Industrial and Labour Market Policy and Performance (Routledge Studies in Business Organization and Networks, 26)

Industrial and Labour Market Policy and Performance

‘Industrial issues are often inextricably linked with labour market concerns and policy approaches that attempt to consider production and employment separately are inherently flawed’. This statement sums up the heart of this important book. With contributions from such leading scholars as Keith Cowling, Francis Green and Malcolm Sawyer, Industrial and Labour Market Policy and Performance covers such topics as: ● ● ● ● ●

the major challenges facing UK industrial and labour market policy the links between innovation, competition and collaboration education, skills formation and human resource management increasing inequalities in the labour market private-finance initiatives

The evidence-led nature of the book will make it an important and useful source for academics and students involved in areas concerned with industrial and labour market economics and policy. The controversial findings of many of the chapters and its readable style will also appeal to informed policy commentators as well as policy-makers themselves. Dan Coffey is Lecturer in Economics at Leeds University Business School, UK. Carole Thornley is Senior Lecturer in Industrial Relations at the University of Keele, UK.

Routledge studies in business organizations and networks

1 Democracy and Efficiency in the Economic Enterprise Edited by Ugo Pagano and Robert Rowthorn

8 Economic Organisation, Capabilities and Coordination Edited by Nicolai Foss and Brian J. Loasby

2 Towards a Competence Theory of the Firm Edited by Nicolai J. Foss and Christian Knudsen

9 The Changing Boundaries of the Firm Explaining evolving inter-firm relations Edited by Massimo G. Colombo

3 Uncertainty and Economic Evolution Essays in honour of Armen A. Alchian Edited by John R. Lott Jr 4 The End of the Professions? The restructuring of professional work Edited by Jane Broadbent, Michael Dietrich and Jennifer Roberts 5 Shopfloor Matters Labor–management relations in twentieth-century American manufacturing David Fairris 6 The Organisation of the Firm International business perspectives Edited by Ram Mudambi and Martin Ricketts 7 Organizing Industrial Activities Across Firm Boundaries Anna Dubois

10 Authority and Control in Modern Industry Theoretical and empirical perspectives Edited by Paul L. Robertson 11 Interfirm Networks Organization and industrial competitiveness Edited by Anna Grandori 12 Privatization and Supply Chain Management Andrew Cox, Lisa Harris and David Parker 13 The Governance of Large Technical Systems Edited by Olivier Coutard 14 Stability and Change in High-Tech Enterprises Organisational practices and routines Neil Costello

15 The New Mutualism in Public Policy Johnston Birchall

21 Workaholism in Organizations Antecedents and consequences Ronald J. Burke

16 An Econometric Analysis of the Real Estate Market and Investment Peijie Wang

22 The Construction Industry An international comparison Edited by Gerhard Bosch and Peter Philips

17 Managing Buyer–Supplier Relations The winning edge through specification management Rajesh Nellore

23 Economic Geography of Higher Education Knowledge, infrastructure and learning regions Edited by Roel Rutten, Frans Boekema and Elsa Kuijpers

18 Supply Chains, Markets and Power Mapping buyer and supplier power regimes Andrew Cox, Paul Ireland, Chris Lonsdale, Joe Sanderson and Glyn Watson 19 Managing Professional Identities Knowledge, performativity, and the ‘new’ professional Edited by Mike Dent and Stephen Whitehead 20 A Comparison of Small & Medium Enterprises in Europe and in the USA Solomon Karmel and Justin Bryon

24 Economies of Network Industries Hans-Werner Gottinger 25 The Corporation Investment, mergers and growth Dennis C. Mueller 26 Industrial and Labour Market Policy and Performance Issues and perspectives Edited by Dan Coffey and Carole Thornley

Industrial and Labour Market Policy and Performance Issues and perspectives Edited by Dan Coffey and Carole Thornley

First published 2003 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2003 Selection and editorial matter Dan Coffey and Carole Thornley; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Industrial and labour market policy and performance : issues and perspectives / [edited by] Dan Coffey and Carole Thornley. p. cm. – (Routledge studies in business organizations and networks ; 16) Includes bibliographical references and index. 1. Labor policy – Great Britain. 2. Labor market – Great Britain. 3. Labor economics – Great Britain. 4. Industrial policy – Great Britain. 5. Labor policy – Europe. 6. Labor market – Europe. 7. Labor economics – Europe. 8. Industrial policy – Europe. I. Coffey, Dan, 1966– II.Thornley, Carole, 1955– III. Routledge studies in business organization and networks ; 16. HD8391.I467 2003 331.12⬘042⬘0941–dc21 ISBN 0-203-98672-5 Master e-book ISBN

ISBN 0–415–26786–2 (Print Edition)

2002037157

Contents

List of figures List of tables Notes on contributors Editors’ preface 1 Introduction: across the policy divide

ix xi xiii xvii 1

DAN COFFEY AND CAROLE THORNLEY

2 Industrial policy and economic development

9

CHRISTINE OUGHTON

3 Markets, competition, co-operation and innovation

29

MICHAEL KITSON, JONATHAN MICHIE AND MAURA SHEEHAN

4 Best practice manufacture as industrial policy: lean production, competitiveness and monopoly capitalism

45

DAN COFFEY

5 Industrial policy, transnational corporations and the problem of ‘hollowing out’ in Japan

62

KEITH COWLING AND PHILIP R. TOMLINSON

6 Labour market policy and inequality in the UK

83

CAROLE THORNLEY

7 The problem of British education policy as economic policy FRANCIS GREEN

109

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Contents

8 HRM, commitment, insecurity and low pay: some indicative evidence from the European banking sector

130

STEVE JEFFERYS, CAROLE THORNLEY AND SYLVIE CONTREPOIS

9 Equal opportunities and productive efficiency in the workplace: fairness, employee participation and the firm

146

VIRGINIE PEROTIN AND ANDREW ROBINSON

10 Reassessing regulation: productivity, wage costs and trade union ‘power’ in the dock

158

DAN COFFEY

11 The Private Finance Initiative: a critical assessment

171

MALCOLM SAWYER

Index

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Figures

2.1 2.2 2.3 2.4 2.5 2.6

Growth of real GDP per worker GDP per worker and per hour worked Business investment per worker Government expenditure on investment Real government R&D expenditure per worker Industry-funded business enterprise R&D (BERD) real expenditure per worker 2.7 GDP per capita by region 2.8 Growth of real GDP 2.9 International comparisons of GDP per hour worked 2.10 World real interest rates 6.1 Local government pay 6.2 Pay for local government NJC workers covered by single status arrangements 7.1 UK public expenditure on education 7.2 Expenditure on educational institutions, international comparisons 7.3 Expected years in education between 15 and 29 7.4 Income inequality and public expenditure on education in OECD countries 10.1 Registered docker per tonnage throughput 1968–88 10.2 Real unit wage cost and severance payments

11 12 16 16 17 17 19 22 23 24 101 102 115 115 116 117 162 166

Tables

2.1 Growth in GDP per capita and its components in the 1980s and 1990s 2.2 Productivity growth, output growth and employment growth 2.3 DTI expenditure 3.1 Concentration of sales 3.2 Competitive structures 3.3 Probit estimates of innovation 5.1 Japan’s top TNCs ranked by ownership of foreign assets 6.1 Earnings dispersion full-time male and female workers 6.2 Changes in the earnings distribution of full-time workers 7.1 Education attainment in the UK in international context 7.2 Proportions of workers who are graduates 7.3 The intensification of teachers’ and lecturers’ labour 8.1 Commitment scores by gender, length of service and union membership 8.2 Commitment scores for higher and lower paid workers and those whose jobs are secure and insecure 8.3 Commitment scores for higher and lower paid workers and those whose jobs are secure and insecure among UK, French and Danish bank employees 10.1 Cost and surplus data, all Scheme ports 11.1 PFI: estimated capital spending by the private sector projects 11.2 Estimated payments under PFI contracts

14 23 25 31 31 36 70 87 94 113 119 122 135 136

139 164 174 175

Contributors

Dan Coffey is Lecturer in Economics at Leeds University Business School, where he is Director for all economics-related MA programmes. He was an Executive Member of the Centre for Industrial Policy and Performance at Leeds University, and has held several substantial ESRC research awards. His research interests include industrial policy, and the interface between economics, engineering and industrial relations. Sylvie Contrepois is a member of the Research Unit ‘Genres et Rapports Sociaux’ (GERS-CNRS) in France, and sits on the editorial committee of Histoire et Societe, Revue Europeenne d’Histoire Sociale Comparee. Her current research is focused on the contemporary evolution of the French trade union movement. Keith Cowling is Emeritus Professor of Economics at the University of Warwick. He has published very widely in the field of industrial economics and industrial policy, and is the author of Monopoly Capitalism (The Macmillan Press Ltd 1982) and co-author (with Roger Sugden) of Transnational Monopoly Capitalism (Wheatsheaf Books Ltd 1987). He is possibly best known for his work on the increasing concentration of economic power and its implications for the wider public interest. He is a founding member of the European Association for Research into Industrial Economics (EARIE) and the European Union Network for Industrial Policy (EUNIP), and has advised extensively on government industrial policy. Francis Green is Professor of Economics at the University of Kent. He has written many papers and several books in the fields of labour economics and political economy. His particular specialisms include the analysis of training, skill acquisition, job security, work effort and the roles of trade unions and of human resource management in the labour market. He is a regular academic adviser on skills issues to the Department for Education and Skills, and is currently an editor of the British Journal of Industrial Relations. Steve Jefferys is Professor of European Employment Studies and Director of the Working Lives Research Institute at London Metropolitan University. His publications include French Employment Relations: Liberté, Egalité and Fraternité at Work (Palgrave Macmillan 2001/02) and he is joint author (with Mick Carpenter) of Management, Work and Welfare in Western Europe (Edward Elgar 2000).

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Michael Kitson is a Fellow of St Catharine’s College, a Lecturer at the Judge Institute of Management Studies and a Research Associate at the Centre for Business Research, all of the University of Cambridge. His publications include The Political Economy of Competitiveness: Essays on Employment, Public Policy and Corporate Performance (Routledge 2000). Jonathan Michie is the Sainsbury Professor of Management at Birkbeck, University of London. His publications include the Reader’s Guide to Social Sciences (Fitzroy Dearborn 2001). He has written many chapters and articles dealing with various aspects of economic performance and competitiveness. Christine Oughton is Reader in Management and Head of the Department of Management in the School of Management and Organizational Psychology at Birkbeck, University of London. She is also co-ordinator (with Professor Jonathan Michie) of the Department of Trade and Industry funded Regional Innovation Network. Virginie Perotin is Professor of Economics at Leeds University Business School. She previously held research positions at the London School of Economics, the Centre d’Etude des Revenus et des Couts (Paris) and the International Labour Office (Geneva), and has acted as a consultant to the World Bank, the OECD, the ILO, the European Commission and the European Parliament. Her current research interests and publications include comparative systems and democratic firm governance. Andrew Robinson is Lecturer in the Accounting and Finance Group at Leeds University Business School. His research interests include the economics of profit-sharing, employee share ownership and governance, industrial democracy and human rights at work. He has been involved in a number of research projects, the findings of which have been published in international journals and books. He has also carried out work for the ILO, OECD and most recently the European Parliament. Malcolm Sawyer is Professor of Economics, University of Leeds, managing editor of International Review of Applied Economics and managing co-editor of International Papers in Political Economy. He is the editor of the series New Directions in Modern Economics published by Edward Elgar, and elected member of the Council of the Royal Economic Society. He has published articles and chapters on a wide range of topics and is the author of numerous books on macroeconomics, political economy and industrial economics. His edited work includes The UK Economy (Oxford University Press 2001). Maura Sheehan is Associate Professor of Entrepreneurship at the Graduate School of Management, University of Dallas. Her publications include ‘Labour Market Flexibility, Human Resource Management and Corporate Performance’, British Journal of Management, 12: 4, December 2001.

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xv

Carole Thornley is Senior Lecturer in Industrial Relations at Keele University. She is currently Joint Secretary of the British Universities Industrial Relations Association, and sits on the editorial committee of Historical Studies in Industrial Relations.An economist by training, she has a particular interest in pay processes and outcomes and has conducted commissioned research for the ILO and UNISON on health service and local government pay. Her research is widely published in academic and practitioner press, and has been presented as evidence in formal pay negotiations and to numerous official pay reviews and commissions. Philip R. Tomlinson is Lecturer in Economics at the School of Management in the University of Bath. His research interests and publications lie predominantly in the area of industrial economics and political economy, with a particular focus on the issues of globalisation, industrial and economic development and industrial policy. His recent research has focused on the effects of globalisation upon the Japanese economy. He is a member of the European Union Network for Research into Industrial Policy (EUNIP) and L’Institute for Industrial Development Policy.

Editors’ preface

This book emerged from a number of years of collaboration across the disciplinary ‘divide’ between ‘industry’ and ‘labour’, and a shared perspective on the continuing relevance of political economy and institutional analysis. It was inspired further by our own working experiences outside of academia, and research contact with policy makers and front-line workers at state, industry, firm and trade union levels – for most of whom the separation of production and employment is neither a conceptual nor a pragmatic option. The book was further inspired by a long-standing admiration for the work of a number of academics, and the idea that important commonalities of interest and approach are emerging, which provide the basis for a new policy consensus.We are deeply grateful to all the authors for their agreement to contribute, and for all their hard work: we are very pleased to present their work in this volume. Our final thanks go to our editors, Terry Clague and Rob Langham, who were immensely patient and helpful, and to our families, friends and colleagues for their support. Dan Coffey and Carole Thornley September 2002

1

Introduction Across the policy divide Dan Coffey and Carole Thornley

This book presents a series of chapters on issues of current and pressing relevance for industrial and labour market policy and performance. It does not set out to provide an exhaustive ‘textbook’ coverage of policy in these areas: indeed, such a project would hardly be feasible within the confines of a single book. Instead, each of the individual contributions broaches issues that should be prominently displayed in any pertinent list of the present dilemmas and weaknesses of, and possibilities for, government policy towards industry and labour. The approach is research-led: many of the contributing authors are leaders in their fields, while the collective contribution adds to policy relevant knowledge in a number of areas of considerable public interest. While primarily addressed towards policy in the UK, there is an internationalism of approach in the sense of an explicit recognition both of supra-national constraints and of the lessons that might be drawn from other national experiences in dealing with similar issues. Conversely, in an increasingly hegemonic global economic system the issues raised here have pertinence for policy, which goes beyond national boundaries. An integral feature of the thematic evolution of this book, through its successive contributions, is that industrial and labour market issues are inextricably linked, and that policy approaches, which attempt to consider production and employment separately are inherently flawed. The first contributions deal with industrial policy and UK competitiveness, the relationships between market forms, collaboration and innovations, contemporary preoccupations with ‘best practice’ production methods and principles, and the relationships between states and transnational corporations (TNCs). The field of discussion then widens to address labour market pressures and policies more generally: distributional pressures, productivity and the national minimum wage, policy towards education and skills formation, human resource management (HRM) strategies, material rewards and job security, employee participation and organisational productivity.The book concludes with chapters considering aspects of the state and forms of ownership and regulation. The book belongs to a well-established tradition of research-led analyses of economic policy as applied to industrial and labour market issues.1 It is intended primarily for professional academics and policy makers (and informed commentators)

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working in government, industry or trade unions, both in the UK and overseas. However, the contributions, both individually and collectively, are written so as to be accessible to undergraduates and postgraduates studying applied industrial or labour economics, HRM, industrial relations or industrial sociology, government policy and politics/political economy. As such, it is hoped that the book will constitute a useful policy-oriented source on issues of current political and economic controversy. Finally, it is also very much hoped that its combination of critical analysis and accessible style will appeal to interested and motivated lay readers.

Thematic approach The perspectives and opinions expressed in this book remain each author’s own, but there are some important running themes and commonalities. The contributing chapters, which frequently depart from orthodoxy in their respective areas, together diverge strongly from the analysis and conclusions of the neoliberal paradigm. If laissez faire competition and the ‘minimal state’ have been elevated over the past two decades as appropriate guiding philosophies for policy formulation and appraisal, this volume explores the potential for more co-operative and negotiated ways forward within a strengthened state infrastructure, and a more forceful and targeted approach to state intervention. Quality of work, access to jobs, distribution of economic rewards and discrimination are issues elevated alongside productivity and output. TNCs are seen as powerful independent players, which may act in ways potentially detrimental to national and local economies. Trade unions are viewed not as simple ‘market obstructions’ but as a legitimate expression of worker ‘voice’, with a major role to play in identifying ways of combining the pursuit of productivity with more egalitarian outcomes than have been obtained in recent years. Discrimination, on grounds of gender, race or class, is tackled as a defining and persistent feature of the economic system, which merits attention as much for its human rights and distributional implications as for any detriment it may impose on organisational ‘efficiency’. Limits to the demand for education from employers reflect identifiable weaknesses in industrial and economic development that also affect distributional and social outcomes. Alternative methods and forms of investment, organisation, ownership and regulation are discussed both from the perspective of narrowly construed productive or allocative efficiency, and from the viewpoint of employment, income distribution and equity. It should be noted that the twin themes of ‘productivity’ and ‘equality’ recur in contributions throughout this book in a way which attempts to pursue linkages in order to better identify ‘virtuous’ policy circles that facilitate the simultaneous pursuit of both: there is no assumed ‘trade-off ’. The chapters jointly signal the importance of both breadth and depth of empirical investigation. Many draw upon research which employs international comparison or example, often essential for contextualising debates and facilitating conceptual generalisations. Detailed national-, sectoral- or firm-level studies and associated cross-section, time series or institutional research provide a degree of richness and detail, which frequently serve to highlight some of the real policy

Introduction

3

challenges ahead. For example, the chapter on equal opportunities and productive efficiency in the workplace illustrates the need for policy approaches which are complex in approach, and which also address employee participation in control of enterprises and potential perceptions of unfairness. The chapter on education points to the need for similarly complex policy approaches, which simultaneously address real demand, incentives and resources. These are tall orders for policy makers, and these and other chapters highlight potential sources of resistance from employers, and, in some instances, groups of employees, as well as the challenges posed for governments keen to restrain expenditure in the shorter term. In this respect the contributions acknowledge that there may be a strong divergence between short-term and longer-term policy constraints and imperatives, and that what may be rational to some will not necessarily coincide with the immediate interests of others. A recognition of imbalances in the power to mould economic relationships and outcomes between various interested parties is explicit or implicit in each of the chapters. At the same time, and notwithstanding due acknowledgement of the realities and magnitudes of the challenges and constraints, the assumption running throughout this book is that real change is possible, and that it is possible to identify policies, which combine the pursuit of a productive national (and international) economy with greater personal dignity and material rewards for the majority rather than a minority of inhabitants.The contributions are in this sense essentially optimistic: a different book might have focused more on the major obstacles operating within capitalist economies, and less on the potential for progressive change. It is hoped that this grounded optimism provides some food for constructive thought and policy debate, of immediate interest and use to policy makers in government, the labour movement and business, as well as to other academics and interested students and lay readers. The approaches and themes coalesce in an overall conceptualisation of current issues and perspectives in industrial and labour market policy and performance that contrasts ‘high road’ with ‘low road’ policy routes to economic development and competitiveness, a useful metaphor which aptly captures the spirit of the contributions, if not their individual subtleties.With these points in mind, we now briefly consider the content of each of the separate chapters.

The individual contributions Christine Oughton’s chapter (Chapter 2) provides an important overview of industrial policy and its role in economic development. Comparing Britain’s relative economic standing with other European and G7 countries, it argues that there have been problems both with relative productivity and income growth.The chapter moves on to consider ‘competitiveness’ policy, and the difficulties associated with simultaneously targeting growth in productivity and in per capita income (‘living standards’).The analysis is initially conducted through an evaluation of problems associated with the 1994 White Paper on Competitiveness (and subsequent papers): Oughton argues that the UK approach (as opposed to the ‘European’) at this time focused on productivity improvements at the expense of wages,

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Dan Coffey and Carole Thornley

emphasising labour market ‘flexibility’ but paying inadequate attention to overall employment, investment, innovation and exports – and therefore to targeted income. This approach to productivity growth is aptly described as the ‘low road’ to competitiveness. Many of the productivity gains achieved were disproportionately generated through employment cuts rather than by growth in output, with detrimental effects on the current account balance and on individual incomes. There was underinvestment in fixed capital and human capital and knowledge (research and development, R&D), while constraints imposed on overall income growth by regional inequalities were not adequately addressed. The chapter progresses to consider developments since 1997. It is suggested that while more recent White Papers have given ‘coherence’ to policy that was ‘largely missing’ in earlier efforts, preliminary evidence on outcomes is ‘mixed’, and that concerns remain about manufacturing capacity. Overall, the appraisal concludes that it ‘remains to be seen’ whether the current policies will be successful in meeting their more ambitious targets. Michael Kitson, Jonathan Michie and Maura Sheehan (Chapter 3) contribution advances our understanding of the factors determining innovation and economic dynamism in the UK business sector. They investigate the potentially two-way relationships that might exist between the structure of the competitive environment on the one hand, and the shape and extent of process and product innovation on the other. They propose that ‘competition’, in the accepted sense of a multiplicity of buyers or sellers, is separable from ‘collaboration’, in the particular sense of co-operation in industrial activities that might support innovation: in particular, they present empirical evidence to suggest that innovation increases with both (domestic) competition and co-operation in industrial activities of this type.They argue that the ‘preferred degree of competition’ must therefore be broached in qualitative as well as quantitative terms. They note that blockages to effective collaboration may include the short-termism that ‘prevails in many firms and industries’; a financial system inimical to long-term investment commitments and ‘geared to quick pay-back periods’; and hostile take-overs. More generally, attempts to ‘squeeze’ productivity growth from UK firms during the 1980s and 1990s via ‘intensification of competitive pressures’ allied with a focus on ‘costcutting’ may have had the effect of undermining conditions for long-term sustainable development. They conclude that the desirability of fostering collaborative structures ‘opens up a very different policy agenda’ than that pursued in the last two decades. Dan Coffey (Chapter 4) considers the now popular claim that there has been a revolution in the basic organising principles of manufacture.The UK’s Department of Trade and Industry (DTI), as with its counterparts elsewhere in the EU, has sought to promote dissemination of ‘lean’ production practices as a way of improving the competitiveness of the country’s manufacturing base. In the case of the UK considerable emphasis has been given to the importance, in this regard, of inward investment: the DTI has cited the effective spread of ‘lean’ production practices as evidence of past benefits from, and a future guarantee of, foreign direct investment (FDI). On the basis of a critical appraisal of the empirical foundations of the ‘lean’

Introduction

5

paradigm Coffey argues that this policy is misdirected, and may actually be detracting from the formulation and implementation of policies that will secure competitiveness for the UK economy by tackling endemic problems of underinvestment, lack of innovation and a stunted manufacturing capacity. It is suggested that while policy makers in the DTI may be attracted to notions of a transplant-led revolution in production practices, this is an unhelpful diversion from a sober assessment of the competitive weaknesses and structural vulnerabilities of UK manufacture. A policy reappraisal is needed that will include a reconsideration of the dependence of UK manufacture on TNCs, and that will seek to improve standards of protective labour regulation at national and supra-national levels. Keith Cowling and Philip R. Tomlinson (Chapter 5) engage with the malaise presently afflicting the Japanese economy, and the lessons to be drawn from this for economies elsewhere. Their commentary commences with the loss of more than 2 million manufacturing jobs in Japan over the course of the 1990s, losses realised in the context of rising business failures and bankruptcies, particularly in the smallfirm sector. They argue that these losses can be attributed at least in part to the activities of Japan’s giant TNCs, which were active over this period in expanding the global base of their activities through FDI and increased offshore production. It is suggested that Japan’s difficulties are at least in part attributable to the ‘hollowing out’ of its domestic economy through the detriment inflicted on its industrial base. The negative consequences for its small-firm sector and regional economies are studied from the viewpoint of ‘strategic failure’, where elite, centralised corporate hierarchies make strategic decisions on key economic variables (such as investment, output and employment) that conflict with a society’s wider interests. It is proposed that these corporate hierarchies are paradoxically the product of past Japanese state industrial policy, pursued through Ministry of International Trade and Industry (MITI), encouraging the growth of ‘national champions’ to compete with giant corporations elsewhere. The authors explore possible directions for future industrial policy formulation and the renewal of Japanese manufacture, in an analysis that provides clear warnings for other national economies on the dangers of globalisation, and the revealed need for supra-national regulatory bodies. Carole Thornley (Chapter 6) provides an overview of the key policy and labour market changes in the UK since 1979, with a particular focus on inequalities in the distribution of economic rewards from productive activity.This chapter commences with a review of key developments in labour market policy and the distribution of earnings, income and wealth over the period stretching from 1979 to 1997, and the effects of labour market ‘deregulation’, loss of industrial capacity, privatisation and contracting out on employees’ bargaining power. It then explores Labour’s post-1997 response to the legacies of this period, evaluating the introduction of the National Minimum Wage (NMW) and associated policy changes. In a careful analysis, which acknowledges the importance of changes in the gender composition of employment, and in the growth of part-time or temporary work, Thornley argues that the effects of these policy developments, while welcome, remain most notable for their modesty in design and impact.The chapter concludes

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with a review of policies, which might combine more decisively egalitarian outcomes with the provision of enhanced incentives for gains in productivity and performance. It is concluded that more radical measures, including a more generous minimum wage, and strengthened trade union rights and equal pay legislation, are a prerequisite of ‘high road’ economic growth. This chapter also makes the point, illustrated through a case study of the largest public sector employment group (local government) that the state is well placed in its own role as a major employer of labour to set the necessary standards for others, supported through appropriate legislation. Francis Green’s chapter (Chapter 7) constitutes an essential overview of education and training policy in the UK, and analysis of past and present policy and performance. The chapter commences with the argument that government intervention in funding and/or regulation of the education and training market is necessary for both economic and equity reasons. The study moves on to provide evidence of the ‘British problem’ in underperformance and under-resourcing, using both domestic time-series data and international comparisons. The case is made for a political economic framework for understanding the macro-dynamics of the education system in Britain, the decline in public resources devoted to the state education system from the mid-1970s onwards, and the linkage to overall levels of inequality. The chapter then argues that public demand for education rose from the 1980s, along with participation rates, but that these developments occurred in the context of fiscal limitations: the education industry experienced ‘increasing and arguably unsustainable pressures’, with an intensification of work effort and a simultaneous diminution of relative pay in this sector. Green also draws attention to the enduring contradiction of deficiencies in demand and ‘distrust of education’ by the business world, especially at the lower end of the job/qualifications market. He concludes that pressures will continue for policy makers to improve investment in education, and notes the potential for a political coalition between those ‘pressing for a more productive human capital infrastructure’ and those ‘concerned with social inclusion and reducing inequality’. To achieve these goals, however, a policy commitment to a ‘financial transformation’ of education and training, with improved incentives and a strategic approach to planning supply and influencing demand, is needed. Steve Jefferys, Carole Thornley and Sylvie Contrepois (Chapter 8) explore the relationships between HRM, employee commitment and the material factors of job security and pay, by means of international comparative fieldwork conducted in the banking sector in the UK, France and Denmark.The context for this study is the growing importance of a variant of HRM strategies that emphasise the ‘social dimensions’ of control. Proponents of this ‘soft’ strand of HRM argue that winning employee ‘commitment’ is a key goal for firms seeking to raise labour productivity, a linkage which also features strongly in current government policy aspirations for ‘best practice’ employment. Jefferys,Thornley and Contrepois provide a critical evaluation of the ‘commitment’ literature; they replicate one of the leading methodologies for assessing ‘commitment’ levels, but in a context which also explores national-, sectoral- and firm-specific institutional frameworks along with

Introduction

7

the ‘material circumstances of work’, factors often neglected in studies of this type. They argue that, to the extent that the concept of ‘commitment’ provides a theoretically robust construct that can be operationalised for purposes of measurement, the objective realities and subjective perceptions of job insecurity and low(er) pay may undermine attempts to elicit higher levels of commitment from employees. The authors explore the policy implications for managers, trade unions and the state, and assess the potential for high-road approaches to wages, employment and productivity. Virginie Perotin and Andrew Robinson (Chapter 9) look at equal opportunities and productive efficiency in the workplace. They take non-discrimination at work as a basic human right: the point of studying the impact of equal opportunities practices on firm performance is to assist the formulation of effective policies to achieve this end. They emphasise that workplace productivity – the focus of their own empirical research – may be adversely impacted by discriminatory practices for reasons which span all dimensions of organisational performance: for example, problems may arise in recruitment and selection, in the allocation and co-ordination of human resources, in the acquisition of skills, in the release of private knowledge and creativity, as well as with individual motivation or morale.They find that productivity is enhanced overall by an equal opportunities policy, that this effect becomes greater, the greater the proportionate size of discriminated groups (women and ethnic minority men), and that this is further enhanced by policies on employee participation that give workers an effective say in the control of the decisions of the firm concerning the allocation and utilisation of resources. Significantly, they argue that associations between low productivity and employment of discriminated groups are the result of organisational failings that can be overturned by effective equal opportunities practices. The penultimate chapter by Dan Coffey (Chapter 10) addresses issues of public ownership and regulation, focusing in particular on the ‘predispositions’ of government to view private sector ownership and control as inherently more ‘efficient’. He argues that this predisposition is strongly influenced by ‘received accounts’ of past inefficiencies and abuses wrought by ‘excessive’ regulation and trade union influence: such ‘received accounts’, however, do not always stand up to close inspection.Taking as his example the port transport system and the National Dock Labour Scheme (NDLS), often cited as particularly pertinent examples of ‘over-regulation’, labour market inflexibilities and trade union militancy, Coffey offers a fundamental reappraisal of cost trends and productivity, which tell a different story. The key point which emerges from this example is that real unit wage costs in the regulated port transport sector were falling most rapidly precisely at the point when received accounts have claimed ‘inefficiencies’ were at their highest. The story told by the data does not match the conventional academic and policy wisdom on the history of this sector, and on the role played by past regulation.Taking this example as an illustration with a potentially generalisable policy lesson, Coffey makes the case for more rigorous, and less reactive, analyses of past and present employment practices and productivity outcomes under different forms of ownership and/or regulatory regimes.

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Dan Coffey and Carole Thornley

In the final chapter (Chapter 11), Malcolm Sawyer contributes to the current debate over public versus private forms of financing and service provision, through a detailed assessment of the Private Finance Initiative (PFI). Sawyer observes that PFI represents further privatisation, both in terms of the private ownership of assets utilised by the public sector and of the private provision of public services. It changes the way in which government finances its capital expenditure programme, and it re-assigns some service provision from employees hired directly by the public sector to employees hired in the private sector. The central question posed is thus whether PFI represents an ‘efficient’ way to fund capital projects. Sawyer carefully evaluates the popular defence of PFI that it provides the government with access to fresh sources of finance that allow investment projects to proceed, which could not otherwise be afforded, and explains why this defence is misplaced. He next shows that the assumptions that PFI reduces levels of public indebtedness are similarly misleading: while increased use of PFI has accompanied a reduction in the recorded size of the public debt, Sawyer finds that this reduction is less than a realistic assessment of the present value of the future liabilities accruing to PFI. Comparing the cost of raising government finance through PFI with direct borrowing, Sawyer concludes that PFI is in fact the less efficient way to fund capital projects. This conclusion is reached in the course of a critical appraisal of the assumptions used (and needed) to justify the selection of PFI project proposals over public sector comparators.

The policy challenges ahead These contributions individually and collectively make an explicit connection between problems of business and industry and problems of employment. They seek to stimulate debate and challenge the myths of the neoliberal paradigm, and argue against the oversimplification and superficiality of many of the assumptions informing government policy in a number of key areas. They consistently differentiate between roads to economic development and competitiveness that emphasise equality of outcomes for workers and citizens as a consistent and desirable policy objective, and roads that elevate short-term gains achieved at the expense of wider social objectives over long-term development and sustainability. The approach is non-dogmatic, and the value judgements are explicit.There is no attempt to understate the policy challenges ahead, but rather to elucidate them in a positive light.

Note 1 Including work by UK policy commentators like Will Hutton, George Monbiot and Polly Toynbee.

2

Industrial policy and economic development Christine Oughton

Introduction Industrial policy may be defined as any set of measures designed to improve the economic performance of industry. Within this broad definition it is useful to distinguish competition and regulatory policy, where the main aim is to promote competition and efficiency via legal and regulatory measures and positive industrial policy, where the main aim is to target and improve economic performance via financial incentives and other policy measures.1 At a theoretical level this distinction between competition policy and positive industrial policy reflects a difference in emphasis between static and dynamic efficiency. Since the 1990s there has been a tendency, particularly amongst politicians to refer to positive industrial policy as competitiveness policy.The use of the term competitiveness to describe positive industrial policy has aroused considerable debate as much on the use of terminology, or what Krugman (1994, 1996) saw as the rhetoric of policy, as on the policy measures themselves. However, debate over industrial policy is nothing new. Throughout the post-war period there has been disagreement over the role and scope of positive industrial policy and this has been reflected in discernible policy shifts. A central question on the role of industrial policy concerns the designation of industrial policy targets. These have included both aggregate measures, such as, productivity, income per capita, employment, growth, exports, innovation, as well as quite specific measures, such as, increasing the number of spin-out companies from universities (DTI 2001). Part of the recent debate over the role of competitiveness policy reflects a lack of clarity over the definition of targets, intermediate targets and policy instruments. In this regard theoretical analysis of positive industrial policy is considerably underdeveloped compared with macroeconomic policy. As far as the scope of industrial policy is concerned, the broad nature of industrial policy targets has meant that industrial policy is wide-ranging: encompassing employment, innovation and regional policies.This cross-functional (and in administrative terms, cross-departmental) scope of industrial policy means that industrial policy cannot be considered in isolation but needs to be integrated with employment, innovation and regional policy measures.

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Christine Oughton

The emergence and growth of European monetary integration also has implications for the role and scope of positive industrial policy.The creation of a single currency in Europe implies that for those member states that have adopted the Euro, exchange rate policy and monetary policy are no longer available as policy instruments to influence competitiveness. The adoption of the single currency therefore places a greater onus on positive industrial policy to correct trade imbalances and poor competitiveness. This chapter aims to provide an overview and assessment of recent UK and European industrial policy. The section on ‘The history of UK industrial policy’ provides a brief history of industrial policy in the UK, identifying the main policy shifts and outlining the nature of Britain’s relative economic decline in the context of the European and international economies. The section on ‘Competitiveness policies’ discusses the emergence of competitiveness policies in the 1990s and provides an assessment of UK and European policies.The final section draws a number of conclusions and highlights areas where future research would be beneficial.

The history of UK industrial policy The area of industrial policy that has exhibited most continuity of development over the post-war period is competition policy.While it is arguable that there has been variability over the implementation of policies such as merger control, changes in competition policy itself have been incremental in nature reflecting a desire to harmonise UK policy with EU policy, to improve empirical measures of market power and to provide greater clarity over the application of policy to specific cases. Notwithstanding these modifications, competition policy has remained focused on the need to prevent the exploitation of market power by single firm dominance, collusion and mergers. In contrast, there has been considerable debate over the role and scope of positive industrial policy that has led to a number of significant policy shifts. Prior to the 1980s industrial policy was characterised by a set of selective sectoral and regional policy measures (with support for manufacturing industry) designed to enhance industrial performance.These sectoral and regional industrial policies operated against a backdrop of a mixed economy and a set of horizontal policy measures, most notably, competition policy, trade policy and macroeconomic policy. Trade policy, which was implemented after 1973 by the European Commission, aimed to reduce tariff and non-tariff barriers and to promote exports. Macroeconomic policy was designed to stabilise employment and inflation and regional industrial policy was used with the aim of reducing structural unemployment and promoting regional convergence. Prior to the 1980s a large part of the overall industrial policy budget was devoted to regional aid. The 1980s and early 1990s marked a new era of industrial policy characterised by an attempt to shift away from sectoral interventions (though the extent to which this objective has been achieved is questionable (see Cowling et al. 1999)) and an emphasis on privatisation and deregulation. In terms of macroeconomic policy, targeting of both employment and inflation was dropped, as control of inflation and the money supply became the main objective and target of policy.

Industrial policy and economic development

11

The underlying rationale of government policy in the 1980s was to limit the role of the state although it is notable that significant sectoral interventions continued as did some regional measures and support for exports through the export credit scheme.This era of policy continued until 1994 when Michael Hesletine, Secretary of State for Trade and Industry produced the first Competitiveness White Paper (CWP). The central argument of the 1994 CWP was that Britain needed to increase its competitiveness, as measured by productivity and income per capita, in order to reverse years of relative economic decline. Britain’s relative economic decline Concern with Britain’s slow productivity growth was not entirely new. Over the post-war period successive governments adopted industrial policies with a view to reversing Britain’s relative economic decline by closing the productivity gap and raising living standards.The immediate cause of Britain’s relative economic decline was slow productivity growth and output growth. During the golden age of economic growth 1950–73 Britain’s productivity growth was significantly below the US and European Community average rates. Figures for the period 1973–2000 are presented in Figure 2.1. It can be seen that Britain’s productivity growth was below the European average between 1973 and 1979. Between 1979 and 1989 there was a marked improvement but still Britain’s productivity growth rate was only in line with the European average – as a result a significant productivity gap remained.The effect of productivity growth on Gross Domestic Product (GDP) per capita depends on employment – this point is discussed in more detail in the next section. During the 1980s Britain’s unemployment rate was significantly above the European average so that in terms of GDP per capita Britain continued to slip behind. World league tables of GDP per capita indicate that while in 1950 the UK was the third richest country in the world, by 1985 the UK had fallen to nineteenth 3.0

1973–79

2.5

1979–89 1989–2000

2.0 1.5 1.0 0.5 0.0 UK

US

Italy

Canada

France

Japan

Germany

EU

OECD

Source: OECD

Figure 2.1 Growth of real GDP per worker. G7 comparison plus EU and OECD averages, 1973–2000. Average annual per cent change. Source: www.treasury.gov.uk.

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Christine Oughton

160

GDP per worker GDP per hour worked

140 120 100 80 60 40 20 0 US

France*

Source: National statistics

Germany

Japan* (*GDP per hour for 1999)

Figure 2.2 GDP per worker and per hour worked, G5 comparison, 2000. Index, UK ⫽ 100. Source: www.treasury.gov.uk.

position. Of the EU (fifteen countries), Britain slipped from being the second richest economy in 1960, to sixth in 1970, to eleventh in 1985. Since then, the UK’s relative economic position has stabilised somewhat but there is, as yet no evidence of a reversal in fortunes. Figures for 2000 show that the UK is ranked twelfth out of the fifteen EU countries.2 In terms of productivity levels, the UK’s position vis-à-vis her main competitors is illustrated in Figure 2.2. It can be seen that productivity in the UK, whether measured per worker or per hour worked is considerably below that in France, Germany and the US.

Competitiveness policies While concern with Britain’s productivity gap and relative economic decline in living standards was not new, the CWPs published by the Conservative government in the 1990s did represent a new way of presenting positive industrial policy in an era where the ethos of government policy, ostensibly, at least, was to minimise government intervention. The UK (1994) and European (1993) CWPs The first UK CWP was published in 1994 (DTI 1994) following the publication of the European Commission’s White Paper on Growth, Competitiveness and Employment in 1993 (CEC 1993 and 1994) and similar reports and policy reviews in Germany, Canada,Australia, New Zealand and the US (DTI 1994: 9).The 1994 UK CWP started from a recognition that the UK had slipped behind her main competitors in the US and Europe both in terms of productivity and income per capita and concluded that an improvement in competitiveness was needed in order to reverse this decline.The White Paper then identified ten areas that determined

Industrial policy and economic development

13

competitiveness and went on to describe a series of policy actions in each of these areas. 1 2 3 4 5 6 7 8 9 10

The macroeconomy Europe Education and training Labour market Innovation Management Fair and open markets Finance, communications, infrastructure and regeneration The commercial framework and taxation The business of government and procurement.

While the 1994 CWP clearly identified the problem and a set of policy measures, a major weakness was its lack of clarity over competitiveness and how this related to quantifiable targets and policy instruments. Competitiveness was discussed as both a means and an end: an instrument and a target. Moreover, the White Paper contained a dual notion of competitiveness that rested on an analogy between firms and nation states. Competitiveness at the level of the firm was defined as the ability of firms to meet consumer needs more efficiently than rival firms.This firmbased definition was associated with targeting productivity. Competitiveness of the economy as a whole was defined as the ability of a nation to compete successfully on world markets while simultaneously increasing real income per capita (DTI 1994: 9).This nationwide target was to be captured by GDP per capita.There was, however, inadequate discussion of how these two definitions of competitiveness related to each other and of the possible conflicts between them. Targeting productivity may be inconsistent with targeting per capita income or living standards as the following discussion shows. Defining output per capita as Y/N, where Y denotes output and N denotes the population, the relationship between income per capita, productivity and labour input is given by the following identity: Y/N ⫽ (L/N ) · (Y/L)

(1)

where L denotes hours worked or labour input. Expressing (1) in terms of proportionate rates of growth yields: (Y/N )g ⫽ (L/N )g ⫹ (Y/L)g

(2)

where the subscript g denotes the rate of growth of the proceeding term. Focusing on productivity it can be seen that output per worker may be increased by raising output, reducing labour input, or some combination of both as shown by equation (3). (Y/L)g ⫽ Yg ⫺ Lg

(3)

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Christine Oughton

If productivity is increased by downsizing the workforce the effect on income per capita may be negative and will certainly be lower than the effects of raising productivity via output growth for a given level of labour input.The 1994 UK CWP put little emphasis on employment creation and its role in generating improvements in living standards.This was in contrast to the European Commission CWP which made employment growth its over-riding priority and argued that one of the major weaknesses of the European economy compared with the US was higher unemployment and lower rates of job creation. The importance of employment effects can be seen from Table 2.1, which shows that during the 1990s virtually all of the difference between the EU and the US in terms of improvements in living standards was accounted for by differences in employment performance rather than productivity performance. Successful targeting of growth in living standards (Y/N ) requires co-ordinated targeting of both output growth and employment growth. Once this is recognised it is possible to identify different routes to attaining competitiveness. If the overriding objective is productivity growth, it is possible to attain this via four routes: (1) downsizing of employment; (2) output growth; (3) a combination of output growth and employment growth such that Yg ⬎ Lg; or (4) some combination of (1) and (2). The first route represents a low road to competitiveness that will put downward pressure on wages, living standards (via L /N ) and growth.The difficulty with this route and to a lesser extent route (4) is that the micro actions of individual firms to downsize have macroeconomic consequences of unemployment and lower growth if all firms decide to follow this path. The second and third routes represent a high road to competitiveness where productivity and income increase and, for any given population level, GDP per capita is also increased via output growth in the case of route (2) and a combination of output and employment growth in the case of (3). If the objective of policy is to target increases in both productivity and living standards then policies need to be put in place that ensure a high growth trajectory, which means giving some consideration to the determinants of growth and, in particular, the role of investment and exports. The 1994 UK CWP did not prioritise a return to full employment, rather the emphasis was on creating flexible labour markets, keeping wage costs down and

Table 2.1 Growth in GDP per capita and its components in the 1980s and 1990s, EU versus the US EU 1980–90 % growth in GDP per capita 2.05 of which: Labour utilisation (L/N )g ⫺0.26 Hourly labour productivity (Y/L)g 2.31

US 1991–99

1980–90

1991–99

1.50

2.20

2.70

⫺0.26 1.76

0.90 1.30

0.95 1.75

Source: Robinson (2001), table 1: 149. Variables (L/N)g and (Y/L)g added by author.

Industrial policy and economic development

15

using labour market flexibility to sharpen incentives and raise productivity. This is in stark contrast to the EU CWPs (1993, 1994) where the over-riding objective was to raise employment, growth and living standards. Indeed, in the European White Paper competitiveness was not an end in itself but a means to raising employment levels and growth.The difference in the primary objective of UK and EU policies resulted in a fundamental difference of approach with European competitiveness policy placing greater emphasis on the need to raise the sustainable rate of growth of the economy by expanding the productive capacity of the EU via an increase in the investment share in GDP. The UK policy did not target capacity creation, investment and growth and many of the productivity gains that occurred in the tradeable sector of the economy were generated disproportionately by employment cuts rather than by output growth (see Michie and Oughton 2001). This has been the case in all economic cycles since the early 1960s. A related weakness was that there was inadequate analysis of the sources of productivity growth and the different effects on GDP per capita that spring from growth effects and employment effects. In order to be successful, a competitiveness policy that targets productivity growth and growth in income per capita, must also target employment growth and output growth. Output growth in the traded sector of the economy is particularly important because any downsizing in this sector affects not just employment growth and GDP per capita but also the balance of trade and thus the sustainable rate of growth that the economy can achieve before running into balance of payments difficulties. Two further limitations of the 1994 CWP and the subsequent CWPs published by the Conservative government of the day was that they failed to fully recognise Britain’s long-term underinvestment in broad capital, that is, investment in physical capital, human capital, knowledge and research and development (R&D) and the extent of regional divergence in terms of GDP per capita and unemployment. Underinvestment in fixed capital, human capital and knowledge The 1994, 1995 and 1996 CWPs failed to adequately diagnose and therefore address Britain’s long-term underinvestment in broad capital, that comprises: fixed capital (which often embodies technical change); human capital (education and training); and knowledge (the generation of new ideas, products and processes via R&D and technology transfer).This was in contrast to the EU White Paper (CEC 1993) that highlighted the fact that the investment share in Europe needed to be increased from its then present value of 19 per cent to around 23–24 per cent to bring it up to the US level. In addition, the EU CWP targeted the promotion of investment in intangible assets as an area for priority action. The extent of Britain’s underinvestment in broad capital vis-à-vis her main competitors is illustrated in Figures 2.3–2.6. Investment, especially fixed capital investment per worker is known to be one of the main determinants of economic growth and productivity (De Long and Summers 1991, 1992). Comparative data

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Christine Oughton

10,000 1974–79 1980–89 1990–2000

8,000 6,000 4,000 2,000 0 France

Japan

Canada

US

Italy

Germany

UK

Source: OECD

Figure 2.3 Business investment per worker, G7 comparison, 1974–2000, US dollars, at 1995 prices and purchasing power parities, averages. Source: www.treasury.gov.uk.

10 1974–79 1980–89 1990–2000

8 6 4 2 0 Japan

US

France

Italy

Canada

Germany

UK

Source: OECD

Figure 2.4 Government expenditure on investment, G7 comparison, 1974–2000. Average annual percentage of GDP, 1995 prices. Source: www.treasury.gov.uk.

on business investment per worker and government investment as a proportion of GDP are shown in Figures 2.3 and 2.4. It can be seen that despite a significant improvement in the 1990s business investment per worker remains the lowest of all the G7 countries.The 1994 CWP and a related paper published by the DTI (DTI 1996b) failed to properly identify the underlying weakness in the UK’s business investment performance compared with her main international competitors.

Industrial policy and economic development

17

Government investment is also a determinant of the rate of economic growth and of the productivity of the business sector of the economy. However, a comparison of the UK with the other G7 countries shows that there was a marked reduction in the share of government investment to GDP in the 1980s and no real recovery in the 1990s.As a result the UK has the lowest government investment share of the G7 countries. R&D expenditure to some extent captures investment in human capital and knowledge, and this is integral to product and process innovation. Figures 2.5 and 2.6 provide comparative data on real government expenditure on R&D per worker and industry-funded business expenditure on R&D per worker for the G7 countries.

800

1969

700

1994 1999

600 500 400 300 200 100 0 US Source: OECD

France

Germany

Italy

UK

Japan

Canada

Figure 2.5 Real government R&D expenditure per worker, G7 comparison, 1989–99. US dollars at 1995 prices and purchasing power parities. Source: www.treasury.gov.uk.

1,200 1989 1,000

1994 1999

800 600 400 200 0 US

Japan

Germany

France

UK

Canada

Italy

Source: OECD

Figure 2.6 Industry-funded business enterprise R&D (BERD) real expenditure per worker, G7 comparison, 1989–99. US dollars, at 1995 prices and purchasing power parities. Source: www.treasury.gov.uk.

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Christine Oughton

It can be seen that UK government investment in R&D lags significantly behind the US, France and Germany. Moreover, there is no sign of any real increase over the period 1994–99. Business expenditure on R&D tells a similar story. The UK lags behind the US, Japan, Germany and France with expenditure remaining flat over the period 1989–99 despite the government’s objective of prioritising innovation as a means to promoting competitiveness.Three further characteristics of the profile of the UK’s R&D investment tend to flatter the UK figures.The first is that the UK spends a high proportion of its R&D on defence related activity that arguably takes longer to spill over into business and wealth-creating innovations. Second, UK business sector R&D is heavily concentrated in the top 100 firms and the pharmaceuticals industry. Third, R&D activity is very unevenly spread across regions, partly as a result of the regional concentration of defence related spending and partly as a result of the regional concentration of business R&D expenditure. Regional convergence In the 1994 CWP the regional dimension of competitiveness policy was dealt with under chapters on London and regeneration.The London chapter focused on the importance of London as a financial centre and its role in shaping the competitiveness of the whole economy.The main policy development was changes in the way policy was administered through the new Government Office for London. This new body was established to co-ordinate policies on inward investment, transport, training, business support, re-use of urban space and measures to enhance the quality of life in London. Similarly, the regional government offices were to play a proactive role in promoting regeneration in the regions via the single regeneration budget and four integrated departments – environment, employment, trade and industry, and transport. However, CWP 1994 contained virtually no analysis of regional divergence and competitiveness and the constraint that regional inequality places on overall income levels and growth. Figure 2.7 shows the extent of the regional income gap for the eight English regions, London,Wales, Scotland and Northern Ireland. It can be seen that in 1994 the poorer UK regions/countries had levels of income per capita that were only around 80 per cent of the UK average and around 40 percentage points below the richest area – London. In view of these disparities, it is evident that the 1994/5/6 CWPs had insufficient diagnosis of the regional dimension and inadequate regional policy measures to tackle the lack of competitiveness of the UK’s lagging regions. Given that the policy proposals in the CWP followed the dismantling of much of UK regional policy instruments in the 1980s (Wren 1996) it is perhaps not surprising that there was further regional divergence between 1994 and 1997. It can be seen from Figure 2.7 that over this period, the two richest areas increased their positive margin over the UK average and of those areas that had below average income in 1994 only the South West, East Midlands and Yorkshire and Humberside made any noticeable step towards the UK average level.

140 120 100 80 60 40 20 0

19

1994 1997

Ea So st ut h Ea st Sc o Ea tla st nd M id W la n es t M ds id la nd So s ut h W es N t or th W Yo es r t H ksh um ir be e a rs nd N ide or th Ea st N W or al th es er n Ire la nd

Lo nd on

Percentage

Industrial policy and economic development

Region

Figure 2.7 GDP per capita by region, 1994 and 1997, UK ⫽ 100. Source: Regional Economics Indicators, Economic Trends, June 2002, table 2.

Competitiveness policies since 1997 When the labour government was elected in 1997 it published a consultation document (DTI 1997) on competitiveness policy before producing its first CWP in 1998. The consultation document made it clear that income per capita was the main policy target alongside employment creation. The document also highlighted investment in broad capital and went further than the previous White Papers in recognising UK underinvestment as a source of lack of competitiveness. In addition, greater emphasis was placed on sectoral and regional analysis with the recommendation of benchmarking at the sector level and the implementation of regional industrial policy through the newly created English Regional Development Agencies. In December 1998, the Labour government published its first CWP (DTI 1998). It aimed to set out: ● ● ●

the competitive challenge facing the UK a new model for how public policy can help business meet the challenge flagship programmes to promote entrepreneurship, innovation, and business learning and modern competitive markets. (DTI 1998: 9)

It started from a recognition that Britain had, invested too little in modern plant and machinery, as well as research and development and other intangible assets. Skill levels, including marketing and design skills, are too low across much of the workforce.Too many British companies have low ambitions.Too few match world best practice. (DTI 1998: 11)

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Christine Oughton

The challenge was to seek a high road to competitiveness based on investment in intangible assets in order to create a ‘knowledge driven economy’.The White Paper then set out three main themes: ● ● ●

strengthening British capabilities encouraging people to collaborate to compete promoting competition. (DTI 1998: 12)

The first two of these themes centred around the role of innovation in terms of investment in R&D, skills and training, improvements in technology transfer with greater collaboration between businesses and industry and the science base in order to catalyse innovation. Regional policy measures were also prioritised with each region being charged with the task of developing a ‘strategic long-term vision for promoting competitiveness in the region’ (DTI 1998: 42). The main areas of new government expenditure included: £25 million to establish enterprise and technology transfer centres at eight universities under the Science Enterprise Challenge; £1.4 billion increase in science spending financed jointly by government and the Wellcome Trust; £10 million to the Regional Development Agencies to promote regional competitiveness policy and £19 million of additional funding to address the UK’s skills gap. The 1998 CWP was supported by two further documents – the publication of competitiveness indicators (including regional indicators) and the introduction of Public Service Agreements (PSAs).The competitiveness indicators have arguably led to greater transparency of UK and regional strengths and weaknesses – though clearly further analysis is needed to understand the factors underlying various aspects of ‘competitiveness’ and possible policy solutions. The PSAs published in December 1998 (HM Treasury 1998) were linked to the government’s comprehensive spending review (CSR). The PSAs were designed to provide measurable targets in policy areas funded by the CSR. They were also designed to set out transparency of policy targets in areas where there is cross-departmental responsibility. The importance attached to the integration of competitiveness policy, education policy, regional policy and employment policy was reflected in the second CWP published in 2001 by the Labour government, which was produced jointly by the DTI and the Department for Education and Employment. The introduction of the PSA objectives and performance targets has led to a significant increase in clarity over the nature of competitiveness policy. As the above discussion of the 1994/5/6 CWP illustrated, one of the problems underlying the Conservative government’s policy design was the failure to recognise that in order to have maximum impact on living standards it was necessary to target growth, productivity, employment and regional convergence. It should also be added that it is necessary to target growth in the tradeables sector of the economy in order to avoid a further deterioration in the current account deficit placing

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21

a constraint on growth.The current labour government’s PSA targets published in July 2002 do make it clear that there are four inter-related policy targets: (i) to increase productivity over the economic cycle and to close the productivity gap with the US, France and Germany (HM Treasury 2002: 25); (ii) to increase the trend rate of growth over the economic cycle (HM Treasury 2002: 35); (iii) to reduce the unemployment rate and increase the rate of employment over the economic cycle (HM Treasury 2002: 31); (iv) to reduce the gap in growth rates between regions (HM Treasury 2002: 11). The first and third of these targets are joint targets between DTI and the Treasury, and the Department for Work and Pensions and the Treasury, respectively.The target for growth is the sole responsibility of the Treasury.The fourth target is shared between the DTI and the Office of the Deputy Prime Minister (which has responsibility for the regions). The targets are all for the period 2002–06, it is therefore too early to provide a policy assessment. However, similar targets were introduced in the first PSAs published in 1998 for the period 1998–2002 and some preliminary assessment of performance is possible. Assessing the 1998 and 2001 CWPs Policies on competitiveness may be assessed in respect of both their internal consistency and design, and their impact or effectiveness. In terms of the former criteria the 1998 and 2001 CWPs provided a more comprehensive assessment of the UK’s relative competitive position, the sources of declining competitiveness and a recognition of the fact that improvements in the UK’s relative living standards (GDP per capita) require an integrated approach to policy that incorporates, growth, employment and regional policy targets. In this respect there is a coherence to current policy design that was largely missing from previous competitiveness policies. Assessing competitiveness policy in terms of its impact and effectiveness is a more difficult task. Just as the period 1994–97 represented too short a time frame over which to judge the impact of the Conservative government’s competitiveness policy, so the period 1998–2001 represents too short a time frame to assess the Labour government’s policies.This is especially the case as most of the targets are expressed in terms of raising the average value of variables such as productivity and growth over the economic cycle.The preliminary evidence from the last 3–4 years that we do have is somewhat mixed. There is no question that unemployment has fallen since 1998 but this improvement in employment performance is part of a trend that can be traced back to the early 1990s. Indeed, the measured unemployment rate has been falling in the UK since 1993. What is perhaps significant in terms of comparative economic performance is that the continuation of this trend took the UK rate of unemployment to below the G7 average in 1998 and to below the Japanese and US rates in

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2001 and 2002, respectively. Indeed, the UK now (2002) has the lowest standardised unemployment rate of any of the G7 countries. In terms of growth, the UK’s comparative economic performance is less favourable: growth in real GDP has averaged around 2.8 per cent per annum between 1998 and 2000 but the UK rate was below the EU rate (3.0 per cent), the G7 average rate (3.0 per cent) and the US rate (4.2 per cent). Growth in 2001 fell to 1.9 per cent but the UK experienced a smaller fall than the European 15 and US economies so that in 2001 and the first quarter of 2002 UK growth was significantly above the European averages.As can be seen from Figure 2.8 the peak rate of growth of real GDP in the UK between 1998 and 2002 was 3.1 per cent in 2000, which was below the peak rates in earlier UK cycles in the 1980s and 1990s. There is therefore as yet little evidence of an increase in the trend rate of growth, though it is important to note that the policy target period for this variable is 2000–06. In terms of productivity the average annual rate of productivity growth between 1997 and 2001 was 2.7 per cent, not sufficiently high to make significant progress on closing the productivity gap – as can be seen from Figure 2.9. Moreover, in the production industries, which are vital for the UK’s trade performance the vast majority of the increase in productivity was associated with reductions in labour input rather than output growth. Real output in the manufacturing and production sectors has remained fairly flat over the period 1997–2001 despite the fact that overall the economy was growing by 2.6 per cent per annum. The stagnation in real output in manufacturing and production is a cause for concern as these industries form a major part of the tradeable goods sector of the economy. Slow growth and stagnation in manufacturing and production has knock-on effects on exports and the current account deficit, and can therefore act as a constraint on the overall rate of growth.

6.0

Per cent

4.0 2.0

20 00

19 98

19 96

19 94

19 92

19 90

19 88

19 86

–2.0

19 84

19 82

0.0

Year European 15

G7

UK

Figure 2.8 Growth of real GDP 1982–2001, annual percentage rate of change. Source: Growth of real GDP figures from table 19 world indicators database on www.treasury.gov.uk.

160 140 120 100 80 60 40 20 0

23

UK France USA G7–UK Germany

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00

Comparative productivity index

Industrial policy and economic development

Year

Figure 2.9 International comparisons of GDP per hour worked (UK ⫽ 100). Source: Office of national Statistics website (www.statistics.gov.uk) International Comparisons of Productivity – GDP per Hour Worked.

Table 2.2 Productivity growth, output growth and employment growth 1997–2001 (per cent) Sector

Rate of growth of output per hour worked

Rate of growth of output

Rate of growth of labour input (hours worked)

Whole economy Production industries Manufacturing

10.8 15.1 14.2

17.4 3.6 2.7

6.6 ⫺12.5 ⫺11.5

Source: Economic Trends, June 2002, own calculations from tables 2.8, 4.7 and 5.1.

Table 2.2 presents a decomposition of productivity growth into its component parts of output growth and employment growth (measured by hours worked) for the period 1997–2001. It can be seen that over this five-year period there was only minimal growth in output in the manufacturing and production goods sectors, while output growth in the economy as a whole was significantly higher driven by strong expansion of the service sector, most notably: transport and communication; business services and finance; and distribution, hotels and catering. The impact of slow growth in the main traded goods sector of the economy (which accounts for over 70 per cent of UK exports) is reflected in the current account of the balance of payments.The current account went into deficit in 1986 and has been increasing more or less ever since. Between 1998 and 2001 the balance of trade in goods deteriorated from a deficit of just over £12 billion (2.5 per cent of GDP) in 1995 to a deficit in excess of £33 billion (3.3 per cent of GDP) in 2001.3 The problem of Britain’s deteriorating net trade performance in goods and services and the need to expand capacity in the traded goods sector of the economy has not received adequate attention under current policy despite the emphasis on ‘competitiveness’.

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Christine Oughton

Per cent

A further concern is the rate of investment in fixed capital. As has been shown above UK investment per worker lags behind the levels attained by other G7 economies and given that this variable is known to be a key determinant of output and productivity growth, raising investment per worker is essential. One of the factors that has been shown to influence the rate of investment is macroeconomic stability and variation in output. Historically the UK has tended to experience wider fluctuations in output over the cycle and this uncertainty has been shown to have a negative impact on investment (Driver and Moreton 1991). In recent years, the macroeconomic stability of the UK economy has improved and this may be one of the factors underlying the increase in investment per head during the 1990s. However, despite the improved macroeconomic performance of the UK over the past decade – including lower inflation and greater demand stability, real interest rates remain high by international standards as illustrated in Figure 2.10. The relatively high level of UK real interest rates is likely to be an important factor constraining business investment. This, together with familiar problems of UK short-termism is an area that the government will need to address if it is to be successful in raising investment per worker and growth in order to close the productivity gap with the US, Germany and France. Finally, it is instructive to look at the planned levels of government expenditure to support competitiveness policy measures.The resource and capital budget of the DTI is shown in Table 2.3. It can be seen that overall the resource expenditure budget for DTI expenditure increased from £2,694 to £4,797 million between 1998–99 and 1999–2000, but the largest factor underlying this increase was expenditure on Liabilities Management (coal and nuclear liabilities). There were only modest increases in the budget to promote enterprise innovation and increased productivity and a slight fall in the budget for science. However, the government did commit significant new resources to the science capital expenditure budget between 1998–99 and 1999–2000 with a significant increase of almost £100 million. It can be seen that this increase is set to continue over the next few years. Similarly the estimated outturn for 2001–02 shows a noticeable increase in expenditure on policy measures to promote innovation and productivity. 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

G7 UK US Germany France

1997

1998

1999 Year

2000

2001

Figure 2.10 World real interest rates. Source: World real interest rates (nominal rates deflated by inflation) from table 26 of the world indicators database on www.treasury.gov.uk.

6,268 73

4,797 ⫺10 0 0 57 ⫺78 11 120 56 7 1,204 1,377

2,694 83 0 0 110 ⫺52 24 24 128 7 466 707

⫺81 ⫺86 120

1,482

⫺2 840

⫺7 1,126 1,452

63 1 ⫺1 101 23 336 122

186

248 353 271 82 77 185 1,648 676 34 289 12 134 39 4,048

1,216

2001–02 Estimated outturn

0 0 156 ⫺76 ⫺7 185 75

197 288 155 87 8 157 1,500 556 27 3,058 89 144

189 323 175 20 11 118 1,447 479 28 1,337 551 118

152 311 140 74 3 151 1,492 417

893

2000 –01 Outturn

837

1999–2000 Outturn

832

1998–99 Outturn

Source: DTI (2002), The Government’s Expenditure Plans 2002–03 to 2003–04.

Resource expenditure: consumption of resources by activity Promotion of enterprise, innovation and increased productivity, of which: Small firms and enterprise Innovation Regional development Aerospace Post office and telecommunications Administration costs and other minor programmes Science Legal and regulatory framework and markets British Trade International Liabilities management Public corporations (profit/loss and capital charge) UKAEA superannuation Unallocated provision Total Department of Trade and Industry resource budget Capital expenditure: capital spending by activity Promotion of enterprise, innovation and increased productivity, of which: Small firms and enterprise Innovation Regional development Aerospace Department capital and other minor programmes Science Legal and regulatory framework and markets British Trade International Liabilities management Public corporations (profit/loss and capital charge) Unallocated provision Total DTI capital budget

Table 2.3 DTI expenditure 1988–2004, £million

1,776

⫺11 961

62 1 133 22 33 353 189

252

263 321 346 75 72 150 1,721 682 32 298 ⫺208 137 31 3,920

1,227

2002–03 Plans

2,055

2 996

50 3 135 145 28 447 213

361

248 329 274 75 112 147 1,839 719 35 201 ⫺402 137 38 3,752

1,186

2003–04 Plans

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Christine Oughton

There is also a marked increase in expenditure on regional development with expenditure more than doubling between 2000–01 and 2002–03. Moreover, for the first time the government has targeted funds for innovation at lagging regions via the Regional Investment Fund (RIF). While the RIF represents only a small part of the total government R&D budget the policy represents an important change in direction that may help to solve the regional innovation paradox, that is, that poorer regions that should invest more in innovation in order to catch up, find it harder than richer regions to absorb funding designed to promote investment in R&D (see Oughton et al. 2002, and Michie and Oughton 2001 for a discussion of this point). In short, while it did not happen immediately, the government has started (in 1999–2000, in terms of capital expenditure, and in 2001–02, in terms of resource expenditure) to commit significant increases in resources to its policy measures to promote competitiveness. A full assessment of the effectiveness of this increase in resources in delivering the targets set out in the PSAs will not be possible until data for the period 2000–06 become available.

Conclusion The experience of competitiveness policies in the UK and Europe since 1993/94 has been mixed. As discussed above, there are two main methods of appraising the policies: the first is to attempt to determine whether there has been any significant (causal) impact on policy targets; the second is to assess the internal coherence and design of the policies themselves.The difficulties of making the first kind of assessment are considerable and include the well-known problem of the counterfactual, namely that we do not know what would have happened in the absence of policy. A further and equally weighty problem is the time lag between policy implementation and impact. Competitiveness policy is long term in nature and the policy targets include cyclical variables, such as productivity and GDP per capita. The most recent policy documents have made it clear that the targets for productivity and growth are expressed in average values (or trend values) over the cycle, for the period 2000–06. At present we simply do not have the data to make a full and detailed assessment of policy impact, especially as the main increases in government funding did not come on stream until very recently. A similar problem prevents a full assessment of the impact of the previous government’s competitiveness policy, which was first introduced in 1994 and was in place for just three years before there was a change in government and policy. It is, however, possible to make an assessment in terms of policy design and coherence. Here it can be seen that the 1994 CWP lacked clarity over the identification of policy targets and instruments and failed to appreciate fully that in order to be effective, targeting GDP per capita and productivity also required targeting growth and employment. This is in contrast to the 1993 European CWP, which recognised the interdependence between investment, employment, growth, productivity and GDP per capita. The early UK CWP also failed to fully recognise: (i) the extent of Britain’s underinvestment in fixed capital and intangible

Industrial policy and economic development

27

assets; (ii) the significance of growth in the traded sector of the economy and the growing deficit on the balance of trade; and (iii) problems of regional inequality. The competitiveness policy of the current government has addressed many of the weaknesses in the design of the previous government’s policy. In particular there is greater clarity over the need to target growth, employment and productivity and a fuller recognition of the extent of Britain’s underinvestment. In addition, regional policy is being integrated with industrial policy and innovation policy and there has been significant devolution of policy design to the regional development agencies. Concerns remain over stagnation in manufacturing and the production industries, low investment in broad capital and the growing deficit on the balance of trade.These are issues that need to be addressed. While there was little increase in DTI expenditure on competitiveness, science and innovation between 1998 and 2000, in 2001–02 the government increased expenditure on measures to promote enterprise, innovation and productivity by 36 per cent (including a 75 per cent increase in DTI resource expenditure on regional development), with a 17.7 per cent increase in the DTI science budget. The stated objective is to increase the trend rate of growth, increase employment, close the productivity gap and promote regional convergence in order to increase living standards. It remains to be seen whether the current policy will be successful in meeting these targets.

Notes 1 The term positive industrial policy was discussed by Jacquemin, 1997. 2 Source: Oughton (1997) and the UK Treasury website (www.treasury.gov.uk) based on OECD Figures expressed in US dollars, purchasing power parities. 3 Source: Economics Trends, June 2002 (and ONS website www.statistics.gov.uk), tables 2.13 and 2.1.

References Commission of the European Communities (CEC) (1993) Growth, Competitiveness and Employment,White Paper. CEC, Brussels. Commission of the European Communities (CEC) (1994) An Industrial Competitiveness Policy for the European Union, Com (94), 319. CEC, Brussels. Cowling, K., Oughton, C. and Sugden, R. (1999) A Reorientation of Industrial Policy? Horizontal Policies and Targeting, in Cowling, K. (ed.), Industrial Policy in Europe: Theoretical Perspectives and Practical Proposals. Routledge, London. De Long, B. and Summers, L. (1991) Equipment Investment and Growth, Quarterly Journal of Economics, 6(2): 445–502. De Long, B. and Summers, L. (1992) Equipment Investment and Growth: How Strong is the Nexus? Brookings Papers on Economic Activity, 2: 157–211. Department of Trade and Industry (DTI) (1994) Competitiveness, White Paper Cm 2563. HMSO: London. Department of Trade and Industry (DTI) (1995) Competitiveness: Forging Ahead,White Paper Cm 2867. HMSO: London. Department of Trade and Industry (DTI) (1996a) Competitiveness: Creating the Enterprise Centre of Europe,White Paper Cm 3300. HMSO: London.

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Department of Trade and Industry (DTI) (1996b) The UK’s Investment Performance: Fact and Fallacy, Competitiveness Occasional Paper, No 1. Department of Trade and Industry (DTI) (1997) Competitiveness: Our Partnership with Business UK. HMSO: London. Department of Trade and Industry (DTI) (1998) Competitiveness: Government’s Partnership with Business UK,White Paper Cm 2867. HMSO: London. Department of Trade and Industry (DTI) (2001) Opportunity for All in a World of Change, White Paper Cm 2867. HMSO: London. Department of Trade and Industry (2002) The Government’s Expenditure Plans 2002–03 to 2003–4. Cm 5416.The Stationery Office: London. Driver, C. and Moreton, D. (1991) The Influence of Uncertainty on UK Manufacturing Investment, Economic Journal, 8(4): 1452–1459. HM Treasury (1998) Public Service Agreements 1998–99 to 1999–00. Cm 1111. The Stationery Office: London. HM Treasury (2002) 2002 Spending Review, Public Service Agreements, 2003–2006, Cm 5571, The Stationery Office. HM Treasury (2002) Competitiveness Indicators, on the Treasury web site, www.treasury.gov.uk. Jacquemin, A. (1987) The New Industrial Organisation. Clarendon Press: Oxford. Krugman, P. (1994) Competitiveness: A Dangerous Obsession, Foreign Affairs, March/April, 28–44. Krugman, P. (1996) Making Sense of the Competitiveness Debate, Oxford Review of Economic Policy, 12(3): 17–25. Michie, J. and Oughton, C. (2001) Regional Innovation Strategies: Integrating Regional, Industrial and Innovation Policy, New Economy, September. Office of National Statistics Web Site (www.statistics.gov.uk) International Comparisons of Productivity – GDP per Hour Worked. Oughton, C. (1997) Competitiveness Policy in the 1990s, Economic Journal, 107(444): 1486–1503. Oughton, C. and Whittam, G. (1997) Competition and Cooperation in the Small Firm Sector, Scottish Journal of Political Economy, 44(1): 1–30. Oughton, C., Landabaso, M. and Morgan, K. (2002) Regional Innovation Systems and Regional Innovation Strategies: Catalysing Innovation and Growth, Journal of Technology Transfer, 27(1): 97–110. Robinson, P. (2001) IPPR Indicators: Policy Objectives and Tools, New Economy, 8(3): 148–150. Wren, C. (1996) Gross Expenditure on UK Industrial Assistance: A Research Note, Scottish Journal of Political Economy, 43(1): 113–126.

3

Markets, competition, co-operation and innovation Michael Kitson, Jonathan Michie and Maura Sheehan

Introduction Successive governments in the UK and US have urged deregulation and increased competition as the key to promoting economic dynamism, innovation and growth. Such arguments go with the grain of textbook economics, where regulation and anything that appears to get in the way of free market competition is assumed to be an impediment to achieving the theoretical holy grail of general equilibrium and what is held to be its representative on earth, efficient markets. This chapter investigates the concept of ‘competition’. The reality turns out to be rather more complex than the simple-minded theorists or politicians would have us believe. Competition is a process, involving firms and other institutions that also need to co-operate. Innovation and economic dynamism requires more than the textbook model would allow. A comprehensive picture of British business, considering such factors as competitive structures, employment and skills, innovation, finance and growth is provided by a series of surveys carried out by the Centre for Business Research (CBR) at the University of Cambridge (and its predecessor the Small Business Research Centre (SBRC)).1 The first of these surveys was conducted in 1991 and was designed to provide a sample of 2000 independent businesses employing less than 500 workers, equally split between business services and manufacturing.The sampling frame used was the Dun and Bradstreet database (see Bullock et al. 1996 for a discussion of the advantages and disadvantages of this database). Originally, 8,050 firms were approached. Of these, 1,880 were discarded as they were too large, subsidiaries, had ceased trading, or were otherwise outside the survey’s scope. Of the 6,170 firms that were surveyed, 2,028 returned useable questionnaires, a response rate of 32.9 per cent. The results of this survey (SBRC 1992) provided the first comprehensive analysis of the UK small and medium sized enterprise (SME) sector since Bolton (1971). A second survey was conducted in 1993, using a short questionnaire focusing on a few key variables. A third survey was conducted in 1995. It is the results of this third survey, using a questionnaire similar in scale to the first survey, which forms

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the basis of most of the analysis in this chapter. Continued monitoring of the respondents to the original survey enabled identification of firms that had failed or were failing. Of the original 2,018 respondents, 436 firms were excluded because of failure or because they were now outside the survey’s scope. Of the 1,592 firms surveyed, 681 firms returned the full postal questionnaire and 317 firms completed shorter questionnaires, a total response rate of 62.7 per cent. In order to draw a comparative picture, the respondents’ characteristics were analysed according to a variety of categories, as follows: ● ●

●

●

●

Two sectors (manufacturing and business services); Four size groups based on 1990 employment (micro, 0–9 employees; small, 10–99 employees; medium, 100–199 employees and larger, 200⫹ employees); Three employment growth categories between 1990 and 1995 (stable/declining – zero or negative growth; medium growth – greater than zero but less than 35 per cent and fast growth – over 35 per cent); Two innovation categories (based on whether the firm innovated or not during the period 1992–95);2 Two collaboration categories3 (based on whether the firm entered into a collaborative arrangement during the period 1992–95).

The competitive environment Firms operate in a range of competitive environments. At one extreme, firms may compete in atomistic markets, with a large number of customers and competitors, with competition driven by price and cost factors.At the other extreme firms may operate in monopolistic or monopsonistic markets with no effective competitors, or with only one customer. The evidence from the CBR survey indicates that, although firms operate in diverse markets, the norm is for rather segmented markets – with firms relying on a few main customers and facing a limited number of competitors. As reported in Table 3.1, 33 per cent of firms relied on just one customer for 25 per cent or more of their sales. The most apparent contrast is by firm size – micro and small firms are more likely to depend on just a few customers for the bulk of their business.Additionally, innovating firms are less likely to be dependent on a single customer than are non-innovating firms; 31 per cent of innovating firms – compared with 38 per cent of non-innovating firms – depend on just one customer to provide 25 per cent or more of their sales. In general, though, most firms have just a few key customers – indicating the importance to these firms of fostering their relations with customer–firms. Table 3.2 reports that nearly two-thirds of firms have less than ten serious competitors.4 The notion that firms are competing with a vast array of other enterprises gains little support from these data. Most firms are operating in segmented and niche markets. Economic theory suggests that the degree of competition plays a complex role in firms’ innovative behaviour. Nickell, for example, tests for the effect of competition

Markets, competition, co-operation and innovation

31

Table 3.1 Concentration of sales (% distribution of firms) % of sales for largest customer

Less than 10% 10–24%

25–49% 50–100% No. of firms

Micro Small Medium Large Manufacturing Services Innovators Non-innovators All

19.7 25.8 40.3 41.3 26.8 26.6 28.8 21.7 26.7

29.2 20.1 14.9 15.2 19.6 23.5 21.8 20.7 21.4

38.2 43.0 32.8 34.8 41.2 39.5 40.7 40.1 40.4

13.0 11.2 11.6 9.7 12.4 10.4 8.8 17.5 11.5

169 375 65 44 347 309 441 206 656

Source: University of Cambridge, ESRC Centre for Business Research, 1995 Survey into Growth, Innovation and Competitive Advantage in Small and Medium Sized Firms.

Table 3.2 Competitive structures (% distribution of firms) Number of serious competitors

All

Manufacturing

Services

Innovators Noninnovators

Collaborators Noncollaborators

0 (monopoly) 1–9 (highly segmented) 10–49 (partially segmented) 50–99 (partially atomistic) 100⫹ (highly atomistic)

3.3 61.3

2.9 69.1

3.6 52.4

2.5 60.9

5.0 63.9

2.0 60.5

4.3 61.2

27.3

23.6

31.5

29.3

20.6

29.0

26.3

2.6

1.2

4.3

2.5

3.0

3.6

2.1

5.5

3.3

8.2

4.8

7.5

4.8

6.2

Source: University of Cambridge, ESRC Centre for Business Research, 1995 Survey into Growth, Innovation and Competitive Advantage in Small and Medium Sized Firms.

on productivity, pointing out that the general belief regarding the efficacy of competition exists ‘despite the fact that it is not supported by any strong theoretical foundation or by a large corpus of hard empirical evidence in its favour’ (Nickell 1996: 725). Nickell’s paper provides evidence of increased competition having a significantly positive effect on corporate performance, and similar results are reported by Nickell et al. (1997).These findings are in line with ‘Schumpeter Mark I’ according to which the pattern of innovative activity is characterised by technological ease of entry to an industry and by the major role played by new firms challenging established firms and thus continuously disrupting the current way of production, organisation and distribution and eliminating the quasi-rents associated with previous innovations.5 On the other hand,‘Schumpeter Mark II’ stresses the importance of large established firms that can institutionalise the innovation process with the creation of research and development (R&D) laboratories filled with researchers, technicians and engineers. According to this model we would

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expect to see more innovation where there were just a few firms benefiting from ex post market power acquired by successful innovation, rather than a high degree of competition (Schumpeter 1947). We examine these competing hypotheses about the relation between firm size and innovative activity in the sections on ‘Collaboration, innovation and corporate performance’ and ‘Hypotheses testing’. Decreasing trade barriers and increased globalisation have contributed to the analysis of not just the level of competition but also the source of competition.The hypothesis that increasing imports and inward foreign direct investment (FDI) have positive effects on the competitive behaviour of domestic firms and negative effects on their profitability have been subject to considerable theoretical and empirical analysis. The empirical evidence suggests that no outcome is certain. Increased imports and/or inward FDI can have both positive and negative effects on domestic firms’ competitiveness. On the one hand, positive effects may be generated by imposing ‘market discipline’ and through positive ‘spillover’ effects (Caves 1985, 1998; Cantwell 1992). On the other hand, negative effects can also be generated if there is a high degree of substitutability of the products supplied by domestic and foreign-owned firms and/or imported goods, and if foreign owned firms’ R&D activities are significantly more effective than that of domestic firms (Zimmerman 1987; Scherer and Hugh 1992; Lee 1996). In contrast, there is evidence that intense domestic competition helps to generate highly competitive – or ‘world-beating’ industries (Porter 1990). Given these considerations, we examine both the effects of the extent of competition and the effect of the source of competitive pressures on innovation. The issues of competitive pressure on the one hand, and financial resources on the other that Schumpeter (1947 and 1961) discusses as being important for innovative activities are also echoed in the literature on the effect of financial market pressures on firms. On the one hand there is an extensive literature on the effect of take-overs, and specifically the threat of hostile take-overs, on firms’ R&D and other corporate behaviour (from the early contributions of, e.g., Marris (1964) and Singh (1975), through to the current literature such as Franks and Mayer (1996)). On the other hand, the now fashionable push for ‘free cash flow’ to be transferred from firms to shareholders (via dividend pay-outs or share buy-backs) takes its academic lead from Jensen and Meckling’s (1976) discussion of the nature and incidence of the costs of monitoring and of motivating agents working on behalf of a principal. One line of argument is that borrowing to fund investment projects will pressure the management to ensure a high return, in order to meet the interest payments due on the debt. We therefore also examine below the effect of take-overs and debt interest payments on firms’ innovative activity.

How firms compete Before reporting on our formal tests for the relationships between, on the one hand, the level and nature of competition and financial market pressure,

Markets, competition, co-operation and innovation

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and on the other hand, innovative performance, it is worth considering how firms actually compete. When firms were asked to identify the sources of their competitive advantage the key factors were ‘personal attention to client needs’, ‘reputation’ and ‘product quality’. ‘Cost advantage’ was the lowest ranked factor, especially amongst those firms with the fastest rate of growth.There were large and significant differences in competitive strategy between innovating and noninnovating firms, with statistically significant differences between the two sectors for seven out of the eleven competitiveness factors.The largest differences, in terms of rank as well as scores, were for product design, flair and creativity, product quality, specialised expertise or products and range of expertise or products; all these factors were more important for innovating firms than they were for noninnovating firms. Further evidence of the differences in competitive factors was found when firms were asked to rate various factors as ‘very significant’ or ‘crucial’: innovating firms were far more likely to rank highly such factors as product design, flair and creativity, and specialised expertise or products compared to non-innovating firms. Overall, innovating firms stress the importance of higher order qualitative factors that require investment in skills and technical capability. Conversely, in terms of rankings, they put less emphasis on cost and price factors compared with non-innovating firms. These major differences were also evident in an earlier survey assessing competitive advantage in 1990 (SBRC 1992). This suggests that such differences do not merely reflect the contrast between firms that innovate and those that do not, but they also reflect differences between those firms that intend to innovate, or are receptive to such developments, and those that do not or are not.

Collaboration, innovation and corporate performance It is widely recognised that collaboration is an important means of fostering innovation (see, e.g. Dore 1983). Half of the innovating firms in the CBR survey had entered into collaborative partnerships, whereas only one in six of the non-innovating firms had entered into such arrangements. Collaboration is particularly important for firms facing foreign competition; as the process of globalisation continues apace such collaborative behaviour may become more important as domestic firms face stiffer competition in both home and overseas markets. One of the important ingredients for achieving competitive success and for engaging successfully in innovative activity, appears to be to establish effective collaboration with others – customers, suppliers, higher education establishments and so on. Such collaboration allows firms to expand their range of expertise, develop specialist products and achieve various other corporate objectives.6 The four most important reasons given by firms in the CBR survey for collaborating were to help expand the range of expertise and products, to assist in the development of specialist services and products required by customers, to provide access to UK markets, and to provide access to overseas markets. The process of

34

Kitson et al.

collaboration allows firms to exploit economies of scale and scope. The reason given for collaboration that has shown the greatest increase since 1990 (from 29 per cent to 38 per cent) is to help keep current customers. This suggests that collaboration may have increased for defensive reasons – perhaps in response to increased domestic and international competition. In general, innovating firms were more likely to collaborate for all reasons compared to non-innovating firms. The one exception was to help keep current customers, suggesting that non-innovators are more defensive in regard to maintaining market share. Additionally, and not surprisingly, the reason for collaboration for non-innovators that showed the greatest fall was the sharing of R&D. The overall impact of increased innovation and collaboration is improvements in both output and employment growth rates – for individual businesses as well as for the economy as a whole.7 In terms of employment, fast growth firms were almost twice as likely to have collaborated compared to firms with negative or no growth. Innovating firms were far less likely to have zero or negative employment growth than were non-innovating firms and were far more likely to have achieved fast growth in employment. The CBR survey indicated a similar picture in the contrast between collaborators and non-collaborators – superior employment growth being shown by the collaborators. This superior performance of innovating firms and of collaborating firms was also apparent in terms of turnover growth and in terms of the growth of profit margins.8

Hypotheses testing In this section we test formally for any correlation between, on the one hand, the competitive environment faced by firms, financial market pressure and collaboration, with, on the other hand, the probability of innovating. Before doing so, however, it is necessary to emphasise that since much of the data used in our estimations are cross-sectional, inferences about causation need to be drawn with caution (see Fernie and Metcalf (1995) for a detailed discussion of the problems of causation and simultaneity with cross-sectional survey data).To reduce problems of simultaneity between the dependent and explanatory variables, where the data are available the lagged value (obtained from the earlier surveys) of explanatory variables are used. It is important to stress therefore that what we are investigating here is the possible correlation between the explanatory variables such as profit margin growth, and the firm’s innovativeness. We are not arguing that there is a simple, one-way causation. Indeed, we would expect any correlation we found to be the result of two-way causal relationships between symbiotic practices. To test for the relationships outlined above, the following generalised reduced form equation is estimated: Yxt* ⫽ ␣ ⫹ ␤⬘Xxt ⫹ ␥⬘⍀xt ⫹ ␭⬘⌿xt ⫹ ␪⬘dcollabxt ⫹ ␧xt

(1)

Markets, competition, co-operation and innovation

35

where ●

●

●

●

Yxt*, indicates whether or not a firm introduced a process or product innovation in the period 1992–95 (with Yxt* ⫽ 1 if Yxt* ⬎ 0, and ⫽ 0 otherwise). Xxt represents a vector of firm characteristics consistently found in the literature to be likely to influence innovative activity (see, e.g. Cosh et al. 1996; Nickell and Nicolitsas 1997). These are profit margin growth (pre-tax profits normalised by turnover growth, 1990–95), employment growth (1990–95), age (1995), size (measured by employment level in 1995), dummy variables for previous innovation (1986–91) and collaboration (1986–91), plus industry dummy variables (the excluded industry dummy is ‘Other Manufacturing’). ⍀xt is the competitive environment faced by the firm measured by the number of serious domestic and overseas competitors faced in 1991 (the year prior to the period covered by the innovation questions, 1992–95). ⌿xt represents financial market pressure faced by the firm measured by, first, whether the firm faced a take-over bid prior to 19919 and, second, the level of interest payments on debt in 1991 (normalised by turnover growth).

Our results are reported in Table 3.3 below. All estimates were made using Limped 6.0. We report only the marginal effects, which are calculated as the derivative of the conditional expectation of the observed dependent variable and evaluated at the sample means, following the procedure in Limdep (Greene 1995).10 The collaboration, competition and finance variables all have the expected signs and are all statistically significant. Our initial probit results indicated a statistically significant correlation between higher levels of competition and a higher rate of innovation. However, on closer inspection of the data it appeared that this effect tailed off as the degree of competition increased and even became negative, giving an inverted U-shaped curve when the likelihood of innovating was plotted on the vertical axis and the degree of competition on the horizontal. We therefore repeated our original probit estimates of equation (1) including the square of the degree of competition as an additional variable, and we did indeed discover a negative coefficient, albeit not as significant as the positive coefficient on the degree of competition itself, but still significant at the 90 per cent confidence level. It was in an attempt to discover why the effect of competition changed beyond a certain point that we split the competition between domestic and foreign, including both in the probit estimates reported in Table 3.3. As can be seen, we were correct in our assumption that the different forms of competition would give us different results.The results in Table 3.3 indicate that the measure of domestic competition continues to have a statistically significant positive coefficient, as does the number of overseas competitors initially, but it is this latter effect, which becomes negative at higher degrees of competition. This is indicated by the statistically significant

Table 3.3 Probit estimates of innovation, 1992–95 Variable

Product/process innovation (1)

Product innovation (2)

Process innovation (3)

Intercept

⫺2.807 (⫺2.612)** 0.198 (1.511) 0.106 (0.798) 0.329 (1.345) 0.855 (4.114)*** 0.648 (3.124)*** 0.127 (1.224) 0.232 (1.927)* ⫺0.138 (⫺1.242) 0.142 (1.124) 0.272 (1.640) 0.534 (3.905)*** 0.057 (1.002) 0.398 (2.226)** ⫺0.156 (⫺1.817)* ⫺0.545 (⫺2.321)** 0.291 (1.976)* ⫺163.8 0.085 443

⫺2.427 (⫺3.725)*** 0.129 (1.284) 0.096 (0.762) 0.434 (1.830)* 0.954 (4.719)*** 0.816 (3.351)*** 0.226 (1.815)* 0.295 (1.988)* ⫺0.197 (⫺1.525) 0.158 (1.216) ⫺0.236 (⫺2.007)* 0.490 (3.188)*** 0.060 (1.012) 0.482 (2.815)*** ⫺0.167 (⫺1.926)* ⫺0.615 (⫺3.351)*** 0.313 (2.019)* ⫺155.8 0.074 331

⫺3.226 (⫺3.962)*** 0.268 (1.935)* 0.133 (0.811) 0.235 (1.542) 0.817 (4.002)*** 0.612 (2.923)*** 0.201 (1.127) 0.096 (1.365) ⫺0.111 (⫺1.084) 0.123 (1.006) 0.502 (2.578)** 0.675 (4.332)*** 0.039 (0.927) 0.317 (1.823)* ⫺0.128 (⫺1.266) ⫺0.249 (⫺1.695) ⫺0.260 (⫺1.871)* ⫺102.5 0.062 299

Log of profit margin growth (1990–95)a Log of employment growth (1990–95) Log (employment size) Dummy if innovated, 1986–91 Dummy if collaborated, 1986–91 Dummy if Chemicals Dummy if Engineering Dummy if Textiles/clothing Dummy if Food/drink Dummy if Services Log (number of domestic competitors in 1991) Log (number of domestic competitors in 1991)2 Log (number of overseas competitors in 1991) Log (number of overseas competitors in 1991)2 Take-over bid, 1986–91 Log (interest payments)b Log-likelihood (Log L) Adjusted R2 Nc

Notes ***, ** and * denote significance of t-statistics at the 99, 95 and 90 per cent level, respectively. a Normalised on turnover growth. b Normalised on turnover growth. c The firms used in this estimation include only those firms which responded to both the 1991 and 1995 survey and also answered the innovation questions in both surveys.

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negative coefficient for the square of this measure.Thus, it is not the case that just because domestic competition has certain effects on the innovative (and other) behaviour of firms, competitive pressure from foreign firms will necessarily have the same effects. Having innovated and collaborated over the period 1987–91 were statistically significantly and positively correlated with innovating in the 1992–95 period, results that we return to in the chapter’s conclusion. Size as measured by employment is also significant, although this is not surprising since a large firm is more likely to have introduced at least one innovation than is a small firm.The size effect is most significant in relation to product innovation. A take-over bid prior to 1991 has a very negative relation to future product innovation but is only marginally significant for process innovation. This may reflect the fact that innovations make firms attractive for take-over bids, and that product innovations (and the prior investments in developing them) tend to be more visible types of innovations than are process innovations. Thus, if the threat of hostile take-over bids were to discourage investment in innovation, it would be likely to discourage product innovation in particular. Debt repayments were statistically significant, although only at the 90 per cent level, and this would be picking up not only the disciplining effect hypothesised by the Jensen and Meckling-type arguments currently in vogue with the move to force ‘free cash flow’ from firms, but also the more mundane factor that firms which innovate are more likely to have had to borrow in order to fund that innovation than are firms which have decided to rest on their laurels. In addition to the above point about overseas competition having a perverse effect at higher levels, overseas competition was also found to be less significant for process than product innovation, which again may reflect the more visible nature of product innovation and the feeling that overseas competition needs to be met in a visible way.The industry dummies indicate that producing in the engineering and chemical industries is positively and significantly correlated with product innovation (column 2) and in the case of engineering, positive and significant for the overall probability of innovating (column 1), whereas producing in the service sector is negatively and significantly correlated with product innovation (column 2) but positively and significantly correlated with process innovation (column 3).

Conclusions and policy implications What might explain these results, of market competition apparently benefiting from cooperation? The issue of whether the competitive environment promotes innovation or price cutting has been examined in detail by Lazonick (1991) who argues that the key determinant of whether or not the firm’s decision makers choose an innovative strategy is the extent to which ‘they control an organisational structure that they believe provides them with the capability of developing productive resources that can overcome the constraints they face’ (Lazonick 1991: 328).

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Such structures include not only the internal organisation of firms themselves and their relationships with the public authorities but also networks of relationships between firms in a particular industry or cluster of industries. Lazonick’s emphasis on the need for control over the requisite organisational structure derives at least in part from his own work as an economic historian on the failure of the British cotton industry to innovate. Referring to a period of stagnation following the end of the post Second World War boom, Lazonick characterises the situation in the following terms: The fundamental problem was an industry mired in its own highly competitive and vertically specialised structure, lacking any internal forces to set organisational transformation in motion. (Lazonick 1986: 35) The vast majority of business people in the cotton industry had neither the incentive to participate nor the ability to lead in the internal restructuring of their industry (ibid.: 45). Given this absence of leadership from within private industry, what was required was the visible hand of co-ordinated control not the invisible hand of the self-regulating market (Elbaum and Lazonick 1986: 10–11). The issue of the relationship between industry structure and the capacity for innovation is a complex one. On the one hand, there is evidence that forms of long-term relationship between independent firms may be superior to vertical integration as a means of co-ordinating the activities required for innovation especially where these activities involve a high degree of technological ‘strangeness’ (Gomes-Casseres 1994: 63).These new forms of alliance are prevalent in high technology industries. There are indications that they contribute most to innovative performance when they involve a dense network of interpersonal relationships and internal infrastructures that enhance learning, unblock information flows and facilitate co-ordination by creating trust and by mitigating perceived differences of interest (Porter 1990: 152–153; Moss Kanter 1994: 97).11 These points regarding information flows and so forth were also brought out by Dore (1983) in his discussion of the ‘obligated relational contracting’ found between Japanese firms.This involves long-term trading relations in which goodwill (with ‘give and take’) is expected to temper the pursuit of self-interest, although this and other labour market practices have since come under strain, especially following the relatively slow economic growth of the 1980s.12 In his 1983 article Dore argued that such relations were more common in Western economies than is generally recognised.While it may be objected that relational contracts lead to price distortions and hence to a loss of allocative efficiency, they do lead to high levels of other kinds of efficiency. Specifically,‘the relative security of such relations encourages investment in supplying firms’, ‘the relationships of trust and mutual dependency make for a more rapid flow of information’, and ‘a by-product of the system is a general emphasis on quality’. This discussion links to a number of

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classic papers (such as Richardson 1972; Mariti and Smiley 1983), with Dore citing Macaulay’s (1962) paper as demonstrating that relational contracting is indeed valued by firms in the US as well as in Japan. In light of such considerations it should perhaps be unsurprising that our analysis of the probability of innovating should have found on the one hand a statistically significant, positive coefficient for competition (consistent with Nickell 1996) while, on the other hand, also finding a statistically significant, positive coefficient for collaboration. It appears, however, that it is not just the degree of competition, which is important but also the nature of the competitive process, and whether this involves collaborative activity, including between competitors. Our results are thus consistent with the tests by Malerba and Orsenigo (1995) of ‘Schumpeter Mark I’ versus ‘Schumpeter Mark II’ (on which, see the discussion above) who find that ‘stability’ emerges as an important feature of the patterns of innovative activity: ‘technological performance is strongly associated with the emergence of a stable group of innovators, who innovate consistently and continuously over time, rather than with concentration or firm size’.This is consistent with our idea that it is the nature of the competitive process rather than just the degree of competition that is important, with co-operative activity also being significantly positively correlated with the likelihood of innovating.13 Thus, the effect of increasing competition is not a simple linear process. One reason for this is that the competitive process involves a significant degree of co-operation between firms and other bodies, including between competitor firms themselves. Our conclusion is that the preferred degree of competition should not be seen in quantitative terms alone but also in qualitative terms, regarding the type of relationships that the firms in question are able to develop and the sorts of pressures (such as the threat of hostile take-over) that the managers of those firms face. Given these apparent benefits of collaboration, why do more firms not enter into such arrangements? In part the answer may lie in the short-termism that prevails in many firms and industries, and a financial system more geared to quick pay-back periods and a high priority to maintaining dividend pay-out levels than to long-term investment commitments.14 Moreover, as illustrated in Table 3.3, a financial system that is geared towards activities, such as hostile take-overs can also contribute to poor firm performance (e.g. firms that faced a take-over bid in 1991 were significantly less likely to have innovated in the 1992–95 period).The attempt to squeeze productivity growth out of UK firms during the 1980s and 1990s via the intensification of competitive pressures allied with the opening up of costcutting competitive avenues may have had two contradictory effects. First, recording what have been interpreted by some as impressive and welcome productivity growth figures (Crafts 1996; Eltis 1996), while at the same time undermining the conditions for long-term, sustainable economic development. We conclude by considering the policy implications of our analysis. The fostering of collaborative structures may be an important element in creating

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a competitive and successful economy – an economy capable of closing the productivity gap with its major competitors.15 This opens up a very different policy agenda than that which was pursued in the UK during the 1980s and 1990s. Instead of ‘freeing up’ of labour and product markets through policies of deregulation and casualisation we need industrial, innovation and macroeconomic policies, which will develop new forms of corporate finance and create effective mechanisms of corporate governance; provide a modern productive infrastructure, which private firms can utilise, in many cases in a co-operative fashion; ensure a macroeconomic regime conducive to the creation of new industrial capacity, including low interest rates and a competitive exchange rate; ensure the expansion of employment opportunities so that investment in education and training will translate into the increased output levels, which in the long run will repay such investments; and promote productive co-operation and industrial innovation. On this last point of promoting innovation, policy should distinguish the different determinants of innovation between types of innovating firm so that the particular policy targets can be more effectively hit.

Acknowledgements We are grateful to Eric Wood for advice, particularly regarding the ESRC Centre for Business Research data on which he worked, and to David Canning, Ciaran Driver, John Spencer and Mary Trainor for helpful comments.

Notes 1 See Bullock et al. (1996), and Cosh et al. (1996) for more detail of the surveys. See also Wood 1998. 2 Firms were classified as innovators or non-innovators on the basis of their answer to the following question: ‘Has your firm introduced any innovations in products (goods or services) or processes during the last three years, which were new to your firm?’ The definition of a product innovation was as follows:‘a new or significantly improved manufactured or service product, which is introduced to the market and requires changes in knowledge or skills, routines, competence, equipment or engineering practices to make the new product. Changes which are purely aesthetic (such as changes in colour or decoration) or which simply involve product differentiation (minor design or presentation changes which leave the product technically unchanged) are NOT to be classified as product innovations’. The definition of process innovation was as follows: ‘a new or significantly improved production, delivery or distribution method and which requires changes in knowledge or skills, routines, competence, equipment, or engineering practices to introduce the new process.’ 3 Firms were classified as collaborators or non-collaborators on the basis of their answer to the following question: ‘Has your firm in the last three years entered into formal or informal collaborative or partnership arrangements with any other organisations?’ 4 There is some evidence of fewer competitors in manufacturing than in services, although there is no clear pattern in the differences between innovators and non-innovators, or

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5 6

7

8 9 10

11

12 13

14 15

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between collaborators and non-collaborators. For a study of innovation in the financial services sector, which includes a useful discussion of the specifics of services, and which focuses on the importance of communication in the innovation process, see Lievens and Moenaert (2000). The label ‘Schumpeter Mark I’ for the theory proposed by Schumpeter (1961) comes from Nelson and Winter (1982) and Kamien and Schwartz (1982), as discussed by Malerba and Orsenigo (1995). This issue of collaboration between firms raises a separate issue beyond the scope of this chapter, namely the question of when collaboration becomes collusion, and how this is (and should be) handled in the context of competition policy. Oughton and Whittam (1996) contains an interesting discussion of the relation between co-operation between firms, on the one hand, and competition policy on the other, combined with an analysis of the benefits to be had from reaping internal and external economies of scale. Co-operative external economies of scale enable SMEs to pool fixed costs, which can result not only in greater efficiency but also, by overcoming entry barriers, thereby increase competition. Thus, public sponsorship of such co-operative industrial activities should not be seen as necessarily at odds with promoting competition. But a failure to appreciate this point could lead to a simple-minded competition policy failing to promote such co-operation – or even outlawing it – thus actually undermining the conditions for healthy competition. On these issues of competition policy, see also Deakin et al. 1997. This discussion also cuts across the distinction that can be made between the different views of the innovation process – and the roles played within this by competition on the one hand, and large firms able to fund R&D on the other – within Schumpeter’s Capitalism, Socialism and Democracy (1947) and The Theory of Economic Development (1961). Note that our data are all for SMEs. There is a mass of evidence to suggest that collaboration between firms of roughly comparable size tends to be of a very different nature from that between large and small firms where the power relations are quite different. See the discussion by Oliver and Blakeborough (1998). For further discussion of the employment, turnover and profit data see Cosh et al. (1996) and Cosh and Hughes (1996). The take-over variable is available only for the 1987–91 period. Since dummy variables can only change in discrete amounts, some argue (e.g. see Long 1997) that these effects should be calculated as the percentage predicted change evaluated at the discrete change in the dummy variable. Since we found little difference between these two sets of calculations, we here report the more usual marginal effect calculations. For further discussion of the role of trust see the March 1997 Special Issue of the Cambridge Journal of Economics on Contracts and Competition, and in particular the Introduction by Deakin and Michie and the papers by Arrighetti, Bachmann and Deakin; Lane; and Burchell and Wilkinson. See also Deakin and Michie (1997) and Deakin et al. (1997). A point taken up by Dore (1998). Our results in Table 3.3 show that the dummy variable for having innovated in 1991 was positively and statistically correlated with the likelihood of innovating in 1995. This is also consistent with the Malerba and Orsenigo finding regarding the importance of a stable group of innovators. An additional problem of a principal–agent nature may occur where the financial sector is dealing with networks or other alliances of firms, the legal definition of which may not be entirely clear. Indeed, when releasing a report in 1997 showing that British firms had reduced spending on innovation in 1996 – at a time when the lifespan of their established products was falling – the UK’s Confederation of British Enterprise warned manufacturers that

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References Bolton (1971) Small Firms: Report of the Committee of Inquiry on Small Firms. HMSO: London. Bullock, A., Duncan, J. and Wood, E. (1996) ‘The Survey Method, Sample Attrition and the SME Panel Database’, in A. Cosh and A. Hughes (eds), The Changing State of British Enterprise. Cambridge: ESRC Centre for Business Research. Cantwell, J. A. (1992) ‘Innovation and Technological Competitiveness’, in P. J. Buckley and M. C. Casson (eds), MNEs in the World Economy: Essays in Honour of John Dunning. Aldershot: Edward Elgar. Caves, R. E. (1985) ‘International Trade and Industrial Organization, Problems Solved and Unsolved’, European Economic Review, 28: 377–95. Caves, R. E. (1998) ‘Industrial Organization and New Findings on the Turnover and Mobility of Firms’, Journal of Economic Literature, XXXVI(4): 1947–82. Cosh, A. and Hughes, A. (1996) The Changing State of British Enterprise. Cambridge: ESRC Centre for Business Research. Cosh A., Duncan, J. and Hughes, A. (1996) ‘Size, Age, Survival and Employment Growth’, in A. Cosh, and A. Hughes (eds), The Changing State of British Enterprise. Cambridge: ESRC Centre for Business Research. Cosh,A., Hughes,A. and Wood, E. (1996) ‘Innovation: Scale, Objectives, and Constraints’, in A. Cosh and A. Hughes (eds), The Changing State of British Enterprise. Cambridge: ESRC Centre for Business Research. Crafts, N. (1996) ‘Deindustrialization and Economic Growth’, Economic Journal, 106(434): 172–83. Deakin, S. and Michie, J. (1997) ‘Contracts and Competition: An Introduction’, Cambridge Journal of Economics, 21(2): 121–5. Deakin, S., Goodwin, T. and Hughes, A. (1997) ‘Cooperation and Trust in Inter-firm Relations: Beyond Competition Policy?’, in S. Deakin and J. Michie (eds), Contracts, Cooperation, and Competition: Studies in Economics, Management, and Law. Oxford: Oxford University Press. Dore, R. (1983) ‘Goodwill and the Spirit of Market Capitalism’, British Journal of Sociology, 34(4): 459–82. Dore, R. (1998) ‘Innovation and Corporate Stuctures: USA and Japan’, chapter 9, in J. Michie and J. Grieve Smith (eds), Globalization, Growth, and Governance: Creating an Innovative Economy. Oxford: Oxford University Press. Elbaum, B. and Lazonick, W. (eds)(1986) The Decline of the British Economy. Oxford: Clarendon Press. Eltis,W. (1996) ‘How Low Profitability and Weak Innovativeness Undermined UK Industrial Growth’, Economic Journal, 106(434): 184–95. Fernie, S. and Metcalf, D. (1995) ‘Participation, Contingent Pay, Representation and Workplace Performance: Evidence from Great Britain’, British Journal of Industrial Relations, 33(3): 379–416. Franks, J. and Mayer, C. (1996) ‘Hostile take-overs and the correction of managerial failure’, Journal of Financial Economics, 40: 163–81.

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Greene,W. (1995) Limdep 7.0: User’s Manual. New York: Econometric Software. Gomes-Casseres, B. (1994) ‘Group Versus Group: How Alliance Networks Compete’ Harvard Business Review, July–August: 62–74. Jensen, M. C. and Meckling,W. H. (1976) ‘The Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’, Journal of Financial Economics, 305–60. Kamien, M. and Schwartz, N. (1982) Market Structure and Innovation. Cambridge: Cambridge University Press. Lazonick,W. (1986) ‘The Cotton Industry’, in Elbaum and Lazonick (eds), The Decline of the British Economy. Oxford: Clarendon Press. Lazonick, W. (1991) Business Organisation and the Myth of the Market Economy. Cambridge: Cambridge University Press. Lee, J. (1996) ‘Technology Imports and R&D Efforts of Korean Manufacturing Firms’, Journal of Development Economics, 50: 197–210. Lievens, A. and Moenaert, R. K. (2000) ‘Project Communication in Financial Service Innovation’, Journal of Management Studies, 35(5): 733–67. Long, J. S. (1997) Regression Models for Categorical and Limited Dependent Variables. California: Sage Publications. Macaulay, S. (1962) ‘Non-Contactual Relations in Business:A Preliminary Study’, paper read at the annual meeting of the American Sociological Association, August. Malerba, F. and Orsenigo, L. (1995) ‘Schumpeterian patterns of innovation’, Cambridge Journal of Economics, 19(1): 47–65. Mariti, P. and Smiley, R. H. (1983) ‘Co-operative Agreements and the Organization of Industry’, Journal of Industrial Economics, 31: 437–51. Marris, R. (1964) The Economic Theory of Managerial Capitalism. Glencoe Ill.: Free Press. Moss Kanter, R. (1994) ‘Collaborative Advantage: The Art of Alliances’, Harvard Business Review, July–August: 96–108 Nelson, R. and Winter, S. (1982) An Evolutionary Theory of Economic Change. Cambridge Mass.: Bellknap Press. Nickell, S. J. (1996) ‘Competition and Corporate Performance’, Journal of Political Economy, 104(4): 724–45. Nickell, S. J. and Nicolitsas, D. (1997) ‘Human Capital, Investment and Innovation:What are the Connections?’, University of Oxford, Centre for Economic Performance Discussion Paper No. 20. Nickell, S. J., Nicolitsas, D. and Dryden, N. (1997) ‘What Makes Firms Perform Well?’, European Economic Review, 41: 783–96. Oliver, N. and Blakeborough, M. (1998) ‘Innovation Networks:The View from the Inside’, chapter 7, in J. Michie and J. Grieve Smith (eds), Globalization, Growth, and Governance: Creating an Innovative Economy Oxford: Oxford University Press. Oughton, C. and Whittam, G. (1996) ‘Competitiveness, EU Industrial Strategy and Subsidiarity’, in P. Devine,Y. Katsoulacos and R. Sugden (eds), Competitiveness, Subsidiarity and Industrial Policy. London: Routledge, 58–103. Porter, M. (1990) The Competitive Advantage of Nations. London: Macmillan. Richardson, G. B. (1972) ‘The Organization of Industry’, Economic Journal, 883–96. SBRC (1992) The State of British Enterprise; Growth, Innovation and Competitive Advantage in Small and Medium-Sized Firms. SBRC, University of Cambridge. Scherer, F. M. and Hugh, K. (1992) ‘R&D Reactions to High-Technology Import Competition’, Review of Economics and Statistics, 2: 202–12. Schumpeter, J.A. (1947) Capitalism, Socialism and Democracy, 2nd edn. London: George Allen and Unwin.

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Schumpeter, J. A. (1961) The Theory of Economic Development trans. R. Opie, Oxford: Oxford University Press. Singh, A. (1975) ‘Take-overs, Economic Natural Selection, and the Theory of the Firm: Evidence from the postwar United Kingdom experience’, The Economic Journal, 85: 497–515. Wood, E. (1998) ‘The Determinants of Innovation in Small and Medium-Sized Enterprises’, chapter 6, in J. Michie and J. Grieve Smith (eds), Globalization, Growth, and Governance: Creating an innovative economy. Oxford: Oxford University Press. Zimmermann, K. F. (1987) ‘Trade and Dynamic efficiency’, Kyklos, 40: 73–87.

4

Best practice manufacture as industrial policy Lean production, competitiveness and monopoly capitalism Dan Coffey

Introduction Current Department of Trade and Industry (DTI) policy thinking on the dissemination of best practice production methods throughout the UK’s manufacturing sectors is heavily weighted by two assumptions.1 The first is that there has been a qualitative shift, quite generally, in the organising principles of manufacture, towards new systems of ‘lean’ production. The second is that this shift has been effectively realised through the medium of inward investment. In this chapter we first appraise the empirical foundations of the ‘lean’ paradigm as expounded in policy circles, in order to gauge the likely efficacy of attempts to raise manufacturing performance by means of measures intended to encourage ‘lean’ thinking.We argue that DTI policy on this point is misdirected, and may actually detract from the formulation and implementation of policies designed to secure ‘competitiveness’ for the UK economy.We then ask whether as a consequence of a policy stance generally slanted towards attracting and retaining foreign direct investment the DTI has proved unduly vulnerable to notions of a transplant-led revolution in production methods, regardless of the evidence. This last point is developed in the context of an assessment of policy responses to the crisis which beset the UK-based automotive industry in 2000, when British manufacture was shaken by successive announcements that major foreign investors would either dispose of, or cease production at, long-established car manufacture and assembly sites.The illustration is chosen because it is an article of faith in the literature that the automotive industry is the leading sector in which ‘lean’ production methods first evolved.

The core tenets of ‘lean’ manufacture assessed It is fundamental to the literature on ‘lean’ production that it is both a qualitatively distinct and a historically recent phenomenon, with its point of origin in the Japanese car manufacture and assembly sector.This literature asserts, amongst other things, that Japanese producers, led by Toyota, were the first volume car assemblers to learn how to effect ‘flexible’ assembly of a mix of model specifications on a single production line, thereby extending customer choice.We start with a brief

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assessment of this claim, because it is not well founded, and it neatly illustrates how assumptions about comparative national contributions to manufacture, even on the most concrete points, can be misdirected by wrongful assertion. We then turn to the core claim with which this section is principally concerned, which is that ‘lean’ methods of factory organisation enable adopting firms to radically reduce the input of labour used to make complex goods, at any level of factory automation. This claim is fundamental to recent pronouncements on the role of ‘best practice’ production methods in policies aimed at developing the competitiveness of UK manufacture. The lean paradigm: ‘flexibility’ versus ‘Fordism’ The notion that Japanese firms in the car manufacture and assembly sector had evolved a new way of doing things grew in popularity in Western academic and business circles throughout the 1980s, as continuing inroads were made on established markets. Notable contributions like Altshuler et al. (1984) and Piore and Sabel (1984) supported the thesis that Japanese manufacturers (led by Toyota) had been instrumental in developing a more ‘flexible’ production apparatus that would give adopting firms a competitive edge in unstable market environments. The chronologies in these and similar contributions suggested that ‘flexible’ manufacture first began to seriously impose itself as an industrial phenomenon in (c.) the mid-1970s.While ‘flexibility’ is a term which can, of course, mean different things to different people, what seemed to particularly excite commentary on Japan was the ability of producers there to offer prospective customers a substantive choice of specifications for cars built on a single production line. Kaplinsky (1988: 456), in a representative commentary, felt able, for example, to draw attention to the ‘bewildering’ range of alternatives offered to customers by firms like Toyota, with ‘more than 10,000 potential variations’ on one model achieved through ‘five body types’ and ‘various options’. This was interpreted as evidence of a general shift towards more customer-oriented production systems. The leading proponents of a ‘lean’ manufacturing paradigm have continued this theme through subsequent contributions. Womack and Jones (1996: 22–23), for example, contrast the achievements of the early Ford Motor Company in realising a high rate of continuous production for a single model specification (the Model T), with the later achievement of Toyota in repeating this feat for many model specifications. As no discussion is attempted of the intervening history of the evolution of Western assembly systems, the inevitable impression left is that flexible assembly of a mix of cars is a recent development of Japanese inspiration. However, the concrete appearance of flexible assembly (in this sense) at Toyota is generally dated to the mid-1960s, when the company first launched a ‘full-line’ of cars comprising a mix of specifications that would be built up on a single assembly line (see Asanuma 1994; Shiomi 1995). In order to justify the claim that by so doing Toyota was breaking new ground by being the first volume producer to mix model specifications on a single line, successive commentators have therefore been obliged to maintain or suggest that factories in the West were at this time – the mid-1960s – still

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committed to ‘Fordist’ regimes in which individual assembly lines were dedicated to mass production of a single specification. This is essentially the tack taken by Womack and Jones (1996); it is also the position implicitly held in each of the other contributions listed above. Their analysis implies that observers of Western car assembly plants, let us say in the 1950s, watching finished units roll off the assembly line, would have noted that each was either exactly alike in every detail, or if differentiated, then only in some very minor degree. The problem here is that this involves making a commitment to a ‘virtual’ or ‘counterfactual’ history, as illustrated by the following comment on the evolution of car manufacture and assembly in North America, from a short history of the sector written before the later upsurge of interest in Japanese attainments in ‘flexibility’: The customer for the 1950s could choose among engines, body styles, colors for both exterior and interior, and even hubcaps. He could designate what he wanted in the way of accessories – radio, heater, air-conditioner, for instance – and the car combining his preferences would roll off the assembly line in company with others representing different assortment of choices. (Rae 1965: 200) It should be conceded that depictions of this kind do not portray ‘Fordist’ mass replication of a single standard specification. In fact, it is a matter of historical record that Western marketing campaigns in the car industry, launched when Toyota was still conducting its first experiments in mixing model specifications on a single production line, were already boasting of ‘flexible’ factories (see Bannock 1973). Much was made at this time of the attendant product permutations, counted for some model ranges built in the factories of Ford or General Motors in millions, or even billions, of feasible product specifications (see, e.g.White 1973: 189). Since an interesting recent study of the shaky historical foundations of the ‘lean’ production paradigm draws attention to other ‘ample’ evidence on this point (Lyddon 1996), there is no need here to develop this theme at greater length.The key point is this: in the sphere of ‘flexible’ assembly Japanese firms like Toyota were laggards, not leaders. On this historical point the conventional wisdom of the ‘lean’ paradigm is entirely misleading.2 Lean productivity: organisation versus investment There is, however, more to the account contributors like Womack and Jones (1996) give of ‘lean’ manufacture than the suggestion that Toyota effectively invented mixed-model assembly. In particular, they build on earlier work, which claims that Japan’s Toyota-led car manufacturers in fact evolved a more ‘productive’ as well as a more ‘flexible’ way of doing things.3 This work is reported in Womack et al. (1990), a hugely influential book that presented the findings of a major global survey of the hours of assembly plant labour then used to build cars in factories around the world: this gave support to the notion that a distinctively ‘lean’ production system had evolved in Japan that could achieve dramatic gains in labour productivity for any

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level of investment in factory automation. Reasonable comparisons have been drawn between public reception of this work and that of the earlier, and similarly famous, Hawthorne studies, but with a due emphasis on the much more rapid popularisation of notions of ‘lean’ production (see Lyddon 1996: 77). The survey in question enjoyed unprecedented sponsorship and funded assistance from the world’s car manufacturing companies, with reported findings based on information obtained from a total of more than ninety assembly plants spread across the globe, or ‘about half the assembly capacity of the entire world’ (Womack et al. 1990: 76). The central contention of the survey’s authors, maintained consistently since, is that it proved that Japanese organisational advantages in production, reflecting ‘lean’ principles, were generating significant reductions in labour input over and above any savings accruing to (typically) high levels of factory automation.What we now wish to suggest is that this notion is no better founded in evidence than the claim that Japanese manufacturers inspired flexible assembly.To make this point clear, we first consider the formal construction of this assembly plant survey, and its main variables. The general principles informing the construction of the index of labour input to assembly employed in the study reported in Womack et al. (1990) can be explained essentially as follows: H ⫽ (LaW/Q)(1 ⫹ Li/Ld )

(1)

We use our own notation, but without altering formal structure. H is a measure of the number of hours of assembly plant labour used to build a car. La is a headcount of the number of plant operatives directly employed to perform a specified list of assembly activities, constituting a subset of all plant assembly activities. By restricting the headcount in this way, an attempt was made to control for vertical integration by netting out of the calculation all sub-assembly work that might distort comparisons. W is the average hours an assembly worker actually spends working in a shift, Q a corresponding estimate of the total number of finished cars built in this time. Li/Ld is the ratio of all ‘indirect’ plant workers (Li) to all ‘direct’ plant workers (Ld, where Ld ⬎ La) on the payroll: ‘indirect’ workers are employed to support or supervise ‘direct’ assembly work, as, for example, in materials handling or inspection activities.The index of labour input to assembly was therefore essentially a measure of the hours of labour used directly to perform a specified list of assembly activities, with a pro-rata allowance based on overall plant employment ratios for ‘indirect’ support workers.The measure shown in (1), however, was then transformed by the architects of the study via the use of weights that attempted to control for differences in product specifications in different plants. Full details, with justification, can be found in Krafcik (1988).While this raises a number of technical complications (and has generated criticism: see Williams et al. 1994), we need not pursue these here since they do not affect our own assessment of the data. To make it clear that (1) is not the final form of the index employed in the study ˆ to denote the transformed reported in Womack et al. (1990) we will simply use H value of H, that is, the estimated hours of labour used to build a car after an attempted weighting for product characteristics.4

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The principal measure of plant automation used can be written as follows: A ⫽ ∑␻jTj ␻j ⬎ 0 for all j ∑␻j ⫽ 1

(2)

Again, we use our own notation, without altering formal structure. A denotes the overall value of a (so-called) ‘total automation index’ for an assembly plant. The index is constructed from a series of individual measures of automation for different stages of the production process (represented here by Tj for each stage j ). A description of each of these measures and stages can be found in Krafcik (1989):5 for example, for installation of trim and final assembly forty-four separate steps are listed, and a value of 1 assigned to each step when automated (0 otherwise), with the results summed. A weighted average is taken of each of these individual measures of automation, using common weights based on the proportionate employment of labour in each stage when compared to total employment in the overall process in a ‘representative’ plant. Given these weights (here ␻j for each stage j ) A increases with the level of automation. Given these measures, data was then collected that would allow each to be calculated for individual assembly plants. The estimates of ‘productivity’ and ‘automation’ resulting from this exercise are recorded in Womack et al. (1990: 95), in the form of a scatter of labour hours used per vehicle built against plant automation, for each of the factories participating in the global survey. Each point in the scatter is in turn clearly labelled by region of location: Australia, Europe, Japan, the Newly Industrialising Countries (or NICs) and North America. Some of these points represent transplants to the region in question. Japanese transplants to North America are distinguished from American-owned plants in North America. For reasons not explained, however, no matching attempt is made to distinguish Japanese or North American transplants in Europe, from ‘European’ plants in Europe. According to the interpretation placed on this scatter by Womack et al. (1990) (see also Krafcik 1989), the world survey successfully established two points: (a) differences in automation, while not irrelevant, were of only secondary importance in accounting for differences in the number of worker hours used to build cars, and (b) Japanese plants were clearly more ‘efficient’, as a national group, than any other group of plants surveyed, after allowing for their typically high levels of automation. These conclusions, in a nutshell, constitute the empirical foundations of ‘lean’ production: Japanese plants, it has since been maintained, were proved in this survey to be organisationally superior. This interpretation has carried the day: the search for best practice management principles is now dominated by methods associated with Japanese manufacturing systems. Let us consider the reasoning employed more closely. The potential role of automation as the principal determinant of labour productivity is rejected by Womack et al. (1990) on the following grounds. They argue that while a simple ˆ on A for the entire survey sample finds a statistically significant relaregression of H tionship, visual inspection of the data shows considerable differences between the most and least ‘efficient’ plants at each and every level of automation (see Womack et al. 1990: 94).This in turn is cited as justification for a procedure of ranking world

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ˆ for individual factories in each ‘efficiencies’ by the (weighted) average values of H region. Upon doing so, they note that the resulting world-ranking places Japan in pole position, with a very low score for average worker-hours used in assembly, and from this it is inferred that this is because of a relatively high concentration of ‘lean’ factories (ibid.: 85).The overall rank order of regions is interpreted as indicating the effective spread of ‘lean’ principles, and similarly for intra-regional variations in labour input (ibid.: 87–88): individual plants in each region, which register a low score on the worker hours used in assembly are described as having successfully absorbed ‘lean’ production methods. However, the thesis maintained throughout the book itself is that ‘lean’ principles and methods are the organisational products of Japanese (and, in particular, of Toyota) manufacture. The question therefore is whether this thesis is consistent with the data. The problem for the ‘lean’ paradigm is that the interpretation of the data which lends support to this thesis is not robust. It is easily established, from the scatter of observations published in Womack et al. (1990: 95), that the plants tending to use most labour hours to build cars at each level of automation were located in Europe.This, however, implies only a differential outcome for Europe-based plants: it does not imply a concentration of superior organisational methods in Japanese plants, per se. If we take due note of the differential performance in Europe compared to the rest of the world, by treating the latter separately, it becomes harder, on the basis of this scatter of observations, to dismiss the role of automation as a principal determinant of labour productivity. Moreover, evidence of a ‘superior’ overall Japanese performance, against plants outside Europe, is almost negligible. ˆ on A for plants in Australia, Japan, the An illustrative simple regression of H 6 NICs and North America, but excluding plants in Europe, and using similar data yields a statistically significant relationship between ‘productivity’ and ‘automation’, with an estimated coefficient of ⫺0.63 and an R2-statistic of approximately 0.73. The last statistic gives automation a considerably ‘higher’ explanatory value than suggested by the perfunctory treatment accorded this variable in Womack et al. (1990): differences in plant automation on this basis accounted for almost three quarters of the differences recorded in labour input to production for factories outside of Europe.This still leaves the question of relative organisational performance, for given levels of investment in automation. One unsophisticated, but defensible, technique for gauging differences in organisational ‘efficiency’ for plants differing in levels of automation would be to compare the sign and size of the residuals computed from this exercise in simple regression.An observation on the regression line (with a residual exactly equal to zero) would imply that the corresponding assembly plant is using just the expected hours of labour to build a car, given its measured level of automation; an observation lying above the line (positive residual) would indicate a state of relative inefficiency because more than the expected hours are being used, and conversely for an observation lying below the line (negative residual).7 If this method were used to compare the ‘performance’ of Japanese plants outside of Europe with competitors outside of Europe, then on the basis of this simple regression exercise it would be hard to find much evidence of Japanese organisational superiority: for example, the data would seem to show

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that there were both ‘efficient’ and ‘inefficient’ performers amongst NIC plants8 (with ˆ ) and Japanese plants outside of Europe, the highest weighted average value for H but no clear balance that would unambiguously favour the latter over the former. Accordingly, and by analogy, the data reported in Womack et al. (1990) should not have been interpreted as if it provided compelling evidence that Japanese manufacture was organisationally exceptional, although more could have been made of the quantitative importance of investment in automation in accounting for reduced labour input in Japanese factories compared to other plants outside Europe.9 So far as the policy inferences drawn from this survey are concerned, this criticism is compounded further by the composition of the Europe-based plants. The survey reported in Womack et al. (1990: 85) appears to include data on 22 separate plants located in Europe, including transplants; of these, 13 were ‘European’, and 9 North American- or Japanese-owned factories. In the scatter of observations, however, described and discussed above, only 18 (unlabelled) plants are shown for Europe.10 As a matter of arithmetic, therefore, between 5 and 9 of the 18 ‘poorly’ performing plants located in Europe must have been North American and/or Japanese transplants.This in turn implies that ‘transplantation’ of production methods, as a means of raising regional or national performance levels, must on this basis be treated as a suspect policy. The panoply of methods associated with Japanese manufacture – team work, just-in-time, quality circles – were not demonstrated by this survey to have generated gains in labour productivity that could begin to match those achieved through automation, when comparisons are drawn with factories in Australia, the NICs and North America. On this basis, there is no clear reason to favour Japanese inward investment to the UK as a means of improving organisational efficiency, over investment from other regions. The composition of the Europe-based factories, however, takes this criticism one step further: the already dense presence of transplants into Europe for this survey sample vitiates any casual assertion that inward investment is associated sui generis with improved manufacturing ‘performance’. If the survey is accepted as rigorous, and if other possible factors influencing regional performance are abstracted from, it is difficult to see how, on the basis of their own data,Womack et al. (1990: 257) could justify their suggestion that ‘improvement’ for regional laggards requires exposure to ‘transplants’ run by firms established in more ‘productive’ regions.While the data presented might still suggest that ‘Europe’ at this time was something of a special case, attempts to defend UK policy on inward investment on the grounds that it will introduce and help disseminate ‘lean’ manufacturing methods are misdirected.

Lean production, competitiveness and monopoly capitalism In and of itself this might seem harmless enough, but there are grounds for supposing that this misdirection has had palpable consequences for UK industrial policy evolution. Following the appearance of Womack et al. (1990), and attendant publicity, policy discussion in the UK, particularly at the DTI, was quick to posit the introduction of ‘lean’ principles and methods as a vehicle for improved

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industrial performance, and a benefit of inward investment (see Bradley et al. 2000: 32). Such assumptions dovetailed neatly with the growing popularity of ‘benchmarking’ and consultancy exercises, nominally designed to measure the extent to which individual organisations are keeping pace with competitors in adopting approved systems and methods, while encouraging ‘competitiveness’ through emulation.11 Exercises of this type have since been promoted by the DTI as an important element in strategy for industrial development, alongside other initiatives intended to directly disseminate ‘lean’ practices.12 Similar enthusiasms exists across the EU (see Keegan 1998), but the particular emphasis on inward investment as an essential catalyst for, and complement to, the spread of ‘lean’ production is a marked feature of DTI thinking. To the charge that the main planks of evidence normally cited to illustrate and support the notion of a ‘lean’ revolution in productivity and flexibility are less than compelling, we ask whether adherence to this notion might not actually undermine ‘competitiveness’. Lean production and competitiveness in UK manufacture The problem of long-term underinvestment in manufacture has been identified as a major weakness of the UK economy by a succession of commentators.The problem, while complex, is manifest in two fundamental ways: (a) British employees in manufacture operate with relatively low levels of capital input per worker hour, when compared internationally with major industrial competitors, and (b) growth in overall manufacturing output has not kept pace with productivity growth. In international comparisons of labour productivity workers in UK manufacture are disadvantaged by the relatively low capital intensity of operations (Kitson and Michie 1996: 201), while at the same time employment opportunities are limited by the fact that such productivity growth as has occurred in recent decades has been principally manifested in a loss of manufacturing jobs rather than an overall growth in output: ‘manufacturing output has not experienced rapidly rising output as a result of productivity growth, but on the contrary, a stagnant trend in output, with the productivity growth hence translating not into output growth but instead job losses’ (ibid.: 197). Such investment as has occurred has tended to focus too narrowly on cost-cutting measures that involve simply downsizing firm workforces by reducing employment, to the neglect of innovations in processes and products that expand capacity and sales. The combination of low labour productivity and limited manufacturing capacity, brought about as a cumulative consequence of low past investment rates, has in turn been linked to a diminished skills base, a low provision of training and a relative degradation of the terms of conditions of employment for British workers in manufacture. Critics have also argued (reasonably) that low rates of past manufacturing investment have visited additional problems on the UK national economy, in the form of inflationary pressures or balance of payments problems occasioned by the constraining effects of a limited domestic capacity upon a rising demand for manufactured products.13 The terms of analysis of the doctrine of ‘lean’ production are hardly conducive to a systematic policy discussion of these issues. It claims that national

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differences in labour productivity are best explained principally by reference to organisational advantages achieved through improved management techniques, rather than by differences in investment in automation or capital inputs. Worse, there is a persistent and exclusive emphasis on measures which raise simple labour productivity, in abstraction from the effects on overall sales volume or production capacity. For example, the index of plant automation utilised in Womack et al. (1990) (see (2) above) treats automation solely from the viewpoint of its efficacy in displacing labour from the points in the production process to which it is directly applied: this follows from the use of fixed weights to measure the expected labour reduction. Hence the core productivity study underpinning the ‘lean’ paradigm not only takes the individual plant as its unit of analysis, but broaches investment solely from the viewpoint of the role of automation in directly removing workers from a production process.The fairly direct message of the paradigm is, in this sense, that ‘lean’ organisation will do it better. But unless embedded within industrial investment programmes that add to global capacity, the results of a reorganisation of production that simply reduces the workforce might be consistent with the sort of aggregate weaknesses identified by Kitson and Michie, namely limited employment opportunities, and a stagnant sectoral output. As an education tool for DTI officials, factory managers or company executives, ‘lean’ thinking, even if it were well-founded empirically, might still be criticised on the grounds that it encourages ‘low road’ thinking, whereby performance is measured against success in downsizing individual plant employment.14 This inherent bias, if combined with unrealistic expectations about the transforming potential of ‘lean’ techniques, may serve to distract from effective and innovatory industrial policy.15 Lean production and monopoly capitalism in the UK Another main concern is that notions of ‘lean’ manufacture are disguising an unwillingness on the part of the British state to confront and tackle the potential problems posed for the national economy, and its local branches and communities, by the transnational corporations (TNCs), which now dominate the manufacturing base. As observed in the introduction, the year 2000 was a particularly difficult one for the UK-based car industry, with successive announcements in March, May and December that BMW would dispose of Rover Group, and Ford and GM would end car assembly at Dagenham and Luton. In response to the rising sense of industrial crisis, the House of Commons Trade and Industry Committee took evidence from a range of interested and affected parties, and published its findings in a Report intended to inform Parliamentary debate (see HC 2000–01).The evidence submitted to this investigation by the DTI amply illustrates our key points. While it makes some generally valid points about the constituent parts of a competitive automotive industry,16 that might apply equally to other manufacturing sectors, the memorandum submitted to the Committee by the DTI (see ibid.: 94–100) is most noteworthy for its sanguine view of the ‘crisis’, and its simple iteration of the view that the UK remains fundamentally attractive to foreign investors. In particular, it explicitly cites the effective introduction of ‘lean’ manufacturing

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principles to the UK as evidence of past benefits from, and a guarantee of future, inward investment. At the same time, this DTI memorandum is marked by a conflict of claims and perceptions regarding the state of international competitiveness of UK manufacture. On the one hand, there is the noted emphasis on the gains achieved by the introduction of ‘lean’ manufacturing techniques to the UK via the medium of transplantation: The advent of Japanese vehicle manufacturing transplants in the UK, starting with the arrival of Nissan in 1986, had an important impact on the UK component sector and has provided the opportunity for a whole generation of UK managers to understand the principles and practices of lean manufacture. A number of UK component companies are now acknowledged best practitioners in lean techniques and continuous improvement… . Indeed the UK is recognised, after the US, as the leading practitioner of lean manufacturing in automotive [production]. (HC 2000–01: 95) On the other hand, existing deficiencies and weaknesses are also noted: Despite the improvements in productivity made in recent years by vehicle manufacturers and by many component suppliers, the UK’s overall productivity (measured by Gross Value Added per person) is lower than that of our main competitors in the EU. This is a situation similar to that in some other sectors of manufacturing. The reasons are complex but include issues such as the macroeconomic instability of the past, which discouraged long-term planning and investment (including in training); the relative value of the products manufactured; capital intensity; and labour productivity. (Ibid.: 96) According to the DTI memorandum, therefore, the UK-based automotive industry somehow contrives both to have the ‘leanest’ producers and the ‘least’ productive, at least when judged against the economy’s main EU competitors. It is worth stressing here, that this passage refers to low relative overall productivity in the UK automotive industry, compared to ‘main’ EU competitors, a situation, which remains ‘similar’ to that experienced in some ‘other’ sectors of manufacture: despite its status as a ‘benchmark’ sector, the UK automotive sector is not ‘competitively’ privileged. It might be noted that while each of the latter deficiencies identified in this document – low product value (quality), low capital intensity, low labour productivity – could be attributed to the fundamental problem of a lack of long-term investment and innovation, this admission is hardly consistent with the spirit of the DTI’s boast (as above) that the UK is the ‘leading practitioner’ of ‘lean’ manufacture in Europe. In fact the qualifying passage on the actual state of competitiveness of UK manufacture might be taken as evidence of the practical rebuttal of ‘lean’ manufacture

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as a policy panacea. But while this is consistent with the argument of preceding sections, it does raise questions as to the institutional utility of the claim that UK manufacture has been transformed. One possible, and obvious, answer, is that the utility of the ‘lean’ paradigm lies precisely in the justification it affords the existing UK policy towards inward investment.This has tended to emphasise the deregulation of labour markets, the relative cheapness of labour, and a placid industrial relations environment. The point is made in another memorandum to the Trade and Industry Committee investigation of the crisis of 2000, produced this time by the Society of Motor Manufacturers and Traders, which emphasises the attractiveness to foreign investors of UK policy commitment to a ‘pro-business’, ‘low taxation’, ‘low inflation’, ‘low labour cost’ economy and ‘an accommodating industrial relations environment’ (ibid.: 79). Such forms of utilitarian myth-making may, however, not only distract from the formulation of policies needed to tackle identified weaknesses in areas of investment, innovation and capacity, but also encourage an unduly passive attitude towards large powerful corporations even when they act in ways that conflict with wider social interests. There are signs that even the Trade and Industry Committee hesitated when tasked with an investigation of the motives informing the decisions of large powerful transnational firms, with the power to deny future investment and jobs. Consider Ford Motor Company. On 12 May 2000, it announced that the car assembly plant at its historic UK site at Dagenham17 would close, thereby bringing to an end approximately seven decades of manufacture of Ford-badged cars in Britain.The announced closure decision overturned earlier and explicit assurances given to trade unions representing workers at the site, the last given as late as March 1999. In their summary of Ford’s possible motives for closure the Committee’s final Report accepts, more or less at face value, the company’s claim that business conditions had deteriorated so sharply in the interim that there was no choice but to abandon earlier commitments. This is by no means instantly plausible: assuming a time lag between the reformulation of a major strategic decision and its public announcement, the time elapsing between the last assurance to the unions and the change in company strategy would presumably have had to be counted in mere months, if not weeks. What is more remarkable, however, is that other possible motives are practically ignored.The period leading to closure was marked, for example, by a high profile, and widely publicised, union-led campaign against racism at the Dagenham factory sites.18 Less than two months prior to the closure announcement, Ford executives, meeting with the then education and employment minister (Margaret Hodge, MP) expressed their view – duly reported in the media – that its Dagenham workers were ‘too aggressive’,‘failed to support the company’ and were represented by unions that ‘resisted change’.19 In oral evidence given before the Trade and Industry Committee it was revealed that managers at the Dagenham site had complained of problems with the state of ‘co-operation’, ‘culture change’ and ‘competitive performance’ at the plant, while the unions’ representative had charged the company with closing the plant as a consequence of a running dispute over new working practices at the site. In its final Report, however, the Committee relegates

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these considerations to the briefest possible mention, merely noting in passing the ‘unfavourable publicity’ occasioned by ‘allegations of racism’, and a ‘troubled’ industrial relations history (see HC 2000–01: xii). In fact there is only one oblique intimation of Ford’s decision to go back on earlier public and private assurances on the future of the Dagenham site; elsewhere, the Report suggests that the closure ‘was not a surprise’, but merely the ‘principal outcome’ of the ‘long awaited results’ of a Europe-wide restructuring review (see, respectively, ibid.: xii, ix; see also 5, 45–46). It is difficult, in this context, not to suspect some possible unwillingness on the part of the Committee to pursue controversy. In this respect the nuances of the Report pose sharply the dilemma facing state policy towards a manufacturing sector dominated by TNCs in a context of a longrunning policy bias towards encouraging inward investment. There is an explicit acknowledgement of the potential vulnerability of UK-based car manufacture to decisions taken by the TNCs operating within the nation’s borders. The car industry has a standard cycle of introduction of a new model; a production life of 6 or 7 years; and its replacement by a new model or relaunched version of the old one. Planning begins for the replacement of a model around halfway through its life, even at the height of its commercial success.A year or so later, the process gets under way of taking decisions as to where to assemble its successor and where to source key sub-assemblies and major components. The number of vehicle manufacturers in the UK and the number of models being made means that every year the future of one or two UK-manufactured models, and by extension that of the manufacturing plants where they are assembled, is called into question. (HC 2000–01: xxvi; emphasis in original) At the same time, this observation is accompanied by the proposal that the key issue is a technological one, pertaining to plant-vintage, rather than a contingent one: The implications are grave for older plants, those with geographical constraints or limitations, and those whose internal configuration cannot readily be adapted to the need for flexible plants able to produce several models and switch quickly from one model to another. No matter how flexible and skilled a workforce, the inherited characteristics of a plant prove fatal to its long-term future. (Ibid.: xxx; emphasis added) This surprising conclusion is arrived at, in part, on the basis of the reasonable observation that Dagenham produced only one model range at the time closure was announced, and so was a great deal more vulnerable than it would have been had it built several distinct model ranges. From this, however, the Committee draws an inference, which is hard to sustain, namely that UK factories building only one model range rather than several may be in this situation principally for technological reasons, namely inherited problems of plant inflexibility. Hence in the case of Ford the Report suggests that the company may have withdrawn from car assembly in

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the UK because the Dagenham facility was a ‘relatively old’ and ‘inflexible plant’, ‘physically constrained’, and in an ‘awkward site’ (see ibid.: xii). Again it is possible to see signs of a Trade and Industry Committee side-stepping an unpalatable reality. No evidence is adduced to support their judgement on the ‘inflexibility’ of the Dagenham site: it is a judgement which is in fact contradicted by the testimony of Ford’s own executives appearing before the Committee, who when prompted on this point signally failed to concede its relevance to the closure decision (see ibid.: 6–7). A more likely explanation of Dagenham’s vulnerability is that as one of the more ‘militant’ sites, with a ‘troubled industrial relations history’, it was deliberately restricted to production of a single model-series, and placed at the ‘tail-end’ of the European bargaining cycle, so that the company retained a credible threat of closure in negotiations: the Committee might reasonably have investigated this possibility. But instead the Report concludes that plant characteristics, rather than the strategic decisions of firms, should be singled out as the main factor determining the future vulnerability of UK sites (ibid.: xxx). While perhaps the result of an idiosynchratic reading of the evidence presented before it, and a reflection of the limitations of a compromise Report arrived at by Committee, this comment singularly fails to consider that the ‘regular cycle’ of location decisions on production may be a corollary to the past strategic decisions of firms in splitting manufacturing operations across separate sites, and reflect continuing strategic ambitions in which firms prefer to bargain with workers in one plant at a time. Again, it is difficult not to suspect some unwillingness on the part of the Committee to court controversy by recognising the possible conflict between social and private interests.20 An alternative prognosis It need hardly be observed that the fear expressed by the Committee, that the UK is filled with ageing and inflexible sites, sits poorly with the assurances of the DTI that the British auto-industry is ‘lean’. In the course of its deliberations, the Report does successfully highlight a number of issues of pressing concern: for example, the lack of transparency and consultation in corporate decision-making, the weakness of UK labour protection laws, the global context of UK manufacture and the vulnerability of jobs to factories (re-)located closer to Eastern Europe (see HC 2000–01: ix–xlv). If a pro-active policy is to be developed, employment standards and employee participation must be placed at the front of reforms. So too must minimum requirements for corporate disclosure of information to, and consultation with, government. Since changing the terms of exit for the TNCs which dominate UK manufacture will also influence decisions on entry, supranational bodies may be needed to control corporate activity and to channel conflicts of interest: EU rules may require reform. Policy development in these areas is consistent with calls by the Committee that some consideration be given to making company agreements with unions legally binding, and for decisions like that taken by Ford, BMW and General Motors to be fed into a review of company law and a re-assessment of the ‘duties’ of company directors to stakeholders, including

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employees and customers (see ibid.: xxxi–xxxiv). To make headway, however, it would be helpful to quietly drop the ‘lean’ revolution, and to consider whether there is an over-reliance on inward investment in the UK in policies intended to encourage the development of industrial capacity and innovation.

Conclusions A great deal of credence and weight is today given in UK policy circles to the achievement of competitive advantage in manufacture through dissemination and promotion of best practice production methods. The preceding discussion raises serious questions about the likely efficacy of this policy in its present form.There are grounds for concern at the level of UK competitiveness policy: the pursuit of ‘best’ production practices (in the form of ‘lean’ manufacture) with no proven value at the level of overall performance may actively undermine strategies for competitiveness by diverting attention from endemic problems of underinvestment in manufacture and inadequate manufacturing capacity. At the same time, a preoccupation with superior production methods nominally identified with ‘transplanted’ principles and methods is likely to encourage (and justify) an industrial policy tack that is overly skewed towards maintaining the attractiveness of the UK to unchallenged TNCs.The willingness of UK policy makers to ‘buy in’ to notions of a ‘lean’ revolution distracts both from rigorous analysis of the current weaknesses and susceptibilities of manufacture, and the need to properly confront the decisions of large, and potentially ‘footloose’, TNCs when these come into open conflict with the interests of workers and communities.The policy recommendation which follows is for a thorough review of current DTI formulations on ‘best’ practice manufacture as this relates to UK industrial competitiveness.

Notes 1 This chapter draws in part on Economic and Social Research Council (ESRC)-funded research (award number H52427006494). Carole Thornley made a number of helpful suggestions on the text, which are gratefully acknowledged. 2 It is interesting to note that commentaries on the geography of international production have for some time suggested that the complex logistics of international supply chains are only consistent with ‘Fordist’ production regimes, so that ‘flexible’ assembly may curtail the globalising tendencies of transnational producers: see Kaplinsky (1988: 456), and Dicken (1998: 165–172).This prognosis should be rejected: in the exemplary case of car manufacture and assembly, transnational production and supply chains evolved at the same time as, not in opposition to, ‘flexible’ assembly systems. 3 Womack and Jones argue that improved ‘flexibility’ and ‘productivity’ are each intimately connected with breakthroughs in production developed at Toyota. For example, they cite the famous Toyota ‘kanban’ principle, purportedly a novel method of co-ordinating discrete activities at different stages of a multi-stage manufacturing process (see Ohno 1988; also Womack et al. 1990: 62), as evidence that the Japanese company successfully evolved a new manufacturing paradigm. While not explored in this chapter, a formalisation of this co-ordination model (see Coffey 2001) shows that the expansive claims made on its behalf cannot be substantiated, and are again misleading.

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4 A number of criticisms, not explored in the secondary literature, could in fact be levied at this index. The control for vertical integration is undermined, for example, by the inclusion of an allowance for ‘indirect’ plant employment: materials handling and transport can be subcontracted, or company workers so engaged may not be listed as employees of the assembly plant. It is not inconceivable that this might generate some systemic biases in regional comparisons. It can also be noted that the ‘total automation index’, described by equation (2), only looks at ‘direct’ process automation and fails to consider the possibility that automation in materials handling or inspection might proceed independently: again, the inclusion of an allowance for ‘indirect’ plant employment creates some potential difficulties. What is also surprising is that ‘indirects’ are treated as a ‘passive’ pro-rata support group for ‘direct’ assembly work. A constant theme in discussions of Japanese manufacturing methods is that they focus precisely on ‘indirect’ – or ‘non-value adding’ – work: the construction of the index is out of kilter with the animus of the literature. One reason why points of this type have not been effectively rehearsed in critical commentary on Womack et al. (1990) is that the construction of the labour input and automation indices is not actually described within. Moreover, the descriptions contained in the key documents – Krafcik (1988) and Krafcik (1989) – are needlessly complex. 5 Four stages are described: welding, sealing, surface coating and trim-installation/ final-assembly. 6 Excluding a match for one clear ‘outlier’. 7 See Barrow and Wagstaff (1995) for a discussion. 8 Subject to exclusion of one clear ‘outlier’. 9 One corollary to this point is that there is no clear evidence, on the basis of this data, that Japanese organisational regimes ‘sweat’ the workforce to an exceptional extent by the standards of other parts of the world.This point, however, is not pursued in detail in this chapter. 10 Along with 6 Australian plants, 11 Japanese-owned plants located outside of Europe, 11 plants located in the NICs (including one clear ‘outlier’) and 14 (North) Americanowned and based plants. 11 A major commercial benchmarking and consultancy service for the UK was launched by the Confederation of British Industry (CBI) in 1995, based on the IBM ‘Business Excellence Model’ (a model heavily informed by many of the assumptions evident in the ‘lean’ production paradigm): this is an intendedly ‘generic’ service, applicable to any branch of manufacture. In the closing years of the 1990s, benchmarking packages were also launched by (amongst others) the West London Training and Enterprise Council (TEC) and by the Cranfield School of Management.Trade services also offered or facilitated bought out consultations: for instance, in the case of the UK automotive industry, the Society of Motor Manufacturers and Traders (SMMT) provided an access point for its membership to commercial benchmarking services. In 1996, the DTI launched the UK Benchmarking Index (UKBI), accessed via Business Links, and intended for small and medium enterprises (SMEs), with a national and multi-sector database (not specific to manufacturing) and focused on a very broad and very generally defined set of ‘business’ parameters, as opposed to specific production methods. 12 In the particular case of the automotive industry the DTI has given financial backing to industry-led training and improvement activities in production and supply chain management, organised through the SMMT–Industry Forum, which undertakes activities that include training of direct recruits and of company secondees (see HC 2000–01: 98–99). 13 The point is developed analytically in Sawyer (2002), in a criticism of analyses of the limits to employment in the UK economy which start from the assumption of clearing labour markets while neglecting the fundamental importance of rates of investment, capacity and aggregate demand. 14 See Chapter 2.

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15 To this should be added the observation that many enthusiasts for Japanese operational methods in manufacture are unenthusiastic about state industrial policy. For example, Porter et al. (2000) endorse ‘lean’ manufacture as a set of consistent and transferable practices, but reject the efficacy of the sort of interventionist industrial policies associated with Japan’s ‘developmental’ state. 16 In particular, the document highlights the importance of a healthy independent Design Engineering sector, and of university-led or based Centres of Excellence, as integral to manufacturing success, while due weight is also given to the role of institutions like the Royal College of Art in promoting education in aesthetics and industrial design: these are eminently reasonable points. 17 Purpose built by Ford in the late 1920s, and once the largest car factory in Europe. 18 On 5 October 1999, for example, an estimated 1,300 workers staged a strike, backed ‘covertly’ by their unions, in ‘protest at alleged systematic racism’ (see Guardian, 6 October 1999: 8).The strike was based in the car-assembly plant, with almost half of the workforce (45 per cent) estimated to be ‘non-white’: two weeks earlier, at a tribunal, and with considerable attendant publicity, Ford ‘admitted racial discrimination, harassment and victimisation’ (see HC 2000–01) of an ethnic minority male, employed in the engine plant. No questions were raised on these points in evidence before the Committee. 19 See Guardian, 29 March 2000, p. 26. 20 The potential conflict between social and private interest when considering state policy towards TNCs is explored in some depth in Cowling (1982), and Cowling and Sugden (1987). Criticism of the ‘lean’ paradigm is obviously related to criticism of the TNC, inasmuch as the conventional wisdom on lean production in the UK (as per the DTI) helps justify an ‘open door’ policy.This is not to deny that there may be distinctive features to Japanese organisational forms, and that these should not be taken seriously in analyses of firms and industries (see Cowling and Sugden 1998), although the underlying conceptual structures and empirical claims of different studies are frequently quite disparate: but inasmuch as ‘lean’ manufacture is concerned, the evidence is not compelling.

References Altshuler, A., Anderson, M., Jones, D., Roos, D. and Womack, J. (1984) The Future of the Automobile. Cambridge: MIT Press. Asanuma, B. (1994) ‘Co-ordination between Production and Distribution in a Globalizing Network of Firms: Assessing Flexibility Achieved in the Japanese Automobile Industry’, in A. Aoki and R. Dore (eds), The Japanese Firm: Sources of Competitive Strength. Oxford: Oxford University Press. Bannock (1973) The Juggernauts:The Age of the Big Corporation. Harmondsworth, Middlesex, England: Penguin Books Ltd. Barrow, M. and Wagstaff, A. (1995) ‘Efficiency Measurement in the Public Sector: An Appraisal’, Fiscal Studies, 10(1): 72–96. Bradley, H., Erikson, M., Stephenson, C. and Williams, S. (2000) Myths at Work. Cambridge: Polity. Coffey, D. (2001) ‘Fordism, Flexibility, and Toyota: Paradigm Failure in the Theory of Lean Enterprise and J-Form Production’, Unpublished Conference Paper presented to EUNIP Annual Conference, November 2001. Cowling, K. (1982) Monopoly Capitalism. London and Basingstoke: The Macmillan Press Ltd. Cowling, K. and Sugden, R. (1987) Transnational Monopoly Capitalism. Brighton:Wheatsheaf Books Ltd.

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Cowling, K. and Sugden, R. (1998) ‘The Essence of the Modern Corporation: Markets, Strategic Decision Making, and the Theory of the Firm’, The Manchester School, 66(1): 59–86. Dicken, P. (1998) Global Shift: Transforming the World Economy, 3rd edn. London: Paul Chapman Publishing Ltd. HC (2000–01) Vehicle Manufacturing in the UK: Report, Together with the Proceedings of the Committee, Minutes of Evidence, and Appendices. House of Commons, Session 2000–01, Trade and Industry Committee (Third Report). Kaplinsky, R. (1988) ‘Restructuring the Capitalist Labour Process: Some Lessons from the Car Industry’, Cambridge Journal of Economics, 12(4): 451–70. Keegan, R. (ed.) (1998) Benchmarking Facts, A European Perspective, produced by European Benchmarking Forum/European Commission. Kitson, M. and Michie, J. (1996) ‘Britain’s Industrial Performance since 1960: Underinvestment and Relative Decline’, Economic Journal, 106(434): 196–212. Krafcik, J. F. (1988) ‘A Methodology for Assembly Plant Performance Determination’, IMVP Research Affiliates, Cambridge, MA: MIT. Krafcik, J. F. (1989) ‘A Comparative Analysis of Assembly Plant Automation’, IMVP International Policy Forum, May 1989. Lyddon, D. (1996) ‘The Myth of Mass Production and the Mass Production of Myth’, Historical Studies in Industrial Relations, March. Ohno, T. (1988) Toyota Production System: Beyond Large Scale Production. Cambridge, MA: Productivity Press. Piore, M. J. and Sabel, C. F. (1984) The Second Industrial Divide: Possibilities for Prosperity. New York: Basic Books, Inc. Porter, M. E., Takeuchi, H. and Sakakibara, M. (2000) Can Japan Compete? Houndmills (Basingstoke) and London: Macmillan Press Ltd. Rae, J. F. (1965) The American Automobile: A Brief History. The University of Chicago and London: Chicago Press. Sawyer, M. (2002) ‘The NAIRU, Aggregate Demand and Investment’, Metroeconomica, 53: 1. Shiomi, H. (1995) ‘The Formation of Assembler Networks in the Automobile Industry: The Case of Toyota Motor Company (1955–1980)’, in H. Shiomi and K. Wada (eds), Fordism Transformed: The Development of Production Methods in the Automobile Industry. Oxford: Oxford University Press. White, J. (1973) The Automobile Industry since 1945. Cambridge, MA: Harvard University Press. Williams, K., Haslam, C., Williams, J., Sukhdev, J. and Adcroft, A. (1994) Cars: Analysis, History, Cases. Providence: Berghahn Books. Womack, P. and Jones, D. T. (1996) Lean Thinking: Banish Waste and Create Wealth in Your Corporation. New York: Simon and Schuster. Womack, P., Jones, D.T. and Roos, D. (1990) The Machine That Changed the World. New York: Rawson Associates, Macmillan Publishing Company.

5

Industrial policy, transnational corporations and the problem of ‘hollowing out’ in Japan Keith Cowling and Philip R.Tomlinson

Introduction During the 1990s, Japan’s domestic manufacturing industry lost over 2 million jobs and recorded a decline in real output of over 10 per cent ( Japanese Statistical Yearbook 2001). There was also a significant and unparalleled rise in business failures and bankruptcies, particularly among Japan’s important small firm sector (Nikkei Weekly 19 October 1998). For Japan’s traditional industrial regions, it has undoubtedly been an exceptionally difficult period.As the decade came to a close, both Japan’s Ministry of International Trade and Industry (MITI)1 and economic commentators were seriously concerned that Japanese industry was ‘hollowing out’ (ku¯doka). And yet, against the backdrop of Japan’s domestic economic problems, the 1990s also saw Japan’s large transnational corporations continue to expand their global position through further Foreign Direct Investment (FDI) and increased offshore production (see section on ‘The globalisation of Japanese manufacturing’). It is our view that the global activities of Japan’s large transnational corporations have exacerbated the ‘hollowing out’ of Japanese industry (see Cowling and Tomlinson (2000, 2002a,b)). These corporations are the ‘central actors’ within the Japanese economy and their strategic decisions, such as those affecting the level and location of new investment, employment and output, ultimately shape the development path for Japanese industry (see also Cowling and Sugden 1994, 1998). In this respect, it follows that the strategic decisions of Corporate Japan to pursue wider globalisation strategies are likely to have a real effect upon the performance of domestic Japanese manufacturing. For instance, the growth in Japanese FDI may have diverted new investment away from Japan’s industrial regions, while Japan’s small keiretsu firms have become increasingly isolated as their main contractors – Japan’s large transnationals – have made a greater use of global outsourcing (see section on ‘The “hollowing out” of Japanese industry: a case of “strategic failure”?’). This chapter considers these issues in further detail and argues that Japan’s recent experiences and the problems of ‘hollowing out’ provide important lessons for the direction of industrial policy in the twenty-first century. In conducting our analysis, we draw upon particular examples from Japan’s domestic machinery industries: a sector at the forefront of Japan’s post Second World War international

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success in manufacturing (see Johnson 1982), but now the most affected by the growth in globalisation (Cowling and Tomlinson 2002b).2 We therefore begin by providing an overview of Japan’s domestic machinery sector, focusing upon its economic development, the characteristics of Japan’s major industrial regions and the nature of Japanese corporate governance (next section). This overview is important since we believe that the current problems facing Japanese manufacturing are, fundamentally, rooted within the make-up of Japan’s domestic industrial structure and, in particular, the concentration of strategic decision-making within Corporate Japan. In the section on ‘The globalisation of Japanese manufacturing’, we briefly explore the globalisation of Japanese industry, focusing upon the role played by Japan’s large (machinery) transnationals. The growth in transnational activity has had real effects for Japanese manufacturing and these are considered further in the section on ‘The “hollowing out” of Japanese industry: a case of “strategic failure”?’. In the light of our observations, the section on ‘Industrial policy – possible directions for the renewal of Japanese manufacturing’ provides some guidelines for the future course of industrial policy in Japan (and elsewhere). Finally, the section on ‘Concluding comments’ concludes.

Japan’s machinery industries MITI, industrial policy and economic development Japan’s machinery sector has been at the forefront of Japanese manufacturing industry for much of the twentieth century. Recent statistics indicate that the sector accounts for approximately 45 per cent of all manufacturing employment and over 40 per cent of total Japanese manufacturing output. The machinery industries also provide 75 per cent of the economy’s exports (Whittaker 1997). Moreover, the sector has been the source of Japan’s international competitiveness in manufacturing and has provided the economy with global competitors or ‘national champions’, such as Toyota, Hitachi and Sony (see section on ‘The globalisation of Japanese manufacturing’). According to Johnson (1982), the growth of Japan’s machinery sector, its relative importance in Japanese manufacturing and its post Second World War international competitiveness are the result of a combination of Japan’s institutional approach to modern capitalism and, crucially, an active industrial policy administered by MITI. In this respect, the immediate post-war period saw MITI designate the machinery industries as being ‘strategic’, thus identifying the sector as being one that would play a pivotal role in Japan’s post-war economic and industrial development. As a result, over the last fifty years, the sector has, at various times, benefited from measures such as direct subsidies, discriminatory tariffs, preferential commodity taxes, import restrictions and favourable industry regulation. In addition, MITI’s industrial policies have also been supported by the development of strong institutional arrangements.These have included the nurturing of a banking keiretsu, which facilitated low cost, long-term finance for Japanese industry. The banking keiretsu primarily consisted of city banks and was supported by the Bank of Japan.

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The Japanese External Trade Organisation ( JETRO) was also established to promote Japanese trading interests abroad. The overseas JETRO offices expanded upon the role played by Japan’s general trading companies (the sogo shosha), by conducting extensive market research and aiding Japanese exporters to secure contracts in new and existing markets (see Johnson 1982). In addition to these measures, MITI also shielded Japan’s machinery industries from foreign competition. This protection included both tariffs and quotas and until 1971, strict controls upon FDI.The controls over FDI were operational under the 1949 Foreign Exchange and Foreign Trade Control Law and the 1950 Foreign Investment Law.These laws allowed MITI to sanction all inward and outward FDI proposals, to protect domestic infant industries from the pressures of global competition.3 MITI did, however, positively encourage machinery firms to enter into suitable licensing and joint venture agreements with foreign firms.These arrangements were usually subject to MITI’s approval, but they enabled Japanese industry to gain access to the latest international technology. For Ozawa (1973), it was the remarkable ability of Japanese manufacturing to successfully adopt and improve upon these technologies that was critical in Japan’s post-war international success. In summary, Japan’s post-war industrial strategy essentially focused upon what Gerschenkron (1962) has identified as the three pre-requisites of industrial development: close co-operation between the State and industry, a supportive and financially stable banking sector and the promotion of social cohesion among the main actors. Crucially, industrial policy was carefully co-ordinated between firms and across industries in order to promote high (and balanced) growth and long-term stability.4 Japan’s ‘industrial districts’ Japan’s machinery industries are primarily concentrated within the large industrial belts of Aichi, Kanagawa, Sizuoka and Tokyo. Since the Meiji Restoration of 1868, these areas have emerged to become the hub of Japanese manufacturing, initially benefiting from being close to major ports and the availability of a large labour force. It is within these areas that we find Japan’s main industrial clusters: Japan’s so-called ‘industrial districts’. According to Marshall (1919), an ‘industrial district’ is a geographical area where there is a cluster of industrial activity, which enables firms to benefit from external economies of scale that are a result of their direct interdependence.These agglomeration economies include not only ‘technological factors’, such as labour market pooling and the sharing of local infrastructure, but also the diffusion of information such as new technology, advances in knowledge and changes in (industrial) organisation. Pure Marshallian ‘industrial districts’ are often characterised by a propagation of small firm activity, with firms establishing essentially horizontal linkages between themselves, such as those evident in Emilia-Romagna – the third Italy – and Baden Württemburg, in Germany. Japan’s ‘industrial districts’ also comprise a large number of small firms. However, as we note below, Japanese small firms – unlike their Italian and German counterparts – principally operate within vertical

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or keiretsu networks, acting as subcontractors to larger firms within a Corporate Group (the kigyo shudan).5 At this point, it is worth considering the nature of Japan’s ‘industrial districts’ in some further detail. According to Whittaker (1997), there are three types of ‘industrial district’ within Japan. The first type of district is known as the sanchi, which comprise of agglomerations of small independent firms, operating within small workshops. In the machinery sector, these firms mainly specialise in the low volume production of high-tech goods and they can be found within the metropolitan centres of Tokyo and Osaka. Whittaker (1997) identifies the smallscale nature of production within the sanchi, as being Japan’s closest example of a pure Marshallian ‘industrial district’. In contrast, the largest of Japan’s ‘industrial districts’ are the so-called ‘company castle towns’ (kigyo joka machi ), where there are a large number of small firms operating, but the dominant players are Japan’s large corporations. Examples of these ‘company castle towns’ include Toyota City, in Aichi prefecture, where Toyota and their core suppliers (for instance, Denso and Aisin Seiki) have established their major domestic operations. Nissan have developed similar clusters within Kanagawa, Tokyo and Tochigi, while Honda’s operations are primarily within the prefectures of Shizuoka, Saitama and Mie. In addition, the large electronics firms, such as Hitachi, Sony,Toshiba and NEC have also created their own vertical keiretsu networks within these regions. Finally, there are also ‘industrial districts’, within Japan, where the main firms are medium-sized firms, who manufacture under their own label, but who combine local contracting out with in-house production (see Whittaker 1997). Japanese industrial structure and corporate governance In Japan, approximately 56 per cent of small firms are involved in some form of subcontracting. However, in the machinery sector, over 70 per cent of small firms are subcontractors and this figure is higher than 80 per cent in Electrical Machinery and Transport Equipment (Whittaker 1997).These are the keiretsu firms that operate in the ‘company castle towns’, where they predominantly supply intermediate goods and services to the larger Corporate Group firms.The majority of these small keiretsu firms are allocated specialised tasks and they rely heavily upon the Corporate Group firms for new orders (see also Scher 1997). In many respects, the keiretsu firms are ‘locked in’ to a vertical relationship with their main contractor. There is a wide and diverse literature that emphasises the long-standing close relationships, co-operation and the mutual trust that exist between keiretsu firms and their main contractors (see, e.g. Gerlach 1992; Scher 1997). These close relations are said to include the practice of large corporations guaranteeing their subcontractors’ income streams, particularly in periods of fluctuating demand. In addition, the Corporate Group can often obtain low-cost, long-term finance for its suppliers through the banking keiretsu.The larger corporations also offer a ‘free consultancy service’, providing their subcontractors with advice and information about manufacturing operations, financial matters and foreign markets. In return, some subcontractors are given responsibility for the design and manufacture of complete

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subassemblies. The ‘close ties’ are extended through extensive cross-shareholdings, where firms hold reciprocal equity stakes with their trading partners and affiliated firms, which include banks, insurance companies, suppliers and trading companies. Aoki (1990, 1994) has described the nature of Japanese inter-firm relations as representing a nexus of treaties, with the Japanese firm (the J-mode) adopting a non-hierarchical mode of production. The strength of this nexus is said to stem from the fact that all participating firms recognise their interdependence, their obligations and responsibilities and the mutual benefits that arise from long-term co-operation. Yet, even if we were to accept that the principal characteristics of mutuality and trust are an important facet of Japanese industrial organisation and have played an important role in the post-war (international) competitiveness of the Japanese economy, we would maintain that in issues relating to corporate governance, these characteristics should not be equated with equal power in decision-making processes (see Sacchetti and Sugden 2003). This is an important distinction, since certain (hierarchical) governance structures are an important mechanism by which a corporate elite can control production activities, in order to further their own interests. Indeed, taking this argument further, we would maintain that (hierarchical) governance structures (and their associated control mechanisms) allow corporate elites to pursue their own prosperity, which is often at the expense of other actors within the industry or locality.6 In the case of Japan’s machinery industries, this is apparent in a pyramidal structure of industrial production where, effectively, a ‘formal command structure’ exists (see Ruigrok and Van Tulder 1995).The result is that the smaller keiretsu firms are often subordinate to the strategic decisions and interests of Japan’s large machinery corporations – the dominant firms within the Corporate Group (Cowling and Tomlinson 2000, 2002a,b). Japan’s automobile industry provides an illustrative example of Japanese corporate governance.The industry has the largest number of inter-firm relationships in Japan and ‘close ties’ are said to exist between the large assemblers and their first, second and lower tier suppliers (Smitka 1991). However, it is often argued to be the case that large assemblers dominate their relationships with suppliers through the use of various control mechanisms, such as an insistence that suppliers comply with a Just-in-Time ( JIT) delivery system and quality control measures. Since a failure to comply with such directives may lead to a loss of custom, lower-tier suppliers are effectively forced to subordinate their production operations entirely to suit their main contractors’ requirements. For instance, Ruigrok and Van Tulder (1995) argue that the adoption of a JIT delivery system allows the assembler to shift the burden of inventories onto their upstream suppliers, while tightening quality control measures subject the suppliers’ production processes to increased monitoring, which, in turn, raises the latter’s’ dependency upon their main contractor.A related issue is the practice of open-book accounting, where the price and cost structure of a particular component is analysed by the assemblers in great detail before a price is eventually ‘agreed upon’. Usually the ‘agreed price’ or ‘target price’ allows the supplier a profit margin, but there is an expectation that the price will

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fall over time, forcing the supplier to continually reduce costs (Aoki 1988; Smitka 1991). The assembler will then accrue most of these productivity gains. Ruigrok and Van Tulder (1995: 83) have described the system as one where ‘the supplier is required to bargain with the assembler literally with all its cards open on the table’. In addition to these (production) control mechanisms, the large automotive assemblers also use their substantial equity holdings in their core suppliers to appoint their former executives into key positions within their supply chains. This has the effect of establishing direct lines of communication and allows the assemblers to disseminate and carry out corporate strategy. Reciprocal shareholding arrangements do exist, with some keiretsu suppliers even holding stakes in their main contractors. However, firms and subcontractors, lower down the industry’s pyramidal structure, have smaller equity stakes in their trading partners and their influence is minimal (see Dodwell Marketing Consultants 1997).The assemblers can also use personnel exchanges, supplier associations and technology sharing to exert direct control over their keiretsu networks. In this respect, Piore and Sabel (1984) give the example of how Nissan, in the early post-war period, were able to use such channels to control the rationalisation and re-organisation of automobile production. Finally, it may be argued that institutions, such as the MITI sponsored Public Testing and Research Centres (PTRs), could offer smaller suppliers the opportunity to diversify, innovate and become more independent from their main contractors. However, even these institutions – which are exclusively designed to assist Japan’s small firms – can be manipulated to suit the larger corporation’s interests. Toyota’s involvement, at the Aichi PTR centre, is a particular example. Rather than being used as a centre for Toyota’s smaller suppliers to advance their own research programmes, the Aichi PTR centre has, in the words of Ruigrok and Tate (1996: 397), become ‘a tool to help subcontractors meet Toyota’s stiff demands’. The authors find that activities at the centre are heavily weighted towards test inspections, with suppliers’ processes and components being subject to close scrutiny. Ruigrok and Tate (1996), argue that Toyota have been able to direct the PTR centre’s activities to the extent, that certification by the PTR centre is now an integral part of the company’s domestic production system. They conclude that the Aichi PTR centre has played a major role in sustaining Toyota’s ability to exert control over its domestic supply chain. The pyramidal and formal command structures of Japan’s machinery industries place Japan’s large corporations in a dominant position.We would concur that the boundaries of the large Japanese corporation are therefore much wider than its legal frontiers, with the operations of Japan’s keiretsu firms falling under the ambit of the Corporate Group(s) (see Cowling and Tomlinson 2000, 2002a,b) and control being exercised from one centre of strategic decision-making (see Cowling and Sugden 1994, 1998).This is a fundamental insight that, in the global economy, has serious implications for Japan’s small keiretsu firms, particularly in the machinery sector. We will return to this issue in the section on ‘The “hollowing out” of Japanese industry: a case of “strategic failure”?’.

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The globalisation of Japanese manufacturing The emergence of Japan’s transnational corporations It can be argued that the emergence of Japan’s large (dominant) corporations and the structure of production were a deliberate result of MITI’s post-war industrial policy. In this respect, Piore and Sabel (1984) note that within MITI’s policy of targeting strategic industries, there was a clear prejudice in favour of promoting the Corporate Group(s), with keiretsu firms being expected to play very much a subservient role. A programme of cartelisation – in which failing firms were allowed to merge – also raised the level of industrial concentration. MITI’s post-war industrial policies were effectively geared towards the cultivation of Japan’s own ‘national champions’, who were seen as being able to compete on the global stage with international rivals from the US and Europe (Piore and Sabel 1984). As Japan’s large corporations began to grow, there were increasing pressures upon MITI to relax the restrictions that had been placed upon overseas FDI (Mason 1994). Large-scale production contributed to demand deficiencies within Japan, as domestic markets became saturated with consumer durables. Firms sought to overcome falling domestic consumption through the export market. However, this eventually led to large trade surpluses and retaliatory trade barriers, particularly from the US. With future export growth uncertain, Japan’s large corporations began to consider the transnational option.7 The growing importance of large corporations, within the Japanese economy, placed MITI under strong pressure to liberalise the regulations on FDI. In 1971, MITI removed all the FDI restrictions that applied to Japanese corporations (Mason 1994). Since the late 1970s, Japanese industry has experienced a significant increase in outward FDI. In the fifteen years between 1981 and 1996, outward Japanese FDI amounted to $470 billion, a four-fold increase in real terms and the highest average growth in overseas investment of any G7 industrial nation (UNCTAD 1997). Japan’s machinery sector, in particular, has been most affected by the growth in globalisation. By 1998, it accounted for almost 60 per cent of Japan’s total outward stock of manufacturing FDI (OECD 1999). With regards to global outsourcing, Japan’s overseas production ratio (as measured by the proportion of total manufacturing output produced offshore) for all manufacturing rose almost five-fold between 1985 and 1999: a higher rate of increase than experienced by other G7 countries, most notably the US, the UK and Germany (MITI 1999). The dramatic increase in Japanese FDI and global outsourcing is, of course, a result of many factors. These primarily relate to the growth of regional trading blocs – such as the EU and North American Free Trade Area (NAFTA) – which have tried to protect indigenous industries from foreign imports, the Yen’s appreciation following the 1985 Plaza Accord and higher labour costs in Japan relative to other countries. These factors have all made it relatively more expensive to export from Japan and so Japan’s transnationals have reacted by increasing their offshore activities to protect and expand their regional and global market shares (Dunning 1993).

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Global actors and market power Japan’s transnationals have consequently emerged to play a dominant role within the global economy. Indeed, since the mid-1960s, Japan’s transnationals have pursued their own global ambitions to gain significant market shares in the global economy. For instance, in 1965, Toyota was the only Japanese automobile manufacturer among the world’s top ten producers. However, by 1996, Toyota had quadrupled its market share and was accompanied in the top ten automobile manufacturers by Nissan, Honda and Mitsubishi (AAMA 1998). Furthermore, within the sub-continental markets of Asia, the large Japanese automotive transnationals have combined market shares in excess of 90 per cent (Dicken 1998). There are similar trends in the other machinery industries: in electronics, Sony has become the world’s largest company in audio and video equipment, while Fujitsu is in the top three of the world’s mainframe computer manufacturers (Toyo Keizai 2001). The extent of Corporate Japan’s global position is reflected in the fact that Japan is now the home to 17 of the world’s top 100 transnational corporations. These corporations collectively own over 16 per cent of the global economy’s foreign assets: a position that is second only to that of the corporate sector of the US (see UNCTAD 2000). In Table 5.1 we provide some details of these seventeen transnational corporations, ranking them in terms of their ownership of foreign assets. The machinery sector accounts for over two-thirds of these transnationals, while the others are Japan’s large trading companies (see Table 5.1). The largest Japanese transnational corporation is Toyota. However, the degree of transnationality is possibly greater in companies such as Honda, Sony and Bridgestone, which own a greater proportion of their assets outside Japan (see Table 5.1). At this point we should note that to support their overseas activities, Japan’s large transnationals have also been (strategically) establishing a new (overseas) keiretsu – in other words, a transnational network – by actively encouraging their core domestic suppliers to follow them overseas.This new keiretsu allows Japan’s transnationals to continue working with their acknowledged suppliers and replicate the close ( Japanese) domestic inter-firm relationships in overseas locations.This reduces the risks and uncertainty associated with international production, while crucially it allows Japan’s large corporations to maintain control over a global supply chain(s).8 Indeed the new keiretsu provides Japan’s transnational corporations with greater leverage in their bargaining position with their suppliers’ subsidiaries and enables them to exert direct control over an international division of labour.This is because the new keiretsu provides Japan’s large transnationals with greater transparency in the comparison of international production costs, while also providing an ‘inside option’ to switch production to an alternative site. This ‘inside option’ is particularly powerful since the mere threat of relocating production – within the new keiretsu – allows Japan’s transnationals to reduce labour militancy and depress their (global) labour costs: a strategy also known as ‘divide and rule’ (see Cowling and Sugden 1994; Peoples and Sugden 2000).9

Automotive Automotive Electronics Diversified Automotive Diversified Trading Trading/Machinery Trading Electronics Electronics Electronics Trading Automotive Electronics Auto-parts Electronics

Toyota Honda Motor Sony Corp.a Mitsubishi Corp. Nissan Motor Mitsui & Co Ltd. Itochu Corp. Sumitomo Corp. Nissho Iwai Matsushita Elect. Fujitsu Ltd. Hitachi Ltd. Marubeni Corp. Mitsubishi Motors Canon Electronics Bridgestone Toshiba Corp.

44.9 26.3 — 21.7 21.6 17.3 15.1 15.0 14.2 12.2 12.2 12.0 10.6 8.4 7.4 7.4 6.8

131.5 41.8 52.5 74.9 57.2 56.5 55.9 45.0 38.5 66.2 42.3 76.6 53.8 25.4 23.4 14.7 48.8

55.2 29.7 40.7 43.5 25.8 46.5 18.4 17.6 9.1 32.4 15.9 19.8 31.4 16.8 17.8 11.3 14.5

Foreign

Foreign

Total

Sales

Assets

101.0 51.7 56.6 116.1 54.4 118.5 115.3 95.0 71.6 63.7 43.3 63.8 98.8 29.1 24.4 17.1 44.6

Total 113,216 — 102,468 3,668 — — — — — 133,629 74,000 58,000 — 18,251 41,834 — —

Foreign

Employment

183,879 112,200 173,000 11,650 131,260 7,288 5,775 5,591 4,041 282,153 188,000 331,494 8,618 29,945 79,799 97,767 198,000

Total 6 18 20 24 25 37 45 46 49 55 56 58 68 88 92 93 100

All TNCs

3 6 3 2 9 4 1 2 3 7 8 9 4 14 11 3 12

By sector

Global rank by foreign assets

Notes Machinery sector TNCs are in bold italics. a Data on Sony’s foreign assets is not published, although the company report that 62 per cent of their ‘long-lived’ assets (i.e. plant and equipment) is located outside Japan (Sony, 1999). UNCTAD (2000) have, therefore, ranked Sony accordingly. — Data unavailable.

Source: UNCTAD (2000),World Investment Report 2000 Cross-Border Mergers and Acquisitions and Development (New York: UN).

Industrial sector

Corporation

Table 5.1 Japan’s top TNCs ranked by ownership of foreign assets 1998 (billions of dollars and number of employees)

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The ‘hollowing out’ of Japanese industry: a case of ‘strategic failure’? The diversion of investment Although the globalisation of Japanese industry appears to have furthered the interests of Corporate Japan (see the section on ‘The globalisation of Japanese manufacturing’), we are concerned that this process has had detrimental effects for Japan’s domestic industrial base. Our first concern is that the significant growth in Japanese FDI has diverted investment away from Japan’s industrial regions. This is a particular problem since the growth in outward Japanese FDI does not appear to have been replenished by a corresponding rise in Japan’s inward flow of FDI. Indeed, by 1997, the ratio of Japan’s outward/inward stock of FDI was 12 : 1 (UNCTAD 1997). MITI (1996) have argued that the attractiveness of alternative overseas sites for investment (vis-à-vis Japan) appears to be increasingly related to the availability of cheaper labour costs, particularly in East Asia. This latter hypothesis is investigated further in Tomlinson (2002), who includes foreign wage variables in a standard domestic investment function for the five subsectors that comprise Japan’s machinery sector.10 After controlling for domestic labour costs and demand side effects,Tomlinson (2002) finds that the growth rate of Japan’s domestic capital stock – in all five sub-sectors – was particularly sensitive to changes in foreign wage conditions over the period 1968–94.Tomlinson (2002) concludes that the significance of the foreign wages in these investment functions is (1) indicative of the real effects of transnational activity within Japanese manufacturing and (2) highlights the extent to which relative (international) wage costs determine the behaviour of investment in Japan. In summary, as Japan becomes increasingly less attractive for new investment funds, the rate of capital renewal in Japanese manufacturing will diminish. This, in turn, will further reduce the country’s potential for indigenous growth and long-run economic development.

Small firm isolation Our second main concern is that the global sourcing strategies of Japan’s large transnationals have created severe demand problems for the smaller firms within Japan’s domestic keiretsu networks. In this respect, the fact that Japan’s large transnationals now have access to a global supply chain, places their smaller (domestic) keiretsu partners in a weaker bargaining position in contract negotiations. Consequently, as recent surveys have consistently shown, Japan’s smaller keiretsu firms have experienced a significant fall in their order book volumes and have felt under severe pressure to accept lower profit margins because of the threat of global sourcing by their main contractor (see for instance, JSBRI 1996; MITI 1998, 1999). The new environment in which Japan’s small firms now find themselves is perhaps best exemplified by Nissan’s recent decision to dismantle its own traditional keiretsu ties. In the global economy of the twenty-first century, Nissan have moved significantly towards a greater use of global sourcing strategies and have issued an ultimatum to

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their smaller domestic keiretsu partners to reduce their costs or risk losing future contracts (see Nikkei Weekly 25 October 1999, 21 May 2001). The days of Japan’s large Corporate firms offering income guarantees and long-term contracts to their smaller lower tier keiretsu partners appear to be over. The breakdown of these traditional ‘close ties’ between the Corporate Group and their smaller domestic keiretsu partners leaves Japan’s important small firm sector increasingly isolated. In the machinery sector, the problems posed by global sourcing are particularly acute since the majority of small keiretsu firms are ‘locked in’ to vertical relationships with their main contactor(s).11 The apparent inability of these small firms to diversify, combined with their over-reliance upon their main contractors has perhaps been a key contributor to their faltering financial performance during the 1990s ( JSBRI 1996). Recent statistics suggest that, since the mid-1980s, Japan’s small machinery firms have, for instance, seen their Gross Profit Margins fall by almost 60 per cent, while their Rate of Return upon Capital has fallen by approximately 45 per cent.12 Furthermore, across the machinery sector, Japan’s keiretsu networks have experienced an unprecedented rise in the number of small firm bankruptcy cases (see Nikkei Weekly 19 October 1998). Regional ‘hollowing out’ Not surprisingly, Japan’s regional economies have all been significantly affected by the impact of the growth in global outsourcing, the diversion of new investment expenditures and the isolation of Japan’s small firm sector. Indeed, we have argued elsewhere that the increasing involvement of Japan’s large corporations in transnational networks – such as the new keiretsu – has led to a ‘hollowing out’ (ku¯doka) of Japanese industry (see also Cowling and Tomlinson 2000, 2002a,b).This occurs when the higher profitability of overseas production reduces the relative importance of Japan’s core (domestic) industrial base. Eventually this leads to a decline in Japanese international competitiveness, de-industrialisation and the problem of ‘structural holes’, where once prosperous manufacturing regions experience longterm social and economic decline. During the 1990s, the ‘hollowing out’ of Japanese industry appears to have exacerbated.The decade saw total Japanese manufacturing record a decline in real output of over 10 per cent, while both the number of business establishments and the level of employment also fell by approximately 15 per cent. None of Japan’s major industrial conurbations regions have been left unscathed by the depression.13 The large industrial belts of Kanagawa, Tokyo, Osaka and Saitama, which all rely heavily upon Japan’s large (global) machinery corporations for their economic prosperity, have been particularly affected.The industrial capacity of these regions has significantly fallen throughout the decade and they now experience a higher than the national average rate of unemployment (for further details see Cowling and Tomlinson 2002b). The problems of de-industrialisation within Japan’s industrial belts hamper both the country’s long-term prospects for economic recovery and a revival in (manufacturing) employment (JEPA 1995). At the regional level, the decline of Japan’s

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small firm base and the loss of industrial vitality in the ‘industrial districts’ weaken the capability for self-regeneration.The contraction of Japan’s keiretsu networks also reduces the potential for the generation of agglomeration economies, which contribute to Total Factor Productivity (TFP) and economic growth. Indeed, in the latter respect, studies have shown that Japan’s TFP growth has been declining in all of Japan’s major industrial sectors throughout the 1990s ( Jones 1995; JETRO 1997). It is our view that there is a causal link between the global expansion of Japan’s large transnational corporations and the deterioration in Japan’s domestic manufacturing performance. However, at this point, we should note that our position is anathema to writers such as Ozawa (1991, 1992), who anticipated net benefits for the Japanese economy from a greater exposure to globalisation. More specifically, Ozawa (1991, 1992) suggested that the growth in outsourcing was an opportunity for Japanese industry to restructure and upgrade its manufacturing technology by re-deploying resources into the development of higher value added products, while traditional, declining industries were moved offshore. Ozawa (1991, 1992) argued that this would lead to a ‘flying geese formation’ of production, where advanced technological work would be done in Japan, while medium and lower value added tasks were done in the Newly Industrialised Economies (NIEs) and so on throughout Asia. The benefits of this pattern were seen to be a combination of rising technological standards and the extension of product life cycles beyond Japanese and Western markets. Unfortunately for Japanese manufacturing, Ozawa’s (1991, 1992) hypothesis does not appear to have been borne out by events. The pattern of globalisation in Japanese industry has been shaped by Japan’s large transnational corporations, who have increasingly used their transnational networks – the new keiretsu – as a direct substitute for production and, in some cases, for product development ( JSBRI 1996). In this latter respect, Beamish et al. (1997: 26) record a notable change in the strategy of Japanese transnationals from establishing offshore ‘assembly (plants), using parts sourced in Japan, to full manufacturing, to, in some cases, R&D located in the host country’. According to the Nikkei Weekly (18 June 2001: 4), the rising technological competence of the NIEs has led ‘to an increasing number of ( Japanese) firms transferring research and development activities, once considered the epitome of Japanese excellence, to (Asian) offshore affiliates’.Whittaker (1997: 58) has also noted that, in production, it now only takes a matter of months before the latest Japanese designed, sophisticated products are able to be manufactured offshore, in East Asia, to serve both the Japanese and Western markets. ‘Strategic failure’ The ‘hollowing out’ of Japanese industry may be seen as an example of ‘strategic failure’ (see Cowling and Tomlinson (2000, 2002a,b)). This concept refers to a situation that occurs when elite, centralised corporate hierarchies make strategic decisions on key economic variables, such as investment, output and employment, and that these decisions conflict with society’s wider interests. Consequently, there

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is then no available market mechanism for society to redress the balance and achieve a socially desirable outcome (Cowling and Sugden 1994). Given our observations concerning the concentration of strategic decision-making within Corporate Japan and the pursuit of global interests by Japan’s large corporations – at the expense of Japan’s domestic industry – the depiction of Japan’s current economic problems as a ‘strategic failure’ appears particularly pertinent. The recognition that Japan is now afflicted with ‘strategic failure’ leads us to consider appropriate industrial policies to help to generate an economic revival. In this respect, a pre-requisite for such policies is not only to learn from the experiences and mistakes of previous industrial policies, but also to be fully aware of the dominant role played by transnational corporations within the Japanese economy. In our view, MITI’s apparent post-war favouritism towards the establishment of the Corporate Group and the promotion of ‘national champions’ was particularly misplaced, and has not been conducive to sustainable, long-term industrial success. In the following section, these concerns lead us to consider some alternative proposals for the future direction of industrial policy, with a particular emphasis upon a greater diffusion of strategic decision-making.

Industrial policy – possible directions for the renewal of Japanese manufacturing Regional policies and small firms In order to counteract the wide effects of ‘hollowing out’ within Japan, we believe that the main focus of Japanese industrial policy should primarily be towards the regeneration of Japan’s regional industrial conurbations. However, while regional policies are favourable, there are some caveats in this approach that are perhaps best exemplified by the experience of MITI’s Technopolis Project. The Technopolis Project was launched in 1983, with the aim of establishing a number of high-tech cities throughout Japan. It was believed that such a strategy would counteract the effects of global outsourcing and avoid the problems of regional ‘hollowing out’ (see Broadbent 1989).The Technopolis Project primarily sought to create science parks, or advanced technological production centres, with close linkages with universities and other research institutions. By the mid-1990s, approximately thirty projects had been initiated under the scheme (Whittaker 1997). Unfortunately, the Technopolis Project has, at best, been only a partial success. In the project’s early days, small regional economies, such as Oita, were able to use their Technopolis status to regenerate industry within its towns and villages (Broadbent 1989). However, on the wider scale, the project has not been sufficient to negate the effects of globalisation and the problems of ‘hollowing out’ (see section on ‘The “hollowing out” of Japanese industry: a case of “strategic failure”?’). In this respect, a closer look at the Technopolis Project might provide a reason for its relative failure to avert the ‘hollowing out’ of industrial Japan. Under the scheme the main instruments of policy were tax breaks, depreciation allowances and special loan rates (Broadbent 1989).These types of subsidy are all policies that

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generally favour the attraction of large-scale corporations rather than the development of an independent small firm base (Armstrong and Taylor 2000). In the global economy, this policy bias is unlikely to encourage long-term investment that is embedded within the local economy. Large-scale corporations take a global perspective and their regional operations are likely to be regarded as being nothing more than footloose investments. Indeed, Broadbent (1989) first recognised this potential problem during the early stages of the Technopolis Project. Broadbent’s (1989: 250) assessment of Technopolis concluded ‘the Japanese State [and the Technopolis Project] is not very strong in the face of broad world economic trends, [which] affect the investment logic of individual companies, causing them to respond in ways similar to that in the West, leading to ever greater international investment’. The inherent bias towards large firms within the Technopolis Project is very similar to MITI’s other post-war industrial policies, which have contributed to a concentration of strategic decision-making within Corporate Japan. In the light of Japan’s ‘strategic failure’ and the recent experiences of ‘hollowing out’, we would therefore advocate a move towards more non-hierarchical modes of production, with strategic decision-making becoming more devolved at a local level. This would lead us to favour policies that strengthen Japan’s small firm base, with a specific focus upon nurturing independent small firm entities rather than subsidising a small firm base that is subservient to the interests of the large-scale transnationals. We would particularly welcome policies that primarily aid the development and extension of those horizontal small firm networks within Japan’s traditional sanchi regions. In our view, the expansion of Japan’s sanchi regions offers Japanese manufacturing the best opportunity to arrest the current decline. In particular, the development of these small horizontal networks may provide the basis for what Best (1990, 2001) has described as ‘collective entrepreneurialism’. Here, co-operative clusters of small firms engage in a mode of flexible specialisation, where they are able to innovate, diversify and eventually emerge to compete with the large transnational corporations. These small firm networks are sometimes referred to as the ‘new competition’, and are best exemplified in the Italian industrial districts of Emilia-Romagna. It is, therefore, perhaps encouraging that MITI have been studying the Italian experience as a way forward for the revitalisation of Japanese manufacturing ( JSBRI 1996). It is important to recognise that a wider role for Japan’s sanchi will require a significant change of emphasis within Japan.This is particularly the case within the machinery sector, where transactions are predominantly vertical. Policies should be geared towards reducing the dependence of small firms upon their main contractors. They should also favour close co-operation both within and between small firm networks. At a practical level, the Japanese State could target aid to smaller firms to enable them to upgrade their technological capability. This may provide Japan’s small firms with an opportunity to become more independent from their main contractors, since it may allow them to diversify their product range and target niche markets.14 In addition, MITI could also undertake substantial investment

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in the upgrading of public infrastructure and expand Japan’s public research and development (R&D) facilities. These facilities should be designed to serve whole networks of small firms and would, therefore, be very different from some of the PTR centres that are currently controlled by Japan’s transnational corporations (see Ruigrok and Tate 1996). Small firms should also be encouraged to foster closer links between themselves, both within and between regions. Such linkages could also be allowed to develop at an international level, between Japan’s sanchi firms and small firms elsewhere, effectively creating multinational webs, which embrace a true sense of multinationalism (Cowling and Sugden 1999). These webs could be supported with appropriate institutional arrangements at a regional, national and supranational level, involving industrial and commercial bodies, educational linkages and mutual research centres. Increased monitoring of transnational activity An important adjunct to these (regional) policies would be for Japan to undertake greater and perhaps more effective monitoring of its transnational corporations. This is important, since transnationals develop and extend linkages with many actors and small firms throughout the globe. Tensions arise when transnationals decide (or threaten) to re-locate production and small firms may become isolated, particularly if they are ‘locked in’ to a long-term relationship with their main contractor (see the section on ‘Japan’s machinery industries’). Part of the problem may be that small firms have insufficient information about the extent of their main contractor’s global activities, and so they often do not appreciate their own vulnerability. Insufficient information also prevents actors (such as small firms and labour) who are involved with transnationals from co-ordinating a response to strategies such as ‘divide and rule’. If Japan’s industrial policy is to focus upon revitalising the small firm sector, as we have advocated, then greater transparency is required so that small firms are more aware of their main contractor’s ‘inside options’ and the dangers of becoming ‘locked in’ to contracting relations. Such transparency may also improve co-ordination between Japanese and other actors who encounter the same transnational corporation. In addition, increased monitoring of the activities of transnational corporations will also be required to ensure that public resources are directed towards their intended target – an independent small firm sector – as opposed to supporting a network of small firms, subservient to transnational interests. At this point, it is worth noting that MITI conducts an annual survey of Japanese transnationals, publishing data of affiliates’ activities and occasionally estimating some of the effects of offshore production upon the Japanese economy. In addition, the international offices of the JETRO also publish survey information about Japanese affiliates in North America, East Asia and Europe.This is a useful data and can be used for future research and to guide policy makers. However the surveys have been criticised on the grounds that there is a wide variance in their coverage and response rates (Ramstetter 1996). Consequently, the surveys can only provide a partial insight into the activities of transnational corporations. Interestingly, an

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independent research company, Toyo Keizai (TK), publishes annual data on the yearly operations of Japanese overseas subsidiaries, providing details of affiliate equity arrangements, overseas sales and employment levels. Ramstetter (1996) has argued that the TK publications are a more reliable source of information than the MITI surveys. Unfortunately, the TK’s high retail price restricts its full use within the wider public domain (Ramstetter 1996). The MITI, JETRO and TK surveys provide a benchmark for the collation of information about ( Japanese) transnationals. Each survey is based on voluntary information, provided by ‘willing participants’.To obtain a more detailed information on transnational activity, it may be appropriate for Japan to establish a regular census of its domestic transnational corporations. This could be undertaken through the establishment of a transnational monitoring unit, with a remit for the accumulation and dissemination of information concerning the activities of Japanese transnationals (see Bailey et al. 1994b). There is a caveat with undertaking such a policy initiative in that, for its successful implementation, Japan will require wide international support. There is a danger that by adopting a unilateral policy to establish such a unit, Japan may become isolated both politically and economically. For instance, if transnationals view the monitoring unit as being over-intrusive, then they may reduce their investments in Japan even further by relocating to countries where the unit has no jurisdiction, thus exacerbating the ‘hollowing out’ of Japanese industry. In this case, it would be preferable for Japan to effectively ‘close off ’ the transnationals’ option of relocating to regimes where there are no monitoring units. Perhaps Japan could use her international influence to encourage an international agreement on the establishment of several transnational monitoring units around the globe.The geographical coverage of a country’s transnational unit should match the geographical extension of that country’s transnational corporations.The units themselves could be policed by the United Nations, whose annual conferences and reports have provided researchers with invaluable, although limited, information on transnational corporations (see UNCTAD reports for further details).

Concluding comments This chapter has explored the problems of ‘hollowing out’ within Japanese manufacturing and, in particular, the relative decline of Japan’s domestic machinery sector. We have argued that, fundamentally, Japan’s current industrial problems are rooted in the hierarchical nature of Japanese industrial organisation. Japan’s hierarchical industrial structure was itself, a by product of a post Second World War industrial policy that appeared to favour the development of large-scale corporations. This apparent policy bias has led to a concentration of strategic decisions within Corporate Japan. In the global economy, this elite group now regards its future as being increasingly involved in transnational production networks to such an extent that it has precipitated a ‘hollowing out’ of Japan’s industrial base, raising the prospect of ‘strategic failure’ for the whole Japanese economy.

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In order to address Japan’s current phase of ‘strategic failure’, we have argued that Japan should now seriously consider policies that move the economy away from one dominated by the large transnational corporations. This has led us to advocate policies that favour more non-hierarchical modes of production, such as the development and extension of horizontal small firm networks (for instance, the Japanese sanchi ), which may encourage a spirit of ‘collective entrepreneurialism’ (Best 1990, 2001). The success of such policies will ultimately depend upon the extent to which industrial policy is rooted in locality and community. In this respect, the focus should be towards encouraging small firms (and individuals) to initiate and pursue their own ideas and interests at a local level but also, through a greater emphasis upon networking, allowing them the opportunity to reach out towards a national and perhaps multinational level. It is our view that such a shift in industrial policy making is more likely to lead to sustainable industrial development and serve the wider public interest than the situation that currently persists within Japan.A system of effective international monitoring of transnational activity would help in the successful implementation of such a strategic redirection of policy making.

Acknowledgements We are grateful to comments and suggestions from Dan Coffey, Carole Thornley, Roger Sugden, Rob Branston, Ben Ferrett, Ron Dorsey and participants at the Second L’institute-Milwaukee Workshop on Urban and Regional Prosperity in a Globalised Economy held between 9 and 20 July 2001. The usual disclaimer applies. Phil Tomlinson acknowledges financial support from the ESRC grant no R00429834718 to conduct this project.

Notes 1 On 6 January 2000, MITI became known as the Ministry of Economy, Trade and Industry (METI).To avoid confusion and given that our analysis is partly historical, we will refer to the ministry as MITI. 2 Japan’s machinery sector consists of five broad industries: Fabricated Metal Products (ISIC 381),Agricultural and Industrial Machinery (ISIC 382), Electrical Machinery and Electric Goods (ISIC 383),Transport Equipment (ISIC 384) and Precision Tools (ISIC 385). 3 The concerns over FDI were two-fold. MITI was concerned that inward flows of FDI would lead to foreign competitors (mainly from the US) entering and monopolising Japanese markets, at the expense of indigenous industry.There were also fears that outward FDI would lead to ‘reverse exports’, which would also harm less efficient domestic infant industries (see Bailey et al. 1994a). 4 There is a related literature on ‘development traps’, which provides an economic rationale for the State to pursue an active industrial policy and encourage an institutional approach to industrialisation (see Rosenstein–Rodan 1943; Gerschenkron 1962; Murphy et al. 1989). 5 We should note that a number of Japan’s smaller firms have developed other income sources and do not rely solely upon sub-contracting (see Whittaker 1997).

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6 This argument is pursued further in Cowling and Sugden (1994, 1998) and more recently in Sugden and Wilson (2002). 7 Pitelis (1996, 2000) argues that deficient domestic demand initiates outward FDI. 8 Such advantages could easily be lost if Japan’s large transnationals have to establish new supply chains with indigenous suppliers, particularly if the latter are generally unfamiliar with Japanese industrial practices (see Gittelman and Dunning 1992). 9 Interestingly, James (1989) has also noted that, by locating new production units in areas, characterised by high unemployment and low wages, Japan’s transnationals have successfully been able to play the international wage game throughout Asia, Europe and North America. 10 The rationale for including foreign wages in a domestic investment function is two-fold. The first is that the major industrialised economies are now dominated by transnational corporations, whose strategic decisions on the size and location of new investment is therefore likely to have a real effect upon the behaviour of an economy’s aggregate investment function (Tomlinson 2002). The second point is related to the observation that since the early 1970s, both Western and Japanese firms have relied upon net earnings as the major source of net income for new industrial investment (see Corbett and Jenkinson 1996;Yaginuma 1997).With imperfect capital markets (and integrated product markets), transnational firms are likely to distribute their internally generated funds between competing international locations, with labour costs being a prime factor (see Steven and Lipsey 1992;Tomlinson 2002). 11 Indeed, MITI (1999) report that over 80 per cent of Japan’s small machinery firms have never changed their main contractor. 12 Data quoted from Cowling and Tomlinson (2002b). 13 See Note 12. 14 It was suggested to us that the hierarchical nature of Japan’s industrial structure might have actually stifled the potential for the Japanese economy to produce sufficient entrepreneurs, which would facilitate the promotion of such activities. In this respect, it may therefore be advantageous for MITI to encourage a greater entrepreneurial spirit amongst the wider Japanese small business community perhaps through trade associations and enterprise clubs. For an in-depth review of Japan’s small firm sector, see Whittaker (1997).

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Ruigrok, W. and Van Tulder, R. (1995) The Logic of International Restructuring. London: Routledge. Sacchetti, S. and Sugden, R. (2003) ‘Governance in Production and Governance of Corporations: The Nature and Impact of Subcontracting Networks’. The Journal of Economic Surveys ( forthcoming). Scher, M. J. (1997) Japanese Interfirm Networks and their Main Banks. London: Macmillan. Smitka, M. J. (1991) Competitive Ties: Subcontracting in the Japanese Automotive Industry. New York: Columbia University. Sony Corporation (1999) Annual Report.Tokyo: Sony Corp. Stevens, G. V. G. and Lipsey, R. E. (1992) ‘Interactions Between Domestic and Foreign Investment’. Journal of International Money and Finance, 11: 40–62. Sugden, R. and Wilson, J. (2002) ‘Urban and Regional Prosperity in a “Globalised” “New Economy”: An Agenda and Perspective’, in R. H. Cheung, R. Meadows and R. Sugden (eds), Urban and Regional Prosperity in a Globalised Economy. Cheltenham: Edward Elgar. Tomlinson, P. R. (2002) ‘The Real Effects of Transnational Activity upon Investment and Labour Demand within Japan’s Machinery Industries’. International Review of Applied Economics, 16(2): 107–129. Toyo Keizai Inc (2001) The Japan Company Handbook.Tokyo:Toyo Keizai. United Nations (UNCTAD 1997) World Investment Report 1997. New York: United Nations. United Nations (UNCTAD 2000) World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development. New York: United Nations. Whittaker, D. H. (1997) Small Firms in the Japanese Economy. Cambridge: Cambridge University Press. Yaginuma, H. (1997) Fixed Investments and Finance Sources: From a National to a Global Perspective, in Report of the Japan Commission on Industrial Performance ( JCIP), Made in Japan – Revitalising Japanese Manufacturing for Economic Growth, pp. 311–334. Cambridge, Mass: MIT Press.

6

Labour market policy and inequality in the UK Carole Thornley

Introduction Orthodox economic analyses of the labour market typically commence with a representative firm in a competitive market with assumed property rights and a direct relationship between desired production and employment levels. There is also a tendency to emphasise ‘commutative justice’, in the sense that the ‘factors of production’, under conditions of free competition, are rewarded on a basis related to the value of their marginal contribution to production (marginal product). On this perspective, and putting to one side the distribution of property rights in ‘capital’ and ‘land’, disparities in income and wealth can be rationalised as consistent with commutative justice, albeit with some concern for those ‘unable to compete’ (Griffiths and Wall 2001: 336–337). This emphasis has undoubtedly marginalised issues of both ‘exploitation’ and ‘distributive justice’ and associated enquiry into ownership, initial endowments, subordination, power, conflict, discrimination and the role, both positive and normative, of institutions.The end result is a dominant economic paradigm in which ‘the subject of income and wealth has not occupied the central position … that one would expect’ (Atkinson 1983: 1). This chapter adopts a different starting point, namely that government policy is necessarily concerned not just with the general level of wages inasmuch as this is perceived to impact upon employment, inflation and international competitiveness, but also with the detailed distribution of wages, income and wealth, and hence relative factor shares. Quite apart from their impact on economic incentives and performance, these latter distributional outcomes in large measure determine issues of status and social relations between groups, while informing individual perceptions of the legitimacy of the system itself. Earnings from employment constitute the main element in the ‘flow’ of income in a capitalist economy: the receipt of earnings is the primary material purpose of entering paid employment. Unearned income from profit (and rent) is claimed on the basis of the possession of ownership rights in non-labour inputs. The distribution of income is closely connected to the ability of individuals to add to future stocks of personal wealth. Government policies (e.g. labour market, industrial or fiscal) can impact at various points in this cycle of employment, income distribution and wealth accumulation.

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This chapter focuses on labour market policy in the last two decades, with particular regard to the impact on distribution of economic reward.The first section reviews the ‘Conservative’ years, from 1979 to 1997. It summarises changes in labour market content and context over this period, including employment legislation, employment composition, and trade union organisation and bargaining power, before reviewing associated distributional shifts, and effects on economic ‘efficiency’.The second section moves on to explore Labour’s response to the legacies of this period, evaluating the introduction of the National Minimum Wage (NMW) and associated policy changes, and distributional shifts since 1997. The chapter concludes with a review of the arguments for government to promote a more egalitarian distribution as both a goal in itself and an important foundation for ‘high road’ economic growth. Policy options could include strengthening the impact of the NMW, strengthening wider legislation and policy, particularly on equal pay and trade union rights, and re-evaluating the government’s own role as a major employer of labour.A case study of local government employment and pay illustrates the potential for a positive lead by the state.

Labour market policy and distribution of rewards 1979–97 While there is always a danger in citing historical discontinuities (Edwards 1995: 604–606), there is a wide measure of agreement that successive Conservative administrations from 1979 to 1997 carried through measures reflecting a sea change in labour market ideology and policy. At the ideological level, a reassertion (and misuse) of the so-called ‘marginal productivity’ theory implied that workers are paid, or should be paid, what they are personally ‘worth’, and that legislative or trade union interventions in wage fixing would create market distortions and disincentives for entrepreneurs.1 An important part of this ideological shift was the intimation that workers themselves should carry the primary responsibility for their own situation (Thornley and Coffey 1999: 526). Labour market policy: content and context At a policy level a wide range of incremental and sometimes opportunist ‘deregulatory’ measures, the extent and scope of which were remarkable in twentiethcentury historical context, combined to reduce the relative power of organised labour and of prior ‘welfarist’ legislation. At the legislative level, Employment Acts were introduced in 1980, 1982, 1988, 1989 and 1990, along with the Trade Union Act of 1984, the Wages Act of 1986 and the Trade Union Reform and Employment Rights Act of 1993.These Acts were backed up with numerous statutory Codes of Practice. Taken together, they addressed the legal restriction of industrial action, the eradication of the closed shop, the regulation of internal union government, the dismantling of statutory support for collective bargaining; and the curtailment of individual employment rights2 (Edwards et al. 1998: 13). With particular respect to direct wages legislation, Schedule 11 of the Employment Protection Act, which provided procedures to extend collectively bargained rates

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of pay to comparable groups of workers was repealed in 1980, and the Fair Wages Resolution rescinded in 1983.The Wages Councils, established in 1909 to provide statutory minimum wages and conditions for workers in particular industries where collective bargaining was weak, and covering about 2.5 million workers in 1986, were weakened in the 1986 Wages Act and fully abolished with the 1993 Act (Low Pay Commission 1998: 205).Whilst some individual elements of this raft of legislation had perverse effects (e.g. political fund ballots), the general effect was clear:‘the law helped to change the conduct of industrial relations, and the reduction in employment protection [despite countervailing pressures from European legislation] plainly gave employers more power’ (Edwards et al. 1998: 18). A second key raft of government policy revolved around its approach to industry and employment.What is perhaps remarkable in post Second World War historical context is the extent to which successive Conservative administrations appeared prepared to tolerate the loss of swathes of industrial capacity and resultant unemployment under the guise of ‘restructuring of the economy’. Significantly, these losses occurred in the ‘strongholds’ of mining and manufacturing trade unionism: in coal, shipbuilding, steel and the car industry, and acted to complement legislative policy in weakening trade unions through direct loss of membership, job insecurity and weakened labour market standing. The third raft of government policy concerned the behaviour of government itself as a producer, and a major ‘employer’ of labour, at both national and local levels. The successive privatisations of the 1980s, and 1990s, well documented in the literature (see, e.g. Sawyer, 1989: 263–272, 2001: 182–185), again served to weaken trade unionism; company-level collective bargaining arrangements, which followed, tended to replace national bargaining. Separate developments like compulsory competitive tendering (or CCT) took workers out of the coverage of collective agreements (especially where transfers took place to non-union private contractors), and weakened the bargaining position of those remaining ‘in-house’ (Colling 1995). In a context of declining public sector employment, and constraint of pay budgets through overt cash limits, governments also sought to decentralise public sector pay and to erode the influence of trade unions at national bargaining levels.3 Set in this context, key changes in the labour market over this period may be viewed as embedded in the particular policies pursued by government.The heightened process of deindustrialisation (and rationalisation pre- and post-privatisation) intensified the shift from manufacturing to service sector employment. Between 1979 and 1997, manufacturing employment declined from 31 per cent of total employment (7 million) to just 18 per cent (4 million), while tertiary sector employment rose from 59 per cent of total employment (13.5 million) to 76 per cent ( just under 17 million) (figures in Griffiths and Wall 1999: 9). Overall, service sector employment grew by 3.2 million while employment in the goods sector (primary and secondary sectors) fell by 4.3 million. As a result ‘total employment fell by 1.08 million, at a time when the number of people in the labour force was steadily increasing’ (ibid.: 10). Unemployment rates were exceptionally high by both domestic and international comparative standards at over 10 per cent for

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significant periods from 1979 through to the mid-1990s,4 with job losses increasingly affecting white collar as well as manual employees. Around half of the ‘new’ service sector jobs were part-time and thus failed to compensate on a one-for-one basis for the loss of mainly full-time manufacturing jobs. Temporary and self-employment also increased. These shifts also accounted in part for important changes in the gender composition of the labour market.The jobs that were lost were disproportionately male manufacturing jobs, and the jobs ‘created’ predominantly female service sector jobs.This intensified existing trends of a rising labour market participation rate for females, and a declining rate for (in particular) older males: for the period 1971–95 the absolute number of women in the workforce increased by 40 per cent (some 3.5 million) compared with a male increase of just 2 per cent ( Johnes and Taylor 1996: 287). By the late 1990s, women accounted for 45 per cent of the workforce. Part-time workers (the great majority of whom are women) grew to account for a quarter (almost 7 million) of employees, and just under 2 million people were employed on a temporary basis (Green 2001: 200–201) with women again overrepresented (figures in Labour Market Trends 2002: S19). These labour market changes, particularly the high levels of unemployment and the growth in private sector services with lower levels of unionisation, reflected and reinforced other aspects of government policy, leading to a shift in the balance of power between employers and employees. The period witnessed ‘the longest recorded decline’ in trade union membership, a fall in strike rates to their ‘lowest ever levels’, and a concomitant decline in the role of collective bargaining alongside the rise of new ‘human resource’ management practices (Edwards et al. 1998: 1). By 1997, the absolute number of trade union members was at a post Second World War low. However, the gender effect noted above intensified the relative ‘feminisation’ of trade unions, with an impact evaluated below. Distributional trends The reversal in distributional trends which ensued remains remarkable by the standards of modern domestic and international experience.With respect to earnings, there was a continuation of the longer term tendency for average real hourly wages to rise in common with the ‘large majority of other industrialized countries’ (Green 2001: 208). However, this picture obscured a widening gap between all percentile groups: the lowest paid in fact ‘hardly benefited at all’ in terms of real wages (Griffiths and Wall 1999: 312). The underlying earnings distribution is skewed by the presence of a long tail of high earners: the majority of employees earn less than the average. However, the gap between the very high-paid and others widened rapidly from the late 1970s, after some earlier narrowing, with a disproportionate effect on the lowest paid. Indicative data5 on the extent of this shift can be seen in Table 6.1, which indicates the position of lower and higher deciles and quartiles as a percentage of the median for male and female workers respectively, for selected years between 1970 and 1997. It can be seen that the position of the lowest decile of male workers improved in the 1970s relative to the median, and then

65.4 79.7 126.7 160.6

66.4 79.8 129.3 170.4

Full-time men Lowest decile Lower quartile Upper quartile Highest decile

Full-time women Lowest decile Lower quartile Upper quartile Highest decile

67.4 81.5 125.2 164.5

67.0 81.0 125.3 157.6

1975

69.4 82.1 124.7 158.6

66.0 80.3 125.1 156.9

1979

66.4 79.7 129.9 168.3

64.1 78.8 129.8 169.7

1983

65.8 78.7 130.9 164.5

60.8 76.9 131.0 171.5

1985

Source: Author’s own calculations from New Earnings Survey (various years).

1970

Percentage of median

63.4 77.2 136.6 177.5

59.0 75.5 134.0 178.3

1988

61.7 76.9 138.8 180.6

57.9 74.6 135.7 183.0

1991

60.5 75.9 139.5 181.5

57.4 74.2 137.0 186.2

1993

Table 6.1 Earnings dispersion full-time male and female workers: selected years 1970–97 (gross weekly)

59.3 75.3 140.0 181.2

56.8 73.3 137.3 187.8

1997

⫺10.1 ⫺6.8 ⫹15.3 ⫹22.6

⫺9.2 ⫺7 ⫹12.2 ⫹30.9

% change relative to median 1979–97

⫺11 ⫺10 ⫺2

⫺12 ⫺12 ⫺7

% change relative to highest decile 1979–97

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deteriorated from 66 per cent of the median in 1979 to just 57 per cent by 1997, while the highest decile improved their position from 157 to 188 per cent over this later period: the whole distribution was stretched out like a concertina, with a particularly strong effect for the highest decile (see second to last column). A similar effect can be seen in Table 6.1 for female workers.The same broad trends are also clearly visible in an all-worker data series constructed by Atkinson (1999: 58–59).6 The female and all-worker distributions would almost certainly widen yet further if part-time (mainly female) workers were routinely included on a pro rata basis in official data. According to one source, by 1995 the male earnings distribution was ‘wider than at any time in the century for which we have records’ ( Joseph Rowntree Foundation 1995b: 42).The pace and extent of growth in earnings inequality was also ‘exceptional by international standards’ (ibid. 1995a: 19–20): the UK had the fourth largest proportion of full-time workers earning less than 50 per cent of the median wage (and the highest proportion earning less than 80 per cent) in a comparison of nine European countries (Griffiths and Wall 1997: 599).The end column in Table 6.1 highlights the nature of the redistribution that occurred. It can be seen that distributional gains were made by the top 10 per cent of earners to the detriment of all other categories, with relative detriment being greater the lower the position in the distributional hierarchy. In line with this, under the Council of Europe decency threshold measure of low pay, the low-paid increased from 7.8 million in 1979 (38 per cent of the workforce) to 10.4 million in 1996 (48 per cent of the workforce) (Low Pay Unit 1996: 8–10).This phenomenon had both class and gender dimensions. Male manual workers formed an important segment of the low paid. However, female workers (particularly, though not exclusively, manual workers,7 and also part-timers) were disproportionately affected: of the 10.4 million, 6.6 million were women and 4.8 million part-time workers (ibid.). Changes in wage inequality are ‘an important proximate factor’ underlying changes in income inequality (Atkinson, 1983: 18; Green 2001: 208).After decades of a proportionate rise in employment income and a decline in private corporate profit and rent, these trends also reversed. Following a reduction of income inequalities in the 1960s and 1970s, these increased to a level ‘much more unequal than [any] since before 1949’, with the growth internationally ‘exceptional’ in its pace and extent ( Joseph Rowntree Foundation 1995a: 14–15).The poorest 20–30 per cent of the population ‘failed to benefit from economic growth’ in terms of real net income after housing costs, while the bottom 70 per cent fared less well than the ‘average’ or ‘mean’ increase (ibid.). Alongside largely regressive changes in the tax and benefits system, and high levels of unemployment, these changes resulted in an unprecedented growth in both in-work poverty and out-of-work poverty. This was again notable by international standards, and had a pernicious effect on children (see Thornley and Coffey 1999: 527). Changes in the stock of wealth, the distribution of which is even more unequal than the distribution of income, are even less transparent than changes in earnings and income: there are notorious problems of concealment and valuation, and the inclusion or exclusion of property capital makes a significant difference to the

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reading of changes. However, important movements also occurred. In broad terms, inequalities in wealth had shown a steady decrease up to the early 1980s: this decrease was subsequently arrested ( Joseph Rowntree Foundation 1995a: 29–31). However, on a tighter definition (marketable wealth less value of dwellings) wealth inequalities actually increased between 1981 and 1996: by the end of this period the most wealthy 1 per cent owned over a quarter of wealth, the most wealthy 5 per cent half, the most wealthy 10 per cent almost two-thirds, and the most wealthy 25 per cent over four-fifths, with each category showing a clear increase (ONS 2000: 97). In a context where the top 5 per cent of wealth owners own over 90 per cent of privately held corporate shares (Giddens 2001: 290), there was a clear cumulative advantage extracted by a relatively small number of wealthy individuals from both higher relative personal earnings and associated post-tax income, and from unearned income. This period will remain notable for increasing the advantage of the few. The evidence on ‘efficiency’ It would be difficult to conceive of shifts in the distribution of income and wealth occuring on this scale as a purely ‘unintended’ byproduct of disinterested policy.8 It is nonetheless reasonable to consider the effects of these changes to the labour market, and on the rewards to employers and employees, on the ‘productiveness’ of the economy. Contrary to the policy rhetoric of the time, the evidence casts considerable doubts, however, on any claim of a positive transformation of the nation’s economic prospects.While there were some ostensible gains in labour and total factor productivity for the whole economy over this period against certain competitor countries (notably the US),9 an important part of the ‘improvement’ was achieved through work extension, with a rise in average weekly hours already long by EU standards, and intensification (see Green 2001: 204). Any ‘achievements’ were also made at the expense of industrial capacity and employment (see also Coates 1994, 2000; Hutton 1996: 13; Kitson and Michie 1996).These ‘methods’ would generally be viewed as unsustainable in the longer term. By 1996, the UK still remained at a disadvantage with respect to whole-economy labour and total factor productivity vis-à-vis the majority of its major competitors, with a particularly substantial gap in manufacturing (Griffiths and Wall 2001: 16). The capital intensity gap in manufacturing between the UK and its major competitors (with the exception of the US) actually widened over this period, and remained substantial against all competitors. For most of the period inward investment flows did not compensate for outward investment (Coates 1994: 164–167).The skills deficit also remained substantial. Overall, the UK still remains ‘at a considerable productivity disadvantage in terms of many of its competitors’ (Griffiths and Wall 2001: 19–21), and a ‘price’ advantage of low relative unit labour costs (RULC) compared with major competitors10 fails to compensate for this. Commentators doubt whether ‘the apparent alternative option of a low-wage, low-productivity industrial economy is viable’ (ibid.: 25; Coates 1994), particularly if the role of technology and quality of products are taken into account (see also Desai 1989: 304; Nolan 1989).

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Manufacturing output also increased at a much lower rate than ‘productivity’ in the 1980s, and was relatively static in the 1990s (Coates 2000: 44–46).This reflected in a balance of payments deficit on non-oil goods from 1982 onwards, reaching almost £31 billion in 1999. Despite unexpected receipts from North Sea Oil and improvements in services and investment income balances, deficits were experienced on the overall UK current account from the mid-1980s, and the UK’s share of world export of manufactures also continued its historic fall during the period (Griffiths and Wall 2001: 680–684). Gross Domestic Product (GDP) growth rates fluctuated throughout. Some additional, and more subtle, economic costs have also been associated with the labour market and distributional changes of the type experienced. It has been argued that growing inequality may obscure or exacerbate underlying problems in mature economies of trends towards manufacturing decline:‘much of the apparent prosperity of the 1980s came from redistribution away from those made unemployed and from workers towards shareholders, rather than from increased production’ (Glyn 1992: 87). The costs of unemployment were also high and, in a macroeconomic sense, swallowed up much of the gains from North Sea Oil, which could have been used for reinvestment, while diverting public expenditure from more productive uses. It has also long been argued that low pay may actually represent a ‘brake on capital investment’ and on the ‘development of productivity and greater efficiency’ (Sachdev and Wilkinson 1998: 48): employers have no incentive to change ‘low road’ behaviour with respect to investment in technology and capital, skills and training, improved production methods and products.11 The gendered aspects of inequalities and impact on productivity have also been highlighted. The Kingsmill Review, in noting that the UK has ‘one of the widest gender pay gaps within the EU’, argues that the scale and persistence of this gap ‘reflects a failure in human capital management … a terrible waste of a national resource’, with adverse implications for litigation, turnover, morale, productivity and profitability (Kingsmill 2001: 1–7).There is an intuitive appeal to the argument put forward in summary by the Joseph Rowntree Foundation: ‘the experience in Britain since the trend towards greater equality of incomes was reversed in the late 1970s has not been a faster rate of growth than in previous periods when the gap between rich and poor was smaller’: there is thus little support for the notion that rising inequality ‘allows a faster rate of economic growth, and so benefits the whole community in the long run’ (1995a: V1: 36). The cumulative weight of these arguments casts substantial doubt on the longer term economic rationality and sustainability of government policies in this period.

Labour market policy and distribution of rewards 1997 to present In the context of such dramatic shifts in employment and distribution, and the breadth and depth of criticisms concerning economic consequences (and ethics), the policy response to date of Labour administrations elected in 1997 and 2001 could be regarded as muted. In particular, the continuing lack of a more strategic

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and interventionist industrial policy, aimed at reversing manufacturing decline, and policies to address the drift to low-paid and undervalued work, must represent a limitation to any labour market policies intended to impact on employment or distribution. The present government’s labour market policy has revolved around a particular set of concepts including ‘minimum standards in the workplace’, ‘flexibility’ and ‘fairness’, in a general approach, which ‘strives for a balance in creating high wage and high skilled jobs’ without ‘generating unnecessary regulation that undermines the competitiveness of business or the employability of our workforce’ (Labour Party 2002: 4–8). The stated desire is for a ‘high road’ approach in which higher productivity will generate higher wages, with ‘competitive markets’ viewed as ‘key drivers’ of productivity (ibid.: 5–6). Labour market policy: the NMW and associated changes In practice, the centre piece of labour market policy relating both to the labour market and to distribution12 has been the establishment of the Low Pay Commission (LPC) in July 1997, and of a new NMW from 1 April 1999. This formed part of a series of policy initiatives to ‘get people back to work’ and to ‘make work pay’ (DTI/EMAR 2002: 4). However, it was undoubtedly strongly influenced by sustained pressure from trade unions (in particular UNISON, the largest trade union in the UK and the main union representing public service workers), and from low pay campaigners.The ‘economic efficiency’ arguments briefly reviewed above were also influential in Labour circles, and even received some qualified support from more surprising quarters such as the CBI (see Sachdev and Wilkinson 1998: 52–53). As argued elsewhere, the fact of the LPC and new NMW sent a strong signal about an ideological and policy shift, which ‘should not be underestimated’ and, which provides ‘a platform for the more ambitious to build on’ (Thornley and Coffey 1999: 528–535). However, the original composition of, and remit for, the LPC cautioned against any expectations of a major economic experiment, providing early warning that ‘economic progress with prudence’ was the order of the day. The Commission’s early deliberations demonstrated the lack of a ‘consensus model’ on the workings of the national economy with which to inform the setting of a minimum rate; equally it demonstrated the weight of received opinion and ‘judgement’ at the vital nexus between deliberations and recommendations. The measure employed for ‘low pay’ focused on the lowest decile in the earnings distribution: this remained as much a matter for controversy as the recommendations on rates, the latter being clearly mediated by power relationships as much as by concern for social or economic engineering (see ibid.). In the event, the final recommendation for £3.60, rising to £3.70 in June 2000, was remarkably close to an uprated lower estimate for a notional Wages council average, and to the CBI and employers’ ideal, and some way removed from union and low pay campaigners’ claims, ranging from £4 to £6.60 at that point. No automatic indexation was proposed, despite campaigners’ concerns that the value of the NMW would otherwise be swiftly eroded. The recommended (and lower) youth rate was amended downwards to £3.00 by

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the government, prior to its restoration at £3.20 in June 2000. The ‘cautious assessment’ of outcomes made by the Commission in the first instance was that the measures would affect about 9 per cent of employees, or around 2.5 million workers (LPC 1998: 1–5 and ibid.: 92, table 6.1), while only increasing the overall wage bill in the UK by around 0.6 per cent (ibid.: 133).13 Assessments have subsequently been notable for their piecemeal downward revisions: the LPC revised its estimate of numbers of workers affected to 1.5 million in February 2000, and then to 1.3 million in March 2001 (constituting only around 5.4 per cent of workers) (Low Pay Unit (LPU) 2002a); similarly, the LPC revised its estimate of initial impact on the ‘national wage bill’ to 0.5 per cent by its Second Report (2000: xi), and to just 0.35 per cent by its Third (2001: x). Part of the reason for very ‘modest’ outcomes has been the fact that rates are not only low but also ‘out of date’ almost as soon as they are announced. Subsequent ‘uprating’ is then dependent on the ‘goodwill’ of the government.This issue caught the public attention in 2000 when the government appeared to perform a U-turn. First rumours circulated that the government would not uprate the NMW and would disband the LPC.14 A few weeks later (after reports of some considerable pressure from backbench MPs and the wider labour movement), it was announced that the NMW would be uprated to £3.70 and that the LPC would be reconvened later in 2000 to provide ‘regular’ reviews (Independent 15 February 2000). A common perception of this incident, quite apart from any possible interpretation as a ‘stage-managed concession’, was that it signalled that the NMW could become a ‘political football’, with notions of efficiency and/or equity neglected. This perception was heightened by the timing of subsequent announcements (Sachdev 2000). During the union conference season in June 2000, it was announced that the Commission would be asked to take account of movements in average earnings in its deliberations (Observer 18 June 2000); in the run up to the General Election of 2001 and following the LPC’s second and third reports (op. cit.), a further uprating to £4.10 from October 2001 was announced. The LPC’s recommendation for a rise to £4.20 from October 2002 was then agreed in Spring 2002. A review of the impact of the NMW on pay and broader inequalities is conducted below. However, it is notable that the amounts awarded to date have remained exceptionally modest, whatever the manner of their announcement.The LPU (2002e), for example, noted that the uprating to £4.10 did little more than restore the NMW to its original 1999 level in relative terms. Indeed, on a calculation of the relationship between the level of the NMW and average hourly earnings for the key dates of 1999 and 2001, the NMW was pitched at around 36 per cent of the latter in both years, with a decline to 35 per cent; in the intervening year.15 The level of around £8,000 per annum from October 2001 can be compared with the LPU’s recommended rate of £10,623 per year (half male median earnings). By focusing attention on the very poorest in society, the NMW may also have distracted somewhat from the major class- and gender-based schisms in the earnings and income distribution, and the critical issues of wealth, factor shares and socio-economic valuation.

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The apparently limited redistributional aspirations for this policy are also reflected in associated labour market legislation and policy to date. Some legislative ‘favours’ have been granted to individual workers and trade unions in the form of new employment rights and trade union recognition rights (Employment Relations Act 1999) (see Salamon 2000: 303–308). However, some of the rights changes have been a response to EU Directives or litigation, and others such as the Employment Bill 2001 have caused contention:16 more generally, government has not sought to repeal the majority of the prior Conservative legislation on trade unions. Similarly, equal pay has attained a higher policy profile, and some concessions have been made to workers and unions, but the flavour of changes has been largely voluntarist and ad hoc.Arguably greater attention has been paid to new state benefits and tax breaks for the lowest earners (including the Working Families Tax Credit, now Working Tax Credit) (Guardian 25 August 2000), and to measures to get people ‘back to work’, than to any radical restructuring of the broader hierarchy requiring either direct intervention or the mediation of the real balance of power between employers and employees. The DTI continues to broadly welcome UK labour market flexibility as a ‘paramount strength’, noting that the UK has a ‘decentralised and voluntarist labour market’, and one of the lowest levels of employment protection legislation (and product market regulation) on a measurement scale compiled by the OECD (DTI/EMAR 2002: 32–34). This provides some indication of the possible conflict between policy concepts like ‘flexibility’ and ‘fairness’. Distributional trends Although there are time lags involved in the full materialisation and reporting of distributional outcomes, it is nonetheless possible to provide an initial analysis of the impact of the above ‘minimum standards’ policy approach in order to gauge whether there has been any discernible impact on distribution or evidence of a ‘higher wage’ policy outcome. Here, the evidence suggests that policies conducted to date are, in fact, barely restraining a further growth in inequalities, with any ‘higher wages’ in relative terms largely accruing to the richest tenth of wage-earners. Table 6.2 provides a point of analysis for earnings levels and key changes in the earnings distribution of full-time workers between 1997 and 2001, on a variety of measures.17 As a point of reference for the reader, average annual wages are shown in row A1: in line with previous trends, these have increased faster than the rate of inflation, so average real wages have risen. However, the skew given to average earnings by the top earners in the distribution can easily be understood by reference to the median (A2), which in terms of annual earnings is several thousand pounds lower.The median has been declining against the ‘average’ (B1): if a majority of the wage-earning population feel ‘relatively worse off than the average’, this is a statistically accurate perception. The female median (A3) is several thousand pounds lower again, and has also been declining against average earnings (B3). It is noteworthy that women’s median annual earnings broadly coincide with the Council of Europe decency threshold measure of low pay: only around a quarter

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Table 6.2 Changes in the earnings distribution of full-time workers 1997–2001 (gross) 1997 Annual earnings A1 Average annual earnings all A2 Median annual earnings all A3 Female median annual

n/a n/a n/a

Weekly earnings B1 Median as % average all B2 Female average as % average all B3 Female median as % average all

1998 £19,561 £16,535 £13,495

1999

2000 a

£20,919 £17,445 £14,342

£22,442 £23,607 £18,512 £19,366 £15,302 £16,052

2001

86 81 71

85 80 70

85 82 71

84 82 71

83 83 70

55 72 140 188

55 72 140 190

56 72 141 192

55 72 140 192

55 72 141 196

29 38 53 74

29 38 53 74

29 38 52 73

29 38 52 73

28 37 51 72

E1 Manual as % non-manual – all

72

72

70

70

69

F1 F2 F3 F4

73 64 66 55

72 64 65 55

74 66 66 55

74 66 66 55

75 67 67 54

86

86

87

87

88

C1 C2 C3 C4

Lowest decile as % median Lower quartile as % median Upper quartile as % median Highest decile as % median

D1 D2 D3 D4

Lowest decile as % highest decile Lower quartile as % highest decile Median as % highest decile Upper quartile as % highest decile

Female as % male – all Female as % male – manual Female as % male – non-manual Female manual as % average earnings F5 Female non-manual as % average earnings

Source: Author’s calculations from New Earnings Survey 1997–2001. Note a Revised figures issued in December 2001.

of men earn this figure.The overall dispersion is shown in rows C1–C4, and it can be seen that the earnings distribution has actually widened between 1997 and 2001, almost entirely due to the pulling away from the median of the highest decile. As with the 1979–97 period, rows D1–D4 clearly demonstrate that the top decile have gained at the relative expense of all other groups in the distribution, though this period has seen a slightly disproportionate gain from middle and higher earners rather than the lowest paid. The polarisation between the earnings of manual and non-manual workers has continued (E1), as has the polarisation of earnings within the female workforce (F1–F5). Although the gender pay gap has continued to narrow for both female manual and non-manual workers (F1–F3), the extent of this improvement has been modest and simply in line with previous trends.18 Any gain for female manual workers has been offset by the widening gap between

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manual and non-manual workers in general: their earnings have declined against the average (F4). Only female non-manual workers have seen any unambiguous, if very modest, improvement. The compositional structure of ‘low pay’ thus remains highly ‘class’-based and gendered.The NMW does not seem to have had any discernible impact on full-time workers’ relative earnings, other than possibly preventing further slippage at the lower end of the distribution (see also LPU, 2002b: 9). Part-time workers are still not included in aggregate summary tables from the New Earnings Survey (NES), even though they now constitute around a quarter of employees. However, as key beneficiaries of the NMW, it can be noted that women’s average part-time earnings increased by 8 per cent between 1999 and 2000 (LPU 2002a), with this increase being several percentage points higher than the increase in full-time average earnings. However, between 2000 and 2001 the part-time increase dropped below that of full-timers and differentials widened again.19 More generally, women’s part-time earnings in the UK remain poor by EU standards, at around 55 per cent of average gross male annual earnings pro rata, or 59 per cent of average gross male hourly earnings excluding overtime.20 With respect to income and wealth, and accepting that data lags are even longer than those for earnings, the record to date is rather worse: ‘nearly 12 million people in the UK are still living in poverty, despite more generous government help in the form of tax credits and increased child benefit … overall income inequality was higher in 1999/2000 than when Labour came to power in 1997’ (LPU 2001b: 6–8). On figures reported in April 2001 almost 4 million of the poor were children (Guardian 18 July 2002).21 The potential significance of earnings and the NMW for any improvements in income distribution is confirmed in the fact that ‘the working poor represent a larger group than the unemployed or pensioned poor’, with over half of the ‘working poor’ in receipt of full-time earnings.22 Nonetheless, it has been argued that the first NMW increase to £3.70 was ‘too low to lift working households out of poverty’ (Unicef, cited in LPU 2001b: 8). A detailed study of ‘equivalised’ income by household showed overall inequalities in both original and post-tax income at their highest level for almost a decade, with a disproportionate and detrimental impact of indirect taxes on the poorest households: the LPU concluded that ‘the questions of increasing earnings at the bottom and progressive taxation at the top will not go away’ (2001a: 11–13). Figures are not yet available to provide a fair analysis of Labour’s record to date on wealth. However, the measures on earnings and income must strongly suggest that, at best, the highly unequal distribution of wealth will have remained static, with a possibility that disparities may actually have grown. Clearly, it will remain to be seen to what extent further upratings of the NMW and further changes to tax and benefits systems and, possibly, employment rights, impact upon this picture in future years. However, the record to date shows that, in its first term at least, Labour (at best) failed to reverse the inequalities’ and factor share trends established during the Conservative years, with the lack of advance in earnings here a crucial factor.

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Carole Thornley As the LPU has put it: The focus … has been on income guarantees achieved through tax credits rather than on wage increases through a more robust and equitable minimum wage level … the fact remains that a major cause of the growing inequality experienced by Britons is the ever-widening divide between the rich and poor in the labour market … a reduction in wage inequality would benefit the poor immediately – and benefit society through higher income growth. (LPU 2001b: 8)

It has even been argued that tax credits in the longer term may actually exacerbate wage inequalities ‘as employers continue to pay low wages, secure in the knowledge that the taxpayer is subsidising their workforce’ (Richard Towers in LPU 2002c: 5).The potential detriment to higher productivity approaches is here clear.

Towards the future: a ‘high road’ approach? At the onset of the twenty-first century, the UK is still one of the richest countries in the world. However, the distribution of rewards from economic activity remains highly unequal, and more so than in many other industrialised nations. Distributional inequalities grew dramatically in the period 1979–97, and policies subsequently conducted have yet to reverse these trends.There are growing pressures for change. Questions have been raised about the basis for appeal to the electorate (as well as to Labour’s specific electoral ‘heartlands’23) if distributive outcomes are perceived to vary relatively little between Labour and Conservative administrations: a democratic deficit could place potential strains on the political legitimacy of the wider system. Moral legitimacy has been called into question by the polarisation of rich and poor, with the contrast between generous executive pay rises and calls for workers’ pay restraint viewed as a particular source of public concern (Guardian 6 April 2002). A rival economic consensus has been developing around the body of evidence on efficiency and innovation: addressing relative inequality is increasingly viewed as a vital precondition in factoring out ‘low-wage, lowproductivity’ behaviour, with rather mixed outcomes on employment,24 productivity, and GDP25 to date lending some weight to this view.These political, moral and economic arguments have tended to coalesce in the form of industrial and political pressures emanating directly from organised labour.There are a number of arguments for a linked approach to addressing distributional outcomes, and some key policy options and challenges are reviewed in the following section. Strengthening the impact of the NMW A set of proposals, with potentially swift and immediate effect on the lower part of the earnings and inequalities distribution, concern the level of the NMW and mechanisms associated with it. In its most recent report, the LPC notes the current ‘scope for a significant increase’ in the NMW, but continues ‘to adopt a prudent

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approach’ (2001: vi). Its estimate that just 1.3–1.5 million workers would be covered by the new rate in October 2001 (ibid.: 103) supports evidence provided earlier in this chapter that the ‘uprated’ level of the NMW is no more ambitious than the original: previous experience also suggests that downward revisions of estimated coverage and impact may again follow over time. The fact that current levels have not provided a strong ‘shock effect’ to ‘sweatshop’ employers, with only modest or ‘mixed’ evidence on productivity responses discerned to date (ibid.: 59), lends weight to the notion that the NMW has been set too low to reap productivity and turnover/motivational benefits. The fact that current levels have put little pressure on differentials at rather higher levels of the distribution, and that there has been a continuing drift to low-paid work (i.e. employment ‘amongst those groups that were particularly vulnerable’ has continued to increase) (ibid.: x–xi), could similarly be viewed as signs of relative failure rather than success. If current levels of the NMW are achieving little in the way of productivity gains or redistributional outcomes, despite a large potential to do so, then clearly raising the level is a policy option.With respect to mechanisms, it has been argued that indexation would benefit employers by enabling them to ‘anticipate and plan ahead’ (Sachdev 2000), as well as benefiting recipients through greater security of income flows. The longer term planning aspects could prove particularly important in stimulating productivity gains. Policy options around the NMW would need to be considered alongside associated tax and benefits systems, not least because of current anomalies. For example: The goods and services provided by low wage workers in cleaning, catering, tourism and leisure are consumed disproportionately by those well up the earnings league.These higher earners are buying their pleasures on the cheap whilst the well-meaning initiatives of the Chancellor effectively translate into using taxpayers’ money to subsidise the income of people who work for employers paying poverty wages. (Richard Towers in LPU 2002d) Regressive forms of taxation, such as indirect taxes, also mean poorer workers actually help subsidise such employers directly, whilst lack of more progressive direct taxation means that workers at the lower end of the distribution effectively subsidise those higher up who benefit from such ‘cheaper’ consumption of goods and services. Any transactions cost analysis would signal the gross underestimation of administrative costs involved in the effective subsidy of low wages through tax credits and benefits, especially wasteful for public sector workers where government is ultimate ‘employer’. Current pressures may in practice lead to ‘redefinitions’ of already disputed terms like ‘low pay’ and ‘poverty’ along absolute rather than relative lines. However, it has been argued that attempts to define poverty in absolute terms or to view the wealth of the affluent ‘as disconnected from poverty and social inclusion’ would be flawed: inequality is a relative concept, and ‘poverty therefore cannot be isolated from wealth because it is defined by it’ (Harvey 2001).26 Such concerns signal the need for closer linkage of the NMW to broader distributional, fiscal and transfer issues, not further distancing.

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Strengthening equal pay and trade union rights A second set of proposals concern the potential to strengthen policy and legislation on equal pay and trade union rights, as opposed to pursuing measures which rely primarily on exhortation to voluntary change.There has been an increasingly vocal campaign arguing for the need to strengthen equal pay legislation and codes. There are strong suggestions that these will need to extend beyond recent intiatives such as the new questionnaire procedure for use in equal pay cases included in the recent Employment Bill, the Part Time Workers and Burden of Proof Regulations, and the government departmental reviews, as noted by the Women and Equality Unit (2001/2). The Equal Opportunities Commission (EOC), for example, has argued that the government should ‘modernise equal pay legislation and include a requirement for employers to hold pay reviews’ (Mellor, cited in UNISON 2001). Similar arguments have been advanced by the TUC: Employers should be carrying out pay audits to ensure their pay systems are not discriminating against women and then taking steps to root out hidden discrimination and remove it. If they won’t do it voluntarily, then it should become a legal obligation. (Carberry, cited in TUC 2002)27 A particularly wide and interlinked series of proposals have been suggested by the LPU (2001a: 16–18) to ‘bridge the gender pay gap’.These include proposals to make amendments to equal pay legislation, including simplifying it and removing the male ‘comparator approach’, and to take a ‘mandatory, not voluntary, approach’ to pay audits. However, linkages are also made with the need to: address overall wage inequality, which has ‘depressed wages in the lowest paid jobs [where] women are concentrated’ (see also LPU 2002b: 15); address structural inequalities; raise the NMW; and restore and improve on the Fair Wages Resolution and Schedule 11 of the 1975 Employment Protection Act.This last measure is viewed as ‘essential to counter-balance the negative effects of privatisation and the contract culture on workers’ pay and conditions’ and to provide a ‘common approach to the dual problems of unfair competition and low pay’ (LPU 2001a: 16–18) Some urgency has been added to these proposals, and to the need for robust pay systems in particular, by a recent spate of litigious activity by both non-unionised employees, and unionbacked employees.28 Calls for the law to be amended to enable ‘group or class actions’, as in the US, are likely to increase (Roberts 2002), and internal government dissension over necessary measures may become more apparent.29 Building on this wide range of proposals, a compelling series of arguments also arise with respect to the need for employees to have sufficient ‘voice’ in negotiating improvements with employers in a context of a continuing asymmetry of power.30 Despite sustained membership loss, unions remain the primary and most direct mechanism for collective representation of labour within individual workplaces and the wider political process.Their role in countering wage inequality is widely acknowledged (Green 2001: 212), as is their potential to provide a ‘shock effect’ to ‘low road’ employers with beneficial impacts on productivity (Freeman

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and Medoff 1984). These effects are likely to be heightened by the increasing ‘feminisation’ of unions, with a greater emphasis on ‘equal’ and ‘low’ pay issues, and an increasingly vocal ‘manual’ workforce. The economic arguments have been given added weight by recent observations from ‘authoritative’ bodies. The LPC, for example, has noted that ‘higher levels of unionisation in the workforce and the existence of collective bargaining reduce the probability of low pay’ (1988: 16; see also LPU 2001c). Recent government initiatives, and most of the proposals for improving gender-based inequalities outcomes, rest to a greater or lesser degree upon unions for their pragmatic application. The work, for example, of union representatives in helping employers conduct voluntary pay reviews would almost certainly be essential, not least to ensure such reviews take place, are ‘robust’, and impact positively rather than negatively on employee perceptions and productivity. Overall union membership has risen, albeit modestly and falteringly, from its low point in 1997 (Labour Market Trends July 2002). However, there is a case to be made that an extension of trade union representation and rights,31 particularly, though not exclusively, to smaller firms and those located in the private sector services (with relatively low levels of unionisation and collective bargaining coverage) could be a crucial concomitant to the NMW and other proposals. At the point of writing, the TUC is reported to be planning to table a wide range of proposals for new employment rights, to include extension of union recognition and changes in the law concerning the capacity to take effective action (Guardian 18 July 2002). Government as a new model employer: a case example A further set of proposals concerns the role that government can play in addressing inequality directly through its own employment practice, and providing positive example to the private sector. One of the factors that can tend to get submerged in modern labour market analyses is the major role played by government as a direct or indirect ‘employer’ of labour in its own right. This lends itself to the potential use of public sector employment, pay and purchasing procedures as ‘regulatory economic tools’: the public sector is both a potentially important source of inequalities and a potentially important additional mechanism to the NMW in addressing them. Despite losses of employment over the last two decades, direct public sector employment still accounts for around 5.2 million, or just over a fifth, of all those employed, and has recently been rising again, albeit modestly (figures in Labour Market Trends 2002: 335). There ‘may be as many as 2 million’ more ‘uncounted public workers’ indirectly employed by government through outside contractors (Toynbee 2002).The particular compositional characteristics of public sector employment with respect to gender and class lend a large potential for addressing distributional concerns: 4 of the 5 million directly employed workers are women, over a third of all female employees. Within the largest public sector employment areas of health and local government (including education), women account for 80 and 71 per cent of the workforce, respectively. These figures stand in stark contrast to the overall share of women in the economy-wide workforce, of around 45 per cent (Thornley 2002a: 8).The public sector also employs

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disproportionately high numbers of part-time women workers (ibid.). Despite the effects of contracting out, the sector is still a major employer of manual and lower clerical and administrative staff. The public sector tends to have a more truncated pay distribution at both the upper and lower end than that of the wider economy. However, it exhibits similar patterns of inequality, with larger than average pockets of low pay just above the level of the NMW in places. Partly because of an early adherence to Conservative spending limits, public sector pay under Labour has continued its decline against private sector pay. The potential for positive government example can be illustrated by reference to a case study on pay in the largest public sector employment area, local government, conducted by the author for UNISON (Thornley 2002a).32 Local government broadly defined includes teachers, police and firefighters, as well as National Joint Council (NJC) local government services staff such as home carers, social workers and non-teaching staff in schools, who form the largest single bargaining group in local government. It is a major employer of women and part-timers: women constitute almost three-quarters of the local government workforce, and almost 60 per cent of them work part-time. Despite suffering some of the worst employment losses through CCT (now ‘best value’), local government is still a major employer of manual workers and of low-paid clerical workers. Figure 6.1 (updated from Thornley 2002a) shows the deterioration in gross pay for local government workers as a whole against average earnings from 1992. The situation is yet worse for the 1.3 million NJC local government services staff, covered by Single Status arrangements since 1997, and forming one of the largest bargaining units in Europe. Over two-thirds of all NJC workers earned basic pay of less than £13,044 in 2000, rising to just £13,500 in 2001, compared with a national average basic at that point of £19,796: almost a quarter are stranded on the lowest two pay scales, earning less than £5 per hour in 2001.The majority of NJC staff are low-paid workers under the Council of Europe decency threshold measure: over four-fifths of the low-paid are women, with the rest mainly male manual workers. Part-time women form almost half the workforce, yet nine in ten are lowpaid: the majority earned a pro rata basic of less than £10,494 in 2000 (£10,875 in 2001).The gender pay gap within the NJC workforce is evident across the pay distribution, with NJC women as a whole (weighted by proportions of full and part-time workers) earning just two-thirds of average gross pay for their male colleagues.The gender pay gap between NJC women and men employed in the wider economy has actually been widening, with part-time women NJC workers earning less than half economy-wide male pay pro rata.The position of local government NJC staff relative to comparable groups in the wider economy is shown in Figure 6.2, where it can easily be seen that NJC staff fare poorly against all comparators. The evidence shows that, if wider inequalities are to be addressed, then employment in local government is a significant focal point, quite apart from any internal issues of efficiency and equity, including the avoidance of equal pay litigation and further deteriorations in industrial relations.33 It is also clear that in raising the issues around poor pay in local government, as with health and the wider public sector, unions also play a role in addressing wider economic and social inequalities.

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130

120

110

100

90

80

70

Local government average Female manual

60

Female nonmanual Male nonmanual Male manual

50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Figure 6.1 Local government pay 1992–2001: male and female manual and non-manual local government workers as percentage of average full-time gross weekly pay for all occupation.

However, government could adopt a more proactive role, and increasing pressure is being applied upon it to do so and to act as a ‘new model employer’, with particular respect to gender inequalities.The Equal Pay Task Force has argued that ‘as a major employer, the Government should act as a role model and develop good practice’ (2001: xiv).34 The Kingsmill Review (2001: 7) has emphasised the ‘distinctive features of the public sector’, making it ‘particularly appropriate’ for government to ‘seek to take a lead’: it is ‘particularly vulnerable should it fail to actively address historic legacies over equal pay for work of equal value and other issues of women’s employment and pay’. Local government is viewed by Kingsmill as especially vulnerable given its concentration of women in particular occupations and at lower grades. Similarly a recent Audit Commission report notes that ‘local authorities still have a long way to go to meet their legal duties on equality’, while new EU Directives will outlaw discrimination in employment on grounds of sexuality, religion and age, thus providing additional pressures for change

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570 520 470 420 370 320 270 220 170

NJC p/t female

Female manual

CoE low pay

NJC female

All female

Male manual

NJC average

Female non-manual

NJC male

Private sector

All occupations

All male

Male non-manual

120

Figure 6.2 Pay for local government NJC workers covered by single status arrangements compared with key economy-wide comparators in 2000 (full-time gross weekly pay, part-timers pro rata).

(Equal Opportunities Review 2002).Taking a lead in the public sector across multiple sources of inequality could provide example to the private sector, and be reinforced through further improvements in legislation and codes of practice. Distributional changes could stimulate improvements in innovation and productivity. However, there are attendant challenges. A more strategic approach, with ‘joined-up thinking’, would be required: current policy measures have tended to be voluntarist and piecemeal in nature, and there has long been an absence of any coherent or ‘long-sighted’ normative pay policy in the public sector. Recent, more ‘generous’, public sector pay awards and initiatives have tended to be reactive and geared towards ‘strategically placed’ occupational groups, for example, doctors and police, although some positive awards at the lower end of the distribution have been made in health (and are being considered for local government workers at

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the time of writing). Such ad hoc approaches may not only fail to address more generalised inequalities, but may also exacerbate them over time. The drift to inadequately resourced ‘hybrid’ public sector pay mechanisms (Thornley 1998), continued use of labour substitution strategies and ambiguities over preferences for private or public sector provision of ‘public services’ may also prove a hindrance to wider initiatives (Thornley et al. 2000).The plight of workers already ‘contracted out’ remains a continuing source of particular concern (Toynbee 2002), as does the potential for the ‘two-tier workforce’ to grow with a further deterioration in terms and conditions. Revaluation and resourcing Two final challenges underpin any policy shifts of the type discussed here.The first of these concerns the need for re-evaluation and revaluation of the worth of work as a basis for redistribution.An endemic problem is the widespread undervaluation of both ‘manual’ and ‘women’s work’. These problems are especially deep-rooted in work regarded as ‘menial’ or ‘dirty’, but which often constitutes essential work with high social use-values not reflected in social status or earnings. Double disadvantage can be found in care-work and work involving ‘soft’ (and often unrecognised) skills – typically feminised areas where pay differences are not really explicable in terms of job content or any reasonable definition of ‘skill’.35 The solution to ingrained class and gender inequalities of this sort will not be found in conservative job evaluation schemes where these simply replicate and legitimate the existing hierarchy. While imaginative job redesign is welcome, it will not be found either in simplistic suggestions that further acquisition of education or training will provide a route out of poverty. Second, serious policy changes require not only supporting institutional and legislative infrastructure, but also adequate resourcing and pump-priming of fairer rewards. It is, of course, this latter requirement, which may prove a particular stumbling block within the public sector, and redistributional policies may also be resisted by low-road employers, and those who gain most from inaction, particularly at points of downturns in profits, share prices and dividends.

Conclusions The key labour market policies of successive Conservative and Labour administrations from 1979 to the present have been explored in this chapter, and it has been argued that issues of distribution must be seen as central, not least because there is growing evidence that rising inequalities also carry disbenefits for the national economy.The chapter has also reviewed a number of arguments for future policy direction, including strengthening the impact of the NMW, strengthening wider rights-based legislation and policy, particularly on equal pay and trade union rights, and re-evaluating government’s role in providing immediate example on best employment practice through its own role as a major employer. It has been argued that a wider project would require a revaluation of worth, and that associated costs

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may be resisted. However, short-term costs should be evaluated against potential longer term gains in moral and political legitimacy, as well as economic ‘efficiency’ in the form of improvements in productivity and innovation, morale, industrial relations, absenteeism and turnover. Quite apart from its ethical desirability, a more equitable society may also prove more stable and more productive.

Acknowledgement I am indebted to Dan Coffey and Wendy Richards for their comments on drafts of this chapter.

Notes 1 For an accessible and succinct critique of this model, see Burchill (1997: chapter two). 2 Sometimes with a ‘disproportionately adverse impact on women’ (Colling and Dickens 2001: 138). 3 An example is given for the case of the NHS in Thornley (1998). 4 Standardised rates (OECD 1998). 5 Data deficiencies in earnings statistics are notorious.The largest survey, and one offering the longest ‘consistent’ time series, is the New Earnings Survey. However, early editions typically provided entirely separate statistics for male and female employees (making ‘all-worker’ comparisons problematic over time), and there have also been a number of definitional changes (see Atkinson 1999 on ‘adult’ rates). 6 The all-worker distribution obviously also picks up improvements in the gender pay gap, which would tend to increase equality (see also Joseph Rowntree Foundation 1995a: 20). 7 It has long been observed that the categories ‘manual’ and ‘non-manual’, employed for many years solely in relation to male jobs, relate less obviously and happily to female occupations or to their relative position in the wage and ‘class’ hierarchy. This is a problem which may also be substantially impacting upon the extent to which some commentators ascribe changes in inequalities to changes in levels of ‘skill’. 8 See Will Hutton on Thatcherism: Guardian 24 March 2002. 9 See also Chapter 2. 10 With the exception of a small disadvantage for the UK with respect to the US. 11 Linking in to the historically ‘recurring preoccupations’ of proponents for a minimum wage, who saw in statutory regulation a means of ‘countering destructive competition and improving economic performance’ (Sachdev and Wilkinson 1998: 53). 12 Skills and training are discussed in Chapter 7. 13 Slightly higher rates would have pulled in very significant numbers of workers: at that time, a figure of £4.00 would have affected 4 million workers, a figure of £4.50 nearly 5.8 million workers; the number of public sector workers who would have been affected rose exponentially from around the £3.50–3.70 point (see LPC 1998: 124, figure 6.8). 14 An article in the Independent (19 February 2000) claimed that there was an internal dispute with the rise being ‘resisted by the Chancellor until Tony Blair intervened, with the support of Stephen Byers … to insist that it was needed’. The same article also claimed that the chair of the LPC, George Bain, ‘came close to resigning in protest at Gordon Brown’s opposition to raising the minimum wage’. 15 Author’s calculations from New Earnings Survey 1999, 2000 and 2001. 16 See, for example,West Midlands Employment & Low Pay Unit 2001/02: 10–13. 17 The NES does not currently allow analysis of wider disadvantage, by ethnicity or disability, for example.

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18 The pay gap narrowed by around 2 per cent in weekly terms, and rather less in hourly terms between 1997 and 2001 – much the same as change between 1991 and 1996. 19 See figures in NES Survey 2001 Summary report. 20 Author’s calculations from NES 2001. 21 See also Child Poverty Action Group (2002). 22 From Department of Social Security Households Below Average Income survey 1999/2000 in LPU (2001b). 23 See, for example, Jon Cruddas, cited in Maguire (2002); Hattersley (2002); Alan Simpson, cited in BBC News 3 February 1999 (http://news.bbc.co.uk). At the point of writing there are difficulties with Labour party funding. 24 Although service sector employment increased, around 400,000 further jobs were lost in manufacturing (Milne 2002). 25 See Chapter 2. 26 See also Hutton (2001) on problems with conceptions of ‘equal worth’. 27 The TUC is embarking on a programme of training to create 500 equal pay representatives to work with employers on pay reviews. Some (limited) government funding has been provided to the TUC for this, and also to the EOC to develop an equal pay model for use in reviews (Roche 2002). 28 See, for example, PCS case for ACAS workers (PCS 2002). 29 See Ward (2002) on underlying reasons for the lack of an equal pay target in recent public service agreements. 30 An eloquent exposition of this asymmetry can be found in Seifert (2002: 3). 31 See also Towers (2002: 181) and special issue of Industrial Relations Journal. 32 This report formed part of the NJC Staff Side Pay Claim for the 2002 round.The findings are part of a three-year project analysing local government pay and the impact of single status arrangements. 33 At the time of writing, failure to agree the 2002 pay claim has led to the first full national strike in the sector since 1979 (UNISON 2002).This industrial action has been reported as ‘the biggest strike by women in British history’ and ‘the first ever joint national stoppage by blue and white collar workers’ (Guardian 17 July 2002: 5).After the involvement of ACAS, union members are currently considering a new set of pay proposals, which are bottom-weighted over a two-year period and also include a proposal for a local government pay commission to report in September 2003. 34 Mary Honeyball (MEP) queries whether the British government is ‘prepared to put its own house in order and become a model employer’, noting it would ‘be difficult for a government which was not attempting to do the best for its own female staff to get other employers to implement equal pay measures’ (Tribune 2 November 2001: 15). 35 See, for example,Thornley 2001a and 2001b on non-registered nurses in the NHS.

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Low Pay Commission (1998) The National Minimum Wage: First Report of the Low Pay Commission, June, HMSO Cm 3976. Low Pay Commission (2000) The National Minimum Wage: Second Report of the Low Pay Commission, February, HMSO Cm 4571. Low Pay Commission (2001) The National Minimum Wage: Third Report of the Low Pay Commission, March, HMSO Cm 5075. Low Pay Unit (1996) ‘Coming Apart at the Seams’, New Review of the Low Pay Unit, November/December no. 33, London: Low Pay Unit. Low Pay Unit (2001a) New Review of the Low Pay Unit, May/June, no. 69, London: Low Pay Unit. Low Pay Unit (2001b) New Review of the Low Pay Unit, September/October, no. 71, London: Low Pay Unit. Low Pay Unit (2001c) Facts About Low Pay, October, http://www.lowpayunit.org.uk/ research/factslowpay.shtml (accessed 12 June 2002). Low Pay Unit (2002a) Minimum Wage Factsheet, http://www.lowpayunit.org.uk/ minwage/minwagefactsht.shtml (accessed 16 July 2002). Low Pay Unit (2002b) New Review of the Low Pay Unit, January/February, no. 73, London: Low Pay Unit. Low Pay Unit (2002c) New Review of the Low Pay Unit, March/April, no. 74, London: Low Pay Unit. Low Pay Unit (2002d) Press Release, 15 April, http://www.lowpayunit.org.uk/press/ rels/pr000422.shtml (accessed 16 July 2002). Low Pay Unit (2002e) Press Release, 19 February, http://www.lowpayunit.org.uk/press/rels/ pr000419.shtml (accessed 12 June 2002). Maguire, K. (2002) ‘No 10 Failing to Help Lowest Paid, Says Ex-adviser’, Guardian, 15 March. Milne, S. (2002) ‘Labour has Undergone a Sea Change’, Guardian, 28 March. Nolan, P. (1989) ‘Walking on Water? Performance and Industrial Relations under Thatcher’, Industrial Relations Journal, 20(2). Observer 18 June 2000. OECD (1998) Economic Outlook, June, HMSO. ONS (various) New Earnings Survey, London: ONS. ONS (2000) Social Trends 30, London:The Stationery Office. PCS (2002) ‘ACAS Staff Win Compensation Deal for Years of Unequal Pay’, http:// www.pcs.org.uk/newsbrief/press/2002/release0223.htm (accessed 1 October 2002). Roberts,Y. (2002) ‘Follow the Money, Girls. It Belongs to You’, Observer, 10 March. Roche, B. (2002) Speech on 8 March at EOC Conference, http://www.cabinetoffice.gov.uk/womens-unit/speeches/08-03-02.htm (accessed 11 July 2002). Sachdev, S. (2000) ‘Minimum Wage Lessons the Government Should Heed’, Guardian, 14 December. Sachdev, S. and Wilkinson, F. (1998) Low Pay, the Working of the Labour Market and the Role of a Minimum Wage, London:The Institute of Employment Rights. Salamon, M. (2000) Industrial Relations: Theory and Practice (3rd edn), Hemel Hempstead: Prentice Hall. Sawyer, M. (1989) ‘Industry’, in M. J. Artis (ed.), Prest and Coppock’s The UK Economy (12th edn), London:Weidenfeld and Nicolson. Sawyer, M. (2001) ‘Privatization and Regulation’ in M. Sawyer (ed.), The UK Economy (15th edn), Oxford: Oxford University Press. Seifert, R. (2002) ‘Public Choice Theory, Privatisation and Flexible Employment Practices in the UK’, Federation News, 52(2): 3–55, London: IER/GFTU.

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Thornley, C. (1998) ‘Contesting Local Pay: The Decentralization of Collective Bargaining in the NHS’, British Journal of Industrial Relations, 36(3): 413–434. Thornley, C. (2001a) ‘Divisions in Health-care Labour’, in C. Komaromy (ed.), Dilemmas in UK Health Care, Buckingham: Open University Press. Thornley, C. (2001b) Still Invisible: Non-registered Nurses in the NHS – an Update, London: UNISON (also presented by UNISON as supplementary Evidence to the Review Body for Nurses, Midwives, Health Visitors and Professions Allied to Medicine). Thornley, C. (2002a), Cold Comfort:The State of Local Government Pay, London: UNISON. Thornley, C. and Coffey, D. (1999) ‘Notes and Issues:The Low Pay Commission in context’, Work, Employment & Society, 13(3): 525–538. Thornley, C., Ironside, M. and Seifert, R. (2000) ‘UNISON and Changes in Collective Bargaining in Health and Local Government’, in M. Terry (ed.), Redefining Public Sector Unionism: UNISON and the Future of Trade Unions, London: Routledge. Towers, B. (2002) ‘Editorial: Employment Rights and Union Avoidance in the USA, UK and Europe: A Special Issue’, Industrial Relations Journal, 33(3): 180–181. Toynbee, P. (2002) ‘Private Lives Need Help’, Guardian, 23 August. Tribune 2 November 2001. TUC (2002) Press Release, 24 January, http://www.tuc.org.uk/equality/tuc-4256-f0.cfm (accessed 2 July 2002). UNISON (2001) UNISON News, 30 March, http://www.unison.org.uk/news/ focus/pages/news1.html (accessed 12 April 2001). UNISON (2002) Press Release, 31 May, http://www.unison.org.uk/asppresspack/ pressrelease_view.asp?id⫽110 (accessed 12 June 2002). Ward, L. (2002) ‘Women’s Issues “Ignored in Government Priorities” ’, Guardian, 7 February. West Midlands Employment & Low Pay Unit (2001/02) Employment Matters, Issue 4, Birmingham:WMELPU. Women and Equality Unit (2001/2), http://www.womenandequalityunit.gov.uk/ pay%20gap/introduction.htm#Pay Reviews, (accessed 11 July 2002).

7

The problem of British education policy as economic policy Francis Green

Introduction Compared to other similar industrial nations, the workforce in Britain is, as a whole, poorly educated.This deficiency, a recurrent theme of enlightened reports and monographs in earlier times, has been asserted hitherto on the basis of piecemeal evidence and informed systemic comparisons with other nations. Recently, however, newly available, consistent, statistics have formally confirmed that educational attainment is low in Britain.The relevant facts will be presented below.Their economic significance arises because of the widespread increase in the perceived importance of education as an economic policy instrument, following technological changes and global development. The British problem now is that, despite absolute improvements in education levels, compared again to other nations the education levels may be falling further behind rather than catching up. Even in this era of high demand for education, no British government has hitherto found itself able to commit the resources necessary to narrow the education gap with other countries. This ‘failure’ of British education policy qua economic policy is not a simple mistake. Rather, it arises from contradictory social, political and economic forces.The consequence, as I shall show, is that the education sector, torn between conflicting forces, is under considerable stress, with declining relative pay and an extreme intensification of work effort.The remedy lies in a democratic resolution of those contradictions, and is not to be found merely through continuous, piecemeal, improvements to the education process or in the training system, even though the latter are also needed. This chapter will first present formal evidence of Britain’s skills deficit, using other similar countries as a benchmark. I then consider the origins of the low educational base, and argue that the political difficulty of raising the level of resources devoted to education is linked to rising inequality in Britain. I examine how the dilemma of increasing demand and constrained resources has been met by a combination of responses: a radical transformation of the independent education sector, high levels of work-based training and efficiency improvements in the state education sector. I then present formal evidence of the increasing strain being felt by the frontline workers in the education sector, that is, the teachers and lecturers.

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This leads me to conclude that there are no more free lunches to be had from the education sector, and that the best chance of raising education achievements is to bring together a sufficient coalition of political forces to support a substantive and sustained rise in education inputs, to match the resources devoted in other countries.

Education policy in (economic) theory1 The economics of education policy begins with the insight that education is not only something to be consumed but also an investment with a future pay-off. The primary quantifiable pay-off is the increased earnings power obtained by more educated workers. From this observation, conventional economics builds an individualistic model of decision-making about education investment. The theory is matched by a large empirical literature estimating the quantitative gains and costs of the investment. Individuals take their education decisions based on the expected private rate of return to each incremental investment, relative to alternative investments. In this way, individuals or their families decide how long to spend in education, which courses to take and so on. Education, however, has special properties that make it rather different from many other services that are sold in the market, and which thereby justify social intervention. First, education is very widely regarded as unusually beneficial. It is hence classed as a ‘merit good’, something which society thinks that individuals, especially children, should partake of for their own good. (Education is thus conceptually the opposite of a hard drug, which government proscribes.) Thus, most governments make education compulsory and provide it free up to a certain level. A distinct though related point is that education has strong external benefits. Each individual prefers others in the same society to be more educated, in that educated individuals generally make for better citizens, less crime and more efficient workplaces that enhance everyone’s productivity.These externalities are not, however, all positive, because to some extent education is a signal of comparative ability and perseverance that employers find useful. Individuals benefit from being further up the educational achievement ranks, and might thus prefer their neighbours from other schools to fare worse than themselves. For these reasons, the social rate of return to education differs from the private rate of return. Further motivation for state intervention derives from equity considerations. If the government’s aim is to reduce inequalities in society, because of a general distaste for poverty and inequality, it could not afford to leave education and training decisions to the market. Market-based systems might end up with individuals choosing vastly different levels of education, with resulting extreme inequalities in income.This society-splitting force is reinforced by the long and uncertain nature of education as investment. Capital markets cannot compensate adequately for this uncertainty, and consequently those with existing wealth are much more able to invest in education – a cumulative process generating greater wealth inequality. And so, egalitarian-minded governments must also provide education subsidised or free, in order to cut into this chain of causation.

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The uncertainty and long-term nature of the benefits of education have led some governments to take a strategic approach to the supply of education, so that over time the outputs of the education system match the needs of the economy. This motivation for intervention has been found to be especially important in rapidly growing economies in East Asia, such as Taiwan, Singapore and South Korea. Although education up to adulthood is the most important phase, continued education and training is also demanded, either to acquire those skills that could not efficiently be transmitted in schools, or to learn the new skills demanded by employers in a changing economy, or to make up for any earlier deficiencies in education. Although the notion of education as a ‘merit good’ survives in much public rhetoric about the need for lifelong learning, the paternalistic basis for this argument is more uncomfortable and ineffective when dealing with adults rather than children. Why should the state know better than employers or employees about their training needs? Nevertheless, there remain cogent arguments for the state to intervene in training markets. As with education, capital market imperfections can lead to individuals and firms under-investing in training. In addition, an imperfect labour market can lead to a situation where an employee and his/ her employer together are unable to capture all the benefits of training. When an employee moves to another firm, the new employer receives some of the benefits. Thus, as with education, the social returns to training may exceed the private returns. There will be under-investment, unless the government intervenes to regulate the quantity or subsidise the cost of training. These are general arguments supporting the need for governments to intervene as funder and/or regulator of the education and training market.Typically, because the funding is so large, for reasons of control governments also choose to act as the providers of education services.

The British problem Although the above conceptual framework provides reasons for government intervention, it does not lend any practical quantifiable means of assessing this intervention. In principle, governments should use the social rate of return to education as the guide to whether to spend more or less, and as to where improvements could be made. However, there are in existence no satisfactory ways of quantifying all the social and external benefits of education.All that is known is that such benefits are large and ought not to be ignored. In practice, decisions about the level of state education spending are better explained by the political economy of education (to which I return below) than from any supposedly rational calculus of the social rate of return. All democratic governments (and many autocratic ones) are faced with the intervention imperatives that I have outlined above. How can we assess successive British governments’ performance in this respect? The best available method is that of benchmarking, a common practice in modern management. In this case, the aim is to benchmark the performance of governments in delivering education systems at least as good as those of other similar nations. Until recently, such international

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comparisons were difficult or impossible to make, owing to lack of reliable data on the comparability of educational attainments and on their spread within populations. It was possible to make comparisons of certain important features of educational systems, but usually not to make reliable judgements about their major effects.A particularly simple form of benchmarking becomes possible, now that the availability of information has greatly improved. Comparisons derive from two kinds of data sources. First, there are cross-national comparisons of time series of education inputs, which have been used to derive estimates of ‘human capital stocks’ in the working population (Centre for Educational Research and Innovation 2001; OECD 2001; Barro and Lee 2002). These data are drawn from national censuses, from representative sample surveys and from administrative data on school enrollments. Second, there are a range of cross-national surveys of educational outputs, as shown by tests on representative survey samples of adult populations (OECD 1995, 1997).We can draw on both methods to benchmark successive British governments’ performance in rectifying market failures in education and training. Table 7.1 brings together educational attainment figures for OECD countries and highlights the position of the UK. At the lower end of the attainment spectrum, the UK is very poorly educated by comparison with the large majority of other countries. In the UK some 71 per cent of the adult population had achieved less than upper secondary education levels (column (1)). Only five countries had a larger proportion. By contrast, at the top end of the education spectrum (column (3)), some 16 per cent of the adult population had achieved tertiary education, a respectable level comparable with many other similar countries, though substantially less than the norm in North America. Column (2) shows that, despite the UK’s poor showing at the below upper secondary level amongst the whole adult population, its relative position appears to be worsening: in most other countries the relative improvement in upper secondary attainment of the young cohort compared with an older cohort is superior to that in the UK.Thus, the education stock of the whole adult population is already set to rise faster in other countries than in the UK.The British educational attainment deficit is not only a historical failure: it looks set to rise in the near future. Column (4) shows comparable figures for literacy in the adult population, for a smaller range of seventeen OECD countries. For the whole population, the UK outperformed only Hungary, Ireland and Portugal. Amongst the young cohort of 16–25 year-olds, the UK score exceeded only the scores of Hungary, Ireland and the US. Comparing qualifications, as opposed to education attainment levels, is more problematic as it involves scrutiny of qualifications in different countries and the making of judgements about standards. So figures are only available for a limited number of countries where such sufficiently close scrutiny has occurred.The picture of a large deficit in the UK in the late 1990s emerges too from this comparison.Thus, the proportion of the 25–28 year-old workforce holding qualifications at a level equivalent to levels NVQ2 or above was 61 per cent in the UK, but 82 per cent in France and 83 per cent in Germany; the equivalent figures for levels NVQ3 or above were 41 per cent in the UK, 53 per cent in France and 79 per cent in Germany.2

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Table 7.1 Education attainment in the UK in international context, mid-1990s

UK Australia Austria Belgium Canada Czech Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan South Korea The Netherlands New Zealand Norway Portugal Spain Sweden Switzerland Turkey US

(1) Percent of 25 and over population with less than upper secondary education

(2) Ratio of upper secondary attainments, 25–29 year-olds over 50–54 year-olds

(3) Percent of 25 and over population with tertiary education attainment

(4) Average literacy score a, 1994–98

71 55 57 74 38 69 42 45 64 63 65

1.16 1.35 1.24 1.61 1.19 1.11 1.14 1.47 1.47

16 24 12 16 49 9 19 19 15 15 11

268 273

288 296

278 279 283 294 289 — 285

305 305 308 320 325

249

275

259

282

287 269 297 220

312 288 307 289

306 274

314 299

268

274

71 64 76 61 43 67 52 35 83 76 35 55 87 29

2.19 1.28 1.16 1.88 1.90 2.33 1.31 1.20 1.21 2.70 2.97 1.24 1.15 2.19 1.03

13 16 12 22 21 19 39 21 10 12 21 15 7 47

16–65

16–25

310

Sources: (1) and (3): Barro and Lee (2002), p. 560; (2): OECD (2001), p. 145; (4): Barro and Lee (2002), p. 555 and OECD (2001), p. 145.b Notes a Average test score in the ‘document’ domain, on a scale of 0–500. ‘Document’ literacy refers to the knowledge and skills that are required to locate and use the information contained in official forms, timetables, maps and charts. b OECD (2001) has alternative estimates attainment; however, there is reason to doubt the allocation of education attainment levels in the case of the UK (Barro and Lee 2002), so the Barro–Lee estimates are preferable at least for this purpose.

Origins of and responses to the problem Any benchmarking exercise presumes an intention to learn from best practice in other settings with a view to implementing changes. It would be wrong to assume that human capital stocks elsewhere, if greater than Britain’s, necessarily constitute better practice, nor that foreign practice could automatically be transferred to Britain. Nevertheless, this exercise suggests that successive British governments have

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for decades been responding less comprehensively than foreign counterparts to the universal imperative to intervene in the education market. It would be superficial to regard this outcome as merely a mistake, an incorrect judgement of the importance of education externalities (although such a misjudgement is involved). Instead, various commentators have looked for systematic historical factors underlying the failure (Ashton and Green 1996; Steedman 2002).The education system inherited in post-war Britain was one dominated by traditional educational values, which were quite distinct from the commercial values of the economy.At the same time the business world exhibited a distrust of education’s products, once one discounted the able elites that went to the public and grammar schools.This distrust was manifested in relatively low demands for qualified workers. Political economy provides a framework for understanding the macro-dynamics of the education system in Britain. As has been many times documented, the education system inherited in the 1970s remained dominated from the top by a public school elite that bought for its upper class and upper middle class children a place in society and the economy.The vast masses went to the new comprehensive schools inaugurated by Harold Wilson’s Labour Governments in the 1960s. However, since that time the state education system has had to develop, first in the context of successive economic and fiscal crises during the 1970s, then in the context of increasing fiscal tightness in the 1980s and 1990s. The British economy moved into the era of the ‘culture of contentment’, as J. K. Galbraith describes it, in which the upper middle classes felt less affection towards the state and communal provision of services including education (Galbraith 1992).The British economy, in the space of a generation, joined the ranks of the most unequal in the industrialised world (Green et al. 1994). Many of the classes in power, both in business and in government, had neither personally experienced the state education system, nor subscribed their own children to it.The pressure for an increase in taxation to fund the necessary expansion in the quality of comprehensive schools was weak. As a consequence, public resources devoted to the state education system underwent a steady decline from the mid-1970s onwards (see Figure 7.1). In the first term of the current Labour government a commitment was made to focus policy on education, but this focus was trumped, as far as resources were concerned, by another commitment to exercise prudence with the national budget and not to increase income taxes. Thus, even by 2000/01 public expenditure remained at 4.8 per cent of Gross Domestic Product (GDP), barely greater than its zenith in the middle of the Thatcher years, and far below the 6.4 per cent recorded in 1974/75. With this past history of a declining share for investment in education, deficiencies in the stocks of achieved qualifications in Britain appear unsurprising.This would be so if other similar countries’ governments have invested more heavily in education in the past. While comparable estimates over a long period of time are not available, recent history confirms that Britain’s spending on education is relatively on the low side for similar nations. One comparative measure of the resources that a nation devotes to education is the total expenditure relative to its national product. Figure 7.2 shows the UK lying below the average among a group of sixteen advanced countries.

7 6.5 6 5.5 5 4.5 4 3.5 2000/01

1998/99

1996/97

1994/95

1992/93

1990/91

1988/89

1986/87

1984/85

1982/83

1980/81

1978/79

1976/77

1974/75

3

Figure 7.1 UK public expenditure on education, 1974/75–2000/01, percent of GDP. Source: Glennerster (2001), table 2.

8

Public All

7 6 5 4 3 2 1

Country average

US

UK

Sweden

Spain

Norway

The Netherlands

Japan

Italy

Ireland

Germany

France

Finland

Denmark

Belgium

Austria

Australia

0

Figure 7.2 Expenditure on educational institutions, international comparisons, per cent of GDP, 1998. Source: OECD (2001), table B2.1a. Note Includes public and private spending.

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A possible distortion arises if some countries have proportionately more young people than others. Hence, an alternative measure is the amount of expenditure per pupil or student. In 1998, UK education spending per primary school child was $1,276 less than the average, while spending per secondary pupil was $828 less than the average, and spending per tertiary student $117 less than the average.3 These figures are slightly distorted because the figures for several countries include the expenditure of private sector institutions, while the UK figures only include some private institutions. Nevertheless, even making generous allowance for private spending on the small minority, the per pupil UK spending deficit remains very substantial. Directly comparable without any adjustment for the private sector are Austria, Belgium, Italy and Norway, all of which have very substantially higher expenditures per pupil than the UK. The UK spending deficit is reflected both in real resources for teaching and in the amount of education its citizens receive.Thus, the ratio of students to teaching staff was greater than the OECD average at all levels of education in 1999 (OECD 2001). Beyond the age of 15 UK participation in education is distinctly low. The average number of years of education expected between 15 and 29 is 5.4 years in the UK, less than many comparable advanced nations (Figure 7.3).

9 Employed Not employed

8 7 6 5 4 3 2 1

Country average

US

UK

Sweden

Spain

The Netherlands

Italy

Germany

France

Finland

Denmark

Belgium

Australia

0

Figure 7.3 Expected years in education between 15 and 29. Source: OECD (2001), table E2.1. Note UK and US 1998; all other countries 1999. Education while employed refers to periods in which people were both working and in education.

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Governments are more likely to be committed to broad educational investment when the sections of society that enjoy access to power exercise pressure in favour of the education sector. A development of the political economy argument noted above would suggest that more egalitarian societies are likely to devote more public resources to education. In unequal societies, by contrast, those with differential access to power can rely more heavily on their private resources. Is there evidence for this? Figure 7.4 plots public education’s share of GDP against a single measure of income inequality, the gini coefficient. It is apparent that a loose relationship does exist. With one exception (France), those countries with a high degree of inequality all spend comparatively little on public education; meanwhile, among those countries with lesser inequality, having a gini coefficient less than 22 per cent, there are several that spend more than 5 per cent of GDP on education.4 These comprise Austria and the Scandinavian countries, Sweden, Norway, Finland and Denmark. This simple comparison is consistent with the idea that in joining the ranks of the more unequal advanced economies Britain has encountered a fairly general problem, the difficulty of finding the resources for a high-level commitment to education across all of society. Just as rising inequality in Britain during the 1980s was beginning to draw closer fiscal boundaries around what was politically feasible for education and other public spending, this was also an era of expanding demand for education.There were two main sources of this demand expansion. First, it became recognised that this

Public education expenditure, 1998, % of GDP

8 7 6 5 4 3 2 18

20

22

24

26

28

30

32

Gini coefficient (%)

Figure 7.4 Income inequality and public expenditure on education in OECD countries. Sources: OECD (2001) table B2.1a;World Development Report 2000/01, table 5. Note The Gini coefficient measures inequality, ranging from 0 (completely equal) to 100 per cent (completely unequal).

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was an era of rising demand for skills; hence people saw potentially rising returns to educational investments and reacted accordingly. The rising demand was thus in tune with the changing economic times – something which was subsequently validated by evidence for the ongoing rise in demand for higher skilled workers in the 1990s. Second, education was becoming an increasing determinant of economic rank in middle-class Britain. The objective was primarily to achieve more education than others, in order to succeed competitively, even if the education did not necessarily make one more productive at work. Peer pressure also came to play an increasing part in showing the way to expanding educational participation, supplemented at times by public persuasion.Thus, whether driven by intuitive recognition of the economic imperatives of new technologies, or whether simply this was a case of rising middle-class aspiration, the tide turned in the late 1980s in favour of mass education expansion. From 1988 to 1994, participation rates for 16–18 year-olds soared by around 10 percentage points, ushering in a radical transformation of the norms of education for a large tranche of ordinary teenagers. Although the changes appear to have halted in the mid-1990s, this increased participation in turn flooded the roads into the universities.Thus, the Age Participation Index (the ratio of initial entrants into full-time higher education to the average of the 18 and 19 year-old population), which had been static at 15 per cent for much of the 1980s, took off after 1988, reaching some 34 per cent by 1997/98 (National Skills Task Force 2000b). But the rising demand for education from the 1980s onwards was also set against the fiscal limitations facing the mass education system. There have been three responses to this major contradiction, involving changes in the private education system and in the state education system and the maintenance of a high-level adult training system. The ruling classes in Britain responded to the changing economic climate and political context by profoundly altering their respect for academic achievement. Parental pressure and resources were lavished on educational investments.The ‘public’ schools, henceforth, were no longer to be merely an education for membership of a certain class, but would build on their inherent potential for providing a first-class academic education. Between the mid-1970s and the present there was no expansion in the proportions of pupils taking this route: both then and now, some 1 in 20 pupils are educated in private institutions. But, over the same period private expenditure on all education rose dramatically, from around £1.5 billion to £8.2 billion in 1995/96 prices – more than a five-fold real increase (Glennerster 2001). At the turn of the century, fees were increasing at 3.5 per cent a year in real terms.This transformation of the private education system is reflected in the quantity of teacher inputs. In England, the number of pupils per teacher in independent schools began to fall from 1975 onwards from 13.8 (the approximate figure for most of the previous decade) to 9.9 in the year 2000. By contrast, the pupil–teacher ratio in state schools, which had been falling for much of the 1950s and 1960s, stagnated from the mid-1970s onwards. In both 1975 and 2000 the ratio was close to 23 for primary schools and to 17 for secondary schools.5 In the state secondary schools, average class sizes were 27 in both 1977 and 2000, while in primary schools they

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were 21 in 1977, 22 in 2000 (Glennerster 2001). Inevitably, better pay, and the ability to offer superior working conditions, often enables private schools to attract good teachers from the state sector, trained at the tax-payers’ expense (Smithers and Robinson 2001). The results of the increased devotion of resources to academic achievements by the public schools, and by the parents now funding the increased fees, was, unsurprisingly, a large increase in their academic achievements.As Table 7.2 shows, amongst those workers aged 45–60 (who had been in school in the 1960s and 1970s) those who had been to private school were more likely to have attained a degree than those who had been to a state school, by a margin of 34 to 13 per cent. Among the younger part of the population, however, those who had been to school primarily in the 1980s and 1990s, the private school/state school gap in achievement of degree status had risen to a margin of 60 to 16 per cent. The relative gain was most remarkable in the case of females experiencing private education, who raised their achievements from 26 to 61 per cent over the generation separating the two cohorts. Good quality private education is available to all who can afford it in Britain, but this system continues to meet the needs mainly of the upper classes and the aspirations of a small proportion of others in society. Now, the pre-eminence of public school products in the elite universities has become almost entirely meritocratic. Largely gone are the overtly privileged lines of access available to public school products, but instead these schools dominate the top universities by virtue of their successful academic achievements. Democratically minded admissions tutors who might wish to spread access more broadly are in a bind, in that they cannot without preferential treatment for state school pupils redress deep-seated inequalities within society.The exclusiveness of the system as a whole is a constant sore, that is occasionally inflamed by political or media interventions. Devices are periodically introduced to at least give the impression of open access, and to Table 7.2 Proportions of workers who are graduates Age

Private %

State %

45–60 All Male Female

34 43 26

13 13 12

25–44 All Male Female

60 60 61

16 16 15

Source: Author’s calculation from The 2001 Skills Survey, described in Felstead et al. (2002).

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legitimise their role in society and support their calls on public funds. But the large majority has still had to satisfy their rising education demands from the state system, and has had to make do with poorer preparation for and hence reduced access to elite universities. The second major response to the emerging bind between rising demands and fiscal restraint has been a sustained and concerted attempt to raise the efficiency of the state education and training system.6 Since the 1980s, there have been countless changes, many of them improvements. Milestones include the replacement of O-levels by GCSEs, the introduction of the National Curriculum, substantive serial reductions in the controlling powers of local authorities, an ongoing expansion in the use of externally validated tests, including SATS at each of three ‘key stages’ in education (7, 11 and 14), an attempt to revive post-school training with Modern Apprenticeships and, most recently, AS-levels. Post-compulsory schooling and training was reformed and subject to institutional changes, including the founding of Training and Enterprise Councils, replaced in 2001 by Learning and Skills Councils. Higher education numbers have been expanded to meet demand, and new universities created. Both secondary and tertiary sectors have been subjected to intrusive ‘quality-control’ regimes that severely curtailed professional flexibilities hitherto experienced. A prominent example is the introduction of compulsory literacy and numeracy hours in the primary school curriculum. An intrusion with less tangible benefits on educational outcomes, and carrying enormous cost, was the introduction of an external quality control system for universities. Alongside these changes, a transformation of the incentives facing students has led to an improved culture of learning.Though far from ideal, the new incentives to get on academically and attempt a route through to tertiary education has led to many school students working much harder than hitherto to achieve relevant qualifications. At the same time, the teachers whose job it is to help the students achieve have also been asked to contribute more effort (see the evidence below). Thus, together with greater efficiencies and a more academic focus of many schools, pupils in the state sector have also delivered ongoing rises in their achievement in public examinations, despite the lack of adequate funding support from governments. There have also been tangible improvements in the proportions of primary school pupils attaining prescribed targets in the basics of reading, writing, science and mathematics (Glennerster 2001). Although such changes are consistent with the view that some performance improvements in the state sector were possible without extra funds, the largest gains have been obtained in the minority of households with the resources to purchase a superior quality education in the private sector, and achieve higher academic results. Moreover, there remains a questionmark over whether the greater focus on achievement of qualifications has not come at an educational cost.While schools have to concentrate on improving academic results, other activities such as sports and cultural events receive less emphasis. In any performance-driven system, there is always an inherent danger of specifying too narrowly defined targets, and reducing the element of trust in the agents who are required to achieve the targets – the teachers and lecturers in the system.

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A third response to the need for higher skills in the modern economy has been the maintenance of comparatively high levels of ongoing training for those in work. Contrary to common presumptions, adult workers in Britain experience more training, on average, than those in most other industrialised nations do. This finding is another revelation deriving from the improvements in internationally comparable statistics over recent years.The participation rate of UK employed adults in training was higher in the mid-1990s than all other countries participating in the International Adult Literacy Surveys: Australia, Belgium, Canada, Ireland,The Netherlands, New Zealand, Poland, Switzerland and the US.When account is taken also of the length of training, the UK is again among the highest in terms of hours in training per person employed. Other studies have compared job-related training access across the EU, using Labour Force Surveys.The participation of UK workers in job-related training is substantially above average (Centre for Educational Research and Innovation 1998). Much of the training in the UK is paid for directly by employers. It therefore often is designed to have a relatively short-term pay-off, so that the firm reaps the value before the employee quits. However, some of this training does make up for previous education deficiencies. Usually about 4 in 10 workers in training are working towards some sort of qualification. One estimate sets the annual expenditure on workforce development at £23 billion (Spilsbury 2001). Investment on this scale suggests that training of adults is contributing substantially to meeting employers’ skill needs in Britain. However, those with the least education typically receive the least training, in Britain or elsewhere. The educational deprivation of many Britons, therefore, remains a hindrance to their development later on in their life.

Two enduring contradictions None of these three responses appears to resolve successfully the contradiction between the growing demand for and the fiscally constrained supply of adequate education for the vast majority in Britain. Despite widespread recognition of the economic importance of education, public shows of multiple initiatives, and absolute improvements in achievements, the education industry has experienced increasing and arguably unsustainable pressures. Outwardly this pressure has shown up in instances of low morale, that are hard to quantify or compare with other industrial sectors enduring hardship (such as agriculture).When shortages of school teachers are manifested in pupils being crowded into large classes or sent home, the media rightly lets the public know.Yet, shortages are just as important when the problem is that very few qualified teachers available for vacant posts and recruiters are forced to employ less suitable applicants. In fact, shortages rarely manifest themselves in pupils being sent home, owing to the capacity in most schools to muddle through with successive ad hoc arrangements. The costs of such arrangements add to the total burden on the teachers who provide the cover. These outward signs of pressure are reflected in formal indicators of the intensification of work effort in the teaching and lecturing professions and the simultaneous diminution of their relative positions in the pay hierarchy. The first five panels of Table 7.3 build up a multidimensional picture of work intensification

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% who strongly agree that ‘my job requires me to work very hard’ Teachers and lecturers All other occupations % who often or always ‘come home from work exhausted’ Teachers and lecturers All other occupations % whose job involves working at high speed all or almost all of the time Teachers and lecturers All other occupations % who agree or strongly agree that they ‘work under a great deal of tension’ Teachers and lecturers All other occupations % whose job involves working to tight deadlines all or almost all of the time Teachers and lecturers All other occupations % fairly, very or completely dissatisfied with their job Teachers and lecturers All other occupations Teachers’ and lecturers’ average pay relative to average pay for all occupations

1992

1997

2001

48.9 30.7

69.6 38.6

73.4 36.5

62.0 50.1

72.5 45.4

10.3 17.7

33.3 25.1

62.4 47.7

74.0 57.4

53.7 41.6

5.8 6.6 1.66

1.42

13.1 9.1 1.34

Sources: Author’s own calculations using the Employment in Britain survey, the 1997 Skills Survey and the 2001 Skills Survey. For descriptions of these surveys, see Gallie et al. (1998), Ashton et al. (1999) and Felstead et al. (2002), respectively.

in teaching and other occupations. Each column is drawn from high quality, randomly drawn, nationally representative surveys of British people in employment aged 20–60, and the questions asked were identical in every respect across years. The first panel shows the per cent of workers who strongly agreed with the statement ‘my job requires me to work very hard’. It repeats my earlier findings of a general intensification of work effort through till 1997 (Green 2001), and shows a levelling off in work effort in the subsequent four years. However, amongst

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teachers and lecturers, the subjective level of work effort was higher in 1992 and increased by very much more from 1992 to 1997, then continued to increase until 2001, by which time nearly three-quarters, remarkably, responded at the top of the agreement scale. The second panel gives responses to a slightly different question, which asks how often respondents ‘come home from work exhausted’. This question refers to something wider than work effort and probably encompasses commuting time. It shows, however, a similar direction to the first question, namely an increase in work pressure for the teaching profession from 1997 to 2001.The third panel gets at the issue a different way, asking how often respondents’ jobs involve ‘working at high speed’. With a similar question asked in two pan-European surveys, it was found that Britain as a whole encountered more intensification than all other EU countries from 1991 to 1996 (Green and McIntosh 2001).The story of intensification is confirmed here, showing an increase from 18 to 25 per cent who answered at the top two scale points (‘all’ or ‘almost all’ of the time) amongst non-teachers. But amongst teachers and lecturers the responses changed from a well below average 10 per cent to an above average 33 per cent. The fourth panel tries yet another tack, using a question asking whether respondents agreed that they ‘work under a great deal of tension’.As can be seen, in 1992, a larger proportion of teachers and lecturers (62 per cent) than of those in other occupations (48 per cent) agreed or strongly agreed with the statement. The difference was maintained in 2001, as all occupations again registered an intensification of work using this measure. The fifth panel records one final measure of work effort, the per cent whose job involves ‘working to tight deadlines’. This measure also showed the British workforce at the forefront of intensification across Europe from 1991 to 1996 (Green and McIntosh 2001). Here we see that teachers and lecturers record higher levels of work effort than the average for all occupations; but there are no comparable earlier figures to examine the trend.7 Not surprisingly, this intensification of teachers’ and lecturers’ work has been matched by a decline in their overall job satisfaction. As the sixth panel shows, the proportion of teachers and lecturers who are ‘fairly dissatisfied’, ‘very dissatisfied’ or ‘completely dissatisfied’ with their jobs has more than doubled, from 6 to 13 per cent, a substantially greater rise than exhibited by the rest of the workforce.8 Together, these findings establish a robust statistical picture of how the education sector has had to respond to the external pressures on it in the modern period. It has delivered undoubted quantifiable improvements in the product, as indicated by rising numbers of better qualified school children and more graduating students. Unsurprisingly, these improvements have not been conjured up by magical rises in labour productivity (despite fantasies about the role of information technology in replacing traditional teaching). Rather, the level of inputs from those involved in the sector has risen sharply, and the intensification appears to be greater than the average for the rest of the economy. The picture of welfare decline in the teaching profession is compounded by the fact that public expenditure constraints have continued to reduce the relative pay

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position of teachers and lecturers.To take the same period, the hourly pay of teachers and lecturers declined from being two-thirds above average in 1992 to being just one-third above average pay in 2001. In light of this decline, problems in the recruitment of teachers and lecturers are no great mystery. Recent research confirms that pay is an important factor affecting whether graduates decide to become teachers (Chevalier et al. 2001). Policies that offer sweeteners to attract teachers to high-cost difficult areas such as London become necessary to prevent recruitment crises, but do not address the fundamental problem of attracting good teachers. The decline in relative pay is a continuation of a longer term trend in Britain. Amongst men, the pay of 31–40 year-old university teachers ranked 82 per cent in the pay distribution in the second half of the 1970s, but this position had fallen to 74 per cent in 1990–94, and to 65 per cent by 1999. Male teachers’ position fell from 72 to 64 per cent over the same period, while the ranking for female teachers fell from 87 to 75 per cent. For men, there is survey evidence that the decline in relative pay up till 1990 induced a decline in the average ability levels of those entering teaching, as measured by scores in standardised tests at age 11 (Nickell and Quintini 2002). Another enduring contradiction unresolved by the many educational reforms of recent decades is the aforementioned distrust of education by the business world. Employers in Britain, unlike those in continental Europe, often do not express their skill needs in terms of the qualifications that they require their employees to hold. Although they have increased their qualifications requirements substantially since the 1980s, there remain large number of jobs in Britain for which no qualifications are required. In 1986, just under 8 million jobs in the British economy were ones, which did not require any qualifications for the job-holders.There was a similar number of people in the workforce who had no qualifications and so, overall, the supply of and demand for qualifications were roughly balanced. By 2001, jobs had become more skilled, and one manifestation of this change is that there were now only 6.5 million jobs wanting no qualifications.Yet, with rising education, there were now less than 3 million people without qualifications. Interestingly, there continued to be an overall balance of demand and supply at the upper end of the qualifications spectrum, but up to level 3 (the equivalent of A-level as the highest qualification) there were many more people supplying these qualifications than jobs demanding them (Felstead et al. 2002). This aggregate surplus of qualifications is partly deceptive, because employers demonstrably value most qualifications in that they are prepared to pay qualified workers more than unqualified workers. Recent estimates of the gross returns to qualifications are positive and substantial at level 3 (A-level or an equivalent) and above; for academic qualifications, those below level 3 are also valued, but vocational qualifications below level 3 do not on average earn a wage premium (Dearden et al. 2002). In addition, unqualified people are less likely to find employment in the first place. Nevertheless, a wide range of evidence suggests that, at the lower end of the skills spectrum, employers in Britain are usually more concerned about relevant work experience and behavioural attributes than they are with specifying minimum educational achievements when recruiting labour.

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Comparable figures about the demand for qualifications are not available in other countries. Nevertheless, it is widely observed that qualifications requirements are frequently stated in advertisements for jobs, where the equivalent in Britain would typically emphasise the skills and qualities required. It is thus likely, although it cannot be shown directly with the evidence at our disposal, that the comparative deficiencies in Britain’s qualification stocks in the population are deficiencies of demand as much as they are deficiencies of supply.

Global education competition and how to ride it If, as seems likely, the government is successful in further increasing the attainment of qualifications in today’s cohorts of school and university students, and if this rise is not matched by sufficient increases in the demand for qualifications by employers, the increasing contradiction will generate a more critical questioning of the function of the education system.Yet, I do not foresee any major relaxation in the demand for education by the British public. Even if the high returns currently being enjoyed by tertiary education graduates start to fall, the pressures on individuals to succeed academically have been ratcheted upwards over recent decades. The norms of success are now counted in academic units for a much larger proportion of the population than was the case for earlier generations, and it seems unlikely that this is a reversible process, at least in the near future. If benchmarks against similar industrial nations retain any validity, the relative deficiencies of Britain’s qualifications stocks will add further pressure on policy makers to improve investment in education. As shown above, the deficiencies in human capital stocks are likely to increase rather than diminish in the foreseeable future. On a comparative basis, therefore, a competitive strategy for the British government would involve investing well above average in the current generation of pupils and students, in order to begin to narrow the educational attainment and achievement gaps with other nations in the next ten years. A further source of demand for education derives from the social imperative of childhood poverty, where unfortunately Britain heads the rest of Europe. Schools have to substitute educational inputs where family inputs are deficient. The UK’s terrible record on poverty in recent decades would imply the need for even greater educational inputs to achieve the same performance, though this extra requirement is hard to quantify. And yet, the pressures already facing the state education system in Britain, and the absence of realistic sources for further radical major productivity rises, suggests that there is little room for further expansion of the educational product without a financial transformation of the industry. Can this imperative be reconciled with the reluctance to solicit greater resources for education from the public purse? The resolution of an issue like this will only emerge politically, and cannot be provided by an abstract rational analysis. At this time of writing the government has announced as part of its review of spending plans that it will substantially increase spending on schools, colleges and universities in the next few years. Its intention is to raise education spending to 5.6 per cent of GDP by 2005–06, above

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the average for Europe.The political support for this expansion arises from a coalition, in the current era, between those forces pressing for a more productive human capital infrastructure, those concerned with social inclusion and with reducing inequality, and those middle- and working-class parents who perceive that education has become a more important determinant of rank in society. Provided that the educational expansion embraces the whole society, and emphasises access for otherwise disadvantaged people, all these political groups can support the necessary tax rises. The coalition could be large enough to preclude vote loss, and appears to have been strong enough to push enlightened but self-interested politicians into honouring the promised expansion. Supporting this positive perspective is the view that technology and global development are set on an inexorable path towards demanding higher skills in the current era, and that at least some of these increased skills will have to be provided by the educational institutions. If educational expansion is now to begin, and indeed to continue beyond the current planning period, three over-riding factors will need to be recognised by governments of whatever hue in the next ten years. First, it must be recognised that it will not be sufficient to hope to ‘persuade’ individuals or employers through its rhetoric to undertake more education and training. It will always be important to remember that both individuals and employers must have real incentives to embark on investments that will take up their own resources of time and effort. Paternalism is not the answer.Where disadvantaged groups have dropped out of the education system it is often because the signals are there for them to do so. Second, it must be accepted that the main input of the education industry has been stretched to such an extent over the last decades that it is pointless to expect further rounds of major productivity improvements from yet more intensification of teachers’ and lecturers’ labour. Not to have recognised the need for further funding, and to have supposed that greater ‘efficiencies’ could deliver the required educational expansion, appears to have been disingenuous or at least wishful thinking. Now, piecemeal privatisations of a few schools or universities, or further trips down the road to selectivity for schools,9 further curriculum changes or extensions of the division of professional labour such as the use of unqualified classroom assistants will no doubt emerge. Unfortunately, much of the proposed expansion of education is to be used to support a programme of diversification in secondary education. Specialisation and diversification, it is thought, will encourage innovation and leadership in secondary heads, and thereby deliver even more educational outputs for the resources devoted. However, most such changes will not be supported by any but a minority of the workforce supposed to deliver the changes, who are acutely aware of the costs imposed by the setting of schools against each other in the competitive chase after funding, and of the potential inequalities that come with diversity. No changes can provide a tax-free solution to the overriding British problem of insufficient education stocks in the modern economy. Third, reforming the resources of the education system may be necessary for ensuring the continued prosperity of the economy, but it is not on its own sufficient. Rather, what is needed is to ensure that a rising supply of academic and

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vocational skills is matched by changing skills demands from employers – a tall order. This necessitates a strategic approach to planning the supply of skills, while not neglecting policies to influence the demand for skills. Although the problem of over-qualification currently remains within bounds, further rapid expansions of Britain’s qualifications stock, without a commensurate expansion in the genuine demand for qualifications from British employers, is a recipe for individual disillusionment and collective failure. At the very least, this risk implies a need for closer and more regular monitoring of the way qualifications are being utilised in the workplace.The need for improved labour market intelligence has been recognised in successive reports – the National Skills Task Force in 2000, and then by the Policy Innovation Unit of the Cabinet Office in 2001 (Policy Innovation Unit 2001; National Skills Task Force 2000a). The improved intelligence ought to include up to date monitoring of the demands for qualifications, as well as estimates of the value of various qualifications in the labour market. Inducing employers to raise their demands for qualifications may not be such an easy matter. It is already the case that British-based employers spend considerable sums on training, mostly without state support. Where, however, they demand lower skilled workers a reasonable presumption is that they find it profitable to do so. Possible subsidies to incentivise upskilling of both jobs and the workforce are worth considering, though the problem of deadweight – paying for skill acquisition that would happen anyway – is a major one. It is known that training is on average greater in organised than in unorganised workplaces, and that workplaces with the characteristics of high performance work organisations – primarily, multiple forms of participation and performance incentive mechanisms – tend to foster a great deal of skill acquisition at workplaces. Policies to facilitate the expansion of such characteristics, as well as to support collective bargaining, will also be beneficial for the economy’s stocks of skills. Nevertheless, it is unlikely that any neo-liberal government in the Anglo-Saxon world will want to intervene much in the private decision-making of employers. The response of the current government to this dilemma is to attempt to make the education and training systems more ‘demand-led’ by both individuals and employers (Policy Innovation Unit 2001).With individuals, the principle is to empower them with full information of education courses and their outcomes, so as to permit them to choose wisely. It is hoped to make the system of qualifications more responsive to what individuals need. For employers, the objective of raising demand, focused especially on smaller businesses, is to be met in part by learning best practice through provision of help with benchmarking and other tools for sharing resources. It is also intended to introduce a national management strategy, which it is hoped will enable business to develop business strategies that will drive up workforce development. It is to be hoped that these policies will make inroads in the coming decade to resolving mismatches between the supply of qualifications and employers’ skill demands in today’s changing economy. But the policies will not have a chance of success unless they are accompanied by a renewed commitment over the coming decades to fund the building of a better educated workforce.

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Notes 1 For a review of neoclassical and alternative perspectives on skill formation systems and how they relate to the economy, see Ashton and Green (1996). For further detail on reasons for intervention in the training market, see Stevens (1999).The use of education as economic policy in East Asia is analysed in Green et al. (1999a,b). 2 Figures from Hilary Steedman, quoted in Campbell et al. (2001). 3 Source: OECD (2001), table B1.1. The overall average would be much higher, and the UK relative deficiency that much lower, if the average had been weighted by the size of the countries. 4 Japan is an interesting exception. 5 National Statistics (2000). 6 In the higher education sector, securing efficiency gains was the explicit rationale for imposing annual 3 per cent cuts in the real unit of resource for several years. 7 Health professionals are another largely public sector who experienced disproportionate work intensification in the 1990s; but according to all measures the rises in work effort were less than for education professionals. 8 This period witnessed a general decline in job satisfaction (Oswald and Gardiner 2001). 9 Selectivity in and competitiveness among schools both have economic costs. The benefits and disadvantages are largely social.

References Ashton, D. and F. Green (1996) Education, Training and the Global Economy. Cheltenham: Edward Elgar. Ashton, D., B. Davies,A. Felstead and F. Green (1999) Work Skills in Britain. Oxford, SKOPE: Oxford and Warwick Universities. Barro, R. J. and J.W. Lee (2001) ‘International Data on Educational Attainment: Updates and Implications’. Oxford Economic Papers-New Series, July 2001, 53(3): 541–563. Campbell, M., S. Baldwin, S. Johnson, R. Chapman, A. Upton and F. Upton (2001) Skills in England 2001.The Research Report. Nottingham: Df ES Publications. Centre for Educational Research and Innovation (1998) Human Capital Investment. Paris: OECD. Centre for Educational Research and Innovation (2001) Education Policy Analysis. Paris: OECD. Chevalier, A., P. Dolton and S. Mcintosh (2001) ‘Recruiting and Retaining Teachers in the UK: An Analysis of Graduate Occupation Choice from the 1960s to the 1990s’, London School of Economics, Centre for Economic Performance, mimeo. Dearden, L., S. McIntosh, M. Myck and A.Vignoles (2002) ‘The Returns to Academic and Vocational Qualifications in Britain’. Bulletin of Economic Research, 54(3): 249–274. Felstead, A., D. Gallie and F. Green (2002) Work Skills In Britain 1986–2001. Nottingham: Df ES Publications. Galbraith, J. K. (1992) The Culture of Contentment. London: Penguin. Gallie, D., M. White, Y. Cheng and M. Tomlinson (1998) Restructuring The Employment Relationship. Oxford: Clarendon Press. Glennerster, H. (2001) United Kingdom Education 1997–2001, London School of Economics, Centre for Analysis of Social Exclusion, CASE paper 50. Green, F. (2001) ‘It’s Been a Hard Day’s Night: The Concentration and Intensification of Work in Late 20th Century Britain’. British Journal of Industrial Relations 39(1): 53–80.

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Green, F. and S. Mcintosh (2001) ‘The Intensification of Work in Europe’. Labour Economics 8(2): 291–308. Green, F.,A. Henley and E.Tsakalotos (1994) ‘Income Inequality in Corporatist and Liberal Economies: A Comparison of Trends within OECD Countries’. International Review of Applied Economics 8(3): 303–331. Green, F., D.Ashton, D. James and J. Sung (1999a) ‘The Role of the State in Skill Formation: Evidence from the Republic of Korea, Singapore, and Taiwan’. Oxford Review of Economic Policy 15(1): 82–96. Green, F., D. Ashton, D. James and J. Sung (1999b) Education and Training for Development in East Asia The Political Economy of Skill Formation in East Asian Newly Industrialised Economies. London and New York: Routledge. National Skills Task Force (2000a) Skills for All: Final Report of the National Skills Task Force. Sudbury: Department for Education and Employment. National Skills Task Force (2000b) Skills for All: Research Report for the National Skills Task Force. Sudbury: Department for Education and Employment. National Statistics (2000) Statistics of Education. Class Sizes and Pupil Teacher Ratios in England. Issue No 12/00, December 2000. London:The Stationery Office. Nickell, S. and G. Quintini (2002) ‘The Consequences of the Decline in Public Sector Pay in Britain: A Little Bit of Evidence’. Economic Journal 112 (February): F107–F118. Oswald,A. and J. Gardner (2001) ‘What has been Happening to Job Satisfaction in Britain?’, Warwick University, mimeo. OECD (2001) Education at a Glance. OECD Indicators. Paris: OECD. OECD and Statistics Canada (1995) Literacy, Economy and Society, Results of the First International Adult Literacy Survey. Paris and Ottawa: OECD. OECD, Human Resources Development Canada and Statistics Canada (1997) Literacy Skills for the Knowledge Society – Further Results from the International Adult Literacy Survey. Paris: OECD. Policy Innovation Unit (2001) In Demand: Adult skills for the 21st century. London: Cabinet Office. Smither, A. and P. Robinson (2001) ‘The Teacher Labour Market’, paper presented to Df ES Research Conference, London, 11/12/2001. Spilsbury, D. (2001) Learning and Training at Work 2000, DfES Research Brief No. 269. Steedman, H. (2002) Employers, employment and the labour market in The Nuffield Foundation (2002) 14–19 Education, London: Nuffield Foundation. Stevens, M. (1999) ‘Human Capital Theory and UK Vocational Training Policy’. Oxford Review of Economic Policy 15(1): 16–32.

8

HRM, commitment, insecurity and low pay Some indicative evidence from the European banking sector Steve Jefferys, Carole Thornley and Sylvie Contrepois

Introduction One notable feature of labour market policy debate over the course of the last two decades has been controversy over changes in labour management techniques associated with ‘Human Resource Management’, or HRM. The terms of this controversy hinge on perceptions of the conceptual and practical underpinnings of HRM, and its linkages with wider neoliberal policies geared towards labour market deregulation, individualisation, privatisation and trade union avoidance. This chapter explores one of the more superficially ‘appealing’ strands of ‘soft’ HRM, in which winning employee ‘commitment’ is regarded as a key goal for firms seeking to raise labour productivity. In the context of government preoccupations with improving competitiveness through encouraging dissemination of best management practices, empirical evidence on the outcomes of HRM-led strategies of this type has an obvious policy significance.This study draws in detail from one strand of pilot fieldwork conducted in the British banking sector in the late 1990s, the findings of which are placed in wider context on the basis of cross-national fieldwork, conducted in France and Denmark as well as the UK. It is argued that to the extent that the concept of ‘commitment’ provides a theoretically robust construct, which can be operationalised for purposes of measurement, the material factors of job insecurity and low(er) pay may undermine firms’ attempts to elicit high levels of commitment from employees; moreover, this may be true largely irrespective of the national- or firm-specific institutional context. In developing this argument we flag up as being of central importance a set of issues often neglected in studies of this type.The implications of the design and findings of this exploratory study for policy, at management, trade-union and state levels, are explored.

HRM and commitment The rhetoric, if not the reality, of HRM has enjoyed a high profile over the last two decades. At one level, the language of HRM has had an important symbolic value in ‘persuading managers that they can make changes in systems of regulation’, and

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in ‘saying to workers that something new is going on’ (Edwards 1995: 607). At another level, elements of it dovetailed neatly (post-1979) with successive Conservative administrations keen to ‘sweep away institutions and regulations which stood in the way of individualism’ (Kessler and Purcell 1995: 340), and looking to employers to carry a neoliberal agenda forward. The influence of the language associated with HRM can be gauged in the extent of its uptake: it has infiltrated many workplaces, including state institutions, and despite some cautionary distancing, even the Trades Union Congress (TUC) and many trade unions. This despite the TUC’s acknowledgement that ‘HRM is a slippery concept that means different things to different people’, and ‘has often been used to conceal a deliberate anti-union policy’ (TUC 1994: 5). A key issue for HRM practices that remains unresolved is one which has been rehearsed over the years in a number of debates concerning the management of labour.This concerns the extent to which managers do (or should) employ mechanisms to control a workforce directly, or rather seek to elicit commitment in a way which enhances individual responsibilities and autonomy in order to boost productivity without suffering increased problems of absenteeism or turnover amongst employees. The options available, in this respect, have been described many times: for example, the choice can be posed as one between ‘direct control’ or ‘responsible autonomy’ (Friedman 1977), or ‘simple’ and ‘technical’ versus ‘bureaucratic’ and ‘social’ control (Edwards 1979).These distinct approaches, which may in some circumstances be pursued simultaneously, are reflected in what are sometimes called the ‘hard’ and ‘soft’ versions of HRM. In recent years a stream of largely US-inspired literature has argued that the softer approach to HRM is preferable.1 The appeal to employers is easily imagined: ‘the rhetoric of “soft” human resource management is associated with the rise of individualism in terms of the development of each employee to the maximum of their potential … it comes close to the utopian world of the high commitment, high performance, team-based, self-regulated workforce’ (Kessler and Purcell 1995: 363). This ‘new individualism’ is in turn consistent with a view of the employee as an ‘atomised individual’, who is perceived to have ‘neither the interest nor the ability to combine with others’, but rather to ‘strive’ to pursue personal interests, which either ‘coincide with’, or ‘are complementary to’, the employer’s interests (ibid.: 341). A particularly influential article by Walton was published in the Harvard Business Review in 1985, which provided a marker for the ‘control to commitment’ debate. It argues that a distinctive characteristic of ‘soft’ HRM is its attempt to use employee commitment to the firm and the firm’s goals strategically, to achieve competitive advantage (Walton 1985; see also Legge 1989). But what form of ‘commitment’ is being referred to? Breaking from Etzioni’s (1961) sociological description of three levels of collective commitment to organisations, alienative (deriving from coercion), calculative and moral, Mowday et al. (1982) examine the individual psychology involved. They distinguish between attitudinal commitment, ‘a mind set in which individuals consider the extent to which their own values and goals are congruent with those of the organisation’, and behavioural commitment, which ‘relates to the process by which individuals

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become locked into a certain organisation and how they deal with this problem’ (ibid.: 29). Meyer and Allen (1991) attempt to integrate the wide range of definitions within an overarching psychological three-component model. At one level there is affective commitment, which reflects ‘the employee’s emotional attachment to, identification with, and involvement in the organisation’; employees with a strong affective commitment to the organisation would continue in employment because they want to do so. At another, there is normative commitment, where loyalty or gratitude have been internalised such that individuals ‘feel that they ought to remain with the organisation’. Finally Meyer and Allen identify continuance commitment as where the individual sees the costs of leaving the organisation as greater than those of staying, in other words they stay ‘because they need to do so’ (ibid.: 67).The emphasis here is on turnover, which reflects one of the abiding preoccupations of the commitment literature. Running through these contributions, however, is a sense of the myriad forms which commitment can take.The construction of both ‘affective commitment’ and ‘normative commitment’ might both be viewed, for example, as a prescriptive goal of human resource policy. It has been argued that many European personnel and HRM managers in the 1990s adopted practices more or less deliberately conceived and designed to raise ‘commitment’ levels (Brewster and Hegewisch 1994). Typical policies introduced to raise ‘attitudinal commitment’ (stronger identification with the company) include individualised performance pay, employee share ownership, appraisal, team briefings, quality circles and employee development programmes. Policies more overtly designed to influence employees’ attitudes include making reference to ‘empowerment’ of employees, or to the need for employee ‘flexibility’. A similar emphasis is given to the elevation of customer service, and to the importance of ‘quality’ imperatives. Many have interpreted these policies as helping construct a consensus around a managerial economic rationality, reducing employee resistance to changes in the labour process (Riboud 1986). The ‘blunt’ instruments used for measuring changed employee behaviour arising from an increase in commitment levels, as for example, by reference to lower voluntary turnover rates or absenteeism (see Mowday et al. 1982; Clegg 1983; Cotton and Tuttle 1986), have proved controversial. More controversial still is the notion that ‘attitudinal commitment’ itself can be clearly identified and measured, let alone be treated as having independent causal powers. Critics have argued that there may be numerous disparate ‘bases’ of commitment in a person’s attitudes (O’Reilly and Chatman 1986), some of which may be complementary with the firm’s interest (Meyer et al. 1989; Becker et al. 1996), and some of which may not (Gordon et al. 1984; Reichers 1985).‘Commitment’ may be to the work group, or occupation, or to stability in an individual’s life rather than to the employer as such (Guest and Dewe 1991; Guest 1992). Thus, Kelly and Kelly’s (1991) review of 1980s research into the impact of HRM initiatives, and the associated ‘New Industrial Relations’, found ‘little or no evidence’ that ‘workers’ largely negative views of management in general had changed; this was despite ‘reasonably good evidence of specific attitude changes of an instrumental and interpersonal nature’ (ibid.: 43). It is even the case that new managerial policies championing commitment

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to the firm’s interests may destabilise extant ‘commitments’ (Linhart and Linhart 1989). For example, an ‘alienative’ managerial promotion of higher ‘employee commitment’ to new product sales by bank counter staff may undermine ‘affective’ commitment to the customer and a public service, with an uncertain impact on firm performance. Two further complications are raised in this chapter. First, ‘employee commitment’ policies do not occur in a vacuum but within the context of national and sectoral labour markets and institutional frameworks.These create externally driven changes in material circumstances and expectations with potentially strong effects over employee attitudes and behaviour within the firm. For example, and drawing on the illustrative case sector used in this study, a state of near bankruptcy experienced in the mid-1990s by the then state-owned Credit Lyonnais bank in France must have had a significant impact on employee commitment.The second objection is that the material circumstances of work at firm level – in particular, the objective realities and subjective perceptions of relative job security and pay – may play a large role in shaping individual employee attitudes to their employer. The differences between ‘job secure’ and ‘job insecure’ workers, and between ‘higher paid’ and ‘lower paid’ employees, for example, may be structural in nature and not easily prone to any limited manipulation by the HR function, however cleverly designed. Despite such manifest difficulties, sustained attempts have been made to explore ways in which ‘commitment’ may be defined and measured, and once measured mapped to productivity or labour cost indices. Such studies have remained properly contentious, and have, in fact, provided few useful insights to managers looking for ‘best’ practice, or to trade unionists negotiating terms. At the same time, however, the rhetoric, if not necessarily the reality, of ‘commitment’ has been adopted by many employers on this side of the Atlantic. There is, therefore, some residual interest in exploring the concept further, particularly when relatively few studies have sought to locate employers’ ‘commitment’-led strategies in an evolving external and internal historical and institutional context, giving due weight to the material conditions in which they are pursued.

The UK case study To do so it is instructive to look at ‘commitment’ in the context of a rapidly restructuring industry with growing job insecurity and problems of low pay. For this purpose the UK banking sector in the late 1990s was ideal; since the mid1980s the industry had been undergoing radical change, within an increasingly volatile operating environment across Europe (for a detailed review see Thornley et al. 1997). In the broadly defined ‘financial intermediation’ sector, employment declined from 1.1 m in 1990 to 1.02 m in 1996, before recovering slightly to 1.07 m by June 2001 (ONS 2002: s25).Within this total, the employment decline in retail banking was more precipitate: an employment peak of 380,400 was reached in 1990, after which it fell by 20 per cent to 304,300 by 1996 as a result of recession, new domestic competition (initially from Building Societies and now

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some large retailers), and the introduction of new technologies (BBA 1998: 64). Employment in the ‘Big Four’ banks alone fell by 25 per cent between 1990 and 1995 and then stabilised over the next five years.With the economic recovery retail bank employment2 rose from the 1996 trough to 354,900 in 1999 before falling back a little and then rising again to 347,800 by the end of 2001 (BBA 2001: 52) – employment levels were thus still substantially lower than in 1990. At the same time pay for most non-managerial workers in this sector was well below the national average, with substantial numbers earning official low pay and with a wide gap between higher paid and lower paid employees across the workforce.3 The shifts towards telephone processing operations and more casual employment practices were tending to bias pay further downwards.4 The research focused on developments in the Co-operative Bank, which along with most other UK banks had seen a new HRM paradigm adopted to guide, if not wholly determine, its personnel policies.5 At a time when branch closures, branch ‘down-sizing’, processing subcontracting and centralisation had created a context of nearly continuous (voluntary) redundancy (the Bank had a sixth fewer employees in 1995 than in 1990), bank management invested in the rhetoric of ‘soft’ HRM to emphasise its adherence to a ‘commitment’-building strategy.A subsequent relative stabilisation of employment, fluctuating around 4,000 between 1996 and 2000, would not have been likely to mitigate an overall context of insecurity, not least because employment levels remained well below the levels of the late 1980s (4,600 in 1989). In practice, the ostensible attempt to garner employee ‘commitment’, and to encourage worker enthusiasm for ‘flexibility’, ‘quality’ and ‘innovation’, had involved telling bank-workers that they were now ‘empowered’.This message was supported by the implementation of an increasingly individualised system of payment, with target setting and monitoring, and (to a lesser extent) the establishment of individualised or direct modes of communication between management and staff bypassing collective channels.6 In a bank with an exceptional ownership structure (it is owned by the Co-operative Wholesale Society in which trade unions are major investors), and where around 70 per cent of staff are union members, these innovations had largely taken place within existing collective bargaining frameworks.Thus, the Bank continued to recognise first the Banking, Insurance and Finance Union (BIFU), and then from 1999 its successor, the merged UNIFI trade union. However, the limits of union strength at the Bank should be acknowledged. For example, the Bank introduced lower rates of pay and worse working conditions at its new Stockport call centre establishment, although it sought and secured a local union agreement for these revised arrangements. The union role was thus perhaps more to temper rather than fundamentally alter the content of management decisions with respect to the workforce. In this vein, a ‘Partnership Agreement’, signed both by the Bank and BIFU in May 1997, upheld the need for employee ‘flexibility and commitment’ as a prerequisite to ‘successful management of change and business development’, while accepting the principle of ongoing ‘redeployment, retraining and voluntary redundancy’. However, in a context of quite modest pay levels with a workforce that had experienced real redundancies

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and was still far from having a secure future, it was not at all obvious that a wide range of HR initiatives, including the ‘Partnership Agreement’, would deliver the expected ‘commitment’. To elicit attitudes to management’s ‘commitment-building’ framework, a questionnaire was distributed on our behalf by managers to between 300 and 400 bank employees in two processing departments and seven branches of the Bank.This was supplemented by intensive interviews. In one section of this questionnaire individual bank-workers were asked to rank their responses to a range of statements intended to proxy enthusiasm for their organisation. Employees could agree or disagree with varying levels of emphasis on whether a particular proxy applied to them (e.g. would any job description or grade be acceptable in exchange for continued employment).While manifestly problematic, this is precisely the sort of study used by exponents of ‘commitment’ (as a measurable construct) to promote their philosophy,7 and it was felt that replication of this method within a much broader research framework could cast light upon the potential role of institutional and material factors. Tables 8.1 and 8.2 exhibit the overall ‘commitment’ scores obtained from the total sample of bank employees,8 and compare this with two sets of constituent subgroups. On the basis of the standard ranking procedure used,9 a score of ‘4.0’ indicates ‘neutrality’, while higher values associate positively with commitment. It is immediately apparent that, when taken as a group, these bank employees show commitment levels that sit somewhere between neutral and slightly positive. Given the likely bias inherent in the method of questionnaire distribution, this is hardly an overwhelming endorsement of the ‘commitment’-strategy undertaken by the Bank over the previous five years or so. If we turn to the constituent subgroups, the details obtained in the questionnaire allow us to distinguish between different categories of employees on the basis of a number of separate characteristics, including gender, length of service and union membership, and pay and relative security. Evidently, the first set of divisions has only marginal effect on mean responses (Table 8.1), with no evidence of significant variation by gender or length of service (although, perhaps paradoxically from the perspective of employers, longer service appears associated with lower scores). Table 8.1 Commitment scores by gender, length of service and union membership (UK) Sample

Average score

Number of respondents

Less than 5 years Non-union members Women Co-op Bank employees Union members Men More than 9 years

4.65 4.64 4.62 4.59 4.57 4.57 4.56

47 35 67 103 68 36 39

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Average score

Number of respondents

‘Higher paid’ ‘Secure’ ‘Temporarily insecure’ Co-op Bank employees ‘Lower paid’ full-timers ‘Insecure’

5.24 4.69 4.66 4.59 4.22 4.21

15 57 25 103 55 20

But perhaps most surprisingly there is little to separate non-union members from union members. Whilst the interpretation of this result must necessarily be cautious, there seems little evidence to suggest that union membership is a significant barrier to ‘commitment’.10 However, the second set of divisions around job security and pay have a more marked impact (Table 8.2).To broach the issue of job security we identified both those respondents who had experienced a ‘threat’ to their job in the last two years, and those who felt a ‘threat’ still existed.The subset of twenty who replied ‘yes’ to both questions we call ‘insecure’, while those who replied ‘no’ we call ‘secure’; those who had experienced a ‘threat’ that had been removed we term ‘temporarily insecure’.That barely more than half of all employees feel ‘secure’ is an interesting result in its own right, but what is just as significant is the effect continuing insecurity has on the attitude of workers to their job. Employees who are ‘secure’ score above average on the commitment scale, as do the ‘temporarily insecure’, who appear to ‘bounce back with gratitude’ once the threat of redundancy is removed. However, workers who are still experiencing job insecurity appear to have all of their views on the organisation coloured.This emerged not only in a below average score on the commitment scale, but also in the wider survey of attitudes and experiences. ‘Insecure’ employees were significantly more likely to describe their work as ‘largely repetitive’, and to note recent changes in job description. These changes were in turn overwhelmingly perceived as dictats handed down by line management without benefit of consultation. Moreover, ‘insecure’ workers saw themselves as most likely to ‘take the blame’ for mistakes made, compared with ‘secure’ workers who felt that line managers or their work group would be equally likely to be blamed.The ‘insecure’ were also less positive about staff–management relationships, appraisal and change. So far as pay is concerned, employees were split into two outlying groups around the average.The ‘higher paid’ were categorised as those earning over £17,500 per annum basic pay (fifteen employees); amongst this minority group earnings were widely dispersed, with two-thirds earning more than £20,000 basic, and over half adding up to £4,000 yearly on top of basic salaries. The ‘lower paid’ comprised

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those full-time bank-workers earning less than £12,500 per annum basic pay (fifty-five employees); of this larger group two-thirds earned between £10,000 and £12,500 basic, and the remainder between £7,500 and £10,000 basic, with eight out of ten receiving additional overtime pay or bonuses of up to a total of £1,000 yearly. It is perhaps worth noting that many fell below the Council of Europe decency threshold.11 The ‘higher paid’ record means higher than the average score for the full sample, and substantially higher than the bank’s lower paid full-time employees. They are much more likely to view themselves as having more influence over senior management decisions affecting their job, pay and employment and to view management–staff relationships to be ‘good’ or ‘very good’. By contrast, half the ‘lower paid’ group feel they have no influence at all over senior management decisions and are much less positive about change.12 The results raise some interesting questions. If job insecurity and low pay (and inferior positions in the pay hierarchy) impact negatively on views of the organisation, to what extent do unions mitigate these circumstances or compete over these issues? These findings do not suggest that workers have a strong perception of the union’s role. When we elicited views on who represents employees’ ‘best interests’ on a range of issues, from pay to volume of work, on average half the employees nominated management, with the union at national or local level selected by only one in five. Over a quarter despondently nominated either ‘themselves’ or ‘nobody’, a gloomy and disconnected view, which was echoed time and again in interviews. Although the union is seen by most as the best representative over the two issues of pay and job security, a separate question on its role in actually preventing job loss showed appreciation to be very weak. Interestingly, ‘insecure’ employees were only slightly more positive about the role of the union than the average (with the ‘temporarily insecure’ being least positive), and were fatalistically more likely than average to nominate ‘nobody’ or ‘themselves’. Perhaps it is hardly surprising that neither management nor union in this instance appeared to have succeeded in winning ‘hearts and minds’. It was clear from interviews that many bank-workers interpreted the recent HRM changes in terms of an imposition of ‘control devices’ rather than commitment-garnering exercises,13 with some carefully explaining that their questionnaire responses were made with one eye on management and the threat of job loss. At the same time, the union itself appeared to share the Bank’s position ‘that many factors directly impacting on our business are outside of our control’.14

Cross-national comparison The key findings from the UK study on the adverse impact of job insecurity and low pay on ‘commitment’ levels raised the question of whether these associations would hold more universally and thus confirm prior conceptual doubts about the difficulties of raising levels of ‘commitment’ by means other than addressing the material circumstances of work.An intellectual question also remained concerning whether, and to what extent, national- and firm-specific institutional context might temper the result.

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Further small-scale studies were subsequently conducted in Denmark and France, in Jyske Bank and Credit Lyonnais, respectively.15 Features broadly associated with the global restructuring of the banking sector (technological change and downsizing from the late 1980s onwards) were common to all three countries, as was the parallel expansion of the not totally dissimilar insurance sector. In France, the banking sector had expanded up to an employment peak of 440,000 in 1986. But by 1992, French banking employment had fallen by 11 per cent to 391,000, and from that level down by another 4.4 per cent to 374,466 by 1996 (Association française de la banque (AFB), 1995, 1998). From that low, as in the UK, financial sector employment stabilised and then picked up slightly to 384,405 in 2000, with losses among the major retail banks who are AFB members being more than made up by growth in employment in other sectors (AFB 2001). Denmark had followed a similar pattern, achieving a peak of 56,200 for commercial and savings banks in 1988, from which attrition occurred virtually continuously, with a 6 per cent decline to 53,000 by 1992 and then a further much more rapid fall of 17 per cent to 43,800 in 1997 ( Jefferys et al. 1999: 12). As in Britain the largest Danish banks shed employment more rapidly than the others. Yet, there were also quite important dissimilarities in employment structures and industrial relations at the national level that might be expected to impact on employees’ views of their relations with employers. Significant differences in national industrial relations institutional traditions, in particular, could be expected to have a strong impact. Thus, while trade union membership in the early 1990s fell heavily in the UK (to 34 per cent) and fractionally in France (to 9 per cent), it rose in Denmark.The resulting very high level of Danish trade union membership (76 per cent in 1994) is matched by the high degree of ‘co-ordination’ between the Danish ‘bargaining partners’, the unions and the employers’ associations, noted by the OECD (1997). At the level of the firm these higher Danish levels of consensus both reflect and are likely to reinforce ‘national’ effects that encourage greater trust between employers and unions. In these circumstances a considerable degree of employer–employee trust is likely to be present as the employment relations norm, and national collective bargaining can continue to play a significant role. HR policies are, perhaps, more likely to be accepted at face value than where low-trust relations predominate and national sectoral collective agreements, where they exist, are often ignored or reinterpreted at will by local bargainers. Of particular potential interest to the current strand of enquiry were the differences in overall levels of pay inequality in the 1990s. In the UK, two government studies have confirmed that up until at least 1997 ‘earnings inequality continued to increase’, with inequality ‘higher among male employees than among female employees, although from 1984 greater increases in inequality are recorded among females’ (McKnight 2000: 8). For full-time male employees, the top to bottom decile earnings inequality ratio was 3.61 by April 1997, a gap that then rose to a post-war high of 3.66 in 1999 and has continued rising to 2001. For full-time women a 3.38 post-war income inequality high on this measure was reached in 1996, stabilising at 3.36 in 1997 and 3.35 in April 1999 before rising again to new

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levels by 2001 (authors’ calculations on gross hourly earnings from ONS 1997, 1999 and 2001). In France, by contrast, full-time employee income inequality fell from 3.26 in 1990 to 3.08 by 1994 and then stayed at that level, largely thanks to the pegging of the National Minimum Wage to about 50 per cent of average hourly earnings (Insee 2001). In Denmark income inequality was much lower in 1990, measured at 2.16, and has generally been viewed as staying low through the 1990s (OECD 1996). The findings shown in Table 8.316 with respect to the material factors of job insecurity and pay are, therefore, all the more interesting, and constituted the most striking and suggestive findings of the survey work. Whilst it is not possible to directly compare earnings levels between the three countries, beyond noting that the average salaries of respondents from Denmark were higher than those from France, and substantially higher than those from the UK, the results show a clear ordinal impact on attitudinal commitment by position in the intra-national earnings hierarchy. The very highest earners in all three countries expressed significantly more favourable views about their banks than did employees in the lowest pay bands. There is also some modest suggestion from the data that both institutional

Table 8.3 Commitment scores for higher and lower paid workers and those whose jobs are secure and insecure among UK, French and Danish bank employees (Co-op, Credit Lyonnais, Jyske) Country

Sample

Mean

Number of responses

Denmark Denmark Denmark Denmark UK Denmark France UK UK France UK UK France France France

Higher paid Secure Average Lower paid Higher paid Insecure Higher paid Secure Average Secure Lower paid Insecure Average Insecure Lower paid

5.34 5.27 5.20 5.07 5.06 4.96 4.91 4.61 4.50 4.53 4.23 4.12 4.19 4.09 4.06

18 96 115 10 18 6 6 62 115 4 54 26 25 19 9

Source: Adapted from Jefferys et al. 1999: 22. Note Higher paid in Jyske – top two pay bands; lower paid – bottom six of eleven pay bands: higher paid in Co-op – top six pay bands; lower paid – those working 32 hours or more located in bottom four of eleven pay bands; higher paid in Credit Lyonnais – top four pay bands; lower paid – bottom six of eleven pay bands.

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context and relative levels of earnings inequality may also operate (not necessarily to the same degree) to influence the relative level and distributional spread of ‘commitment’ scores. For example, the narrower commitment ‘distribution’ for Danish workers could reflect a rather more ‘consensual’ institutional context and/or a narrower earnings distribution in Danish banking where the earnings distribution for the economy as a whole is also narrower.The relative pattern and level of French responses would suggest both are important, and clearly Denmark may provide an example of a relative ‘virtuous circle’. Further research would be needed to confirm and disaggregate these effects. However, the key point is that national differences in institutional context and material outcomes (and possibly firm-specific context within these) may act to temper the level and distribution of ‘commitment’ scores, but they do not change their basic rank order. Clearly this latter point raises fruitful lines for further research as the suggestion is that pay inequality per se militates against full achievement of ‘high-commitment’ production methods. With respect to job security, secure workers in all three countries were similarly much more likely to express favourable views about their banks than were those whose jobs were under threat. The larger British and Danish surveys suggested that job insecurity may be even more closely associated with lower attitudinal commitment scores than is low pay. The examination of commitment within firms in other national contexts would thus appear to suggest that the national- and firm-specific institutional context does not make a significant difference to this ordinal result, though it may again influence relative levels and distribution. As a final comment, there was little evidence from the wider survey that ‘harder’ or ‘softer’ managerial styles per se make any significant difference to levels of attitudinal commitment, and mixed evidence on the impact of union membership as a potentially competing locus for ‘commitment’ (requiring subtlety of interpretation). These findings lend further weight to the strength of the effect of material conditions of work on ‘commitment’ levels.

Discussion and conclusion These findings are necessarily tentative, given small sample-size, and clearly more research is needed. However, they signal that the pay distribution and individual positions within it are important ‘extraneous’ and ‘material’ factors influencing the degree of ‘commitment’. The relative degree of job insecurity – or perceptions of it – also plays a strong role. These findings could provide fruitful avenues for further research as they carry broader implications for some older debates on the conceptualisation and analysis of the relative merits and demerits of differing modes of production. Some interesting issues of causation and of potential changes in strength of effect arise here. First, while firms may be expected to have some degree of discretion over pay and employment levels, these material factors are also deeply influenced both by the broader socio-economic–political environment at a sectoral, national and, increasingly, international level. It was clear from interviews that there were

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major differences in the extent to which job insecurity in particular was viewed as something ‘beyond the firm’s control’ and ‘inevitable’, or subject to control or even ‘manipulation’ by the firm. Second, it is interesting to speculate that the relative ordinal ranking of pay and job security might be subject to fluctuations depending on the internal and external environment with respect to levels of unemployment/ job insecurity, inflation/prices and pay. For example, our studies did not permit the estimation of the relative significance of lower pay at times of relatively low unemployment/job insecurity, or for periods where prices and pay elsewhere are rising more rapidly than the pay of our respective firms’ bank workers. Clearly here if job insecurity has been more prevalent amongst lower paid workers (and our findings suggested just that – see later), then respondents are reacting to ‘rational’ ordinal job-characteristics at a particular point in time, that is, for them, at a point of high job insecurity, it is better to have a job than none at all, and pay is a secondary factor. Conversely, high pay is more appreciated by workers who do not feel an immediate or imminent threat of job loss. What implications do these findings have for the discussion of employee commitment with which we began this chapter? At the most general level they tend to suggest that Etzioni’s more sociological analysis of commitment as a social, if not structural, issue that over-determines individual psychological responses, continues to have merit. They also undermine the implication behind the psychologists’ analysis that commitment is an individual state of mind that can be adjusted by deploying the ‘correct’ HR policies. In the subject index of their synoptic book Commitment in the Workplace, Meyer and Allen (1997), for example, do not include any references at all to pay, salary, remuneration or wages, while under ‘Layoffs’ they suggest the interested reader turns to ‘Downsizing’, the value-laden HRM phrase for acceptable or necessary redundancies. They do marshal evidence that perceptions of organisational ‘justice’ and ‘fairness’ may help shape affective commitment (ibid.: 42, 46–48), but rather than trying to assess the impact of the terms of subordination created by the employment relationship, what they are seeking to do is to measure the degree of adjustment to that subordination. With respect to the policy implications for managers, trade unions and the state respectively, two varieties of interpretation are possible. At one level, to the extent that proponents assert a linkage between attitudinal commitment and behavioural adjustment in a ‘higher productivity’ model, and to the extent this can be taken seriously as a conceptual construct, the findings act as a reminder that job security and pay are subjects of great importance to employees, which (not surprisingly) impact on their views of the organisation. Thus, whatever view is taken of ‘commitment’, there is no basis in these results for a managerial policy, which attempts to promote individualism rather than focusing on collective material grievances of the sort normally expressed through trade unions.Taken at face value, the scope for ‘soft’ HR policies, that will inspire employee attitudinal identification with the firm, appears limited, unless the associated costs of improving material circumstances of work are also contemplated. Somewhat paradoxically, the resource implications are probably more apparent in ‘harder’ HR strategies focused on more overt forms of ‘control’. The policy implications for trade unions on this version are

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clear: they should focus on the core business of employment and pay, taking care not to neglect pay (and low pay) issues even where job insecurity is an issue.Trade unions could here play a role in raising productivity by keeping employers focused on the linkage between material conditions and ‘commitment’ levels. Similarly, and to the extent state is seen as a ‘neutral arbiter’, states wishing to promote the ‘high road’ in industrial and labour market policies for developed or developing ‘market’ economies could build on ‘higher wage, higher productivity’ models. However, they may need to develop clearer policies countering job loss and redundancy at firm and sectoral levels and/or contemplate intervention – this runs against the recent policy grain. On a more sceptical note, a second variety of interpretation might stress the more strategic elements underlying extant and potential managerial policy. For example, there is always the possibility that the rhetoric of ‘commitment’ and ‘empowerment’ is simply a cover to the more cynical tactic of pursuing a two-tier approach to labour management, where workforce divisions are fostered on the basis of pay and security. Here commitment may be sought at the upper levels of an organisation, while workers at the lower end are used to provide cheapness and disposability. On this interpretation, the interesting question becomes the extent to which trade unions are prepared, and able, to challenge this style of management. In this context, unions may well see an advantage to building more vigorously on the material sources of discontent around job security and, especially, pay where the majority of workers are clustered at lower levels in pay hierarchies within firms as within the overall economy.Their route may need to challenge employers more directly for employee ‘commitment’, and it may be necessary to show some clearer space between managerial initiatives and union stance. The implications for state policy are interesting.To the extent that managerial policy is seen here as ‘rational’ and ‘cost-efficient’, micro-efficiency for the firm might diverge from macro-efficiency in the potential socio-economic–political costs of resultant unemployment and low pay. The question then becomes the appropriate level of intervention for the state. On a more sceptical note again, and to the extent that the state is complicit in ‘low wage/low productivity/higher unemployment’ models, and is prepared to pursue this in international competitive environments, an interesting question becomes the extent to which the state is willing, and prepared, to dampen down the fall-out, which may be expressed both in low commitment to employers – and, as may be increasingly likely, to the concept of nation-state.

Notes 1 It is interesting to note that by the late 1990s, in organisations where unions still had a presence, soft HRM was also becoming strongly associated with the concept of ‘partnership’.The discourse of partnership, more generally, has been described as emphasising ‘trust and honesty’, ‘mutuality’, ‘common vision’, ‘open management’, ‘agreement without coercion’, employee ‘voice’,‘involvement’,‘ownership’,‘responsibility’,‘employment security’, ‘fair reward’ and ‘quality’ (Knell 1999: 19). The significance of this shift can be seen in the fact that in January 2001, the TUC launched its own consultancy firm, the TUC-Partnership Institute, and government policy documents now routinely

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2 3

4 5 6 7 8 9 10 11 12 13 14 15 16

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link the concepts of ‘commitment’ and ‘partnership’ in examples of employment ‘best practice’. Measured by employment in organisations, which are members of the BBA. The industrial and occupational classifications in national official statistics are not sufficiently disaggregated to enable detailed analysis of bank workers’ earnings. However, the closest occupational category currently available for non-managerial bank workers is that for counter clerks and cashiers, although it can be noted that this category, dating from 1990, does not adequately reflect the recent shift to call-centre operations (telephone conversation between Dr Thornley and the ONS 17 August 2002). Here, the average basic salary for full-time workers in 1997 was around £12,800, with 40 per cent earning less than £13,000 gross (representing ‘low pay’ under the official Council of Europe decency threshold measure, which was £12,998 gross at this point). This picture is broadly consistent with our case study findings on earnings. Average gross pay was £14,981, just 78 per cent of the national average of £19,115 (ONS 1997). By 2001, average gross pay for counter clerks and cashiers had fallen to just 70 per cent of the national average (ONS 2001).The distributions of earnings for this occupational category, for bank managers, and for the financial intermediation industry as a whole are relatively wide. Our own surveys and interviews suggest processing staff are even less well paid, with a distinct downward trend in ‘new’ centres. See Thornley et al. 1997. We argue elsewhere (Thornley et al. 1997) that many of these techniques were interpreted by staff as having more to do with direct control. The study employed the full (fiften-factor) ‘Organisational Commitment’ scale designed by Mowday et al. 1982. An initial return of 103. A seven-point Likert scale, where 1 is the most negative and 7 the most positive score. Our wider research findings based on interviews with Co-op employees suggest that it is union activism rather than union membership, which makes a difference. The Council of Europe decency threshold measure corresponded to £11,524 for basic earnings at this time (NES 1997). Interestingly, Performance Related Pay appears to have had little effect. Whether our scores here reflect ‘commitment’ or, as is more likely, rational compliance does not change the direction of the argument in this chapter. Co-operative Bank, Agreement relating to Partnership Agreement, 8 May 1997: 4. For a full review of method and findings, see Jefferys et al. 1999. Note that the number of responses for the UK includes here late responses.

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OECD (1997) Employment Outlook, Paris: Organisation of Economic Cooperation and Development. ONS (1997) New Earnings Survey, London: Office for National Statistics. ONS (1999) New Earnings Survey, London: Office for National Statistics. ONS (2001) New Earnings Survey, London: Office for National Statistics. ONS (2002) Labour Market Trends, May, London: Office for National Statistics. O’Reilly, C. A. and Chatman, J. (1986) ‘Organizational Commitment and Psychological Attachment: The Effects of Compliance, Identification, and Internationalization on Prosocial Behavior’, Journal of Applied Psychology, 71: 492–499. Reichers, A. (1985) ‘A Review and Reconceptualization of Organizational Commitment’, Academy of Management Review, 10: 465–476. Riboud, A. (1986) Modernisation, mode d’emploi, Paris: Documentation francaise. Thornley, C., Contrepois, S. and Jefferys, S. (1997) ‘Trade Unions, Restructuring and Individualisation in French and British banks’, European Journal of Industrial Relations,V3 N1: 83–105. TUC (1994) Human Resource Management: A Trade Union Response, Report to 1994 Congress, London:Trades Union Congress. Walton, R. (1985) ‘From Control to Commitment in the Workplace’, Harvard Business Review,V63, March–April.

9

Equal opportunities and productive efficiency in the workplace Fairness, employee participation and the firm Virginie Perotin and Andrew Robinson

Introduction Non-discrimination at work is a core labour standard.The implications for individual welfare of effective policies aimed at fighting discrimination at work are profound. In this chapter we assess the findings of our own empirical work (Perotin and Robinson 2000) investigating the impact of policies aimed at fighting discrimination on workplace productivity. There have been many attempts to make the ‘business case’ for equal opportunities, and to some extent our work provides a platform upon which individual business might build in designing thorough equal opportunities measures that will assist performance. However, the case for equal opportunities in employment is predicated on human rights, and the significance of careful empirical study of the effects of anti-discrimination measures on workplace productivity lies in the lessons to be drawn for the formulation of effective policies – to be implemented by state bodies as well as by individual enterprises – to realise this objective. In reviewing the relationships which we found to exist between equal opportunities policies and workplace productivity, we raise a number of pertinent issues for policy formulation, most notably the important role that can be played by schemes which extend employee participation in control over the allocation and utilisation of resources by the firm.

Equal opportunities and productive efficiency in the workplace Equal opportunities practices encompass a number of dimensions of work. Equal opportunities practices in the workplace may range from simple company statements on a policy of non-discrimination through to quite comprehensive sets of measures aimed at monitoring the situation of discriminated groups and at identifying and remedying the sources of discrimination: thoroughgoing efforts may involve extensive inputs to training, and reorganisation in areas like hiring, performance appraisal, management evaluation, promotions and grievances (see Hodges-Aeberhard and Raskin 1997). Liff (1995) observes that equal opportunities policies intended to change the ‘whole range’ of employment practice – the allocation of work, the

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assessment of performance, the determination of remuneration – largely emerged in the UK from about the mid-1970s, with enactment of legislation on equal pay and sexual and racial discrimination; reviewing this, Liff concludes that existing antidiscrimination legislation has been effective to a degree in bringing the issue of discrimination ‘onto the agenda’ of workplace management, despite continuing reserves about the limited scope and practical application of the law. The premise behind this judgement is that many firms today perceive potential gains from planning for equal opportunities.1 The point of departure for our own work is that non-discrimination is a fundamental human right, integral to international labour conventions, and a core labour standard: it is therefore important to examine the impact of anti-discrimination policies on productivity and performance, not because the case for such policies hinges on a ‘good’ outcome for business, but in order to better inform and assist policy design and formulation in the pursuit of equal opportunities in employment.2 Anti-discrimination policies may increase firm efficiency in a number of ways. Labour may be more efficiently allocated because equal opportunities measures widen the pool of applicants from which selection is effectively made for any given post, thereby improving the allocation of human resources at the point of hiring and promotion. As a consequence, equal opportunities measures may better match workers and jobs, while encouraging the formulation of more ‘objective’ employment criteria and the use of more systematic search procedures when selecting appropriate candidates for posts. Other reasons for supposing that effective antidiscrimination measures will increase the productive efficiency of an organisation might include (e.g.) better incentives for personal development and the accumulation of skills and know-how by members of discriminated groups as their career prospects improve: if this also occurs in a context of increased loyalty and longer term relationships with the firm, then there may be mutual advantages for both employer and employee from enhanced investments in firm-specific skills. The adverse effects of discriminatory environments on the health, morale and dignity of employees have been well documented; where a discriminatory environment encourages sexual or racial harassment, individual and organisational performance may also suffer as a consequence of individual stress, loss of confidence, absenteeism or resignation, as well as a lack of workplace co-operation. On the other hand, effective planning for and implementation of equal opportunities at work can alleviate these specific adverse effects of discrimination, while improving the performance of discriminated groups by affording access to more rewarding job assignments, providing opportunities to utilise private knowledge and personal creativity, and inculcating a sense of fairness. Motivation for non-discriminated groups might also increase if they have to compete for advancement on a more level playing field, although, as observed below, this is one possibility only.3 The problems associated with discrimination may therefore impact on many levels of organisational performance. There is of course another potential consequence of equal opportunities practices that is relevant to the determination of the productive efficiency of the workplace. If one consequence of measures intended to realise equality of treatment for

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all employees is an increase in pay rates for jobs hitherto undertaken by discriminated groups, then for reasons of morale and motivation, productivity of workers in these jobs might well increase as a result.Whether or not this increases the profits of the firm will depend on whether or not the overall increase in productivity is sufficiently large to compensate the increased rates of pay. From this viewpoint it is necessary to differentiate the impact of equal opportunities practices on the financial performance of the firm (profitability) from the impact on input productivity: the purely pay-related effect of equal opportunities policies on workplace productivity is not the same thing as their net effect on financial performance. Altman (1995), for example, shows that wage discrimination can be as profitable as non-discrimination, and thus can persist in a competitive market, even if this discrimination causes productivity to suffer as a result. It is always possible, therefore, that some firms might tolerate discriminatory practices that lower productivity but bolster profitability, and this possibility must be borne in mind when considering appropriate formulations of government policies aimed at eliminating discrimination and promoting equal opportunities in the workplace.A consolidated treatment of the effects of equal opportunities planning on both financial performance and productivity variables would entail a more complex, theoretical and empirical approach to the data than that undertaken in our own study: at the same time, an understanding of the effects of equal opportunities measures on establishment productivity considered separately from financial outcomes is an important starting point for further investigation. It is, of course, also possible to think of reasons why productivity might suffer rather than improve as a result of effective equal opportunities measures, so that empirical evidence is essential if policy formulation is not to be left open to criticism that it is arbitrary or unfounded. The few existing empirical studies dealing with the consequences of affirmative action for efficiency have found a positive and statistically significant association with productivity.4 At the same time, there are possible downsides to the impact of equal opportunities on productivity. If the antidiscrimination policy is inadequate or ineffective, a sense of ‘tokenism’ may exacerbate the problems already associated with discrimination, while a lag between recognition of problems and the implementation of effective palliative measures may similarly cause a loss of morale amongst the discriminated group, at least until real changes occur. If there is a backlash against equal opportunities from the nondiscriminated group, either because they are unwilling to lose their relative advantages, or fear reverse discrimination, then productivity in the workplace may similarly suffer. More generally, however, if much of the resource-use and disruption caused by equal opportunities initiatives is incurred at the onset of reforms, while benefits accrue in the medium to long term, productivity may initially deteriorate before an improvement becomes apparent, so that the time frame is important. In our study we were able to add to a body of evidence which has a bearing on these issues by tackling the following (empirical) questions: (a) Do equal opportunities practices increase productive efficiency in the workplace, and does the size of the effect depend on how actively these policies are

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pursued, or on the relative size of discriminated groups within the establishment’s workforce? (b) Do equal opportunities policies impact positively on the consequences of employee participation schemes for workplace productivity, and are equal opportunities policies more likely to be found where employee participation schemes exist? (c) Are there other conditioning factors that should be considered when assessing the impact of equal opportunities on workplace productivity? The significance of the first of these questions is almost self-evident. It is obviously important to know if the overall effects of equal opportunities planning on workplace productivity is positive, and if the benefits to productivity from (e.g.) a simple company statement on a policy of non-discrimination is expected to be more or less than those accruing to a thoroughgoing review (say) of pay and promotions. It is also conceivable that the benefits to productivity will vary depending on the relative size of the discriminated group within the workplace; if this appears to be so, then the formulation of government policy on equal opportunities legislation must take into account the fact that the likelihood that a firm will independently choose to adopt a proactive stance on equal opportunities is in part a function of the extent of workplace segregation. Hence the importance of the first set of questions. The second requires a little more explanation. It has long been recognised that there are potential productivity gains to be had from schemes which encourage worker involvement in the organisation and running of the firm.5 Following Ben-Ner and Jones (1995), who approach worker participation from the viewpoint of a sharing of property rights, we can in fact distinguish two types of employee participation: participation in control, and participation in returns. The defining feature of the first type of participation is that such schemes must give employees some ability to independently influence the allocation or utilisation of resources by the firm; as such, the delineation of participation in control should necessarily exclude schemes (as, e.g., individual performance-pay) where all of the decisions taken which impact on resource use are entirely a matter for managerial discretion. On the other hand, the definition of participation in returns can vary somewhat in intended breadth: it might include, for example, some forms of on-the-job consumption, or be restricted to a share in the firm’s financial surplus (of revenue over cost) after all contractual liabilities to other parties with a prior claim on this surplus are settled. The key point is that gains from participation potentially mimic those from equal opportunities planning. It is generally hoped that worker participation in control will provide incentives for the acquisition of skills, disclosure of private information, expenditure of discretionary effort and exercise of individual creativity, as a consequence of added responsibility and initiative, and enhanced dignity (see, e.g. Lazear 1995): participation in decision-making may also prevent conflicts, improve trust and enforce decisions. Similarly it is hoped that participation in returns will give employees incentives to improve the quantity and quality of work, to develop personal skills and knowledge, and – for deferred and share-based

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schemes – to stay longer with the firm; other potential effects of participation in returns include closer co-operation with colleagues and supervisors and better communication, albeit with less of an effect on the organisation of work than would be expected under participation in control (Perotin and Robinson 2000). There is evidence that concern for equal opportunities is more likely to be shown when the firm in question provides participation schemes (Perotin et al. 1998). Participation in control is likely to be more fully realised, and effective, if discriminated groups get better opportunities to contribute, and if those contributions are taken properly into account; conversely, a failure to involve discriminated groups from the outset in participation schemes may simply exacerbate perceptions of unfairness. Similarly, participation in returns may offer greater incentives to discriminated groups, and help diminish perceptions of unfairness, if accompanied by effective equal opportunities planning that expands coverage of such schemes or improves bonuses or share allocations (see Perotin and Robinson 2000). Joint effects of employee participation and of equal opportunities may still, of course, depend on how actively equal opportunity policies are pursued, and on the particular form and design of the participation scheme, as well as on the composition of the workforce: the interactions between the components of each may be complex. But it is broadly possible to think of equal opportunities and participation as complementary, in the sense that the effect of each type of practice is strengthened by the presence of the other, even though neither type of practice may be necessary for the other to have an effect. For purposes of empirical study, measures of the extent of equal opportunities practices were constructed on the basis of (i) whether a firm possessed a formal written equal opportunities policy, and (ii) whether this was supported by additional policies for active monitoring of discrimination and review of procedures. In fact three different incremental levels of equal opportunities practices were constructed on the basis of the number of separate monitoring and review practices pursued by the firm, with regard to employment of minorities, job allocations by gender, promotions, selection procedures, relative pay rates, and a disability friendly workplace (the highest score being awarded to establishments with an active policy in each area).This demarcation of different levels of equal opportunities practices was not arbitrarily imposed on the data but was based on the distribution of practices in firms: it became clear that there was, in fact, a progression of practices that arose from the distribution itself.6 Six measures of employee participation were also constructed: the indicators used were based (for measures of participation in control) on the simple presence/absence of joint consultative councils, quality circles and team briefings on the one hand, and (for performance measures) profit-related pay, employee share ownership schemes and deferred profit-sharing schemes, on the other. Our analyses aimed to investigate whether the interactions between a formal equal opportunities policy as such and each of the six measures of employee participation described above was positive, and therefore productivity enhancing, and whether these joint effects are conditioned by the intensity of the supporting measures aimed against discrimination, or by the relative size of discriminated groups.

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As we emphasised when initially reporting our study findings, and comparing these with the suppositions of the existing literature, one great advantage of this approach to modelling and estimation is the deployment of a range of measures both of anti-discrimination practice and of employee participation (see Perotin and Robinson 2000).The data used was drawn from the 1998 Workplace Employment Relations Survey (WERS98: see Cully et al. 1998), which also provided information on the composition of the workforce, including data relevant to the study of workplace segregation and discrimination: gender, ethnicity and disability. One salient point to note is that productivity was measured subjectively using management’s own assessment of labour productivity when ranked against comparable workplace establishments on a scale of 1–5 (a score of 1 being a ‘lot lower’ and of 5 being a ‘lot better’, with a score of 3 indicating a similar level of efficiency). Analysis was also limited to workplaces in the trading sector – producing commercial goods and services sold to customers for a price – since employees in the non-trading sector (as in the case of the public sector) would necessarily be excluded from participation in returns in the form of employee share ownership schemes. Data on the capital intensity of the establishment, and on employee qualifications, was not available. At the same time, however, we were able to take into account a whole range of controls for other dimensions of workplace activity, which are more typically neglected, including important aspects of industrial relations, job quality and working conditions.

The case for equal opportunities with employee participation What then were our main findings, and what bearing do these have on the formulation of policy on equal opportunities, at the level of the state and commercial enterprise? In the first instance, when considered in isolation and apart from the composition of the workforce in terms of the relative size of the discriminated group, or the intensity of the supporting measures aimed against discrimination, our analysis found the existence of an equal opportunities policy to be positively and significantly associated with productivity. The effect on productivity outcomes was, in fact, greater, the larger the proportion of women or ethnic minority employees (male or female) in the workforce; indeed, for highly segregated workplaces with a very low proportion of employees from discriminated groups the simple presence of an anti-discrimination policy had a negative effect, suggesting that until the composition of the workforce is more balanced only the costs of the policy are felt. In the second instance, the results permit us to comment on whether or not there is a positive relationship between equal opportunities practices and employee participation. Broadly speaking, an equal opportunities policy assists, as well as gains from, employee participation; this suggests strongly that these separate initiatives (equal opportunities and participation) are genuinely complementary in the sense of providing mutual support. It is perhaps worth noting that the productivity effect from an equal opportunities policy when unsupported by participation schemes

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was in fact found to be negative, although this negative effect was only slightly significant, and further empirical studies on this issue would be needed before conclusions could be drawn. Overall, however, we found that employee participation schemes actively improve the effects of equal opportunities policies on workplace productivity. These findings have direct implications for policies both of firms as private enterprises, and for government bodies keen to promote equal opportunities. Since some firms may not immediately benefit from implementing equal opportunities practices, public policy interventions might be needed to encourage implementation of anti-discrimination measures: our findings show that this is liable to be the case where discriminated groups are only lightly represented in the workplace.To tackle equal opportunities issues in this context requires that the government take an overview of the wider linkages between segregation, discrimination, equal opportunities and participation.The key finding that the joint pursuit of equal opportunities policies and employee participation schemes is generally associated with a productivity advantage over and above the separate effects of these policies considered individually should be properly absorbed into the corpus of best practice employment policies. If these are very concrete inferences, of direct and obvious policy relevance both to enterprises and to government, our findings, taken together, also contribute to a long-running debate on the basic reasons for discrimination in employment: what are the reasons for the persistence of discriminatory practices in employment, and what effect do they have on productivity? In a recent succinct commentary on the economics of discrimination, Arrow (1998) argues that market-led analyses would tend to point towards the eventual elimination of discrimination: for example, competitive pressures might be expected to ensure that the opportunities for arbitrage opened up by discriminatory selection on the part of employers are fully exploited and thus eliminated, provided it is accepted that some employers at least are profit maximisers. One case where discrimination might then persist would be if there are indeed real differences on average between the productivities of discriminated and non-discriminated groups. If this difference is known, but the cause not directly observable, then profit-maximising firms will select on the basis of the observable characteristic of the group with lower average productivity: in other words, there will be statistical discrimination on the basis (say) of race or gender, even when the employer does not possess a taste for discrimination as such. Arrow also notes that discrimination of this type would also tend to discourage acquisition of skills or attitudes conducive to high productivity, so that it becomes institutionally embedded: this echoes an earlier observation (see Arrow 1972) that if female and ethnic minority employees are given less rewarding job assignments, stereotyped notions about their productivity relative to non-minority men will produce self-fulfilling predictions even if those notions were wrong in the first place. Even accepting this reciprocity of effects, however, explanations of this type focus on the (average) personal characteristics of the discriminated group. In his more recent commentary, Arrow expresses dissatisfaction with an approach that seeks to explain the persistence of discrimination by reference to the personal

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characteristics of the discriminated group, and recommends that more attention be given to the study of social sources of discrimination, as for example, to the role of social networks – from which discriminated groups are excluded – in perpetuating discriminatory practices in the economic sphere (see Arrow 1998). When investigating the relationship between employee characteristics and productivity we found in our own empirical study that while the proportion of ethnic minority employees in the workplace per se had a significant negative association with productivity, and the proportion of women a negative association whenever significant, this outcome could be largely turned around by the policies of the firm.This in turn suggests that the negative associations were driven by the practices of the firm rather than the personal characteristics of the discriminated groups. There are, of course, a number of explanations as to why establishment productivity might fall with an increase in the employment of discriminated groups for reasons unrelated to the personal attributes of these workers: discriminating employment practices might, for example, segregate women and ethnic minority men into less productive jobs and/or establishments. Our finding that policies pursued by the firm on equal opportunities and employee participation may overturn the negative consequences for establishment productivity of hiring discriminated groups points strongly to explanations of this phenomenon, which do in fact focus on what happens inside the firm rather than on personal attributes: [W]e find that equal opportunities practices have a higher effect on productivity, the higher the proportion of women or members of ethnic minorities – men and women – in the workforce. Furthermore, in establishments that have anti-discrimination policies this effect entirely compensates for the negative and significant effect of the proportion of women in the workforce on productivity and makes up for most of the negative effect of the proportion of members of ethnic minorities. This finding supports the hypothesis that at least some of the negative association between women and ethnic minorities and establishment productivity is endogenously determined in the organisation rather than exogenously related to individual employee characteristics, and hence can be corrected with equal opportunities programmes. (Perotin and Robinson 2000: 572) If these results were replicated and confirmed by further research, then the main focus of the economic debate on discriminated groups and productivity should shift from an emphasis on individual employee characteristics to an emphasis on features of the work environment. Our results also permit us to comment (albeit very provisionally) on the effectiveness of individual employee participation schemes, in a context of equal opportunities. The precise form of the scheme is very important: outcomes are more likely to be positive when participation involves some degree of worker control over the use of resources, and not merely a residual right to a share in the returns of the firm.There are, however, exceptions. One of the control-based participation schemes – quality circles – performs badly: establishments employing quality

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circles show no significant productivity benefits when these are implemented on their own, and the effects actually become significantly negative when jointly implemented with an equal opportunities policy, an outcome, which grows worse as the proportion of discriminated groups in the workplace increases.This is a suggestive finding in its own right, although one that still requires explanation, and, which in this sense is best viewed as a result requiring further exploration in future research.7 The results also show that participation schemes based on returns rather than control are not so effective in boosting productivity: profit-related pay schemes show, in particular, a consistently poor outcome for productivity. It is often argued that employees are more likely to be risk-averse than employers, so that profitrelated pay schemes may struggle at the first hurdle since employees are asked to accept, in the form of a variable income, some of the risks previously borne by the firm. Problems of this kind may be compounded, and conflict with managers generated, if there is not also some participation in control, since workers may balk at this risk unless they have a say in decision-making. Problems of conflict may also arise quite generally if profit-sharing schemes are perceived simply as attempts to undermine collective bargaining, and the role of workers’ representative organisations. Profit-sharing schemes have also been criticised, from an entirely different perspective, on the grounds that they encourage ‘free-riding’ behaviour, since individual beneficiaries are made more likely to shirk because the costs of low personal productivity are now borne collectively. For closely related reasons, employee share-ownership schemes have also been criticised on grounds of adverse impact on the performance of managers, since the incentive to manage effectively are undermined by the requirement to share rewards with other workforce sections.8 It should be noted, however, that our findings here are rather atypical gauged against other studies, and again tend to raise questions rather than provide answers. A poor result from profit-sharing schemes might, for example, indicate the cosmetic nature of the exercise (driven, e.g. by tax advantages), rather than a more fundamental failing. Our finding that profit-sharing schemes contribute little to productivity was compounded by the result that the interaction with equal opportunities policies is rather ambiguous.This outcome might be explained by conflicting pressures: incentives to discriminated groups should increase as a consequence of equal opportunities planning to the extent that they can expect a better share in the profits of the firm while conversely there may be incentive-dilution to nondiscriminated groups, who might fear a matching deterioration in their share. While this is once again a suggestive finding, the most complex result of our statistical analysis concerns the effects of an increase in the intensity of the supporting measures aimed against discrimination: the ‘best’ outcomes for workplace productivity obtained when a formal equal opportunities policy was supported at a low level by additional anti-discrimination measures, but at high levels of supporting activity the effects on workplace productivity actually became negative. This remained the case even when the anti-discrimination measures were carried out in combination with participation schemes. It is possible to speculate on the reasons. Firms engaging in the most thorough set of equal opportunities measures may incur the largest short-run costs before reaping medium to long-term benefits,

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and this may affect the cross-section results. Establishments with particularly severe problems of discrimination – perhaps with related productivity problems – may adopt the most intensive equal opportunities measures to tackle this.The ‘backlash’ from non-discriminated groups may be greatest where policies are firmest. Further research is needed. Finally, and perhaps with little great surprise, other factors found to have a positive effect on productivity included a recent pay increase, on-the-job task variety and trade union recognition, while shift-work had a negative effect. It is worth noting that training had a negative relationship (not significant) with productivity: this reinforces the need to draw a distinction between short-term and long-term benefits, when interpreting cross-section results.

Conclusions Equal opportunities and non-discrimination in employment is a key element of human rights at work. Our results, from the viewpoint of policy formulation, suggest that there is a pragmatic case for many enterprises to regard it as a strategic element of human resource management, aimed at improving firm performance. There is strong evidence that policies which fight workplace discrimination squarely and positively raise average performance and improve the impact of employee participation on productivity. The complementarity evident between equal opportunities measures and employee participation is a key policy issue for the firm: participation in control will yield more benefits to the enterprise if discriminated groups get opportunities to contribute, while conversely perceptions of unfairness may worsen if participation schemes are introduced without fully involving discriminated groups: the positive outcome for the firm is clearly one involving patterns of positive and mutual reinforcement brought about by commitment both to equality of opportunity for all employees and active participation. The findings also contribute to the economic debate about discrimination, which has tended to concentrate on determinants of performance linked to individual employee characteristics, and has largely ignored the influence of firm policies on organisational and individual productivity.At the same time, a detailed study of the interplay between specific participative measures and equal opportunities policies of varying degrees of intensity, and of the critical importance of the share of discriminated groups in total workforce employment, points to the need for careful research-led policy formulation, at firm and state level.

Notes 1 Liff takes as an example the employer-led initiative ‘Opportunity 2000’, which was launched at the onset of the 1990s to promote equal opportunities at work in the UK, on the basis of recommendations to employers, which differed little in substance from those already laid down in the Codes of Practice established earlier by the Equal Opportunities Commission (EOC). This initiative was supported by a Conservative government chary of extensions to equal opportunities law. For a review of this initiative, and some flavour of the critical debate on its content and limitations, see Richards (2001).

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2 This is not intended as a criticism of Liff, who at no point suggests that equal opportunities measures should stand or fall on the basis of demonstrated benefits to business. In the context of UK legislation, and the prevalence of the ‘business case’ approach, however, we are concerned to avoid misunderstanding by emphasising that our point of departure is non-discrimination as a human right. 3 For references to the literature on these points the reader should consult Perotin and Robinson (2000). 4 See Perotin and Robinson (2000). 5 For some examples from the wealth of empirical literature in support of this proposition, see Perotin and Robinson (2000). 6 For example, firms monitoring promotions or reviewing pay rates all had a written policy on equal opportunities and all monitored workforce composition. 7 Quality circles were in fact found to be the scheme least often combined with equal opportunities policies. The unimpressive performance of quality circles could be due to the specific nature of such schemes, since they link most closely to the operational dimensions of production and organisation rather than to other forms of participation in control.There is little evidence that employees gain much influence by participating in such schemes (see Delbridge and Whitfield, 1999), while the possibility that initiatives of this type lead in some contexts to the marginalisation of trade unions, and encourage firms to develop management routes, which downgrade existing forms of communication and systems of industrial relations, have been frequently noted (see Blyton and Turnbull, 1998). 8 According to Alchian and Demsetz (1972), for example, efficiency in production hinges on the maintenance within the firm of a specialised monitoring function, so that rewards are ‘metered’ to agents engaged in production on the basis of individual performance, thereby minimising net losses to production arising from ‘free riding’ behaviour (shirking). For this specialised monitoring function to be maintained the agents employed as monitors should in turn be rewarded on the basis of the ‘residual’ income left over to the firm after all other liabilities are met and all other individuals participating in the firm have been paid according to their marginal contributions to production. From this viewpoint, profit-sharing schemes would (a) dilute the incentives to agents employed as monitors, for effective monitoring, while (b) encouraging free riding behaviour (shirking) amongst the monitored group, since payments here are now decided partly by collective rather than individual performance.This highly influential perspective predicts therefore that firm performance may suffer because of free riding and dilute managerial incentives. The argument that managerial incentives are diluted by profit-sharing can also be derived from Jensen and Meckling (1976), who predict that on-the-job consumption by the most senior tier of a firm’s management hierarchy will increase (and firm performance decline) as its ownership rights in the residual income of the firm falls. While the literature on these points is very extensive, these seminal articles are indicative of a prominent strand of thinking, which suggests that participation in returns (and for that matter control) is bad for performance. However, it must also be noted that this is a perspective, which is not supported by the findings of what is now a large empirical literature.

References Alchian, A. A. and Demsetz, H. (1972) ‘Production, Information Costs and Economic Organization’, American Economic Review, 62: 5. Altman, M. (1995) ‘Labour Market Discrimination, Pay Inequality and Effort Variability: An Alternative to the Neoclassical Model’, Eastern Economic Journal, 21: 2. Arrow, K. J. (1972) ‘Models of Job Discrimination’, in A. H. Pascal (ed.), Racial Discrimination in Economic Life, Lexington, MA: D.C. Heath.

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Arrow, K. J. (1998) ‘What has Economics to Say About Racial Discrimination’, Journal of Economic Perspectives, 12: 2. Ben-Ner, A. and Jones, D. C. (1995) ‘Employee participation, ownership and productivity’, Industrial Relations, 34: 532–54. Blyton, P. and Turnbull, P. (1998) The Dynamics of Employee Relations (2nd edn), Houndmills (Basingstoke) and London: Macmillan Press Ltd. Cully, M., O’Reilly, A., Millward, N., Forth, J.,Woodland, S., Dix, G. and Bryson, A. (1998) The 1998 Workplace Employee Relations Survey: First Findings, London (UK): Department of Trade and Industry. Delbridge, R. and Whitfield, K. (1999) ‘Employee Perceptions of Job Influence Under Varying Forms of Organisational Participation’, mimeo, Cardiff (UK): Cardiff Business School. Lazear, E. P. (1995) Personnel Economics, Cambridge, MA: MIT Press. Liff, S. (1995) ‘Equal Opportunities: Continuing Discrimination in a Context of Formal Equality’, in P. Edwards (ed.), Industrial Relations: Theory and Practice in Britain, Oxford: Blackwell Publishers Ltd. Hodges-Aeberhard, J. and Raskin, C. (eds) (1997) Affirmative Action in the Employment of Ethnic Minorities and Persons with Disabilities, Geneva (Switzerland): International Labour Office. Jensen, M. and Meckling, W. (1976) ‘Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure’, Journal of Financial Economics, 3: 4. Perotin,V., Curtain, R. and Millward, N. (1998) ‘Participation for All? Worker Involvement Schemes and Concern for Equal Opportunities in Australian and British firms’, Presented at the 9th Conference of the International Association for the Economics of Participation, Bristol. Perotin, V. and Robinson, A. (2000) ‘Employee Participation and Equal Opportunities: Productivity Effect and Potential Complementarities’, British Journal of Industrial Relations, 38(4): 557–83. Richards,W. (2001) ‘Evaluating Equal Opportunities Initiatives: The Case for a ‘Transformative’ Agenda’, in M. Noon and E. Ogbanna (eds), Equality, Diversity and Disadvantage in Employment, Basingstoke: Palgrave.

10 Reassessing regulation Productivity, wage costs and trade union ‘power’ in the dock Dan Coffey

Introduction There are signs of a restoration of public confidence in a positive role for the regulation of labour markets, and for an extension of collective control, by consumers and workers, over the production and distribution of marketed goods and services. Britain’s trade unions are similarly enjoying a revival of confidence and of public approbation. At the same time, positions taken today in debates over the future of regulation and collective ownership and control necessarily reflect present beliefs about past reasons for economic failure or conflict. In this respect, the predispositions of ‘new’ Labour, as with earlier Conservative administrations, remain biased towards the notion that ‘private’ somehow equates with hard-headed economic ‘efficiency’, while the anti-trade unionism of the 1980s and 1990s has mellowed only to the extent that some limited input from organised labour is accepted provided labour markets remain ‘flexible’. The roots of what remains, at government level, an essentially defeated view on the efficiency of public ownership and the merits of organised labour might be traced, at least in part, to the set of perceptions engendered by the Thatcherite political reaction against both, a reaction which developed and gathered pace in a period of economic conflict and social uncertainty. In this chapter we make the case for looking back to look forward. We do so by means of a concrete industrial example that effectively highlights the gulf that can exist between today’s received accounts of past inefficiencies and abuses wrought by ‘excessive’ regulation and trade union influence, and the infinitely more complex realities suggested by the historical data.

Looking back to look forward In a significant recent study, commissioned by the public services union UNISON, Sawyer and O’Donnell (1999) assess the efficacy of public ownership in industry (with particular regard to the major utilities). It is an important document, certainly for its content, but also for its political context. So far as the content is concerned, it successfully highlights the many forms which public ownership might take, beyond the ‘top-down’ post Second World War Morrisonian model of state-owned

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industry.1 It assesses ‘full’ public ownership, with a 100 per cent nationalisation of assets, but with due consideration of the scope for experimentation in modes of internal management and in forms of economic democracy; ‘partial’ public ownership, in which government holds a substantial stake; and ‘strategic’ public ownership, in which key parts of a given industry are nationalised. It considers too the potential for ‘regionally’ centred forms of public ownership and control, as well as for ‘mutualisation’, in which ownership of a company is devolved so that its assets are held collectively by the consumers of its goods or services. Sawyer and O’Donnell (ibid.: 96–104) also touch on the rich but largely untapped seam of democratic forms of direct employee ownership, in the sense of local, regional or national co-operatives, and the role which trade unions might play in maintaining internal democracy in such organisations.Their study explores the potentially differing aims and objectives of public, as opposed to private, ownership, from the viewpoint of the strategic orientation of the national economy, of community control, of standards of employment, of benefits to rural populations, of the redistribution of income and wealth, and of the environment. Of equal importance to the rich content of this document, however, is the fact of its commissioning by UNISON, the Trades Union Congress (TUC’s) largest affiliate and a union with a membership in the ‘essential services’: electricity, gas, water.The political context of this study is one of popular disenchantment with the social fruits of privatisation, and the fact of its commission reflects a corresponding willingness on the part of a union to take a lead in exploring alternatives. In order to do so it is necessary to have a credible view of past experiences, and in keeping with this theme Sawyer and O’Donnell (ibid.: 19–30) duly provide an assessment of the comparative performance of UK public enterprise in producing marketed goods and services. In doing so they draw on a substantial body of empirical evidence which demonstrates the illegitimacy of casual assertions, of the type which abound today, that public enterprise in Britain has historically been less ‘efficient’ than the private sector in its utilisation of resources for production.There are of course pitfalls to be avoided when studying comparative performance: for example, differences in the objectives of public and private enterprise might make simple comparisons of profitability or financial outcomes invidious, where like is clearly not being compared with like.2 Even in the more narrowly circumscribed sphere of resource use in production, comparisons unavoidably suffer from noncommensurabilities in technology, or in the scale and scope of operations. But such problems exist for any commentary on comparative performance: the point at issue is whether on the basis of undoubtedly ‘complex’ and ‘mixed’ empirical findings it is possible to discern any reasonable basis for supposing the private sector to be more ‘efficient’. The studies reviewed by Sawyer and O’Donnell suggest that there is not.They note that comparisons made for Britain between the old nationalised sectors and ‘manufacture’, taken as a proxy for private enterprise, show little evidence of an overall difference in trends of productivity for labour or capital, or for total factor productivity, that would support claims of systemic comparative weaknesses in the state-owned sectors. According to Millward (1991), for example, total factor

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productivity growth in each of the successive periods 1951–64, 1964–73 and 1973–85, was actually higher in the nationalised industries overall than in manufacture. Disaggregated estimates of total factor productivity growth by Hannah (1994), comparing manufacture with public enterprise in steel, airlines, electricity, gas, road freight, coal, railways, buses, post office and telecommunications, for successive periods stretching from 1948 to 1985, show considerable variation by individual industry, but no obvious overall pattern of the sort which might indicate a comparative ‘inefficiency’ accruing to public ownership (for these and other summary findings by Millward and Hannah, see Sawyer and O’Donnell 1999: 22–23).This is consistent with the similarly complex findings of direct comparisons of performance in UK industries before and after a privatisation experience. Sawyer and O’Donnell (ibid.: 28) cite Parker and Martin (1995), a study which divides observations on annual changes in total factor (and labour) productivity into five non-overlapping intervals covering periods before, during and after privatisation. Again, the findings are mixed and hard to interpret: for the particular instances of the privatisation of British Gas, British Steel, British Telecom and British Aerospace, for example, the productivity growth changes associated with ( but not necessarily determined by) privatisation were muddy in the first case, catastrophic in the second, not obvious in the third and mildly improving in the fourth. Whatever the interpretation given to individual cases, what is entirely lacking is any sign of an overall pattern of ‘improvements’ which might validate a claim that ‘private’ is ‘efficient’.While this might not surprise serious economists with some substantive knowledge of the area, it does sit somewhat at odds with the misdirected perceptions which seem to inform much of current government thinking on the likely benefits (through Private Finance Initiatives (PFI) and other measures) of further privatisation.3 What we wish to suggest in this chapter is that the picture might appear more complex still if a closer look were taken at one of the defining ‘truths’ of modern British life, namely that the waves of privatisation and labour market deregulation associated with Thatcherism were a necessary corrective, if nothing else, to decades of trade union dominance.The point has been succinctly made: the Conservatives entered office in 1979 on a platform of revitalising competitiveness by tackling the ‘union problem’, duly spent eighteen years dismantling the legal rights of workers in order to restore managerial prerogative, and in so doing helped install a ‘powerful new orthodoxy’ that made economic underperformance a reflex to labour market ‘inflexibilities’ that could be closely linked to trade union power (Coates 2000: 48–49). If, in general terms, the absence of any discernible pattern of overall improvements in productivity growth following the privatisation of industries once criticised as redoubts of trade union power might give pause to today’s followers of this new orthodoxy, there is further value in assessing in more detailed terms the actual basis for the complaint that union ‘power’ was a past source of inefficiency. There are a number of possible candidates for examination, industries with troubled histories and a major union presence that have experienced privatisation, as for example, the car manufacture and assembly sector, the coal mining industry, the shipbuilding industry. We choose as our illustration, however, the port transport

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sector, since in this very specific instance both privatisation and a deregulation of the terms of employment were advanced by the then Conservative government as a necessary corollary to the defeat of union ‘power’ and thus an improved utilisation of resources (see Coffey 1998).

Re-evaluating the past: the deregulation of dock labour The close of the Thatcher years in government was marked by (amongst other things) the abolition of the UK’s National Dock Labour Scheme (NDLS), which had regulated, in successive forms, the employment of dock labour for over forty years (1947–89). Abolition of the Scheme was announced on 6 April 1989, and an accompanying Bill passed before the onset of Parliament’s summer recess that same year. Industrial action sparked by the announcement and passage of this Act was quickly defeated. Prior to abolition, the state had already completed an extensive programme of privatisation of infrastructure: provisions were made in the 1981 Transport Act for the dissolution of the National Ports Council; nationally owned ports operated by the British Transport Docks Board were sold to Associated British Ports (ABP) in February 1983; and British Rail’s shipping and ports subsidiaries to Sea Containers in July 1984. Following abolition, enabling legislation was passed in the 1991 Ports Act for the privatisation of Trust ports. The overall pattern, therefore, conformed to what posterity will judge to be one of the hallmarks of the latter terms of office of the Thatcher governments, namely a relentless drive towards privatisation,4 and the sweeping aside of regulations governing employment. We focus here on deregulation and the abolition of the NDLS, since this was the butt of the most vocal objections by public critics of union influence in the port sector. For example, according to D. Davis, Member of Parliament (Conservative), the Scheme stood in the way both of an effective utilisation of resources and of the adoption of labour saving investment strategies, because it constituted a legislative framework for the maintenance of ‘restrictive employment practices’ that were without parallel elsewhere in industry:5 [T]he Scheme encourages practices of unimaginable wastefulness; undermines effective management; destroys discipline; stultifies technological development and by a combination of high costs and low reliability, drives away business. (Davis 1988: 11) But any charge of stagnant productivity in the regulated port sector deserves shortshrift. With respect to physical input–output relations, an index of the number of dockers retained per unit of throughput handled can be gauged by dividing an estimated total of the annual tonnage of cargo shifted through all Scheme ports into the National Dock Labour Board’s (NDLB) own estimates of the overall number of dockers registered. Changes in the value of this index over any extended period of time will obviously reflect changes in the technologies driving simple labour productivity. The result, exhibited in Figure 10.1, shows a precipitous fall in the

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100 Docker per tonne

90 80 70 60 50 40 30 20 10 0

68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Figure 10.1 Registered docker per tonnage throughput 1968–88 (indexed from 100). Sources: NDLB, HMSO.

workforce retained per tonne of cargo handled over the last twenty or so years of the Scheme’s life.6 Over the period as a whole, the total number of dockers employed under the terms of the Scheme fell from a starting point of more than fifty-six thousand in 1968, to close at a finishing position of less than ten thousand in 1988.The corresponding drop in the value of the docker-retention index shows that the fall in the number of dockworkers employed per unit of cargo handled was even sharper: in fact the twenty-year period before deregulation saw labour’s underlying productivity rise to such an extent that by the time abolition and deregulation came, the number of dockers retained for every load of cargo shifted was about one-seventh of its level two decades earlier.7 Of more subtlety is the notion that the Scheme was abolished because it imposed costs on the sector that grew steadily worse even as productivity increased. This charge, hinges on the costs purportedly incurred by the industry in adhering to the principle that there should be no compulsory redundancies amongst Scheme-registered dockers, the widely publicised ‘job for life’, which was credited with placing an unsustainable burden on the resources of the port sector. Since it should be clear from the preceding paragraph that dockers left the sector in their tens of thousands over the decades before abolition, this charge requires further explanation. It helps to provide some historical perspective. Although a national Scheme for dockworkers had been instituted as early as 1947, the NDLS as it existed in the last half of its career was the product of reforms to the industry that followed on from the 1965 report of a Committee of Inquiry chaired by Lord Devlin (see Devlin 1965). Prior to these reforms, port sector employment had still been marked by the

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practice of hiring dockers on a ‘casual’ basis. ‘Decasualisation’ came, following Devlin, on 18 September 1967, as part of the first phase of a two-stage reform project; this was followed (through 1970–72) by an overhaul of port payment systems and the implementation of deals arrived at on working hours and practices that were intended to promote efficiency (e.g. of the latter, see Wilson 1972: 278–281). In effect, registered dockworkers were now accorded the right of ‘permanent’ or ‘noncasual’ employment, in return for a commitment on the part of their representative organisations to a progressive ‘modernisation’ of the industry. These reforms met with ambivalence and some hostility from dockers. However, and this is the received view as it stands in the secondary literature (see Wilson 1972; also Turnbull et al. 1992), the industry stood in the shadow of a pending technological transformation, in the shape of ‘containers’ and mechanised handling, so that co-operation was grudgingly exchanged for the principle of job security. This principle was further strengthened in the aftermath of reforms, as dockers’ sensitivities about prospective job loss heightened, to effectively establish a de facto pledge of ‘no compulsory redundancy’ (Turnbull et al. ibid.: 25; see also Turnbull and Saundry 1999: 279), popularised in the public imagination as the so called ‘job for life’.8 Contemporary commentators, even sympathetic ones, were quick, however, to seize on the evident contradiction between dockers’ aspirations for guaranteed employment and the fact of a looming investment strategy by employers focused on labour saving technologies: see for example Wilson (1972: 304–305). It is a view, which subsequently carried the day for a generation of commentaries. A similar view is expressed, for example, twenty years later, in the Turnbull et al. (1992) survey of the industry’s employment history up to the Scheme’s abolition, and of the strike which followed: here it is argued that the ‘burden’ of the Scheme increased as advances in productivity were made because dockers, who had an income guarantee even when ‘surplus’ to requirements, could only be encouraged to leave the register at a considerable cost to employers. While undoubtedly a more sophisticated analysis than the charge of stagnating productivity, it still requires evidence and here it fails to convince. Before the Devlin reforms, port sector employment had been characterised by the maintenance of pools of ‘surplus’ labour, in the sense of a pool of dockworkers not actually needed on any given day to load or unload cargoes. After Devlin’s reforms, and coincident to the onset of ‘containerisation’ and ‘mechanisation’, the recorded share of ‘surplus employment’ in total registered employment was subject to an overall increase, when measured as an annual average percentage of the dockers’ register. It is on the basis of this observation that it has been generally concluded that the terms of the reformed Dock Labour Scheme imposed a cumulatively unsustainable burden on employers, which grew worse in the run up to abolition.While still on the dockers’ register, the Scheme required that these workers be paid; in order to move dockers’ off of the register, severance terms had to be generous to obtain voluntary exit: [T]he problem was not so much how to reduce the workforce but how to reduce it fast enough. This was reflected in the growing size of the surplus

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The Scheme is said to have collapsed in the face of surplus and severance costs. The problems with this account are several. Let us consider first of all the alleged problem posed by the rise in the relative size of the ‘surplus’ workforce.The obvious point to note is that this rise occurred in a context of a steadily declining total workforce. Table 10.1 provides some illustrative statistics for select years: columns (i) and (ii) depict respectively the headline ‘surplus’ in each year, and the share of this surplus in total registered employment. It can be seen that the absolute number of dockers falling into this surplus category at first increases slightly before dropping back sharply in the years prior to abolition; the more substantial increase in the share of surplus (here peaking at 16.8 per cent in 1980) follows from its expression as a percentage of a steadily falling total employment.This is important: it can be seen, for instance, from the selected years in the table that while the relative size of surplus in 1988 was still ‘larger’ than that recorded in 1968 (but not 1980), the actual number of dockers so described was at the same time much smaller – 932 as opposed to 3,340. The suggestion in much of the extant literature, that the Scheme had to go because it was being progressively swamped by ‘surplus’ dockers, is in this sense misdirected.9 There are, however, stronger objections still. In the second instance, it would be wrong to treat the payments made, under the auspices of the Scheme, to dockers lacking work (and therefore listed as ‘surplus’) as a simple surcharge on the industry. Even were such a position adopted, the arithmetic would not be compelling as a defence of abolition. Suppose, for argument’s sake, we were to adopt the simple

Table 10.1 Cost and surplus data, all Scheme ports 1968–88 Year

(i) Actual surplus employees

(ii) Surplus as % of register

(iii) Tonnage shifted per surplus docker (000 tonnes)

(iv) Imputed real unit cost a (£ per 000 tonnes)

1968 1972 1976 1980 1984 1988

3,340 3,137 3,632 4,103 1,669 932

5.9 7.6 11.7 16.8 12.5 9.6

82 88 77 67 160 330

119.40 133.81 150.19 173.47 87.10 53.86

Sources: (Calculated from) NDLB Annual Reports and Accounts, HMSO. Note a At 1988 prices.

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expedient of ‘costing’ each surplus docker at average industry earnings for the year concerned, before recalculating the total as a gross contribution to the costs of a unit of industry throughput at inflation adjusted prices.Again,Table 10.1 provides some illustrative statistics for select years. Column (iii) shows that after an uneven descent to a low of just 67,000 tonnes in 1980, the weight of cargo shifted in Scheme ports per ‘surplus’ worker more than doubled, to 160,000 tonnes in 1984, before doubling again, to 330,000 tonnes in 1988. Column (iv) gives the associated results for our simple ‘costing’ exercise: the imputed unit charge per thousand tonnes rises, from £119.40 in 1968 to £173.46 in 1980, followed by a significant fall, to just £53.86 in 1988.While this is for selected years only, the basic point of this illustration is true overall. On the basis of the sort of arguments still popular among academic writers, the Scheme should have been abolished in 1980 or thereabouts, not eight years later, with the surplus fast disappearing, and with it any conceivable surcharge recovered against throughput. However, this is giving too much credence to critics of the Scheme. In order to gauge the impact on wage costs of maintaining a ‘surplus’ docker, some account would also have to be taken of its effect on rates of pay for work actually done. There has been a tendency to portray the NDLS as if it were an unambiguous example of a vehicle for enhanced union ‘power’: for example, in Turnbull (1991: 21), or Turnbull and Wass (1994: 519–521), the argument seemingly advanced is that the Devlin reforms turned the Transport and General Workers Union (TGWU) into a veritable ‘monopoly’ that could dictate terms to employers. But the ‘evidence’ does not feel like that. So far as the bargaining power of the workforce is concerned, after some initial rise in the aftermath of Devlin there was then in fact an extended period of decline, and then stagnation, in dockers’ real inflationadjusted overall average earnings. In fact real earnings growth for dockers only started to resume (and then slowly) in the 1980s, a period in which, according to these writers, union power was already passing its apex. The significance of this point has generally been missed in the academic industrial relations literature pertaining to the industry, where commentators have typically neglected to take proper account of general price inflation when considering movements in dockers’ wages: for instance, Mellish (1972: 23), Wilson (1972: 226) and Turnbull et al. (1992: 23) present similar graphical representations of movements in dockers’ average money earnings, but not movements in average real earnings after inflation. The possibility which should therefore be considered in any future study of the industry is that the terms of the Scheme, and the pressures then brought to bear on dockers, by employers, meant that the workforce may have borne the cost of its own ‘surplus’, in the form of an extended period of stagnation in real average earnings despite great strides in productivity. What in fact removes any doubts about the inadequacies of conventional explanations for the abolition of the Scheme is a bare inspection of the overall trends in unit labour costs over the previous two decades. Figure 10.2 shows movements in a real unit–wage cost index, again constructed for the whole of the twenty-year period 1969–88. This establishes, quite clearly, that unit outlays measured gross of all wage expenditures, including all payments to the ‘surplus’ workforce,

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120 Real unit wage and severance Real unit wage

100

80

60

40

20

0 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

Figure 10.2 Real unit wage cost and severance payments Scheme registered ports 1969–88 (indexed from 100). Sources: NDLB, Port Transport Statistics, Economic Trends.

were falling almost continuously over this interval. In fact at the point of abolition (in 1989) real unit wage cost was at a level less than one-third of that prevailing at the time of the first Devlin reforms.When severance payments are added, the graph of (real) unit labour costs becomes more jagged, but the downward trend remains very pronounced.10 In fact, from 1980 the total bill per tonne of cargo shifted through Scheme ports, accruing to current real wage expenditures plus severance payments to dockers leaving the industry, fell at an average rate of 7 per cent per annum from 1981 to 1984, and at 7.5 per cent per annum between 1985 and 1988. It should be stressed that these are the averaged rates of cost reduction inclusive of severance payments: between 1981 and 1984, for example, overall real unit wage costs without severance fell at 9 per cent per annum.This is particularly noteworthy, since these are the years singled out by commentators as representing the nadir of the industry’s prospects.Turnbull and Saundry (1999: 279), for example, suggest that in addition to the costs of ‘surplus labour’ and ‘idle time’ in the docks, efficiency in Scheme ports was by this time (the early 1980s) suffering from ‘managerial incompetence’, as more and more dockers were employed directly by poorly financed port authorities. But the evidence does not support this position: real unit wage costs fell more quickly, and the tonnage shifted per registered docker rose more quickly, in the early to mid-1980s than at any other time between 1968 and 1988.

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Recovering the past The case of the NDLS is an interesting one. Derided as an example of the worst sort of state interference in employer–employee relations and a redoubt of trade union abuse and obduracy, it retains totemic significance. Even specialists in academic study of industrial relations, not typically thought to be hostile to the rights of organised labour to exist, seem to concede this ground: With hindsight it is now apparent that the abolition of the Scheme may have been a necessary condition for change in the industry, given the intransigence of the dockers and the TGWU, but it was never sufficient to achieve the goals of international competitiveness set by the government. (Blyton and Turnbull 1998: 147) This summary statement occurs in the context of an appraisal of the overall benefits of privatisation and deregulation in the port transport sector.The conclusion offered is that in the absence of an integrated government policy towards this sector any immediate benefits which accrued to the industry from the abolition of the Scheme are likely to prove short-lived: long-term gains may not appear. But in this judgement it is still supposed that ‘dockers and the TGWU’ were ‘intransigent’, and that to this extent taking on the union – by abolishing the Scheme – was a step proved with ‘hindsight’ to have been a necessary, albeit not a sufficient, condition for competitive ‘change’. But on the basis of the available evidence this does not convince. The surging gains in productivity, and the steady, and by any standards marked, reductions in real unit labour costs over the whole of the twenty-year period before abolition begs the question as to what sort of ‘change’ could imply a more convincing move to ‘competitiveness’. The principal criticism of the Scheme, that by the 1980s employers were struggling with rising costs as a consequence of regulation, is simply not true. There is no evidence either that it awarded unions a major bargaining advantage. Nor are there signs of growing managerial ‘incompetence’ in the ports: the early 1980s, the years generally singled out by academics as representing a nadir for the industry, were in fact the years in which overall unit wage costs were falling most rapidly. Much work is needed if the dynamics of this industry – before and after regulation – are to be properly understood, or for that matter properly described: it might prove that an accurate account of the Dock Labour Scheme will eventually judge it to have been a singularly effective vehicle for suppressing wage gains and facilitating reductions in employment during a period of profound change in the organisation of production. But ‘change’ it delivered. Let us return to the beginning. In their survey of the future prospects of public ownership and regulation, Sawyer and O’Donnell (1999: 43–64) consider the legal and financial obstacles to a possible extension of public control, as, for example, from the Articles of the Treaty of Rome (to which the UK is signatory) governing competition and state aid, and the costs of nationalisation. On both grounds they conclude that the difficulties are more apparent than real.11 But what is also

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necessary for any meaningful discussion of the desirability, and the advisability, of an attempt to extend direct and democratic control by workers and consumers of the production and distribution of goods and services, is a realistic assessment of the past.The calumny directed towards labour market regulation in the port transport sector, its workforce and unions, when judged against the actual industry data, illustrates the territory that must first be regained.This is not to deny the value of much of the rich institutional detail compiled in successive studies of the industrial relations of the docks (see, e.g. Turnbull et al. 1992); rather, it is to question the framework within which this detail has been located.The UK’s port transport sector, it should be emphasized, was never a nationalised sector in the sense (say) of coal, nor is there evidence to suggest that workers obtained much in the way of strategic control (see Turnbull and Saundry 1999) The point is not to reify the regulatory and ownership structures that existed as past ‘privileges’: the point is to separate rhetoric from reality as a necessary step in future policy formation.

Conclusions In this chapter we have argued that historical perceptions of past economic failings and conflict are inextricably linked to positions taken today in debates about the future potential for effective regulation and democratic control of employment and the provision of marketed goods and services.The relationship is certainly a twoway one: if perceptions of the past inform today’s judgements, the restoration of public confidence in the ‘reasonableness’ of alternative forms of regulation, ownership and control, as integral components of a healthy economy, might encourage a critical reassessment of the recent history of the role of unions, the efficacy of regulation, and the advantages and disadvantages of state control.To do so requires a multidisciplinary effort, combining efforts to advance the economic analysis of regulatory systems and forms of ownership with the rich qualitative data gathered by sociologists, political scientists or industrial relations specialists. No matter how sympathetic the analysis is to trade union organisation, the tacit assumptions of investigators conditioned by the precepts of the past twenty years may tend automatically to give the advantage in issues of ‘economics’ or hard-headed ‘efficiency’ to the anti-union, anti-regulation side of the equation, conceding key issues requiring careful study just at the point where interrogation of the data might usefully begin.What is clear, in the particular case of the port transport sector, a touchstone example for vociferous critics of trade union influence and involvement in industry, is that perceptions of unreasonable demands from organised labour, and of inefficient working practices, may have surprisingly little to recommend them historically. And if this is true for one such industry, then others may equally benefit from a careful reassessment of the past.

Notes 1 Treated here as the historically dominant model of nationalisation in the UK, as advanced by Herbert Morrison, initially encompassing (post-1945) such industries as the railways,

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8 9

10

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coal, gas and electricity, and extending (in the late 1960s) to include postal services and telecommunications.The defining features of the Morrisonian blueprint for nationalisation, as posited by Sawyer and O’Donnell, are that the industry should be defined as a single vertically integrated unit, concentrated on core products and services, and organised as a statutory monopoly answerable to Parliament, with no formal involvement of workers or consumers.This deficit of economic democracy is identified as a key failing of this particular form of nationalisation, potentially alienating in its implications both for the public as employees, and the public as consumers. The implications of the different objectives of private and public enterprise for profitability and the financial outcomes of decisions on resource use are discussed in Sawyer and O’Donnell (ibid.). PFI is explored by Malcolm Sawyer in Chapter 11. See Turnbull and Saundry (1999) for an overview of recent and current ownership patterns. The following excerpt is from a passage, which is also cited (at greater length) in Blyton and Turnbull (1998: 144) to illustrate the vituperation hurled at Scheme ports. I am indebted to Mr Richard Saundry for providing me with the estimated totals of the annual tonnage of cargo shifted through all Scheme ports, which are used as the denominator in this index. Productivity, if crudely proxied by this measure, grew rapidly in all regions of the UK, albeit with considerable port-level variation reflecting differences in the composition of cargoes and the average size and frequency of shipments. By taking Scheme port ‘tonnage’ as a unit of throughput, we abstract from consideration of differences in, or changes in, the composition of cargoes or distribution across ports. Figure 10.1 is of ‘indicative’ value, in terms of general trends, but subject to this proviso. It should be noted that coverage of the reformed Scheme was never complete: for a discussion of ‘non-Scheme’ ports, and their role in the industry prior to abolition, see Turnbull et al. (1992). Contrary to the usage of NDLB data in the studies associated with the UK’s industrial relations academics, the summary figures shown in columns (i) and (ii) are not synonymous with the scheme port sector’s ‘unemployed’ workforce for the given years. Some of these ‘surplus’ dockers would not have been idle but instead actively engaged in the loading and unloading of cargoes.This follows from the peculiar manner by which the Board chose to estimate ‘surplus’, applying the term both to unemployed dockers and to the ‘working margin’ of dockers listed as surplus but used to deal with day-to-day fluctuations in demand.To find a more ‘correct’ measure of the surplus one would have to subtract from the figure shown in column (iii) the number of dockers listed in the annual National Dock Labour Board ‘Report and Accounts’ under ‘shortages’, denoting by default the average number of registered dockworkers without permanent assignment used as extra hands by employers intent on achieving a desired rate of turnaround for ships in port at time of peak activity. The consequences of doing so have no effect on the overall trend in the ‘costings’ shown in Table 10.1, although in any given year the imputed unit cost falls somewhat: to (e.g.) £25.02 in 1972, £164.46 in 1980, to £39.70 in 1988.While worth noting that past discussions of the problem of the ‘surplus’ docker historically exaggerate the average share of the workforce not employed in loading and unloading, the overall tenor of the debate is unaffected. In Figure 10.2 we assume that total severance liabilities incurred in any given year were recovered on the back of total industry throughput handled that same year, a deliberate simplification. The state played a role in underwriting provisions, another factor worth bearing in mind on this point. On the costs of renationalisation Sawyer and O’Donnell (ibid.) argue (for the utilities) as follows: (a) in keeping with historical precedents for the UK renationalisation could be realised by an exchange of government bonds of equal value for shares held by private individuals, or pension funds, or foreign firms, so that holders of these bonds would

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then receive a fixed nominal interest payment; (b) shareholders would not be disadvantaged, since renationalisation occurs through an exchange of equivalents, while the government finances would be unaffected in the short term in the sense that taxation would not be affected, and expenditures elsewhere (e.g. on the NHS) would not fall. Over the longer term the government would have liabilities in the form of interest payments on the bonds issued, but against this it would receive the profits of the nationalised units. Aggregate demand in the wider economy would be unaffected, with no private wealth effects (in principle), or changes to government tax and spend: what would change would be the distribution of ownership rights. Some possible provisos, on issues like timing and valuation, EC legislation, the Maastricht criteria and the UK’s ‘golden rule’ for public expenditure, are also discussed by the authors, in some detail.

References Blyton, P. and Turnbull, P. (1998) The Dynamics of Employee Relations (2nd edn), Houndmills (Basingstoke) and London: Macmillan Press Ltd. Coates, D. (2000) Models of Capitalism: Growth and Stagnation in the Modern Era, Cambridge: Polity Press Ltd. Coffey, D. (1998) Re-assessing the Regulation of Port Transport: Productivity and Employment in the Docks, Centre for Industrial Policy and Performance, Leeds: University of Leeds. Davis, D. (1988) ‘Clear the Decks – Abolish the National Dock Labour Scheme’, Policy Study No. 101, London: Centre for Policy Studies. Devlin (1965) Final Report of the Committee of Inquiry Under the Rt. Hon. Lord Devlin into Certain Matters Concerning the Port Transport Industry, HMSO. Hannah, L. (1994) ‘The Economic Consequences of the State Ownership of Industry, 1945–1990’, in R. C. Floud and D. M. McCloskey (eds), The Economic History of Britain since 1700,Vol. 3, 2nd edn, Cambridge: Cambridge University Press. Mellish, M. (1972) The Docks after Devlin, Warwick Studies in Industrial Relations, London: Heinemann Educational Books. Millward, R. (1991) ‘The Nationalised Industries’, in M. Artis and D. Cobham (eds), Labour’s Economic Policies 1974–1979, Manchester: Manchester University Press. Parker, D. and Martin, S. (1995) ‘The Impact of UK Privatisation on Labour and Total Factor Productivity’, Scottish Journal of Political Economy, 42(2). Sawyer, M. and O’Donnell, K. (1999) A Future for Public Ownership, London: Lawrence and Wishart Ltd (published in association with UNISON). Turnbull, P. (1991) ‘Labour Market Deregulation and Economic Performance:The Case of Britain’s Docks’, Work, Employment, and Society, 5(1), March. Turnbull, P. and Saundry, R. (1999) ‘Contractual (In)Security, Labour Market Regulation and Competitive Performance in the Port Transport Industry: A Contextualised Comparison of Britain and Spain’, British Journal of Industrial Relations, 37(2). Turnbull, P. and Wass,V. (1994) ‘The Greatest Game No More -Redundant Dockers and the Demise of “Dock Work” ’, Work, Employment, and Society, 8(4), December. Turnbull, P.,Woolfson, C. and Kelly, J. (1992) Dock Strike, Conflict and Restructuring in Britain’s Ports, Aldershot: Avebury. Wilson, D. (1972) Dockers:The Impact of Industrial Change, London: Fontana/Collins.

11 The Private Finance Initiative A critical assessment Malcolm Sawyer

Introduction Governments have long borrowed from the private sector to finance their expenditure: this borrowing has sometimes taken the form of ‘printing money’ but predominantly has been through the sale of bonds and bills to the private sector. Governments have typically run budget deficits: for example, in the late twentieth century, in the UK there were only six years in the last three decades when tax revenue more than covered public expenditure.The ‘printing of money’ (more accurately the increase of notes, coins and bank reserves with the Central Bank) is linked with an expansion of the monetary system.The budget deficits add to the national debt, which has thereby tended to grow over time as budgets have typically been in deficit. However, when the economy is growing, the national debt may increase in absolute terms but decline relative to the level of national income, and this has been the broad trend in the post-war period as the national debt declined from 300 per cent of Gross Domestic Product (GDP) to under 40 per cent at the present time. It has also always been the case that the private sector has provided goods and services to the public sector. The type of goods and services that have been provided by the private sector and the type that have been produced ‘in house’ by the public sector have, of course, varied over time and differed between countries. But, a widespread feature in the past twenty years or so has been the shift away from the ‘in house’ provision of goods and services (and particularly the latter) by the public sector and towards the contracting out of services to be provided by the private sector. These services contribute to the provision of services by the government to the public, but the services themselves are supplied by the private sector rather than by public sector employees. The introduction and development of the Private Finance Initiative (hereafter PFI) has led to changes in the form of financing for public sector investment and the degree of contracting out of services to private sector provision. In terms of the private ownership of assets utilised by the public sector and in the private sector provision of public services, the PFI represents further privatisation. The general feature of the PFI is that a private company undertakes a capital investment project (e.g. construction of a school), which it finances itself. The capital project

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is leased to the public sector (often for twenty-five or thirty years) and the private company typically supplies services related to the capital project to the public sector.These services may range from maintenance of the capital project to provision of cleaning services for the construction concerned.The purpose of this chapter is to assess the PFI, and specifically whether it provides an efficient and effective way of generating investment in the public sector. The PFI is viewed as part of the development of public–private partnerships (hereafter PPP). PPPs are a broader concept, which include PFI as a particular case. However,‘Public–private partnerships (PPPs) are key elements in the Government’s strategy for delivering modern, high quality public services and promoting the UK’s competitiveness.They cover the range of business structures and partnership arrangements, from the Private Finance Initiative (PFI) to joint ventures and concessions, to outsourcing, and to the sale of equity stakes in state-owned businesses’ (Public Private Partnerships – The Government’s Approach 2000). The PFI in effect changes the way in which government finances its capital expenditure programme. Instead of borrowing through the sale of bonds (or through taxation), the government is indirectly borrowing from the private capital market. The company undertaking the capital investment project provides the finance (from its own retained profits or through borrowing) but the government in effect pays for that finance as part of the leasing charges in the future.This raises questions as to whether the replacement of direct borrowing by this indirect form of borrowing is more or less expensive (for the government) and whether additional finance is thereby provided: and these questions are discussed below.The PFI also changes the extent to which services (which may be termed public services generally provided to the public on a free at the point of use basis) that were formerly provided by employees in the public sector are now provided by the private sector on a contracted-out basis. It may appear that this is merely the substitution of one group of employees undertaking a range of jobs (i.e. public sector workers) by another group (i.e. private sector workers). Indeed at the time of the move from public to private employment, the employees involved often remain providing the service despite the change of employer. However, there are (at least) three significant issues here, though we only have space to mention them and do not explore them at length. The first issue relates to the conditions of employment and the level of wages.The experience of contracting-out of services during the 1980s and 1990s suggests that the wages and working conditions of many of the employees involved worsen with the shift from public to private sector employment. Colling and Ferner, for example, report that ‘large groups of workers who previously had the protection of union representation and collective bargaining have now been exposed to the coldest winds of private-sector market competition, and pay, conditions and employment levels have suffered as a result’ (Colling and Ferner 1995: 507).1 There may be lower costs associated with private provision rather than public provision, but arising from worsening of working conditions including wages. The second issue relates to the aims and objectives of those providing public services. Private contractors have the prime objective of achieving profits whether

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through increased revenue or reduced costs.The provision of good quality services by a private contractor depends on such provision as being consistent with high profits.The provision of public services by the public sector does not involve such profit considerations.The managers within the public sector may pursue a range of objectives and may not place sufficient emphasis on the provision of quality public services. However, the general point remains that the objectives of and incentives faced by public sector workers and by private sector managers are likely to differ. The third issue is that the direct hiring of labour by the public sector is replaced by the public sector contracting with the private sector, which in turn hires labour to provide the services.The contractual arrangements become much more complex – an employment relationship is replaced by a government–private firm contract and an employment contract between private firm and the employees. Additional contractual layers are introduced. Some of the implications of this are briefly mentioned below. The PFI then involves capital investment (for a public sector project) to be undertaken by the private sector, and for the public sector to purchase a flow of services arising from that capital project. Whilst the construction of public sector projects (schools, hospitals etc.) has typically been undertaken by private sector companies, the PFI introduces the idea that the private sector company will retain ownership of the investment project, which is then leased to the public sector for a substantial period of time. Further, under PFI services related to the investment project (e.g. maintenance) are provided by the private sector company. The question to be addressed is whether this is a more or less costly way for government to secure public investment.

The scale of the PFI We begin by considering the scale of PFI expenditure and the implications for the future course of public expenditure.There are a number of relevant dimensions of the scale of the PFI.The first refers to the scale of investment, which is financed in this way. Table 11.1 provides figures for PFIs broken down by government department responsible for the commissioning of the PFI projects. It can be readily seen that the PFI is concentrated in the area of health (often hospital construction), environment, transport and the regions, and especially local authorities where much of that is in the area of education (school construction and refurbishment). The totals given at the bottom of Table 11.1 indicate the overall investment arising from the PFI programme between 2000 and 2005. In relation to overall public expenditure the figures (at under £4 billion) appear relatively small: overall public expenditure is estimated at just under £400 billion for 2001/02, and hence PFIs were equivalent to under 1 per cent of public expenditure. A more appropriate comparator would be other forms of public investment: gross investment in 2001/02 was estimated at just under £30 billion, and after depreciation and asset sales, net investment undertaken directly by the public sector at £12 billion.Thus, it could be said that one-quarter of the overall net capital investment contracted

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Table 11.1 PFI: estimated capital spending by the private sector (signed deals) projects in £ million 2002–03 Defence Foreign and commonwealth office and international development Environment, food and rural affairs Trade and industry Transport, local government and regions Education and skillsa Home office Legal departments Culture, media and sport Health Work and pensions GCHQ Scotland Wales Northern Ireland Cabinet office Chancellor’s departments Local authoritiesb,c Greater London authority Total

2003–04

2004–05

262 9

105 8

0 8

16 16 1,076 9 84 47 1 311 67 42 118 12 42 0 32 1,580 0 3,724

3 14 1,005 0 13 24 0 126 14 7 19 0 11 0 7 1,900 0 3,256

0 11 458 0 2 9 0 55 22 0 0 0 3 0 13 1,900 0 2,481

Source: HM Treasury Budget Report 2002, table C17. Notes a Excludes PFI activity in education institutions classified to the private sector. Schools projects funded through Revenue Support Grant are included in the local authority figures. b Figures represent spending on projects supported by central government through Revenue Support Grants. c PFI activity in local authority schools is included in the local authority line.

by the public sector (i.e. the near £4 billion under PFI and the £12 billion directly undertaken) was undertaken through the PFI. Under the PFI, the government is contractually committed to lease the project from the private sector company for a specified period (often 25–30 years) ahead (and on the other side the private company is contractually obliged to lease the project to the public sector). For the private company this provides a guaranteed future income stream (usually in real terms with price to be paid for lease and services linked to the retail price index). For the government, there is the contractual obligation to make those future payments. Table 11.2 provides an indication of the extent of future commitments, which flow from the PFI.The figures in that table indicate the future obligations from the contracts in force around the time of writing (April 2002).The expectation would be that as more PFIs come on stream in the future, these expenditure commitments from the PFI programme would rise significantly. It can be seen from Table 11.2 that at present the future obligations amount on an annual basis to nearly £5 billions

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Table 11.2 Estimated payments under PFI contracts – March 2000 Years

£ million

Years

£ million

2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13 2013–14 2014–15

4,545 4,907 4,944 4,964 4,980 5,026 4,786 4,726 4,453 4,384 4,199 4,105 3,945

2015–16 2016–17 2017–18 2018–19 2019–20 2020–21 2021–22 2022–23 2023–24 2024–25 2025–26 2026–27 2027–28

3,940 3,943 3,898 3,071 3,323 3,434 2,923 3,013 2,982 2,995 2,708 940 617

Source: HM Treasury Budget Report 2002.

through the present decade, then running at around £4 billion through the second decade of the century, then gradually declining. The effects of contracts running for 25–30 years are clearly visible from the table, which shows the decline in the commitments during the 2020s. These figures are in constant prices, and the obligations in nominal terms would in general rise in line with the rate of inflation. A government’s commitment to make future interest payments on its borrowing (bonds and bills sold by government) is a very substantial part of the government debt.The present value of the future interest payments is represented by the capital value of the bonds, and it is the capital value of the bonds, which is directly included in measurement of the government debt. In a comparable way, it can be argued, that the future commitments for payments under PFI contracts should also be included as part of the government debt. These commitments are as much an obligation for future expenditure as interest payments on bonds and bills.The PFI is, in effect, an alternative form of borrowing, and the future expenditure under the PFI a contractual commitment for the government to make. The figures in Table 11.2 are in real terms so it is appropriate to use a real rate of interest to discount those future commitments to arrive at estimates of their present value.The absolute sum of these future payments (hence using a zero rate of discount) is £97,751 millions. Using a (real) discount rate of 5 per cent gives a present value of nearly £62 billion and a discount rate of 2.5 per cent £76.5 billion.The public sector net debt in April 2002 stood at £310.6 billion and gross debt £380.5 billion. Over the past five years, the national debt has tended to decline: the net debt by nearly £30 billion and gross debt by around £20 billion (though as GDP has continued to grow there has been a more marked decline in the ratio of debt to GDP). Hence, the (discounted) present value of the PFI

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commitments would add significantly to the national debt, of the order of 20–25 per cent at present, and is likely to rise significantly in the future. Further, the use of PFIs rather than public investment financed by direct borrowing has enabled a significant reduction in the national debt to occur: the fall in the recorded size of public debt has gone alongside increased use of PFIs and hence rising future commitments under PFI contracts. The rise in the present value of PFI commitments from very little a few years ago to around £75 billion (using a 2.5 per cent discount rate) is greater than the decline in the recorded public debt. In the absence of PFIs, public investment on that scale would have entailed a higher level of public expenditure being recorded, and a higher level of borrowing and hence of the national debt.The use of PFI rather than public sector investment funded by borrowing has the effect of putting the capital costs involved ‘off balance sheet’. Instead of the government recording that it had borrowed and that its debt was thereby higher, the government enters into a set of future commitments, which do not appear in the government’s balance sheet. If the government undertakes an investment project, which it finances, then it can raise the money from general taxation or through borrowing. In the first case, it can be argued that the present generation of taxpayers are funding investment, which will have benefits for future generations. In the second case, there is some matching of costs and benefits in that there are both future costs (interest payments) and future benefits. However, this is only a general matching in that both costs and benefits are seen to occur in the future, but there is no attempt to match the time profile of costs with the time profile of benefits. But it is also, of course, the case that governments run deficits or surpluses on their overall budget position and it is not possible to precisely identify, which forms of expenditure are being funded through borrowing. As Buiter argues, ‘The Treasury documents claim that “… worthwhile capital spending by government provides benefits for both current and future generations” and that “[b]y aiming to match over time the costs and benefits of public expenditure, the golden rule is consistent with the principle of fairness between generations” (HM Treasury 1997: 16). The first quote is obviously correct.The validity of the second is debatable’ (Buiter 2001: 8). The term ‘investment’ is used in a variety of ways. But the general concept of investment in economic analysis is expenditure undertaken in the near term in the anticipation of a stream of future benefits resulting from that expenditure. The stream of future benefits may be subject to considerable uncertainty and the anticipations of those undertaking the investment may not be fulfilled. Hence, for example, we may speak of investment in human capital (through education and training), which yields benefits in the future (a more productive work force, a more educated populace etc). However, in the context of national income accounts in general and government expenditure in particular, the measurement of investment refers to fixed capital formation – schools, hospitals and the like – and not to a more general notion of investment. Government expenditure on, for example, education can be viewed in terms of investment in human capital, where the private and social benefits of that investment appear over time – perhaps up to fifty or more years into the future. But most expenditure on education (teachers’

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salaries, provision of books and other study materials) is counted as current expenditure, and only expenditure on buildings etc. would be counted as capital expenditure. But the notion of investment is often used in a confusing way: take for example the following quote from Tony Blair. ‘Who can seriously doubt that Britain has been chronically under-invested in for 20 years or that it harms not just our quality of life but our future prosperity. Every school we invest in helps our children earn more. Every extra nurse we employ in the NHS is a guarantee people won’t be forced to go private to be treated when ill. Every penny spent on new track and trains … is a step towards the transport system that this country … needs. Yes, it takes time. It takes patience. But it takes, above all, investment. That is the choice we must make’ (Speech 22 November 2000).2 This quote suggests that employment of nurses in the NHS is part of investment – in one sense it is as the services of nurses help to provide health care, and the benefits of health care to the individual receiving it may be long lasting. But in terms of public expenditure accounts it is not.

Costs of finance When the PFI is viewed as an alternative way (to direct government borrowing) to finance public investment, the first question that arises is whether this is a more or less expensive way of securing finance. The cost of finance to the public sector of the PFI arrangement is effectively the rate of profit of the private contractor firm involved where the rate of profit is calculated gross of any interest charges. In turn, the rate of profit of the firm will have to cover the cost of finance for the firm, cover its own operating profits, which may be regarded as including some compensation for the risk incurred. An alternative to PFI is direct borrowing by the government (typically through the sales of bonds) and the use of that money to pay for the capital project.The cost of finance in that case would be the (post-tax) rate of interest on bonds.The government is usually regarded as being able to borrow at the lowest rate of interest: there is no perceived default risk on government bonds (simply because government can raise taxes and/or print money if necessary) and the government receives part of the interest payment back in the form of tax revenue. Private companies cannot borrow at such a low rate of interest. The extent of the difference between the cost of direct borrowing by the government and the cost of indirect borrowing through PFI arrangements remains a matter of some dispute, though few would doubt that the government can borrow directly more cheaply than it can through the indirect route. One report, Building Better Partnerships, published by the Institute for Public Policy Research (IPPR) estimates that the cost of finance under the PFI ‘may still be 1–2 per cent higher than the rate at which the government borrows’. However, it is suggested elsewhere that ‘Shareholders in private finance initiative schemes can expect real returns of 15–25 per cent a year’3 (Gaffney et al. 1999), which would be far in excess of the cost of finance through sale of bonds. The cost of finance through the PFI includes some premia for risk – there can be the risk premia charged by financial institutions in lending to a private

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company (arising from risk of default on the loan etc.) and by the private company (to compensate for the risk incurred on the construction and operating costs of the project when the contractual payments by government may be fixed, at least in real terms). It can be presumed that those risk premia are incorporated into the bid price submitted. The implicit cost of finance is then raised. But it is argued that ‘Consortiums – typically a construction firm, plus a bank or specialist investment house and a facilities manager – can also refinance their loans once a project has been built. … On completion, the risks involved in a project tumble. Additional savings accrue because interest rates are cheaper on completion than when a loan was originally sealed. Refinancing can yield windfall profits of tens of millions as the public purse pays “rent” at the old “high-risk” premium’ (D. Heald, Observer 28 April 2002). Lending directly to the government is usually regarded as the safest form of lending since the government can raise taxes and indeed issue money to cover its borrowing costs. The cost of finance for the government (particularly bearing in mind that it is the post-tax rate of interest, which is relevant) is generally lower than the cost of finance for any other body. It can then be expected that using the cost of finance obtained indirectly through the PFI will be higher than the cost of finance on direct borrowing by government.

Discount rate In arriving at a decision on the use of a PFI, a public sector comparator (PSC) is used against which the PFI project proposal is compared.The PSC is based on the public sector commissioning a capital project and then operating the project itself, with finance provided either through borrowing or through taxation. Such a comparison raises a number of issues, two of which are examined here, one in this section and the other in the section on ‘Costs of construction and of operation’. One of the issues concerned the estimates of the costs of construction etc., which would be incurred under the public sector alternative, and this is discussed in the section on ‘Costs of construction and of operation’. The other issue concerns the rate of discount used to make the comparisons. The time profile of the expenditure incurred by the public sector could be expected to differ substantially as between the PSC and the PFI.The capital expenditure under the PSC is incurred as the investment project is undertaken, whilst the leasing costs under the PFI are spread over a 25–30-year period.The use of a relative high rate of discount (hence placing more weight on the near future as compared with the more distant future) will tend to favour the PFI, and conversely a low rate of discount tends to favour the PSC. Hence, Gaffney et al. (1999: 117) argue that the calculations of value for money exploit the fact that under public procurement all the costs of hospital development are paid in the first few years, whereas under the private finance initiative they are spread over 25 or 30 years. … The discount assumption affects fundamentally the appraisal outcome’. They take

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a specific example of a PFI relating to a hospital in the Carlisle area, where the calculations indicated that ‘at 6 per cent the Carlisle private finance initiative scheme is slightly cheaper than its public sector equivalent and thus is held to be better value for money. When the discount rate is reduced by only 0.5 per cent, the outcome of the appraisal is reversed and the public sector option seems preferable.The economic advantage of public sector procurement continues to increase as the discount rate is reduced’. The figures in the table concerned show that at a 6 per cent discount rate the estimated advantage of the PFI over the PSC is less than 1 per cent of the PSC, at a 5 per cent discount rate the PSC has a 1–12 per cent advantage and near to 5 per cent advantage at a 3 per cent discount rate. The authors further note that ‘according to Treasury guidance, “the practical choice of 6 per cent, from the top of the range … is an operational judgement, reflecting, for example, concern to ensure that there is no inefficient bias against private sector supply.” (HM Treasury, The Green Book: Appraisal and Evaluation in Central Government, London: HMSO 1992)’ (ibid.: 118). A study undertaken for the Office of Health Economics reaches a similar conclusion. ‘The net benefits of NHS PFI schemes relative to their public sector comparators appear small. For NHS PFI schemes so far signed-off, the estimated net benefit would disappear if the real annual discount rate used to calculate the net present value costs of the different options were reduced from 6 per cent to a more appropriate, risk free, level of 4 per cent.The current discount rate is too high given that the costs of risks transferred are estimated separately and added onto the publicly financed project’s costs’ (Sussex 2001). The rate of discount involved here is a real rate of discount since the prices used in the estimates of the expenditures involved are in ‘constant price’ terms.The government can currently borrow at under 6 per cent but this is the nominal rate of interest from which effects of inflation need to be deducted. Further, the government pays only the post-tax rate of interest. It may be concluded that the rate of discount being used is considerably higher than the rate of interest at which government can secure funds. The argument for applying any discounting is based on the view that a benefit enjoyed at some time in the future has less value than a benefit enjoyed today – the former involves more waiting than the latter. In a similar vein a cost incurred in the future imposes less pain than a cost incurred today.Whatever the merits of those arguments, it is still relevant to compare the total costs of PFI with the PSC without reference to discounting.The ability of the government to finance public expenditure depends on the total cost of that expenditure, no matter when it is incurred. To illustrate the argument, consider a comparison between public expenditure of 100 incurred in the current year (year 1), and expenditure of 150 incurred in the future in year 10, where both yield the same stream of benefits. The former could be a capital project undertaken and paid for now, the latter a capital project undertaken now but only paid for later. Using a 6 per cent rate of discount would

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lead to the latter (with present value of less than 84) being chosen over the latter. However, the stream of public expenditure is larger in the second case. It could be pointed out that when year 10 arrives it will be the 150 which is paid, not the present value of 84. Even if there were economic growth of say 2.5 per cent per annum, the expenditure of 150 in year 10 would be a higher proportion of national income than expenditure of 100 in year 1 would be.When there are constraints on the size of the budget deficit (e.g. under the Stability and Growth Pact of the eurozone whereby budget deficit cannot exceed 3 per cent of GDP in any year and where the budget should be broadly in balance over the course of the business cycle), then either taxation will be higher or other forms of public expenditure lower as a proportion of GDP. This discussion would indicate that the choice of the discount rate is significant for decisions taken on the use of PFI (rather than the public sector alternative).This discount rate has typically been pitched on the high side thereby favouring the use of PFI. It has also been suggested that although the present value of public expenditure in say twenty years time may be relatively low (e.g. using a 5 per cent discount rate £1 in twenty years time has a present value of £0.40) but the impact of that expenditure in twenty years on the rest of public expenditure can be significant.

Additional finance and additional investment? It is often argued that the PFI provides additional investment for the public sector. For example, Paul Boateng, then Financial Secretary to the Treasury argued that ‘for the future we plan 100 new hospital schemes – including 26 new PFI hospitals to be up and running by mid 2005 – eight already up and running, 15 more at various stages of construction. An investment in our nations health that would not have been possible without finance from the private sector’ (Boateng 2001). In a similar vein, another government minister has argued that ‘The ability to raise capital from the markets does of course require the prospect of a commercial return – something, which is not intrinsically on offer for facilities such as hospitals or schools or prisons where we do not charge the customers. But the Private Finance Initiative, with the concept of paying for a service over 20–30 years, rather than paying for a building in one go, has created a means of providing a commercial return on such projects.Thus we have a vehicle for private capital in projects which were previously the unchallenged domain of public funding’ (Falconer 2001). The argument that the PFI provides additional finance for the public sector and enables projects to proceed, which would not otherwise have been possible is essentially spurious. However, when public sector investment is undertaken there are resource costs involved in the construction and maintenance of the investment project, and the investment has to be funded whether directly or indirectly. As Sussex (2001) argues,‘if we observe that more NHS investment is made now with the PFI than was made before it was introduced, then this is the result simply of a political decision to increase investment. Given the government’s current tests of

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fiscal prudence, there appear to be no current macroeconomic reasons for preferring PFI to Exchequer financing, or for regarding one approach as any more affordable than the other’. Consider what the limitations on the level of public investment actually are. In a fully employed economy, then resources used in one direction are not available for use elsewhere. The limit on public investment is then the availability of resources: the opportunity cost of the investment is that resources have to be drawn away from use elsewhere. In an economy with spare resources of labour and capital, that would not be the case. Resources are available, which can be put to use (whether to construct public investment projects or for use elsewhere is a political decision to be made). But the limits are in effect the same whether the investment programme is undertaken through PFI or through some other form. The limitation on public sector investment may be thought to be one of finance and funding. An investment project may be financed from general taxation, which would mean that tax revenue is higher (than it would be otherwise) and finance available for private expenditure thereby reduced.When a government decides that capital expenditure is not to be financed through general taxation but through borrowing it faces, in effect, a choice.The public sector can borrow from the private sector and uses the funds obtained to pay for the investment project, or the private sector finances the project directly as through the PFI schemes. In either case, the public sector is borrowing from the private sector.The public sector repays the full cost of the private sector companies, which have constructed the investment projects in annual payments over periods of 20–30 years. But it does not provide access to any higher level of funding than would otherwise be the case with public funding. In either case, the public sector faces future obligations – either in the form of future interest payments on the borrowing or in the form of leasing and other charges to the private sector. However, there are features of the public accounting system whereby it appears that the PFI can add to the capital investment programmes of the government. It can first be noted that concern is often expressed over the public debt to GDP ratio – for example under the Stability and Growth Pact of the eurozone countries it is intended that the gross debt to GDP ratio should be below 60 per cent.There is little rationale for picking a figure such as 60 per cent and as far as we are aware no justification has been given for that particular figure. It may also be queried as to why gross debt should be used (as Buiter notes, it was chosen ‘for reasons known only to the authors of the Treaty, and possibly not even to them’ (2001: 12)). However, it is not the precise figure which concerns us here but rather the concept of the debt to GDP ratio forming some constraint on public sector activity. If as an individual we calculated that our debt to income ratio was say 60 per cent would we be concerned?4 I would suggest that before rushing to judgement we would ask what that individual’s net wealth position was – that is how do assets compare with the liabilities of individual.We might also ask whether the ratio was increasing, that is, whether the individual was continuously running a deficit and adding to their debt. We might also ask whether the individual has any obligations to make future payments (which have not been capitalised and

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included in the debt). For example, parents who have committed themselves to finance their children’s university education have incurred a debt (in this case more of a moral than a legal obligation), but one which would not be included in the usual calculations of financial debt. Applying those concerns to government, it can be noted that governments often have substantial assets (roads, schools etc.) to offset against their liabilities, and that to some degree the government borrowing has been undertaken in order to acquire those assets. Some of the assets will yield income for the government (e.g. ownership of a toll bridge) while many of the assets will yield services for the community (e.g. hospitals). Some of the assets could be readily sold by the government (e.g. land) whereas there would be little opportunity for sale (e.g. schools). But the main point remains that the net wealth position of the public sector appears rather different to their gross debt position. It can also be noted that a government can typically borrow at relatively low rates of interest, and that the effective cost of borrowing so far as government is concerned is the post-tax rate of interest. It can readily be shown that in a growing economy a government can run a deficit year on year without its debt to GDP ratio rising perpetually, provided that the growth rate of the economy is greater than the post-tax rate of interest.5 It has been indicated above how the arrangements under PFI commit government to future payments, and the present value of those future payments is a measure of the future liabilities which have been incurred by government. A consideration of a government’s future obligations and liabilities would lead to those future PFI commitments being included in the public debt calculations. If that were done, then whether a project was funded by government borrowing or financed through the PFI would make little difference to the public debt argument (except of course the size of the debt may differ, depending on which is the cheaper option). Thus, it can be argued that if the government’s debt position was calculated appropriately and/or if government assets were weighted alongside government liabilities, then any concern over the size of the public debt would not discriminate in favour of PFI arrangements. But the present accounting arrangements whereby it appears that PFI investment can be undertaken without government borrowing biases the decision-making process towards favouring PFI (over the public sector alternatives). However, the use of PFI is storing up future commitments.

Costs of construction and of operation It has often been argued by government ministers and others that the costs of construction will be lower under the PFI arrangements than it would be if undertaken in the ‘traditional’ way. Further, when the PFI is being compared with the PSC, then the latter builds in the view that these costs are likely to be higher. It is also pointed out that there have been substantial cost over-runs on public projects: the history of cost over-runs is a long one. One senior government minister, for example, argued that ‘on average privately-financed projects are delivering savings of 17% compared to public sector alternatives – this represents savings of

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£2 billion on a £12 billion programme, equivalent to 25 new hospitals or 130 new schools’ (Smith 2000). In a similar vein, it is reported that ‘London Underground, justifying the PPP, reckoned, on the basis of 225 projects, that the average cost overrun was 17 per cent’ (Hutton 2002). Let us note that projects differ in the extent to which they are similar to previous projects and the extent to which they can be considered one-off. When a project (e.g. building a school) appears to be similar to previous ones, then experience from previous projects may enable the contract to be specified in terms of a fixed price. The project may involve elements which are new, but with a fixed price the firm undertaking the project bears the risk if costs outrun those expected (and reaps the gains when costs are lower than expected). But when the project confronts the unknown (e.g. the construction of the Channel Tunnel, the development of Concorde), and where the risks may be incalculable, then it is unlikely that a firm would be willing to sign a fixed price contract: simply by doing so, a firm would be putting its existence on the line. There are clearly issues of risk bearing and of incentives involved here, which may be irresolvable. A fixed price contract pressures the contractor to be cost efficient, but that may be at the expense of the overall quality of the project. But the initial price may be set higher than it would be otherwise to compensate for the risks involved.The contractor undertaking the project cannot know what unforeseen circumstances (positive or negative) may arise.A cost-plus contract means that the risk is retained by the public sector and there are not incentives to minimise costs (or to complete the contract on time). Such a contract though can allow for unforeseen circumstances. The introduction of PFI does not change the basic problem of how a contract can be written between government and private contractors, which both leads to cost efficiency and deals with the inherent risks. A contractor may be awarded a fixed price contract whether that price is paid ‘up front’ (as a capital sum) or is paid over many years (as a fee for leasing and services). Conversely, a contractor may be awarded a form of cost-plus contractor in either case.

Risks The argument is put that the use of PFI is a way of transferring risk from the public sector to the private sector. In effect a service contract and leasing arrangement is agreed for many years ahead between government and the private sector body, at a specified price (which may be index linked in some way, e.g. to the retail price index). Variations in costs, favourable or unfavourable, during the period of the contract have to be met by the private sector body, and in that way risk is deemed to be transferred to the private sector body. It can also be argued that a contract under which the price for specified output is fixed (and hence does not vary with costs or other economic circumstances and which would seem to be required in order that risk is transferred) also places pressure on the private sector body to provide the contracted service in a cost efficient manner. The notion that PFI contracts transfer risk from the public sector to the private sector has been seen as one of the advantages of the use of PFIs. A (then) Treasury

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minister argued that under PFI ‘risk is managed effectively – so the consumer can benefit from enhanced services without the taxpayer having to shoulder the burden of failures or fluctuations in demand. …Transferring risks to the private sector frees the taxpayer from unnecessary burden, creates a greater incentive for the private sector to deliver to budget and on time, and when they do, benefits the citizen – the consumer of public services’ (Smith 2001). The transferring of a risk comes at a price.A person insuring their house against damage by fire pays an insurance premium to the insurance company such that if a fire occurs the insurance company will compensate the insured person for (most of the) cost of the damage suffered.The risk of suffering loss is transferred from the individual to the insurance company. Whilst (in general) an individual takes out one insurance policy against fire damage, the insurance company is selling insurance policies to many individuals. In effect, the individuals are pooling their risks with the insurance company.The insurance company works on the basis that while some of those insured will suffer fire damage, most will not. If the frequency of fire is f (i.e. a proportion f of insured houses suffer fire damage in one year), and the cost of damage is Z, then the insurance company will pay out f · N · Z where N is the number of houses insured. Provided that the insurance premiums have exceeded f · N · Z the insurance company makes a profit. People are willing to take out insurance policies even though the insurance company is making a profit from them since although fire damage occurs infrequently when it does it can have a major cost for the individual concerned.The insurance company takes on the risk on the basis that the overall outcome for damage (i.e. f · N · Z ) is fairly predictable. It was seen above that the cost of finance under PFI can reflect the price in effect charged by the private sector for taking on risk. Further, it has usually been argued that the government operates on such a large scale that it can more easily absorb risk than any (much smaller) private individual. A government, which is say operating a large number of schools may find that it is not worthwhile taking out insurance on a school burning down: in effect it provides insurance to itself. Any insurance policy (whether taken out with an insurance company or through passing the risk on to a private contractor who operates the school) has costs attached. In effect under the PFI scheme the government pays the private sector to take on risk, when the government itself (through its size) is better able to accommodate that risk. The transfer of risk under a PFI contract may anyway be incomplete especially with regard to large (negative) shocks.The argument is simply that in the event of some large negative shock, which raised costs such that the contract became unprofitable, then the contract would be revoked. This may take the form of the private sector body seeking to renegotiate the contract (under the threat of bankruptcy otherwise). The principle of risk adjustment is that, in order to make a fair comparison of costs between private finance initiative options and public sector comparators, account needs to be taken of risks which under public procurement the public sector carries itself, but which under private finance initiative it pays

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another agent, the private investor, to bear. When the cost of public sector options is adjusted to reflect this transfer of risk, the apparent cost disadvantage of the private finance initiative options disappears. In most cases this is done through adding a lump sum representing the cost of risk to the net present cost of the public sector comparator.Table 4 shows that risk transfer is valued at between £20 million and £73 million in a sample of schemes and has a decisive effect on the outcome of economic appraisal. Both discounting and risk adjustment seem to be necessary if the private finance initiative is to show value for money.There are several problems with the risk adjustment carried out in the appraisal of private finance initiative schemes. One is that the 6% discount rate already takes account of an element of risk, as it is set at a level that is deemed by the Treasury to be higher than a risk-free interest rate. Interest rates are after all largely determined by the level of estimated risk associated with an investment. As the value for money test involves discounting costs at 6% and then adjusting the comparator for risk, the cost of risk is effectively counted twice. (Gaffney et al. 1999: 118) The introduction of PFI schemes may also generate risks so far as the public sector is concerned, which were previously absent (under the ‘traditional’ means of funding public investment). The PFI approach introduces a significant element of inflexibility, namely that the services related to the capital project are contracted for a period of many years ahead (often twenty-five or thirty years). If say a school is constructed, there is some element of inflexibility in that there may be few alternative uses for a school building: in other words the construction of a school represents a strong element of ‘sunk costs’. But the buildings and the land on which it is built may have some alternative uses. However when the school is constructed under the PFI, then there will be a leasing arrangement on the school for twentyfive or thirty years and often maintenance and other contractual arrangements. Demographic changes over a quarter of a century will bring a changing pattern in the requirements for school places, and yet those schools constructed under PFI will be contracted to continue to provide services whether or not they are wanted. Hence, ‘taking on a 30 year contract for services is an additional risk for [NHS] trusts. If the demand for hospital services is reduced for any reason, the NHS trust is still tied into an agreement for maintenance, facilities, and management services over and above the cost of building the hospital.This would not be the case if the hospital was built with public funding’ (MacDonald 2000). Similarly,‘another issue is the underestimation of demand risk, which arises if serviced schools or prison places under a 30-year PFI project turn out to be in excess of requirements’ (Heald 2002). The second concerns the extent to which risk is effectively transferred to the private sector. In the event of major difficulties with the operation of the PFI project, will the government not be forced to come to the rescue of the project? Take as an example: in the event that a contractor found it unprofitable to provide services relating to a PFI project (say on a school or a hospital) would the government

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be able to let the project be closed down.The contractor would be in a relatively strong bargaining position to be bailed out in some way by the government.Thus, it can be argued that risk is not effectively transferred to the private sector, particularly when the risks involved are substantial.

Contracts and incentives The provision of any service involves contractual relations between the parties involved. If a public service is to be provided, then some form of contractual relationship must exist between the government and those providing the service.The contracts may be in the form of employment contracts between government and its employees when the public service is provided ‘in house’, or it may be in the form of a contract between the government and a private sector body (and in turn that body will have employment contracts with its employees and other contracts with its suppliers). There is now a vast economics literature on contracts, and we pick out some of the salient features of that literature in respect of the PFI and PPP.6 It is recognised that contracts involve costs (to all the parties involved), which have been included under the general heading of ‘transactions costs’. These costs include the costs of negotiating the contract, the costs of monitoring the implementation of the contract. In a world of complexity, uncertainty and bounded rationality, contracts are inevitably incomplete. It is simply not possible to envisage and list all possibilities eventualities which may occur and how the parties to the contract would respond. Employment contracts, for example, may provide general indications of what types of tasks an employee is to undertake, to whom the employee reports etc. But it is not feasible that an employment contract could specify what an employee is to do each minute of the day, and how the employee would respond in all circumstances. Contracts often involve a ‘principal–agent’ situation – that is where one person (the agent) undertakes activities to ‘satisfy’ another person (the principal).The principal wants certain objectives to be pursued, but for these objectives to be worked towards by the agent. However, the principal will find some difficulty in precisely defining her objectives and ensuring that the agent shares those objectives. The contract, which is agreed by the principal and the agent will set up incentives for the agent to behave in certain type of way. For example, a contract, which specifies payment by amount produced creates incentives to produce as much as possible without regard to the quality of what is produced. The introduction of PFI, PPP and similar forms of contracting out activities, which in earlier times would have been undertaken within the public sector may have the effect of pushing the government towards a clearer statement of its objectives. If the contract between the government and the private sector body includes targets to be met by the provider, then it ensures that some consideration is given to the targets to be specified. The literature on contracts would suggest that fully specified contracts are never feasible. In particular, a contract cannot specify what is to be done in every

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possible eventuality. On the one side, this limits the ability of the government to specify what is to be undertaken through the contract, especially when the contract extends for many years into the future. On the other side, it generates difficulties for the contract to be flexible and to adjust to changing circumstances. The literature would also point to the costs involved in the writing and monitoring of contracts. Although these types of costs may not be substantial relative to the other costs involved, they can still play a significant role. One illustration of this is provided by the following: Another key feature of PFI schemes is that it takes a long time to negotiate deals to a successful conclusion.The evidence from recently completed NHS hospital schemes is that it takes approximately 30 months to move from advertisement to contract closure. The process is shorter in local government but the average time taken to conclude deals from the point of advertisement is still 26 months.As this is preceded by a period of investment appraisal and followed by a 12-month to 2-year construction period, it is possible that purchases will have to wait three to four years (at a minimum) before schemes are operational. They should therefore guard against unrealistic expectations and recognise that the PFI is unlikely to be a ‘quick fix’ solution to their investment needs. (Barnes 2001) The length of contract under PFI raises inevitable difficulties for the writing and monitoring of such contracts. As argued in the section on ‘Additional finance and additional investment?’, there is nothing inherent in the PFI which would generate more efficient outcomes for the government.

Conclusions The PFI involves further private provision of services to the public sector, which would otherwise have been provided by the employees of the public sector. As such, the PFI is a form of creeping privatisation whereby public services are provided by the private sector. It also involves the private ownership of capital facilities such as schools and hospitals, which also would have formerly been owned by the public sector. This form of privatisation has been justified along a number of lines such as permitting higher levels of investment, lower costs and transferring risk. In this chapter we have pointed to the higher effective cost of finance (to the public sector), which is involved in the PFI (as compared with the alternatives).The claims for savings on construction costs (a figure of 17 per cent being often quoted) have been doubted. It has also been argued that PFI per se does not lead to higher levels of investment, nor to any significant transfer of risk to the private sector.We have also pointed to the future commitments, which government has entered into through PFI, and argued that the present value of such commitments should be added to the estimates of the public debt. Overall, we would conclude that there must then be considerable doubt as to whether the PFI is a cost effective way of providing and funding infrastructure and public services.

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Acknowledgements This chapter was written while I was Distinguished Visiting Fellow at La Trobe University, and I am grateful to that University for its hospitality and facilities. I am also grateful to Dan Coffey for comments on an earlier draft.

Notes 1 Further, ‘a 1993 report from the Environment Department confessed that 51% of contracted-out council workers had taken direct real cuts in pay, bonuses, holiday and sick pay. Manual staff, the report concluded, had borne the brunt of savings made through contracting out’ (P. Toynbee, Guardian 10 July 2002). 2 Quotes taken from web site of 10 Downing Street. 3 Chantrey Vellacott DFK, Economic Report, London: Chantrey Vellacott, 1999. 4 Sixty per cent may sound a high figure but consider someone with a relatively recent mortgage on their home where the ratio could well be of the order of 300 or 400 per cent. 5 The change in public debt is equal to B ⫹ rD where B is the primary deficit (i.e. tax revenue minus expenditure other than interest payments), r the post-tax rate of interest and D the national debt. The growth of the public debt is then B/D ⫹ r. The debt to income ratio will be constant when national debt grows at the same rate as national income, that is, when B/D ⫹ r ⫽ g (the growth of national income). This can be expressed as b ⫹ rd ⫽ gd (where b is primary budget deficit to income ratio and d debt to income ratio) and it can be noted that g and r can either be both in real terms or both in nominal terms. However, interest payments are made and recorded in nominal terms, and the size of interest payments (relative to say national income or to other government expenditure) of which people are aware is in nominal terms.The above equation can be rewritten as (b ⫹ rd )/g ⫽ d, which provides a relationship between government deficit and national debt or as d ⫽ b/( g ⫺ r) which provides a relationship between the primary deficit and national debt (all expressed relative to national income).The important implication of this is that, provided that g ⬎ r, any size of primary deficit leads to a sustainable (non-exploding) debt to income ratio. 6 See, for example, Williamson (1989) on the general ideas on transactions costs, and Sappington (1991) and Strong and Waterson (1987) on issues raised by the principal– agent problem.

References Barnes, M. (2001) ‘Putting the PFI into Practice’, Public Finance, 29 June 2001 (on-line version). Boateng, P. (2001) ‘Keynote Address’ at the Public Private Partnerships/Private Finance Initiative Global Summit, Dublin, 16 October 2001. Buiter,W. (2001) ‘Notes on “A Code for Fiscal Stability” ’, Oxford Economic Papers, 53: 1–19. Colling, T. and Ferner, A. (1995) ‘Privatization and Marketization’, in P. Edwards (ed.), Industrial Relations:Theory and Practice in Britain, Oxford: Blackwell. Falconer, Lord (2001) ‘The Politics of Major Projects’ Lecture at University of Strathclyde, 22 March 2001. Gaffney, D., Pollock, A. M., Price, D. and Shaoul, J. (1999) ‘PFI in the NHS – Is there an Economic Case’, British Medical Journal, 319: 116–119. Heald, D. (2002) Observer, 28 April 2002. HM Treasury (1997) Pre-Budget Report: Securing Britain’s Long-term Economic Future.

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Hutton,W. (2002) ‘Risky – No Matter How You Slice it’, Observer, 28 April 2002. MacDonald, R. (2000) ‘Private Finance Initiative Condemned’, British Medical Journal, 321: 657. Public Private Partnerships – the Government’s Approach, Stationery Office, 2000. Sappington, D. E. M. (1991) ‘Incentives in Principal–Agent Relationships’, Journal of Economic Perspectives, 5(2): 45–66. Smith, A. (2001) Speech by Chief Secretary to the Treasury at the OGC PUK Conference, 23 October 2001. Smith, A. (2000) ‘Partners in the Modernisation of Britain’, Speech by R. Hon. Andrew Smith MP, Chief Secretary to the Treasury, to the IPPR seminar on PPPs, 5 April 2000. Strong, N. and Waterson, M. (1987) ‘Principals, Agents and Information’ in R. Clarke and T. McGuiness (eds), The Economics of the Firm, Oxford: Blackwell. Sussex, Jon (2001) The Economics of the Private Finance Initiative in the NHS, Office of Health Economics: Summary on www.ohe.org (accessed 9 May 2002). Toynbee, P. (2002) Guardian, 10 July 2002. Williamson, O. E. (1989) ‘Transactions Cost Economics’, in R. Schmalensee and R. Willig (eds), Handbook of Industrial Organisation, Amsterdam: North-Holland.

Index

Age Participation Index 118 Allen, N. 132, 141 Altman, M. 148 Altshuler, A. 46 anti-discrimination measures 146–8, 151, 154 Arrow, K.J. 152 Ashton, D. 122 Associated British Ports (ABP) 161 Atkinson, A.B. 88 Australia 49–51, 121 Austria 116–17 automobile manufacturers 69 balance of payments 23 Banking, Insurance and Finance Union (BIFU) 134 banking sector 6; global restructuring of 138 Bank of Japan 63 bankruptcies 62 Barro, R.J. 113 Beamish, P.W. 73 behavioural adjustment 141 behavioural attributes 124 Belgium 116, 121 benchmarks 52, 112, 125 Ben-Ner, A. 148 best practice: employment policies 152; in management 130; manufacture as industrial policy 45; production methods 46, 58 ‘Big Four’ banks 134 Blair,T. 177 BMW 53, 57 Boateng, P. 180 Bolton 29 bonuses 150 Branston, R. 78 Bridgestone 69

Britain see United Kingdom British Aerospace 160 British Gas 160 British Rail 161 British Steel 160 British Telecom 160 British Transport Docks Board 161 Broadbent, J. 75 budget deficits 171 Buiter,W. 176 business: failures 62; investment per worker 16 business enterprise R&D (BERD), industry-funded 17 Canada 12, 121 capital: expenditure 172, 181; intensity gap in manufacturing 89; investment 15, 171, 173, 181; markets 110; projects 8; value of bonds 175 care-work 103 car manufacture and assembly 47 Centre for Business Research (CBR) 31, 40, 78; surveys of 29–30, 33–4 Channel Tunnel 183 childhood poverty 125 children 88 Coffey, D. 4–5, 7, 78, 104 collaboration 34; benefits of 39; innovation and corporate performance 33–4 collective bargaining 154 collective entrepreneurialism 78 collective representation of labour 98 Colling,T. 172 commercial and savings banks 138 commitment: affective 132, 141; attitudinal 131–2, 141; behavioural 131; collective 131; concept of 7; continuance 132; levels 137, 142; scores 135–6

192

Index

competition 29; degree of 39; effect of 35; policy 9 competitive environment 30–2, 34 competitiveness 45, 51; policies 12–26 Competitiveness White Paper (CWP) 11; see also United Kingdom and Europe compulsory competitive tendering (CCT) 85, 100 Concorde, development of 183 ‘consensus model’ on workings of national economy 91 consultancy exercises 52 contracting out of services 172; to private sector provision 171 contracts and incentives 186–7; ‘principal–agent’ situation 186 Contrepois, S. 6 Co-operative Bank 134, 139 Co-operative Wholesale Society 134 corporate finance, new forms of 40 corporate governance 40 Corporate Group 65–8 Corporate Japan 62–3, 71, 74–5, 77; global position 69 corporate strategy 67 cost: advantage 33; of construction and of operation 182; over-runs 182; unemployment 90 cotton industry 38 Council of Europe decency threshold measure of low pay 93, 100, 137 Cowling, K. 5 Credit Lyonnais 133, 138–9 current account deficit 22–3 customer: choice 45; service 132 Dagenham 55–6 Davis, D. 161 debt interest payments 32 decasualisation 163 deindustrialisation process of 85 democratic forms of direct employee ownership 159 Denmark 130, 138, 140; banks 138, 140; income inequality 139; trade union membership 138; workers 140 depreciation allowances 74 deregulation 10, 29; of terms of employment 161 development of specialist services 33 Devlin, Lord 162; reforms 163, 165–6 discount rate 178–80 discriminated groups 7; share of total workforce employment 155

discrimination 2; in employment 101 discriminatory environments 147 distribution: of income and wealth, shifts in 89; of wages 83 distributional inequalities 96 distributive justice 83 Dore, R. 38–9 Dorsey, R. 78 Dun and Bradstreet database 29 earnings: distribution 87, 93–4; inequalities 92, 96, 140 East Asia 71, 76; growing economies in 111 economic democracy 159 economics: of discrimination 152; literature on contracts 186 Economic Trends 23 economies of scale and scope 34 education 1, 111, 127; demand for 117; economic importance 121; expansion 118, 126; expected years in 116; inputs, time series of 112; investment 117; levels of 110; market 114; as ‘merit good’ 110–11; policy in (economic) theory 110–11; spending 125; stock of whole adult population 112; system, outputs of 111 ‘efficiency’, evidence on 89 electronics 69 employees: bargaining power 5; behaviour 132; commitment 6, 133–4, 141–2; conditions of 172; growth 23, 34–5; income inequality 139; individual characteristics 153; manual 86; participation 1, 3, 146, 150–2; performance 21; relationship 141; share ownership schemes 150 employment 83; and inflation, policy targeting 10; protection legislation 93; rights, new 93 Employment Bill 93, 98 Employment in Britain survey 122 English Regional Development Agencies 19 enterprise: innovation 24; and technology transfer centres 20 equal opportunities 3, 7, 151; in employment 146, 155; impact on productivity 148; planning 150; policies 152, 154; practices 147, 153; in workplace 146 Equal Opportunities Commission (EOC) 98

Index equal pay 6, 98–9, 103; legislation 6, 98, 147 Equal Pay Task Force 101 equitable society 104 ‘equivalised’ income by household 95 ESRC see Centre for Business Research ethnic minority employees 152–3 Etzioni, A. 131; analysis of commitment 141 Europe 49–51, 68, 76, 88; banking sector 130; competitiveness policies 26; economy 14; industrial policy 10; monetary integration 10; personnel and HRM managers 132 European (1993) Competitiveness White Paper (CWP) 12–15 European Commission 10, 12 European Community 11 European Union (EU) 4, 11–12, 14, 22, 52, 68, 89, 95, 121, 123; competitors 54; Directives 93, 101; policy 10 Felstead, A. 119, 122 female employees 138, 152 female workforce 88, 94–5 ‘feminisation’ of trade unions 86, 99 Ferner, A. 172 Ferrett, B. 78 firm: innovativeness 30, 32, 34; size 39 ‘flexibility’ versus ‘Fordism’ 46 ‘flying geese formation’ of production 73 Ford Motor Company 46–7, 53, 55–7 foreign competition 64 foreign direct investment (FDI) 4–5, 32, 62, 64; overseas 68; restrictions 68 foreign investors 53 France 18, 21, 24, 112, 130, 133, 138–9; banking employment 138 free cash flow 32, 37 ‘freeing up’ of labour and product markets 40 free market competition 29 ‘free-riding’ behaviour 154 Fujitsu 69 G5 12 G7 countries 11, 16–17, 24; unemployment rate 21 Gaffney, D. 178 Galbraith, J.K. 114 Gallie, D. 122 gender: composition of labour market 86; inequalities 101; pay gap 94, 100 general equilibrium 29

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General Motors 47, 53, 57 Germany 12, 18, 21, 24, 68, 112; Baden Württemburg 64 Gerschenkron, A. 64 Glennerster, H. 115 global actors and market power 69–70 global economy 1, 77; foreign assets 69 global education, competition 125–78 globalisation 32; effects of 74; exposure to 73; strategies 62 global outsourcing 68 goodwill 38 government: bonds 177; borrowing 182; debt position 182; expenditure on investment 16; investment 17; as new model employer 99–103; policy towards industry and labour 1 Green, F. 6 Gross Domestic Product (GDP) 11, 71, 96, 114, 175; growth rates 90; international comparisons 23; investment share in 15; per capita 13–14, 19; per worker 12; real, growth of 22 Hannah, L. 160 Harvard Business Review 131 Hawthorne studies 48 Hesletine, M. 11 higher levels of unionisation in workforce 99 ‘higher wage, higher productivity’ models 142 ‘high road’ approach 7, 91, 96–103 Hitachi 63, 65 Honda 65, 69 human capital 15–18; investment in 176; stocks 112–13 human resource management (HRM) 1–2; changes 137; commitment, insecurity and low pay 130; ‘hard’ and ‘soft’ versions of 131; initiatives, impact of 132; paradigm, new 134; practices 86; strategies 6 human resources, allocation of 147 human rights 146 Hungary 112 income 95; guarantees 72; inequality 88, 95; per capita 18; and wealth 83 index-action 97 individualisation 130 individualism 131 industrial district, pure Marshallian 64–5

194

Index

industrial policy 62; overview 3; positive 9; targets 9 industrial production, pyramidal structure of 66 industrial relations 2, 138 industry structure 38 inflation 24, 83 information, flow of 38 innovation 30, 33, 38, 40, 104; Probit estimates of 36; product and process innovation 17 Institute for Public Policy Research (IPPR) 177 insurance sector 138 intangible assets 19 interest rates 178; world real 24 International Adult Literacy Surveys 121 international competitiveness 83 investment: in broad capital 19; concept of 176; diversion of 71; in education 114; in factory automation 48; in fixed capital 24; with future pay-off 110; inward 45 Ireland 112, 121 Italy 116; industrial districts of Emilia-Romagna 64, 75 Japan 18, 39, 49–50, 77; automobile industry 45, 47, 66; corporate governance 65–8; de-industrialisation 72; domestic manufacturing industry 62–3; economy 5; FDI 68, 71; firms 38, 66; flexibility 47; 1949 Foreign Exchange and Foreign Trade Control Law 64; 1950 Foreign Investment Law 64; hollowing out 62, 71–2; industrial districts 62, 64–7; industrial organisation 66; industrial policy 74–7; international competitiveness 63, 72; keiretsu 63, 65, 67–8, 71–3; machinery industries 63–7; manufacturing, globalisation of 68–70; Ministry of International Trade and Industry (MITI) 5, 62–3, 67–8, 71, 77; national champions 68; organisational superiority 48, 50; sanchi 75–6; small firms 62, 72, 74–6; strategic failure 71, 73, 75, 78; Technopolis Project 74; transnational corporations 5, 68–70, 73, 76; transplants in Europe and North America 49; unemployment rate 21 Japanese External Trade Organisation (JETRO) 64, 76–7 Jeffery, S. 6, 139 Jensen, M.C. 32, 37

job: creation 14; insecurity 133, 137, 140; redesign, imaginative 103; security 1, 135, 140 job-related training 121 Johnson, C. 63 Jones, D.C. 148 Jones, D.T. 46–7 Joseph Rowntree Foundation 90 Just-in-Time ( JIT) delivery system 66 Jyske Bank 138–9 Kaplinsky, R. 46 keiretsu see Japan Kelly, C. 132 Kelly, J. 132 Kingsmill Review 90, 101 Kitson, M. 4, 53 knowledge 15–18 knowledge-driven economy 20 Krafcik, J.F. 48–9 Krugman, P. 9 labour: costs 69; economics 2; index of input to assembly 48; management techniques 130; productivity 49, 53; saving investment strategies 161; and total factor productivity 89 Labour Force Surveys 121–2 labour market: deregulation 5, 130; economic analyses of 83; flexibility 4, 14–15; inflexibilities 7, 160; intelligence 127; policy 83, 90–6, 103, 130; practices 38; regulation 168 laissez faire competition 2 La Trobe University 188 Lazonick,W. 37–8 lean manufacture, core tenets of 45–51 lean production 45–58 Learning and Skills Councils 120 Lee, J.W. 113 Liabilities Management 24 Liff, S. 146–7 Limped 6.0 35 living standards 20; decline in 12; targeting of growth in 14 local government 100; pay 100–1; workers 101 London 124; as financial centre 18 London Underground 183 low pay 88, 99, 133, 137, 141–2 Low Pay Commission (LPC) 91–2, 96, 99 Low Pay Unit (LPU) 92, 95–6, 98 ‘low road’ behaviour 90

Index ‘low-wage, low-productivity’ behaviour 96 ‘low wage/low productivity/higher unemployment’ models 142 Macaulay, S. 39 male earnings 88, 95 Malerba, F. 39 management: ‘commitment-building’ framework 135; of labour 131; techniques 53 manual workforce 94, 99 manufacture: organising principles of 4; and production 22 ‘marginal productivity’ theory 84 markets 29; competition 37; discipline 32; economies 142 Marshall, A. 64 Martin, S. 160 Meckling,W.H. 32, 37 Meiji Restoration of 1868 64 Mellish, M. 165 Meyer, J. 132, 141 Michie, J. 4, 53 Millward, R. 159–60 ‘minimum standards’ policy approach 93 Mitsubishi 69 mixed-model assembly 47 Modern Apprenticeships 120 modern labour market analyses 99 monopoly capitalism 45, 51 Morrisonian model of state-owned industry 158 Mowday, R. 131 National Dock Labour Board (NDLB) 161, 164, 166; see also UK National Dock Labour Scheme (NDLS) 7, 162–5, 167; see also UK nationalisation of assets 159 National Skills Task Force in 2000 127 NEC 65 neoliberal agenda 131 Netherlands, the 121 New Earnings Survey (NES) 87, 94–5 New Industrial Relations 132 Newly Industrialised Economies (NIEs) 73 Newly Industrialising Countries (or NICs) 49–51 New Zealand 12, 121 Nickell, S.J. 30–1 Nikkei Weekly 73 Nissan 65, 67, 69, 71 non-discrimination: in employment 155; policy of 146

195

non-hierarchical mode of production 66 non-innovating firms 30, 33–4 North America 47, 49–51, 112 North American Free Trade Area (NAFTA) 68 Northern Ireland 18 North Sea Oil 90 Norway 116 National Vocational Qualification (NVQ) 112 O’Donnell, K. 158–60, 167 off balance sheet 176 Office of Health Economics 179 offshore production 5 open-book accounting 66 organisational ‘efficiency’ for plants 50 organisational ‘justice’ and ‘fairness’ 141 Organisation for Economic Cooperation and Development (OECD) 11, 93, 112–13, 115–17 Orsenigo, L. 39 Osaka 65 Oughton, C. 3 output: gap 40; growth 23; per capita 13 over-regulation 7 overseas competition 37 ownership, forms of 1 Ozawa,T. 64, 73 Parker, D. 160 participation schemes 150 Part Time Workers and Burden of Proof Regulations 98 pay: basic 136; distribution 140; inequality 138; levels 134 Perotin,V. 7 personnel policies 134 physical capital 15–18 Piore, M.J. 46, 67–8 plant: automation 49–50, 53; inflexibility 56 1985 Plaza Accord 68 Poland 121 Policy Innovation Unit of the Cabinet Office in 2001 127 Portugal 112 poverty 97, 110; in-work 88; out-of-work 88 printing of money 171 private contractors 172–3 private education system 118–19

196

Index

Private Finance Initiative (PFI) 8, 171–8, 180, 183, 186; commitments 182; contract, transfer of risk under 184; as a form of creeping privatisation 187; hospitals 180; scale of 173–7; schemes 179, 185, 187 privatisation 10, 130, 160–1 product: design, flair and creativity 33; innovation 17; life cycles 73; quality 33 production: control mechanisms 67; systems, customer-oriented 46 productive efficiency 7; in workplace 3, 146 productivity 2, 98, 158; of discriminated and non-discriminated groups 152; gap 24, 27; growth 22–3, 39; of labour or capital 159 profit: consideration 173; margin growth 35 profit-related pay schemes 154 profit-sharing schemes 154; deferred 150 Public Service Agreements (PSAs) 20–1, 26 psychological three-component model 132 public accounting system 181 public education, share of GDP 117 public investment 176; forms of 173; limitations 181 public–private partnerships 172 public schools 119; elite 114 public sector: direct hiring of labour 173; employment 85, 99; investment 171; net wealth position of 182; provision of ‘public services’ 103, 173 public sector comparator (PSC), capital expenditure 178 public services union (UNISON) 100, 158–9 Public Testing and Research Centres (PTRs) 67, 76 quality: circles 153; control 66, 120; of products 89 racism 55 real unit wage cost 166; index 165 Regional Development Agencies 20 Regional Investment Fund (RIF) 26 relational contracts 38–9 relative unit labour costs (RULC) 89 research and development (R&D): creation of laboratories 31; expenditure 17; public facilities 76; sharing of 34 revaluation and resourcing 103 Richards,W. 104 rights-based legislation 103 risk: bearing, issue of 183–6; premia 177–8

Robinson, A. 7 Robinson, P. 14 Rover Group 53 Ruigrok,W. 66–7 Sabel, C.F. 46, 67–8 Saundry, R. 166 Sawyer, M. 8, 158–60, 167 Scandinavian countries 117 schools, new comprehensive 114 school teachers, shortages of 121 Schumpeter, J.A. 32 Schumpeter Mark I 31, 39 Schumpeter Mark II 31, 39 science: capital expenditure budget 24; parks 74; spending 20 Science Enterprise Challenge 20 Scotland 18 Sea Containers 161 Second L’institute-Milwaukee Workshop on Urban and Regional Prosperity in a Globalised Economy 78 self-regulating market 38 severance costs 164, 166 sexual and racial discrimination, legislation on 147 Sheehan, M. 4 short-termism 39 Singapore 111 single firm dominance 10 single model specification 46 Single Status arrangements 100, 102 skills: acquisition of 152; deficit 89; formation 1; levels 19 1997 Skills Survey 122 2001 Skills Survey 119, 122 slow growth, impact of 22–3 Small Business Research Centre (SBRC) 29 small firms: bankruptcy cases 72; isolation 71; networks, horizontal 78 social inclusion 97 social networks, role of 153 Society of Motor Manufactures and Traders 55 ‘soft’ HRM 134 ‘soft’ skills 103 Sony 63, 65, 69 South Korea 111 ‘spillover’ effects 32 Stability and Growth Pact of eurozone countries 180–1 state education system 114, 120, 125 ‘strategic’ public ownership 159 subcontracting 65, 67 Sugden, R. 78

Index ‘surplus’ labour 163 Sussex, J. 180 Switzerland 121 Taiwan 111 take-overs 37, 39; effect of 32 tariff barriers 10 tax: breaks 74; credits 96 taxation 176; regressive forms of 97 teachers 118–22; pay 122–4 technology and global development 126 Technopolis Project 75 Thornley, C. 5–6, 78 Tokyo 65 Tokyo Keizai (TK) 77 Tomlinson, P.R. 5, 71 Toshiba 65 total automation index 49 Total Factor Productivity (TFP) 73, 159 Toyota 45–7, 63, 65, 67, 69 trade: barriers 32; policy 10 tradeables sector of economy 20, 22, 27 Trade and Industry Committee 55, 57 trade unions 85, 91, 98–9, 137, 141, 159; avoidance 130; militancy 7; organisation 168; power 158, 160; recognition rights 93; rights 6, 98, 103 Trades Union Congress (TUC) 98–9, 131, 159 training 127; benefits of 111; per person employed 121; underinvestment 111 Training and Enterprise Councils 120 transactions costs 186; analysis 97 transnational corporations (TNCs) 1–2, 53, 56, 62, 76–7 Transport and General Workers Union (TGWU) 165, 167 Treaty of Rome Articles of 167 Turnbull, P. 163, 165–6 unemployment 14, 88, 142; low 141; rate 21 UNIFI trade union 134 unions see trade unions UNISON see public sector United Kingdom (UK) 29, 33, 45, 68, 88–9, 96, 130, 139; 1981 Transport Act 161; 1991 Ports Act 161; automotive industry 45, 53–4, 56–7; banking sector 130, 133; business investment performance 16; Codes of Practice 84; competitiveness 1, 172; competitiveness policies 19, 26, 58; Competitiveness White Paper (CWP) 12–16, 21–6; comprehensive spending review (CSR)

197

20; Conservative administrations 15, 20–1, 85, 96, 100, 103, 131, 158, 161; current account deficits 90; Department for Education and Employment 20; Department of Trade and Industry (DTI) 4–5, 16, 20–1, 24–5, 27, 45, 51–4, 57–8, 93; Department for Work and Pensions 21; distributional trends 86–9; dock labour deregulation of 161–6; education 6, 109, 112–16, 125; Employment Acts 84; Employment Protection Act 84, 98; Fair Wages Resolution 85; firms 4, 39; General Election of 2001 92; government investment in R&D 18; HM Treasury Budget Report 2002 174; House of Commons Trade and Industry Committee 53; industrial competitiveness 58; industrial policy 10–12, 51; inequality in 83, 117; investment per worker 24; inward investment 51, 58; labour administration 5, 19–21, 84, 95–6, 103, 114; labour market policy 84–90; local government employment 84, 102; national health services (NHS) 177, 180, 185; National Joint Council (NJC) in UK 100; National Minimum Wage (NMW) 1, 5, 84, 91–3, 95–7, 99–100, 103, 139; National Ports Council 161; productivity gap 12; productivity growth 11; qualification stocks 125, 127; regional convergence 18; skills gap 20, 109; small and medium sized enterprise (SME) sector 29;Thatcher years 114, 158, 160–1; trade performance 22–3; Trade Union Act of 1984 84;Trade Union Reform and Employment Rights Act of 1993 84; trade unions 158; underinvestment in broad capital 15, 26–7, 52; unemployment rate 11;Wages Act of 1986 84–5;Wages Councils 85 United Nations 77 United Nations Conference on Trade and Development (UNCTAD) 70 United States (US) 12, 14–15, 18, 21, 24, 29, 39, 68, 98, 121; unemployment rate 21 universities, elite 119 University of Cambridge CBR see Centre for Business Research Van Tulder, R. 66–7 ‘virtuous’ policy circles 2 voluntary turnover rates 132

198

Index

wages 83; costs 14, 158; inequality 88, 98; level of 172; recommendations on 91 Wales 18 Walton, R. 131 Wass,V. 165 wealth 92, 95; changes in stock of 88 Wellcome Trust 20 Western car assembly plants 46–7 white collar employees 86 Whittaker, D.H. 65, 73 Wilson, D. 163, 165 Womack, P. 46–51, 53 women 152; median annual earnings 93; overall share in economy-wide workforce 99; as part-time workers 95, 100

Women and Equality Unit 98 Wood, E. 40 work: environment 153; experience 124; training 109 workers: graduate 119; participation in control 149–50; representative organisation 154; skilled 118 Workplace Employment Relations Survey (WERS98) 1998 151 workplace productivity 152, 154 World Development Report 2000 117 World Investment Report 2000 Cross-Border Mergers and Acquisitions and Development 70 yen appreciation 68