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

2. 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)

3. 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),

4. 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):
Vergeer & Kleinknecht 2014: Does labor market deregulation reduce labor productivity growth? International Labour Review, Vol. 153(3):

5. 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)

6. 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)

7. 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 (in parallel with a strong growth of flexible labour)

8. This paper takes a look at firm-level data …
Database:
SCP National Labour Demand Survey in The Netherlands
Coverage:
About 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?

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

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

11. 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%
employees
8.2%
21-50 years old
13.7%
>500
8.3%
>50 years old
12.3%

12. 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%

13. 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

14. 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