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 Tüselmann (docserver.com).
It is wrong to associate non-standard and precarious employment. Serious disadvantages and lack of protection tend to cumulate in certain categories of non-standard work such as marginal part-part time employment or short term temporary job arrangements, which offer no opportunities for eventual permanent employment. During the 1980s, employers too were consistent advocates of the need to increase flexibility. This was seen as a more viable way of reducing unemployment than the trade union policy of distributing the total volume of work by reducing the working hours. Ultimately in Germany, the trade union aim was increasingly focused on reducing the length of the working week, or the supply of hours to the working employee, as identify by Felstead (1999). Initially the metal workers and printers pursued this aim, while in construction and chemicals emphasis was placed on reducing and the supply of persons by early retirement. Following each settlement in metal workers’ disputes, both parties achieved their aims. The unions conceded a greater flexibility in the structure of working time and the employees conceded a shorter nominal working week (although it should be added that the union also began to see advantages for its members in increasing flexibility, sabbatical leave being one example).
In Japan, the purpose of trade unions was estimated by Sako (1997), as a stronger preference of employment rather than wage increase. Consequently, it is likely that trade unions are willing to make the sacrifice of wages in exchange for the assurance of employment. This is a big distinction with the European experience, especially in Germany, where the impact of union powers on reducing the length of the working week, as explained above, are exceedingly strong. In addition, the rate of unionisation in Japan is fairly low (about 30 percent) by international standards, and more importantly, the rate is under a constant decline. Not only weak preferences of wage increases by trade unions but also the low rate of unionisation contributed to some of the flexibility of wages. Although ironic, it is interesting that both Japan and the U.S., where macroeconomic performances are relatively better than the European countries like Germany, have lower unionisation rates.
Schmid (1996) argues that the labour side should be able to insist on a higher wage payments in view of the fact that the appropriately measured labour share within the national income in Japan has declined constantly, and that some increases in wages in boom industries will encourage a much elevated domestic consumption, which has a positive effect on reducing the currently huge trade surplus. Labour market flexibility in terms of a cooperative behaviour of trade unions in relation to managements may be regarded as one of the causes for the current foreign trade surplus. Sako (1997) gives one example of the fact that labour market flexibility cannot always be evaluated positively. It was established that Japan has flexibility in some areas, while rigidity is observed in other areas. In some cases, flexibility does not contribute to a better performance of the labour market. Some sacrifices or costs are paid sporadically in order to achieve flexibility in those areas. Consequently, it is not possible to suggest that the labour market flexibility is always evaluated positively.
It is possible to conclude based on a large number of studies, in particular pure statistical studies, which do not use the Phillips curve approach, that wages in Japan (both nominal and real) are considerably flexible. We have to be careful about introducing labour market flexibility from one country to another country without examining the effects on the labour market and macro economy, as it may hurt a better aspect in another country. Yang (2003) gives the understanding that the main reason for the better performance of the Japanese macro economy, if any, is due not to labour market flexibility but to elements other than the working of the labour market. Nevertheless, that labour market flexibility, especially flexible working hours due mainly to overtime hours and the other flexibilities, was effective in minimizing the fluctuation rate of unemployment. It is also noted that the rate of unemployment is a poor indicator of the labour market condition in Japan for the following reasons: First, the rate of unemployment is significantly underestimated because of the existence of discouraged workers. Secondly, an important degree of fluctuation is noted in response to a change in output when the index for the labour market condition is calculated appropriately, unlike the rate of unemployment as clarified in Schmid (1996).
The analysis of numerous flexibility indicators exposed that German companies, in general, use the enhanced framework, however only to a limited extent. Given the organisation of the German regulatory environment and the particularities of the industrial relations system, the comparatively high degree of functional flexibility in German companies and the interdependencies and trade-offs between the several types of labour flexibility, it is possible that many firms already operate with an “optimal” flexibility mix. In light of the relatively high degree of functional flexibility, the pay-offs from enhancing other forms of flexibility may be considered to be low, as demonstrated in Schmid (1996). This may partly explain the limited impact of the Employment Promotion Acts on fixed-term employment, the steady growth of permanent employmentdespite strong regulations on dismissal, and the retention of the central system of pay bargaining in spite of the resulting limited scope for the pursuit of downward financial flexibility. However, in the later case the issue of reforms has become the subject of contentious discussions in Germany.
With reference to temporal flexibility, which may be viewed as more complementary to functional flexibility, deregulation and controlled decentralisation has gone furthest.
Since the 1980s numerous indicators, such as the growth of part-time and shift work, point to a higher degree of temporal flexibility (although the degree of this increase is fairly limited, especially when compared to Japan. For reasons discussed above, the full potential for part-time employment has not been fully utilised. The different forms of shift work have grown faster in other EU countries. In Japan, the work sharing agreements have not been implemented on a general basis and overtime and short-time working has not decreased, as establish in Felstead (1999). This may demonstrate that companies are now enjoying sufficient degrees of formal and informal temporal flexibility inside their flexibility mix; and attempting to fine tune certain elements of this type of flexibility. On the other hand, many of the measures taken to improve the framework for greater labour flexibility are comparatively recent ones and may yet not have fully fed through to the company level. It will be fascinating to see whether, in future, these lead to more noteworthy shifts in the flexibility mix of German companies, or whether the limits of greater labour flexibility within the current German context have been reached.
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