Conceptualising globalisation and the role of the state ...

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5. Conceptualising globalisation and the role of thestate – Part 3Dynamics of national employment models in the era of globalisation: policystill matters

STEFFEN LEHNDORFF, IAT, GERMANY

Introduction

Over recent decades, the assumption that national institutions are becoming toothless ti-

gers in the face of ‘globalisation’ has become increasingly influential in both public and

academic discourse. In a nutshell, the adaptation to the needs of ‘the’ market appears to

be ‘one size fits all’ when it comes to national models of labour market regulation, taxes,

and public spending and property. The implication is that most likely there will be a con-

vergence towards a so-called Anglo-Saxon model of capitalism as the only choice avail-

able for maintaining international competitiveness and fostering employment.

Contrary and parallel to this revival of ‘one best way’ thinking, there has been a grow-

ing body of literature on the persistence of distinctive ‘varieties of capitalism’. A wide

range of typologies of models has been developed varying according to the focus of

analysis. W e find typologies of business systems and corporate governance in conjunction

with systems of industrial relations and employment regulation, of welfare regimes and

gender contracts, of production models, education and training systems and innovation

systems. Indeed, the ‘varieties of capitalism’ are reflected in a ‘variety of approaches’

(Coates, 2005). However, as far as the prospects of these varieties are concerned, the ar-

guably most powerful argument so far goes that, within individual models of capitalism

specific configurations of ‘institutional complementarities’ have evolved which may pro-

vide for ‘comparative institutional advantages’ (Hall & Soskice, 2001). Thus, the so-called

‘co-ordinated market economies’, in the language of Hall and Soskice, or variants of ‘ne-

gotiated capitalism’, as Coates (2000) has branded them, may develop, in competition

with the ‘liberal market economies’, their own rationales of economic performance and

welfare. Next to the structures of capital ownership, it is the training, innovation and in-

dustrial relations systems in particular which are regarded as most important for the

evolution of specific features of co-ordination between firms. Co-ordination, in turn, may

foster long-term approaches, rather than giving in to market-induced short-termism.

W hile this stream of literature makes a strong counter-mainstream point regarding the

means of adaptation to the ‘needs’ of globalisation, the argument carries with it a certain

danger of functionalism, or ‘institutional determinism’ (Crouch & Farrell, 2002). One im-

plication would be that the ‘varieties of capitalism’ approach does not sufficiently take

into account the interaction between different institutions and between these institutions

and major actors, including governments. This shortcoming would become particularly

relevant in a context of change. There can be turning points in national models where the

changes are so marked that more attention must be focused on discontinuity than conti-

DYNAMICS OF NATIONAL EMPLOYMENT MODELS

30

nuity. Hall and Soskice, like many others, are certainly aware of this problem. It is exactly

for this reason that they dedicated a chapter to the need for ‘analysing change in national

systems’. Their argument goes as follows (Hall & Soskice, 2001: 62 f.):

‘We see national political economies as systems that often experience external shocks

emanating from a world economy in which technologies, products, and tastes change

continuously. These shocks will often unsettle the equilibriums on which economic ac-

tors have been co-ordinating and challenging the existing practices of firms. We expect

firms to respond with efforts to modify their practices so as to sustain their competitive

advantages, including comparative institutional advantages. Thus, much of the ad-

justment process will be oriented to the institutional recreation of comparative advan-

tage.’

Quite obviously, the problem of a potential functionalism is far from being solved. One

critical aspect here is the assumption that major actors maintain their interest in the exist-

ing institutional setting. This interest, however, cannot be taken for granted. The attitudes

and roles of actors, and of government policy in particular, should be on the radar when it

comes to analyse change.

This reasoning was one starting point of our ongoing EU 6th Framework Programme

research project ‘Dynamics of national employment models’ (DYNAMO). In this project,

we take the ‘varieties’ talk literally, with an involvement of researchers from ten EU

countries. The analyses, both at national and sectoral levels, look at changes over the last

twenty years and discuss potential trends towards either a ‘liberal market economy’ or a

‘European social model’. Some of the work-in-progress is published on the project website

(http://www.iatge.de/projekt/2005/dynamo/index.html).

In what follows, I will dwell on some intermediate project findings and illustrate the

importance of government policies by the examples of two flagships of ‘co-ordinated

market economies’ within the typologies of national models of capitalism, namely Ger-

many and Sweden.1

Upheaval in the German employment system

For a long time, the Federal Republic of Germany was regarded both at home and abroad

as one of the countries that had been particularly successful in combining economic

growth and social equalisation. According to these analyses, the essence of the ‘German

model’ ultimately lay - or lies - in the fact that the high value added generated by the

country’s high-skill, high-quality manufacturing (and exporting) sector benefits the whole

of German society by being redistributed through generalising institutions such as the

collective bargaining system, labour law and the welfare state. It was only through this

interaction that the German model’s characteristic combination of economic dynamism

and low social inequality could be achieved.

However, since the historic turning point of 1989/90, when Germany was united, and

the arrival of the high unemployment levels that have persisted ever since, opinions on

1 The following summary is based on the German and Swedish country reports for the DYNAMO project.

For references and details cf. Bosch et al. (2005) and Anxo & Niklasson (2005).

CONCEPTUALISING GLOBALISATION AND THE ROLE OF THE STATE

31

the German employment model have been divided. Whereas in major parts of the Anglo-

Saxon literature, in particular, the emphasis continues to be put on the ‘comparative in-

stitutional advantages’ of German capitalism (Hall & Soskice, 2001), some German

authors tend to maintain that the character of the system is geared to stagnation. It is the

structure of the welfare state in particular which is the focus of these authors’ criticism,

since it allegedly drives up labour costs and hence impedes employment growth in the

service sector, particularly in the low-wage sectors (Streeck & Trampusch, 2005). Our own

analysis of the upheavals currently taking place in the German employment model di-

verges from the latter assessment in many regards.

Firstly, far too little attention has been paid to the impressive regenerative capacities of

the high-skill, high-quality productive system that makes up the productive core of the

German employment system. The most striking illustrations of this regenerative capaci-

ties are the successes achieved by German companies in their export markets. Although

globalisation is one of the favoured explanations for the decrepitude of the German em-

ployment system, challenges such as the international reorganisation of value chains or

even the increased price competition in global markets for high-quality goods are clearly

being met so successfully by firms that German manufacturing industry is actually one of

the winners from globalisation rather than a loser. The development of a German form of

lean production, which has benefited from the specialist qualifications of large swathes of

the German labour force, is not the only reason for these economic successes. This re-

structuring of production systems is also linked to a marked shift within organisations

and among employees towards greater flexibility and customer orientation, which has set

new standards that will have to be adopted in many parts of the private and public serv-

ice sector.

Secondly, however, cracks have begun to appear in the foundations of the skill-based,

high-quality productive system, putting its very survival in jeopardy. There are structural

and political reasons for this. On the one hand, the trend towards the ‘financialisation’ of

capitalism is squeezing out the ‘patient capital’ - even in Germany capital is becoming

more impatient. The increasing short-termism of corporate decision-making is under-

mining institutions, such as the vocational training and industrial relations system, that

rely on long-term strategic considerations and trust relationships. Policymakers are not

only not countering this trend but are actually encouraging and supporting it. The under-

investment in education and training, from the provision of care for younger children to

further vocational training, and the deregulation strategies being pursued at national and

EU level have particularly destabilising effects on an employment model that draws its

strength from its human resources.

Thirdly, even if the foundations of the high-skill, high-quality manufacturing system

can be successfully shored up and stabilised, it will no longer be sufficient - in contrast to

previous decades - to give renewed impetus to the employment system as a whole. De-

spite the important position of manufacturing industry in the German employment sys-

tem, the vast majority of workers have for a long time been employed in service activities

(Table 5.1).


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Table 5.1 The quantitative shifts in employment between and within employment segments, 1985 to 2004*

Employment segments 1985 1995 2004

Production 50.8 47.5 45.1Of which:M anufacturing industryBusiness services

35.67.6

27.610.2

24.913.1

Consumption/distribution 24.0 24.3 23.9

Provision 25.1 28.3 31.0Of which:Public serviceEducationHealth

9.14.45.4

9.15.38.9

8.15.8

11.6

* Share of employees in the various segments and sectors in total dependent employment (%); numbers referto the Federal Republic of Germany.

Source: European Labour Force Survey, special tabulation

In order to boost employment growth in the service sector, there needs to be an increase

in both investment and demand, the impetus for which, beyond the manufacturing sector,

would have to come from German consumers as well as from government investment.

The latter would require a turnaround to counter the trend over recent decades (Figure

5.1).

Figure 5.1 Trends in public investment in large EU economies

One particularly urgent requirement in this regard is a reshaping of the welfare state in

order to provide support for the increasing number of women entering the labour market.


33

At the same time, if the expansion and improvement in childcare, education and other

care services were to be accelerated, major new areas of employment would be opened

up. To date, Germany is obviously lagging behind other EU countries when it comes to

employment rates in social, i.e. educational, health and care, services (Figure 5.2). Instead

of clear priorities being set in favour of closing this gap by a state-initiated strategy of

service sector development, considerable resources continue to be devoted to subsidising

the traditional single or main (male) breadwinner model. The lack of will or ability to

modernise the taxation and social security systems in this respect places considerable fi-

nancial restrictions on recent attempts to improve childcare provision and is increasing

the cost pressures on the statutory old age and health insurance schemes, which are then

shifted on to the insured.

Figure 5.2 Employment in education/health/social services* (EU 2004)

12,45

13,75

13,91

14,22

14,93

15,19

15,57

15,74

15,79

15,87

17,28

17,30

17,53

17,60

17,74

17,85

18,06

18,51

19,94

20,84

22,94

23,17

24,20

27,31

29,89

Zypern

Spanien

Slowenien

Tschechische Republik

Estland

Lettland

Österreich

Portugal

Luxemburg

Slowakei

Italien

Griechenland

Ungarn

Malta

Deutschland

Polen

EU-25

Irland

Frankreich

Litauen

Großbritannien

Belgien

Finnland

Dänemark

Schweden

* NACE80 (education) and 85 (health/social services).

Source: ELFS / Institut Arbeit und Technik

Fourthly, the failure to invest in areas such as education and childcare that are important

for the future is also a reaction to government indebtedness, which increased sharply in

the 1990s. German unification and the way in which it was implemented, both economi-

cally and politically, were important factors that paved the way to this state of affairs. In

the wake of this economic shock and the attendant change in the political climate, the

German employment system became caught up in a vicious circle of stagnation and aus-

terity. Persistently high levels of unemployment undermine the financial and political ba-

sis of the institutional structure. Meanwhile, low economic growth rates and the shifting

of risk from the statutory social insurance schemes to private households exacerbate the


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distribution problems. The government’s room for manoeuvre has been further restricted

by its tax-cutting policy. Since German unification, the structural problems of the German

employment model have become ever more acute and German policymakers are particu-

larly constrained by the restrictive requirements and conditions forced on them by EMU

stability criteria and, especially, ECB policy, which takes absolutely no responsibility

whatsoever for employment growth. However, these ‘constraints’ have also arisen out of

the choices made by German policymakers. Today, they act as a self-made straitjacket.

Fifthly, the vicious circle of stagnation and austerity in which German economic policy

is now caught up, the persistent stagnation of real incomes, the cutbacks in social security

benefits, the weakening of industrial relations and, not least, the failure to invest in the

future have all contributed to the development in the German labour market of increas-

ingly extensive areas of precarious employment and even poverty around the dynamic

productive core of the employment system. Social inequality is on the rise and the long-

established pillars - the welfare state and the industrial relations system - are increasingly

unable to prop up the employment system as a whole. The labour market reforms of past

years play a particularly important role in this regard, with possible long-term conse-

quences, since they are bringing the extensive, vocationally qualified middle segment of

the German labour market, which until now was the most vital resource available to the

German employment system, face to face with new social risks of considerable magni-

tude. Furthermore, they are damaging the further vocational training system. Nor should

it be forgotten that Germany is one of the few EU Member States that has not sought,

through the introduction of a legal minimum wage, to counter the emergence of a ‘work-

ing poor’ segment on the ever-widening margins of the labour market.

It is clear from this brief summary of the contradictions in the German employment

model what a decisive role government policy has played in the situation that has devel-

oped. Through the provision of infrastructure, the organisation of social equalisation and

in its capacity as an employer, the state plays a key role in the employment system; in all

these areas, it has been working to destabilise that system, whether through its own pas-

sivity or the initiatives it has taken. However, the state would also be a key player in any

revitalisation of the employment system, since it is unlikely that the crucial actors will be

encouraged by the new economic governance structures to adopt long-term strategies of

their own accord. Consequently, it is all the more important to put in place new and

stronger counterweights outside of these governance structures - in the education and re-

search infrastructure, the welfare state and labour market institutions - in order to reduce

the influence of the new short-termism.

All in all, the picture at the beginning of the new century is one of an employment sys-

tem that is becoming increasingly fragmented. Unemployment remains at a high level,

particularly in Eastern Germany but also in large areas of Western Germany. Social differ-

entiation within the different employment segments is increasing, while the equalising

links between the employment segments are becoming weaker (Table 5.2). The long-

established combination of skill-based, high-quality manufacturing and social equalisa-

tion has been seriously undermined. The fragmentation of the employment system is

further reinforced by the East-West gap within Germany. There is a risk that Eastern

Germany will become the country’s ‘Mezzogiorno’, in which large tracts of the territory

suffer from emigration, impoverishment and dangerous political instability.


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Table 5.2 Changes in the German employment model by employment segments

Production Consumption and distri-bution

Provision

Governance Changes in ownership struc-tures and role of banking sys-tem and increasing impor-tance of shareholder valueorientationChallenges to ties betweenhigh- and low-added-valuesegments of the productionchainOutsourcing of business ser-vices into areas with weakerregulatory standards

Privatisation of post/telecomand parts of public transportStock market orientation ofGerman Railways AG (plc.)Increasing importance of ten-dering in local transportPressure on labour costs inlow-price oriented competi-tion in distributive services

Privatisation trend in healthand elderly careCost-cutting pressures inhealth and elderly care inconjunction with governancestrategies borrowed fromprivate businessesStaffing cutbacks in publicservices and clash over collec-tive agreements

Industry–Wide collective bar-gaining in manufacturingmaintained but traded againstdecentralisation and growingnumber of derogationsAgreement on fundamentalreform of status and pay inmetalworking

Industry–Wide bargaining indistributive services main-tained but on the edge

Major reform of pay andstatus structures in publicservices but …… break-up of association ofpublic employers

Industrial relations

East-West gap in coverage and binding character of collective bargainingChallenges to predominance of collectively agreed standards over firm agreements in variousmanufacturing and service industriesDemise of extension of collective agreements except for construction

Training Dual system of vocational training modernised but increasing reluctance to provide vocationaltraining amongst employers in some industries

Employment Persistent decommodification of labour through labour law but blurring boundaries at fringes oflabour marketImproved opportunities for electing works councils in smaller establishmentsLabour market policy drives jobseekers into low wage jobs far below collectively agreed wagesPublic tenders do not always respect collectively agreed wage rates

Welfare system Persistent decommodification of labour through extensive social security coverage but cuts inbenefitsContinuing male breadwinner orientation in spite of improved conditions for combination ofpart-time work with parental benefitsSubsidies for marginal part-time work extended

Source: Bosch et al., 2005

While it is true that Sweden is not the best of all possible worlds, which has very recently

been underscored by the Swedish voters’ reaction to the (by Swedish standards) persis-

tently high unemployment rates, it is interesting to look at the contrasting picture it offers

to Germany when it comes to the approach of major actors to the defence and renewal of

the national employment model.

Renaissance of the Swedish model in turbulent times

As Anxo and Niklasson (2005) conclude, the Swedish economy has during the last decade,

after a period of turbulence in the early 1990s, undergone a particularly favourable eco-

nomic development. Unemployment has been cut by half, inflation has been curbed and


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the country appears to have recovered from the deep economic crisis of the early 1990s

(Figure 5.3).

Figure 5.3 Trends in unemployment in Sweden*

* Taken from Anxo & Niklasson (2005)

The re-orientation of macroeconomic and employment policy is one important explana-

tion of the ’Swedish Success Story’. It includes not just the use of classical adjustment

measures such as the devaluation of the Swedish Crown, but it is also closely linked to

changes in the industrial relations system. Most importantly, the has been a clear ten-

dency towards a re-coordination of wage bargaining which has played a vital role in the

Swedish recovery. These new developments reflect a desire on the two sides of industry

to re-coordinate collective bargaining at industry level, and to restore the leading role of

the traded good sectors in wage formation. Overall, these new trends appear to respond

to a three-pronged objective: ensuring industrial peace; limiting the transaction costs as-

sociated with the absence of co-ordination mechanisms and the negative externalities on

employment of uncontrolled wage developments; and finally insuring the application of

the principle of subsidiarity, making it possible to adapt the provisions contained in in-

dustry-wide collective agreements to the productive and competitive constraints of

Swedish companies. Hence, the tendency towards a re-coordination of collective bar-

gaining co-exists with a marked tendency to a decentralisation, differentiation and indi-

vidualisation of wage setting and working conditions. Although contradictory at first

sight, these tendencies should not be interpreted as a weakening of the Swedish collective

bargaining tradition, but should rather be considered as a recomposition and adaptation

of the Swedish Model of Industrial Relations in response to the major transformations in

work organisation and production processes that have taken place in recent decades.


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In the view of Anxo and Niklasson, these developments do not call into question the

basic foundations of the Swedish Model, namely a strong contractual tradition based on

the existence of powerful social partners who enjoy considerable autonomy from the

Public Authorities, but instead reflect a transition and adjustment of the Swedish Model

to the new challenges posed by post-industrial societies. Sweden’s various bipartite co-

operation agreements concluded during the late 1990s may be interpreted as a new his-

toric compromise combining employers’ demands for greater flexibility with a desire on

the part of the trade union movement to restore full employment and sustained income

growth.

The various reforms of the Swedish social protection system undertaken during the last

decade have essentially taken the form of a temporary reduction in the level of income

compensation and, perhaps with the exception of the root-and-branch restructuring of the

tax and pension system, left the Swedish welfare state system almost intact. The Swedish

social protection system remains, by international standards, still clearly universal and

inclusive in nature and still enjoys a high level of across-the-board political and public

support. The structural reforms undertaken in the tax and benefit system, in particular the

reshaping of the pension system and the tax reform initiated in the early 1990s aiming at

strengthening work incentives and fostering investment in human capital, are also clearly

in line with the general philosophy of the original Swedish model favouring integrative

transitions instead of passive support and social exclusion. Last but not least, the third

main element of the Rehn-Meidner model, the extensive use of active labour market poli-

cies (ALMPs), i.e. the overall policy of activation, still occupies a central role in Swedish sta-

bilisation policy and its reorientation towards supply oriented measures (occupational

and geographical mobility, active search programmes etc.) in many respects stands out as

strongly in accordance with the strategy initiated in the 1950s.

Government policy has also been important for the restructuring of the industrial and

value creation capacity of the economy. During the last fifteen years, the largest increase

in industrial output has been found in knowledge-intensive production. However, due to

rapid increases in manufacturing productivity, the greatest job creation has taken place in

the knowledge-intensive service sectors. The Swedish economy is highly dependent on a

limited number of relatively large multinational enterprises with a large number of sub-

contractors in Sweden and abroad. These large enterprises are dependent for their long-

term survival on their ability to continuously develop their products and methods of pro-

duction. This is one of the main factors behind the relatively high level of R&D spending

in Sweden. Swedish multinationals are among the most R&D-intensive in the world. Since

1989, R&D investments have increased on average by more than 10 per cent from one year

to the next and in 2001 they amounted to what corresponds to almost 4 per cent of GNP.

This share seems to be larger for Sweden than for any other industrialised country. It is

true that private industrial companies account for the main part - about 75 per cent - of

these investments. However, the State has contributed to this trend by high levels of pub-

lic expenditure on schooling, higher education and research.

Thus, in a comparative perspective, it should be noted that the public sector continues

to be pertinent for the whole of the employment system in Sweden (Figure 5.4). The high

levels of public spending on social services, in particular, are crucial for a positive sum

game of high levels of female labour supply and strong service sector job dynamics

(Esping-Andersen, 2002).


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Figure 5.4 Employment by sectors in Sweden*

* Taken from Anxo & Niklasson (2005)

Conclusion

The two flagships of ‘co-ordinated market economies’, Sweden and Germany, provide

contrasting pictures when it comes to the roles and attitudes of major actors in a period of

major turbulence in both economies. Table 5.3 summarises the diverging approaches in

policy areas crucial for the future of their national employment models.

As may be suggested by the stylised comparison, it cannot be taken for granted that

leading actors, including governments, are aware of the foundations of their respective

comparative institutional advantages. Even more so, firms may not necessarily be inter-

ested in the revival of an institutional setting which has provided competitive advantages

over many decades in the past but has run into trouble in recent years. Economic main-

stream thinking, changing ownership structures, changing supranational institutions and

(de)regulation all pose new challenges to employment models which have traditionally

been geared to long-term orientations, rather than primarily responding to volatile market

signals. Governments who try to ‘train the Rottweilers’, to take up Coates’s phrase in his

contribution to the present conference, appear to need strong support from social actors

who insist on the long-term needs of the society in question and its economic and em-

ployment systems.


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Table 5.3 Government policy in Germany and Sweden: Stylised features 1990 onwards

Policy area Germany Sweden

Fiscal policy Focus: boost of private investment bycuts in state revenues and spending

Reduction of public employmentReducing public deficits by austerityAll-time low of public inv.Weaker R&D expenditures

Tax reforms weakening of tax base+ tax cuts for higher incomes

Focus: boost of both employment andprivate investment by maintenance ofpublic revenues and spending

Safeguarding of public employmentReducing public deficits by growthRecovery of public investmentSoaring R&D expenditures

Tax reforms widening of tax base +lower tax rates

Monetary policy EuroMaastricht-centred

IndependentSupport of turnaround by devalua-

tions of Swedish Crown

Education Not at the top of the list High on agenda

Gender approach Continuing promotion of „modernised“male breadwinner

Continuing promotion of dual breadwin-ner model

Industrial relationsapproach

Urge for gradual fragmentation; contra-dictory and diminishing role of state asemployer

Urge for recovery of centralised coordina-tion with strong elements of decentralisa-tion

Labour marketreforms

Weakening of both unemployment insur-ance and active LMP

Economic growth background;continuing emphasis on training

Source: Own portrayal based on Bosch et al. (2005) and Anxo & Niklasson (2005)

References

Anxo D. & Niklasson H. (2005), The Swedish model in turbulent times: Decline or renaissance? Contri-bution to the conference ‘Dynamics of National Employment Models (DYNAMO)’, 1st projectconference and 26th conference of the International Working Party on Labour Market Segmen-tation (IWPLMS), Berlin, 08.09.2005-11.09.2005(http://www.iatge.de/projekt/2005/dynamo/publications.html).

Bosch G., Haipeter T., Latniak E., Lehndorff S. & Schief S., (2005), Changes in the system or change ofsystem? The national employment model of Germany. Contribution to the conference ‘Dynam-ics of National Employment Models (DYNAMO)’, 1st project conference and 26th conference ofthe International Working Party on Labour Market Segmentation (IWPLMS), Berlin, 08.09.2005-11.09.2005 (http://www.iatge.de/projekt/2005/dynamo/publications.html).

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Hall, Peter A.& Soskice D.(2001), An Introduction to Varieties of Capitalism. In: Peter A. Hall undDavid Soskice (Hg.), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage.Oxford University Press, New York, p. 1-71.

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