due to the meticulous configuration of the German industrial relations system and labour market regulations.
In the 1990s, intensified international competition, accelerated technological change and gradually more volatile and segmented consumer markets across Europe have spurred employers’ demands for greater labour flexibility. Against this background renewed concern about Germany’s long-term attractiveness as an investment and production location has led to the emergence of the issue of labour flexibility, a ‘Leitmotif’ in German human resource management in general, and employee relations in particular, as explained by Tiselmann (docserver. com).