Rigidities through flexibility: Flexible labour and the rise of management bureaucracies Alfred Kleinknecht Emeritus Professor & Visiting Fellow of WSI (Hans-Böckler-Stiftung) www.alfredkleinknecht.nl

Background: Since the supply-side turn in economics in the end 1970s we observe: An OECD-wide decline of labour's share in National Income An increasing group of working poor on precarious jobs … versus top income earners Campaigns for deregulation of labour markets & sobering of the welfare state And, as a consequence: A persistent decline of growth rates of labour productivity (firm-level and country-level evidence)

Previous research shows that: The decline of labour productivity growth is related to two factors: Weak wage growth Increasingly flexible labour relations → erosion of 'social capital' (i.e. trust and loyalty of workers) Survey article: “How ‘structural reforms’ of labor markets harm innovation”, Research Paper No. 6 (July 2015), www.socialeurope.com

Rationale? Speed of capital – labour substitution Vintage effects Induced Innovation (Kennedy/van Weizsäcker) Creative destruction (Schumpeter) Key finding from panel data estimates: A one-percent wage decline (increase) leads to 0.3 ̶ 0.5% lower (higher) growth of value added per labour hour Background reading: Vergeer & Kleinknecht 2011: The impact of labor market deregulation on productivity, Journal of Post-Keynesian Economics, Vol. 33(2): 369-404. Vergeer & Kleinknecht 2014: Does labor market deregulation reduce labor productivity growth? International Labour Review, Vol. 153(3): 365-393.

In addition, larger labour turnover leads to weaker innovation performance due to: Lower trust and loyalty of workers: Larger externalities discourage investment in R&D and knowledge Larger management & control bureaucracies (this paper) Un-learning organizations (weaker historical memories) Firm-sponsored training becomes less profitable More power to the bosses: Favours autocratic management practices Top management makes poor use of expertise from the shop floor Culture of fear: risk avoidance is bad for innovation Weak functioning of the 'creative accumulation' innovation model (continuous accumulation of firm specific [often 'tacit'] knowledge)

Hypothesis to be tested in this paper: Deregulation of labour markets (or adoption of 'Anglo-Saxon' HRM practices through flexible jobs) is destructive to trust and loyalty  increasing need for monitoring & control  thicker management bureaucracies A first indication at macro-level: Shares of managers in the working population are much larger in 'flexible' Anglo-Saxon countries compared to 'Old Europe' (next sheet)

Share of managers in the working population (19 OECD countries, 1984-1997) 5 10 15 Managers as a percentage of the non-agrarian working population Canada USA Australia U.K. Netherlands Austria Finland Denmark Japan Portugal Germany Ireland Belgium Switzerland Italy Sweden Greece Spain Norway According to De Beer (2001), the Dutch figure increased from 2% to 6% during 1978-98 (in parallel with a strong growth of flexible labour)

This paper takes a look at firm-level data … Database: SCP National Labour Demand Survey 2009-2010 in The Netherlands Coverage: About 3.000 organizations that employ personnel (5 or more) in manufacturing, services, government, not-for-profit etc. Survey focuses on labour market indicators (e.g. flexible workers) Question of key relevance to this paper: What share of your employees occupy managerial positions?

Annual shares of managers in the Dutch working population, 1991-2010 Source: Own calculations based on the SCP labour demand panel, data available through www.dans.knaw.nl

Flexible workers as a percentage of the working population, 1991-2010 Source: Own calculations based on the SCP labour demand panel, data available through www.dans.knaw.nl

Average management ratios (MR) by firm size and by firm age classes Firm size classes: Mean MR: Firm age classes: 1-9 employees 22.4% 5 years or less 13.9% 10-19 employees 14.8% 6-10 years old 14.2% 20-49 employees 11.1% 11-20 years old 14.1% 100-499 employees 8.2% 21-50 years old 13.7% >500 8.3% >50 years old 12.3%

Average management ratios, shares of temporary workers and manpower agency workers by industry   Sectors: % of Mana-gers % of Temporary Workers % of Manpower Workers + free-lancers Agriculture 21.60% 18.31% 15.31% Traditional manufacturing (wood, textiles, paper, etc.). 13.56% 12.20% 9.50% Chemicals 12.08% 5.36% 11.20% Metals 13.62% 13.51% 15.40% Mechanical engineering 13.60% 11.14% 10.27% Automobiles 14.54% 15.22% 18.56% Commercial Services 13.27% 12.61% 8.61% Public Services 8.44% 23.85% 12.53% Construction 16.63% 11.03% 16.30% Trade 15.78% 23.01% 10.59% Transportation 12.44% 19.46% 13.84% Knowledge Intensive Services 14.22% 19.23% 11.74% Public Administration 9.00% 9.22% 8.30% Education 8.40% 16.95% 4.95% Healthcare 10.60% 15.79% 5.45% Non-Commercial Services 14.47% 24.65% 9.01%

Regressions explaining % share of managers in total personnel: Exogenous variables: Significant? Variable of interest: % share of flexible workers (i.e. people on temporary contracts + manpower agency workers + free lancers) ++ Controls: Firm size (log of employees) - - Firm age (log of years) Firm growth Major restructuring activities (dummy) + Operates in a competitive market (dummy) Is sensitive to business cycles (dummy) Message from sector dummies: Private firms have thicker management layers than public/government organizations

Conclusion: Your start with more flexibility … Structural reforms that intend to make labour markets more 'flexible' result in: Easier hire & fire and larger rates of job turnover … … which destroys social capital (trust & loyalty) … … and once social capital is destroyed you need tougher monitoring & control … … and this creates new rigidities: thicker management bureaucracies → more inertia in decision making … … which is bad for creativity & innovation and frustrating for creative people! … and you end up with new rigidities