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Implications of labour market flexibility on Human Resource Management

| August 24, 2016

Introduction

Over the past few decades, there has been an increase in demand for greater labour flexibility, driven primarily by increases in international competition and advances in technology (Vincente-Lorente & Suarez-Gonzalez 2007). Given the intense competition and the speed of technological change, there has been a proliferation of non-standard forms of employment such as outsourcing, temporary, part-time or informal employment. For example, the UK has grown to become a net exporter of IT-enabled services, offshoring call centre jobs to countries such as India (Heckley 2005). Outsourcing in the UK is currently the norm and has grown to become a major industry. The growth in such flexible labour markets is also mirrored in other parts of Europe as well including in countries such as Germany, Switzerland, Sweden and Benelux (Leighton 2003).

It is clear that world of work is changing rapidly. However, these changes are not new and have been there for many years, both in Europe and other advanced economies. According to Flau and Mittelstadt (2010), these labour market flexibilities were considered alternative for the rising unemployment. During the early 1960s, the high levels of unemployment prompted national governments to implement a variety of programs that would make labour markets flexible. Labour market policies and Programs that promote short-term working were implemented (Flau & Mittelstadt 2010).

Whilst these atypical forms of employment may have been there, it is in the recent years that it has garnered the attention of most commentators, scholars and academics. For example, offshoring and outsourcing in the UK has become more pronounced. These changes seem to have had tremendous impacts in the business world, in terms of employment prospects, growth, productivity and inequality (Flau & Mittelstadt 2010).

The increase in labour market flexibility has generated some controversies in the Human resource circle. On the positive side, it is seen especially by the neo-liberals as key to prosperity in a turbulent global economy. However, evidence also points to the disadvantages that may result from such labour market flexibility including uneven distribution of the benefits, increasing income disparities, disruption of career paths, decrease in employee commitment and reduced labour productivity as a result of the uncertain job climate (Brodsky 1994).

These are some of the main concerns which have attracted the attention of many scholars in the human resource circle, industrial relations and policy makers as well (Anagnostopoulos 2008).  On the one hand, labour market flexibility is seen to have short-run cost benefits associated with declining employer funded training. On the other hand, it potentially weakens human resource development systems and disrupts established labour relations practices. In this regard, this paper critically discusses the implications of labour flexibility on the international management of human resources.

Labour market flexibility

Before exploring further on this topic, it is worthwhile to first define labour market flexibility. In essence, this refers to the firm’s ability to institute some changes in its working patterns including setting wages, hiring employees on contracts, firing them and changing the working hours (Conley 2008). In response to multi-faceted changes, organizations today are increasingly changing their recruitment arrangements and adapting flexible kind of arrangements. Changes in the labour market has led to the rise and growth in demand for flexible labour arrangements such as part time jobs, temporary contracts, labour hires and outsourcing among many others.

For example, Part-time work has increased by 4 percentage points, rising from 16.6% in 1996 to about 20.8% in 2006 (Rani 2008). The share of part-time work varies from country to country and exceeds 20% in most of the advanced economies. It is high in the UK, Japan, Netherlands, Norway and Sweden. There has also been an increasing trend in temporary employment from 11.7% in 1996 to about 15% in 2006 (Rani 2008). Indications, however, show that ‘vulnerable workers’ are more likely to experience temporary work than others. According to an EU migration report, 52% of registered migrant workers were found to be mostly concentrated in the temporary forms of employment, earning the lowest wage (Home office 2007). The proportion of temporary work remains highest in the service sectors compared to the manufacturing sectors.

The rise in such flexible labour arrangements can be attributed to intense competition and the need for businesses to adapt to various multi-faceted changes, driven by new technology. Advances in technology have made the process of fragmentation and outsourcing of tasks easier. However, the pervasive nature of such atypical forms of employment has raised concern over their impact on human resource management, particularly human resource development.

Outsourcing in the UK

Outsourcing in the UK has become a common practice with over 90% of employers outsourcing at least one service. British Airways is a prime example, having offshored its services by creating call centres in India. Outsourcing is increasingly growing to become a major industry in the UK and is likely to continue to grow as major client organizations are concentrated in the public sector. The growth in such flexible labour markets is mirrored in other parts of Europe such as Germany, Switzerland, Benelux and Sweden with 70%, 74%, 54% and 44% of employers in these countries outsourcing at least one service (Leighton 2003).

Outsourcing in the UK is having major implications on international human resource management. Such flexible forms of labour have been found to have significant impacts on several aspects of HRM, especially the payroll, ITC, training, staffing and recruitment (Pen et al. 2013). To fully comprehend the impact of labour market flexibility on international human resource management, it is worthwhile to examine Atkinson’s model which forms the basis of strategies that most companies use

Atkinson’s model

Atkinson’s model identifies four main flexibilities sought by companies:

  • Functional: the functional ability describes the firm’s ability to match the skills of employees with tasks by dismantling the traditional rigidities between different occupational groups (Kalleberg 2001). This is mainly achieved through outsourcing and offshoring of services.
  • External numerical flexibility – this involves adjustment of the labour force from external market and is achieved through relaxed hiring and firing regulations and through temporary employment (Leighton 2003)
  • Internal numerical flexibility – this refers to the adjustment of schedules or working hours and comprise mainly of part-time jobs (Wilton 2013)
  • Financial/wage flexibility – this flexibility involves the wage differences and is done with the aim of ensuring that employment cost reflects the supply and demand of labour (Wilton 2013). It comprise mainly of individual performance wages, assessment based pay and rate-for- the job systems

In Atkinson’s model, within the core group, are highly skilled workers with firm-specific capabilities. This group contains a unique resource and thus the focus of human resource managers is ensuring their retention. Workers in the first peripheral group are considered to posses skills which are not firm-specific and hence the firm may rely on external market to fill such posts (functional and numerical flexibility) (Wilton 2013). The second peripheral group comprise mainly of workers under atypical forms of employment, providing both the temporal and numerical flexibility. This model describes how companies respond to the increased need for flexibility.

Implications of labour market flexibility on international human resource management

A commonly held view is that Labour market flexibility is an essential ingredient for progress. It has been seen for a long time as unequivocally good, helping address the wide problems of unemployment (Rowley 2013). It is also seen as a key ingredient for growth especially under turbulent global economic conditions. According to some commentators, Labour market flexibilities have created a knowledge intensive economy where most of the workers get involved in knowledge intensive work and benefit from high wages attached to those jobs (Schuler & Jackson 2005).

Labour market flexibility is also seen to be of paramount importance, helping in the control of labour costs and satisfying demand for labour. Having just the right number of workers and hiring others at wages that reflect their differing productivity certainly reduces the labour costs associated with traditional approaches of staffing and training (Silvia 2010).  In addition, they enable the company to adjust to fluctuations in business demand and achieve greater efficiency which is made possible by matching of skills and tasks.

In spite of these benefits, critics have argued that most of the benefits of flexible labour markets are short-run and have pointed out to the wider negative impacts on the human resource development. The perspective of a radical upskilling has been criticized by sceptics who argue that the growth of a knowledge economy is overstated and that a significant proportion of non-standard forms of employment are in fact low skilled and poorly paid menial jobs (Wilton 2013).

These non-standard forms of employment are also a major source of income inequality, driving the wage gap. They have increased income inequality in many countries. However, it remains unclear as to the extent to which such inequality can be attributed to non-standard forms of work. For example, some economies such as Lithuania, Romania and Latvia have experienced an increase in income inequality despite a decline in atypical forms of work, indicating the possibility of other institutional factors coming into play (Rani 2008)

A similar issue of concern relates to job security. As with atypical forms of work, job security is not guaranteed which results in reductions in job tenure and increase in worker’s mobility across different firms. Although employers may emphasize their role in ensuring ’employability’ of workers in terms of the skills that can be transferable across firms as opposed to offering them with job security; it poses the question: just how ‘portable’ are skills learned on and off-the-job (Vaitilingham 2006 p.28).

There is also a concern of the widening income inequality. Flexible working arrangements are seen to further widen the wage gap. However, there is mixed evidences with regard to the impact of labour market flexibilities on income inequality. Whereas studies by Blanchard & Landlier (2002) and Giesecke & Gross (2004) have argued that there is no upward mobility for atypical forms of employment; studies by Gregg & wadsworth (1996) have found these labour market flexibilities as widening income inequality.

Perhaps, an issue that has received much attention is the concern of declining employee and employer commitment. Flexible working arrangements such as outsourcing involve contracting out services by the management, which implies engaging ‘labour without obligation’ (Hall 2013). In return, workers implicated in outsourcing tend to feel little obligation. It can therefore be made that firms that outsource their services runs the risk of reduced employee and employer commitment to human resource development strategies as well.

There is a host of other issues of concern associated with non-standard employment such as low pay, lack of promotion, lack of employer pension scheme and even lack of sick pay provision (McGovern et al 2004). This can be seen in the UK and some other Europe countries. Similar patterns of problems have been observed by Kalleberg et al. (2003) in the US, indicating the potentially harmful effects of labour market flexibility on human resources.

The national government dilemma of creating a flexible workforce.

Labour market flexibility seems to have had tremendous impacts on in the business world. Whereas these atypical forms of unemployment may not be new, the tactics and strategies employed in some countries is. For instance, some labour patterns in Germany mirrors the ‘zero hours contacts’ in UK (Wilton 2013). The implications of these labour market flexibilities in Human Resource Management and industrial relations are obvious, ranging from increased job insecurity to decreased employee commitment to skill loss and reduced employee loyalty trust

However, there remains a dilemma with regard to creating a flexible workforce. Neo-liberal economists hold of the view that labour market flexibility plays an important role in economic progress and is key to overcoming the turbulent effects of economic instability (Wilton 2013). National governments are thus under pressure to minimize the regulation of business practices in response to the changing nature of the labour market. But at the same time, they must strike a balance between economic responsiveness and employee protection. This can be seen with the long battle over the rights for workers working under atypical forms of employment such as temporary contracts, a key characteristic of the labour market flexibility

Conclusion

Labour market flexibilities such as part time jobs, temporary contract, outsourcing, labour hire and contracting out have significant impacts on human resource development. To some degree, it can be seen that flexible labour markets may minimize labour costs associated with recruitment and staff training. Although such non-standard forms of employment have short-run cost benefits associated with declining employer funded training, the human resource sector will suffer in the long run in terms of reduced employee commitment, skill loss, and declining employee loyalty and trust.

Flexible labour arrangements such as outsourcing need not to be viewed as simply a cost-cutting exercise. However, cost reduction continues to become a major motivation for most companies. There is also an imperative need to strike a balance between economic responsiveness and employee protection. Strategies need to be devised that take into consideration both the benefits of flexible working arrangements and its implications on human resources in terms of the job content, job security and loyalty of different groups of workers.

References

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