ISSN 1362-3761 CentrePiece · 2004. 10. 6. · CentrePiece The Magazine of Economic Performance Volume 3 Issue 3 Autumn 1998 £4.00 ISSN 1362-3761 A profitable occupation?

C e n t r e Pi e c eT h e M a g a z i n e o f E c o n o m i c P e r f o r m a n c e V o l u m e 3 I s s u e 3 A u t u m n 1 9 9 8 £ 4 . 0 0

I S S N 1 3 6 2 - 3 7 6 1

A profitable occupation?

Editor: Graham InghamDeputy Editor: Mark BennisterDesign: Raphael WhittlePrinted by: Warwick Printing CompanyPhotography: Karl Fulton

CentrePiece is the magazine of the Centre for EconomicPerformance at the London School of Economics. Articles in this issue reflect the opinions of the authors, not of the Centre. Requests for permission to reproduce the articles should be sent to the Editor at the address below.Correspondence, especially relating to the articles in this issue, is welcomed.

Editorial and Subscriptions OfficeCentre for Economic PerformanceLondon School of EconomicsHoughton StreetLondon WC2A 2AE

Annual subscriptions for one year (3 issues):Individuals £11.00Students £7.00Organisations (UK and Europe) £25.00Rest of world £32.00 or US $50.00Visa and Mastercard acceptedCheques payable to London School of Economics

© Centre for Economic Performance 1998 Volume 3 Issue 3 (ISSN 1362-3761) All rights reserved.

CentrePiece is printed on environmentally friendly, totally chlorine free paper.

Editor’s noteOur most explicit front cover ever ensures there’s no needto offer a prize for guessing what our special theme is.Employment and unemployment, and the changing patternsof work in the late twentieth century affect us all, no matterwhere we live and what we do. Much of the research activ-ity at the Centre for Economic Performance is concernedwith one aspect of work or another. So we invited a range ofpeople to write about the issues which specifically concernthem and to share some of their most important findings witha wider audience.

Michael West and Malcolm Patterson, engaged in a massiveempirical study looking at what companies actually do, havediscovered a clear link between worker satisfaction andcompany profitability. That may sound like common sense.But if it’s so obvious why do so many companies fail to takethis on board in the way they treat their staff?

Three articles look at different aspects of the UK labour mar-ket: Richard Layard argues the case for helping people re-enter the work force; Richard Dickens and Stephen Machinlook at the likely impact of the new minimum wage; and PaulGregg, Genevieve Knight and Jonathan Wadsworth pointout that there’s a hidden cost to unemployment in Britain –the continuing losses suffered when people find another job.

Our guest columnist is Bill Callaghan, Head of EconomicAffairs at the TUC. He enters a plea for more partnership inthe debate about work. Howard Gospel looks at the attemptto revive apprenticeship in Britain and warns that this couldbe Britain’s last chance to develop effective on-the-job train-ing. And Ronald Dore shares his thoughts on how the atti-tude to employment in Japan may be changing in the wakeof the upheavals now under way in that troubled economy.

We also have a review of Mad Money by Susan Strange – acritical assessment of the impact of global financial deregu-lation whose publication has coincided with yet anothermassive upheaval in the world’s financial markets.

Now there may be no prizes for guessing the meaning of ourfront cover. But there are prizes for filling in the Readers’Survey which you will find inserted in this issue. Please fill itin and return it to us (we’ll even pay the postage). We wantto know what you think of us: and whether you think there are changes we should make to the magazine. As anincentive, if you return the survey to us by 1st Decemberwe’ll enter your name in a prize draw – five readers will wincopies of Mad Money.

Graham Ingham

THE LONDON SCHOOL OF ECONOMICS

AND POLITICAL SCIENCE

HOUGHTON STREET LONDON, WC2A 2AE

Tel: 0171 955 7798 Fax: 0171 955 7671

Homepage: http://cep.lse.ac.uk/

Email: [email protected]

C E N T R E f o r E C O N O M I C P E R F O R M A N C E

E . S .R . CECONOMIC& S O C I A LRE S E A RC HC O U N C I L

CentrePiece Autumn 1998 1

C e n t r e P i e c e V o l u m e 3 I s s u e 3 A u t u m n 1 9 9 8

2

6

10

14

16

19

24

28

30

ContentsPeople power

The link between job satisfaction and productivity

MICHAEL WEST and MALCOLM PATTERSON

investigate the link between worker satisfaction and

company performance in exclusive new CEP research

West meets East:Will Japan convert to capitalism? RONALD DORE

on the challenges facing the Japanese

economy and the likely impact on employment

Minimum wage: maximum impact?RICHARD DICKENS and STEPHEN MACHIN look

at the likely impact of the minimum wage

What it costs to lose your jobPAUL GREGG, GENEVIEVE KNIGHT and

JONATHAN WADSWORTH reveal the hidden costs

facing people who lose one job and find another

GUEST COLUMN

The future of work: a challenge for partnershipBILL CALLAGHAN on recent changes

in the UK labour market

Reinventing apprenticeshipHOWARD GOSPEL asks if the attempt to revive

apprenticeship is the last chance for on-the-job training?

Getting people back to workRICHARD LAYARD sets out the case for

helping people re-enter the workforce

BOOK REVIEW

A world gone madNICHOLAS BAYNE reviews

Mad Money by Susan Strange

The weightless economy columnDANNY QUAH asks what the

weightless economy means for jobs

CentrePiece Autumn 1998

How often have you heard a modern manager sayof their workforce: people are our most importantasset? But is it merely more empty rhetoric ordoes it actually have relevance to the workplace?

New research at the CEP has revealed that people andtheir attitudes are in fact a company’s greatest asset; andyet found that managers are reluctant to use it.

Does satisfaction matter?Work psychologists have long been preoccupied by thequestion of job satisfaction, particularly whether a satisfiedworker is a productive worker. Much of the evidence frompsychological studies indicates not. Although there is a linkbetween individual performance and job satisfaction, it is veryweak. Satisfied workers often perform badly and manydissatisfied workers often perform well. But the CEP poseda new question: is the satisfaction of the workforce as awhole related to the organisationÕs productivity and profitabil-ity? Our findings show a surprisingly clear link which shedsnew light on the imperatives and priorities of management. Itsuggests that companies need to focus much more on theattitudes of the workforce in order to perform well.

The study involved 42 UK manufacturing companies(largely in mechanical engineering and plastics and rubber)and over 5,000 employees who answered questions abouttheir satisfaction with 15 different aspects of their workranging from physical working conditions, to fellowworkers, the amount of variety in the job, rate of pay, job security, and management-worker relations in thecompany. Those participating in the research indicated theextent to which they were dissatisfied or satisfied with eachof these aspects of their work. When the results werecombined within each company, we explored whether theypredicted the performance of the companies a year later. Infact, aggregated job satisfaction within a companypredicted a large part of the variation between companiesin performance (up to 25%). In particular, the job satisfac-tion of the workforce was a very good predictor of subse-quent productivity and a reasonably good predictor ofprofitability one year later (see Figures below).

Of course, one explanation for these startling findings isthat company performance is fairly stable: so in a companywhich is performing well, employees generally feel satisfied(prospects for security, pay and promotion may look good).

2

Figure 1 Employee Satisfaction and companyproductivity (18 months later)

There’s long been confusion and controversy about the links between

worker satisfaction, productivity and corporate profits. Research by

Malcolm Patterson and Michael West at the CEP sheds new and

potentially profitable light on these links.

People powerThe link between job satisfaction and productivity

Figure 2 Employee Satisfaction and companyprofitability

Other factors 75%

Employeesatisfaction25%

Employeesatisfaction12%

Other factors 88%


But such stability of performance could mean that examin-ing levels of satisfaction as a predictor of performance ayear later throws up a spurious finding – leading us falselyto assume that satisfaction of the workforce predictssubsequent performance. In a stringent test of this possibil-ity, we took out the effects of company performance for thethree years before we measured the job satisfaction of theworkforce and then saw if we could still predict companyperformance three years later. In effect we exploredwhether the collective satisfaction of a company’sworkforce could explain change in productivity andprofitability over the following year. Surprisingly, we couldstill account for a highly significant 11% of the change incompany performance. No other factor we have examined(such as competitive strategy, technology, market share,Total Quality Management or R&D strategy) could so effec-tively predict company performance.

Who’s happiest?We were intrigued to know whether this result held for allworkers or applied only to managers whose power mightgive them greater influence over productivity and profitabil-ity. The results showed that the findings held up for bothnon-management and management staff. However, when

we probed deeper still, we found that particular groups didseem to be important in terms of the influence of theirsatisfaction in predicting company performance. Peoplewho described themselves as non-management, but whoworked in administrative functions in the office rather thanon the shopfloor, were particularly important in terms of theinfluence of their work satisfaction levels on subsequentcompany performance. We speculate that perhaps theseare the people whose work most affects financial indica-tors such as those who work in sales and marketing, orwho control costs via purchasing decisions, but thefindings clearly point to the need for us to investigate thesegroups further.

More challenging to understand is the influence of theattitudes of a shadowy group who describe themselves as

3

by Michael West and Malcolm Patterson

4

5

4

44

4

4

4

4

5

4.97

5.08

4.82

4.65

4.2 4.52

Figure 3 Overall job satisfaction of management andnon-management groups

Management (Other)

Management (Office)

Management (Shop floor)

Non- management (Office)

Non- management (Other)

Non- management(Shop floor)

Very satisfied

Very dissatisfied

The job satisfaction of the workforce was a very good predictor of subsequentproductivity and a reasonably goodpredictor of profitability one year later.


non management but who work neither on the shopfloor,nor in the office. The more positive were their views of theirwork, the higher was company productivity a year later.Overall, however, the attitudes to work of non-shopflooremployees were particularly important in predicting subse-quent company performance.

One question we have been able to answer definitively iswhether employee attitudes have a direct effect oncompany profitability one year after they were measured, orif the effects are simply indirect, via productivity improve-ments. By modelling the effects of worker satisfaction onproductivity and profitability we are able to show clearly thatthe direction of effect is almost completely from employeesatisfaction to productivity: improvements there then lead togreater profitability.

Teamwork, co-ordination and co-operation But why is it that overall employee satisfaction affectsproductivity while individual job satisfaction is so weaklyrelated to performance? The answer lies in employee co-ordination and teamworking. Employees in the manufactur-ing sector have to co-ordinate their efforts and co-operate,as a natural function of their jobs. Where the level of satis-faction is generally high, employees may be more motivatedto make the extra effort to meet the needs of those in otherdepartments or functions. For example, one of the compa-nies in the automotive industry in Glasgow, with a signifi-cantly high level of employee satisfaction, made strenuousefforts to ensure good cross-team working in order topromote organisational effectiveness.

Of course, co-operation with others takes time and effort.And employees may be disgruntled about aspects of their

work: they may have difficulties with fellow workers or linemanagers, be dissatisfied with the rates of pay or theamount of responsibility they have. Consequently they maybe less inclined to give their time and effort, preferring tohoard their resources for their own immediate work. On thepositive side there are ways that collective satisfaction cantranslate into organisational productivity. Those who takethe trouble to do things which are not part of their job, forinstance picking up spillage from an assembly line or takingtime to deal with a visitor when the reception is notattended, are likely to be more motivated to do so whenthey see their work conditions as satisfactory rather thanunsatisfactory. Traditional methods of measuring job perfor-mance would not pick up such behaviour, but accumulatedacross an organisation over a year, they can make asubstantial difference to productivity and performance.

More satisfied workers are also likely to control the behav-iour and influence the efforts of less satisfied workers byencouraging others to aim for higher productivity. Previousresearch even suggests that positive mood and job satis-faction are associated with higher levels of creativity,perhaps influencing organisational innovation.

But the needs of satisfaction varies between differentgroups of workers, as our research also reveals. Figure 3shows that managers, wherever they are located(shopfloor, offices, etc.), are in general, significantly moresatisfied with their working conditions than non-manage-ment groups. Least satisfied are those non-managers whowork on the shopfloor. They are more unhappy thanmanagers with every aspect of their work environment. Thisis not surprising. Managers have more power and control,are better paid and have more variety and responsibly intheir jobs. There are one or two other differences between

4

Figure 4 Satisfaction of employees with aspects of their work

O 1 2 3 4 5 6 7

Extremely dissatisfied Extremely satisfied

1 Your fellow workers 5.412 Freedom to choose own method of working 5.083 Your immediate boss 4.944 The amount of variety in your job 4.925 Amount of responsibility 4.896 Your hours of work 4.867 Opportunities to use your abilities 4.68 Physical working conditions 4.69 Your job security 4.610 Attention paid to your suggestions 4.211 The way the organisation is managed 4.1612 Management/worker relations in the company 4.113 Recognition you get for good work 3.9614 Your chance of promotion 3.6115 Your rate of pay 3.5

Employees may be disgruntled about aspects of their work: they may have difficulties with fellow workers or line managers, be dissatisfied with the rates of pay or the amount of responsibility.


sources of satisfaction for managers and non-managers.The latter appear to rate their satisfaction with hours ofwork relatively highly, in contrast to managers who rate theamount of variety in their work as relatively satisfactory.

Employees typically rate satisfaction as highest in relation totheir fellow workers, freedom to choose their own methodof working, their immediate bosses, and the amount ofvariety in their jobs. Predictably they are least satisfied withtheir rate of pay (this applies to all groups!). They are alsorelatively unhappy with their chances of promotion, therecognition they get for good work, management-workerrelations and the way the organisation is managed. Thusfactors intrinsic to the job appear to offer the greatestsources of satisfaction; extraneous factors provide thegreatest causes of dissatisfaction, as Figure 4 (left) shows.

Indeed, given that it is the intrinsic aspects of a job whichprovide a significant source of satisfaction, it is alarming todiscover that for many people in these organisations, jobsare impoverished, monotonous and deskilling. We visited110 manufacturing outlets around the country varying insize from 80 to 1000, employees, with an average of 230;in more than half of these, the average job cycle time on theshopfloor – the time it took to complete the average taskand begin it over again – was 10 minutes or less. Thistranslates to more than 6 times an hour, 45 times a day,220 times a week, over 800 times a month and so on. In25% of the companies the average job cycle time was oneminute or less!

Wasting resources?All this leads us to conclude that the current managerialapproaches to job design are counter-productive. Employeesin such monotonous jobs are much less satisfied in generalthan those who work in jobs with a higher degree of variety,responsibility and the freedom to do the work in their ownway. And because – as we have seen – job satisfactionpredicts company performance it makes sense for managersto try to enrich people’s work by introducing job rotation,teamworking, job enrichment programmes or devolvingresponsibility for management of work and materials to thoseactually doing the work. At the very least, the types of impov-erished jobs we see in manufacturing organisations up anddown the country represent waste, on an enormous scale, ofthe resources, intelligence, skills and energy of those whoare required to perform them. Moreover, they are intrinsicallystressful and thus likely to lead to lower productivity viaabsenteeism and labour turnover.

These depressing discoveries are not isolated. Half of thefirms we have visited have no individual responsible for‘human resource management’, and more than two thirdshad no written personnel strategy. Managers described theapproach to training mostly as ‘reactive’, with only 6% ofthem reporting organised training schemes. Planned jobrotations and formal career planning were rare.

Or utilising assets?On the other hand we did see some shining examples ofgood practice. Zotefoams, a foam manufacturer, enjoys thehighest profits and labour productivity of all the companiestaking part in our research. The firm is also one of themost enlightened in how it treats its employees. Thecompany has invested in producing a skilled, flexible andmotivated workforce. Shopfloor employees operate inteams and are able to perform a variety of tasks. Thecompany aimed to encourage know-how and locate infor-mation at the lowest levels of the hierarchy. With the exper-tise to manage their own work, recognise problems andgenerate solutions (three quarters of Zotefoams’workforce have received training in group problem solvingskills) fewer issues need to be resolved by management.Training plays a key role in the company’s people manage-ment strategy. All shopfloor employees, supervisors andmanagers undergo NVQ training, from Levels 2 to 5. Thecompany pays its shopfloor staff above the average ratefor the industry and it has adopted skill-based pay tomotivate and reward skill development. Zotefoams alsopromotes a community ethos by breaking down traditionalmanagement/non-management boundaries. There is asingle salary structure for all staff, employee share optionsand profit-sharing (the percentage is the same for every-one) throughout the company. The directors have nospecial privileges. Not surprisingly staff at this companyscore very highly on our measures of job satisfaction.

Michael Hammer recently commented that “the biggest lietold in most organisations is that ‘people are our mostimportant asset’”. Our research in the Centre for EconomicPerformance suggests this is both true and deeply untrue.Yes, there is a big gap between the rhetoric of peoplemanagement in organisations and the reality, giving the lieto the ‘most important asset’ argument. At the same time,the most empirical of our findings show that it is theattitudes of the people in the organisation which seem toaccount for the largest part of the variation in companyproductivity and thereby profitability. Indeed, people andtheir attitudes to their jobs are the most important companyassets. Many of the managers we spoke to acknowledgedthis possibility, and reassured us they were planning to dealwith people issues once they had got the business sortedout. Our findings indicate people are the business.

5

The types of impoverished jobs we see in manufacturing organisations up and down the country represent waste, on an enormous scale, of the resources,

intelligence, skills and energy of those who are required to perform them.

Michael West and Malcolm Patterson are both members of theCEP Corporate Performance Programme. They are based in theInstitute of Work Psychology at Sheffield University.


Until recently the Japanese

economy was the envy of the

industrial world with rapid

growth, low inflation – and by

western standards, negligible

unemployment. This was a

country where the job for life still

existed. But in the last few years,

Japan has seen a reversal in its

economic fortunes. Ronald Dore

of the CEP considers Japan’s

economic future and asks what it

means for the workers.

C e n t r e Pi e c eT h e M a g a z i n e

o f E c o n o m i c P e r f o r m a n c e

V o l u m e 3 I s s u e 3 A u t u

m n 1 9 9 8 £ 4. 0 0

I S S N 1 3 6 2 - 37 6 1


The Magazine of Econom

ic Performance

Volume 3

Issue3 Autum

n 1998


ISS

N 1

36

2-3

76

1

£ 4 . 0 0¥ 8 9 0

CentrePiece

There can hardly be a more unrewarding jobin the world today than trying to run Japan’smacroeconomic policy. You can try to tacklethe recession by being as Keynesian as youlike: pave roads, build schools and hospitals,cut taxes, add a budget deficit up to 7% ofGDP to a public debt already getting close

to a 100%. And what happens? The Financial Times andthe Wall Street Journal ring up the chief economist atGoldman Sachs Tokyo, or an analyst at Merrill Lynch toask what they think of the latest policy announcement. “Toolittle and too late”, they are reported as saying, “themarkets are unlikely to be impressed”.

On cue, the markets then show that they are notimpressed. The yen falls; the stock market loses another100 points; the Japanese newspapers reflect the gloomand blame it all on their colourless politicians and incompe-tent bureaucrats. The new schools and hospitals may helpkeep unemployment down, but this response puts paid toany hope that the fiscal stimulus will inspire that elusiveconfidence that encourages consumers to spend or firmsto invest. The Nagoya dentists who were thinking of buyingnew cars instead go along to one of 30 offices Merrill Lynch has aquired from the bankrupt Yamaichi

West meets East:will Japan convert to capitalism?


Securities and exercise their new post-Big Bang freedomto buy American mutual funds – thus adding a real transaction, a real capital transfer, to increase the forexspeculators’ pressure on the yen.

On the less gloomy side, Japanese exporters are, ofcourse, making money hand over fist with the weak yen.May 1998 exports to the US were 60% up, year on year.Sooner or later, Congress will force Robert Rubin to listento other voices than those of his former Wall Streetcolleagues and do something to boost the yen and staunchthe import flood. Once that happens and the Nagoyadentist sees that his fingers are about to get burned, thesituation could turn around. Let us hope that happensbefore China is forced to devalue and the deflationary spiral spreads.

Is Japan capitalist?Part of the trouble is that Japan is trying to behave like a‘proper’ capitalist country when it is not capitalist at all. AFortune writer this spring listed “the qualities that define theJapanese model” – “the commitment to workers and theindifference to shareholders, the concern with broadersocial goals and xenophobia”. These features explain why“measured by the corporate sector’s return on equity,Japan in the mid-1990s was the rich world’s most inefficientdeployer of capital”.

Capitalism – as a set of beliefs or principles – is surelyabout the supreme importance of not deploying capitalinefficiently. As for the other factors of production, labourwe have got quite used to wasting; we call it unemploymentand Phillips told us how much you have to have in order toprotect your savings against inflation. Waste of land we callextensive agriculture or environmental protection, andgenerally consider them to be a good thing. But waste yourcapital, allocate it to anything other than the use that gives itthe highest possible return, and that is sinful inefficiency.

It is a doctrine which might seem perfectly reasonable intruly capital-scarce agrarian societies. The funny ‘parableof the talents’ that sticks out like a sore thumb in the NewTestament makes sense in that context. But it is odd thatthe doctrine should reach its ‘end-of-history’ apogee at atime when the world is awash with spare capital. Andodder still that some of its most ardent proponents shouldbe found in a country which is more awash than most. TheJapanese are great savers; their present problems stemlargely from their refusal to consume and their determinedexemplification of the backward-sloping supply curve – thelower go the returns on their excess savings, the morethey save.

But there are ardent proponents of capitalist doctrines inJapan. Economists with PhDs from Chicago and MIT – thekind that get on government committees – laud theirgovernment’s wisdom for example in changing company

law to allow much more extensive share buy-backs.Companies’ investment use of their retained earnings, theysay, undergoes no real market test. Return that money tothe market and the market will see to it that it is allocated toits optimal use. Likewise, company presidents: “our indiffer-ence to the interests of the shareholders must end”, theysay in their speeches. “We must start working to RoE –return on equity – targets, because the creation of share-holder value is what counts.” Usually adding, lest anyoneshould think they are not up to date, that single-mindedconcentration on shareholder value is – ultimately – “thebest way we can serve our other stakeholders”. In 1998 arevision of company law permitted payment of directors instock options, to make them really feel like agents of theirshareholder principals.

Plus on dit que ça change...Toyota was one of the first companies to give directorsstock options – within two or three weeks of the enactmentof the law. “Was there a feeling that your directors wereslacking and needed extra incentives?” I asked a seniorfinance manager. Perish the thought. So why? “Well, ourChairman, as you know, is the Chairman of the Keidanren –the Japanese equivalent of the CBI. We thought it was ourduty to help get the system established...” In other words,impressing on Americans that Japan wishes sincerely tobecome capitalist has now become a national duty.

But while the economists mean every word they say whenthey preach capitalist rationality, and half of Japan’s topbankers are looking for a retirement job with ChaseManhattan or Salomon Smith Barney, it is not so obviousthat the people who run Japan’s big corporations are goingto change their ways – for all that, they occasionally, as theycommute from their suburban homes, think enviously of theyachts and ranches that an American CEO’s pay can buy.

Perhaps the phrase which most frequently recurs in thetriumphalist Western reporting about ‘the collapse of theJapanese model’ is ‘lifetime employment is breaking down’.In fact, no major firm has down-sized by dismissal. Acouple of years ago, Japan Steel had some 15,000 surplusworkers on its books ‘leased’ to other firms – often at arental well below the Japan Steel salary they continued toreceive. It is anyway not usually realised that lifetimeemployment is only a small part of what makes Japan differ-ent. It is part of a quite coherent, and I would say non-capitalist, pattern, variously called the employee-sovereigntyfirm, the labour-managed firm, the human-capital-ist firm1; orthe community firm. It involves;

■ Cross-shareholdings between firms, banks and insur-ance companies that prevent threats of hostile take-overs,make a company’s share price of little consequence (otherthan as one relatively minor factor Moody’s takes intoaccount when rating a company’s bonds), makes it possi-ble to treat dividends as something like a small fixed charge

by Ronald Dore


ic Performance

Volume 3

Issue3 Autum

n 1998


ISS

N 1

36

2-3

76

1

£ 4 . 0 0¥ 8 9 0

CentrePiece

1 The first three are terms used by Komiya and Itami in K. Imai and R.Komiya, Business Enterprise in Japan, Cambridge, MIT, 1994, the last by myself in Taking Japan Seriously, London, Athlone, 1988


(usually giving a yield of not more than 1% of the shareprice) thereby allowing firms to treat their membersdecently/thereby allowing outrageous over-manning andwaste of capital. (Take your pick.)

■ Employment contracts, terms of ‘service’, which arenothing like those of a capitalist firm whose managers’ job itis to buy the best quality labour at the cheapest price, butsimilar in almost every respect to those of a civil service, anarmy or a navy. That is to say: career contracts, not jobcontracts. Pay is determined, not by the job actually doneat the moment, but by annual movement up incrementalscales – faster or slower depending on performance assubjectively rated by superiors and the personnel office. (If you like: rate-for-the-person wages not rate-for-the-job wages.)

■ Top management appointed from the high flyers whocome up the lifetime management tracks (Board appoint-ments usually come between age 50 and 55). Their salariesare set at the top ends of the incremental ladders they havebeen on all their lives and bear much the same ratio to thenext rank down as permanent secretaries to under-secre-taries in the British civil service. There is no external labourmarket in executive talent, no notion of a ‘going price’ forsuch talent such as ‘justifies’ an 18% rise for the boss ofYorkshire Water.

The pay system, in fact, points up the distinctiveness of thewhole system. The incremental scales are renegotiatedannually in the quaintly named ‘spring struggle’. Theargument in the negotiations is not exactly wages versusprofits. On the one hand is the ‘we want jam today’ of the enterprise union, (whose members, and often, nowadays,leaders, include junior managers, the future CEOs, who arerequired to join what is a closed shop, for the first ten yearsof their career, before they reach line-responsibilities). Onthe other is the ‘we must invest in the future’ of the seniormanagers. (The latter already have higher pay, of course,and are more likely to have lÕentreprise cÕest nous sort offeelings about making the firm great). But it is a peculiar‘struggle’. In a capitalist firm, a manager who succeeds inscrewing down the workers’ demands and leaving more toboost profits can expect a rise or a bonus; well done, thougood and faithful servant. But in Japan, the manager whoknocks the 5% demand back to 3% is likely to becondemning himself to a mere 3% rise too. Or less: in thepresent crisis many top managements are taking a symbolic10% pay reduction to show that they are serious aboutbeing, not the shareholder principals’ agents, but elders ofthe enterprise community.

(I cannot forebear, in passing, to remark on how stubbornlyeconomists, who love to make a market of everything, insiston saying that Japanese firms have internal labour markets(ILM). They do not: there is no open competition for vacantposts; there is no negotiating the pay for, no sense of re-contracting for, the new job when you are appointed. There

is no simulation, in other words, of what happens in exter-nal labour markets. What Japanese firms have is not ILMbut POPS – a personnel office posting system. As in theBritish Foreign Office, you go where you are told and themove may or may not alter your position on the incrementalpay scale (with reshuffles usually every two years). Andwhere you are posted is partly a function of how well youare likely to do that particular job, partly of the training youwill thereby get for future jobs.)

Can it last?This Japanese corporate system seems to fit quite well withthe behavioural dispositions and personality characteristicsof a lot of Japanese – the commitments it requires, thesecurity it offers, the sense of a co-operative commonendeavour. Its emphasis on male breadwinner wages risingwith family responsibilities, fits the high-marriage, low-divorce gender-discriminating family structure. The need thesystem has to grade entry talent is well served by the wholeeducational system.

But even though it fits, the system is of relatively recentcreation – a product of wartime regulation and the postwarupheavals. Pre-war Japan was much more genuinelycapitalist. In the 1920s and 1930s, owners dominated inboardrooms and scrabbled for dividends; labour ‘struggles’were desperate and for real.

So there is nothing inherently improbable about Japan oncemore embracing Anglo-Saxon capitalism and coming tomake the creation of shareholder value the supreme virtueagain. And, as already indicated, the dominant rhetoric intoday’s Japan would lead one to believe that the society ishell-bent on doing so. But the forces of inertia are strong.The cross-shareholding system – for all the predictions ofcollapse – is holding up well; the ratio of ‘stable sharehold-ers’ is still slightly higher than in the mid 1980s. Firms go toextraordinary lengths to avoid being the first major companyto ‘restructure’ redundant employees out of their jobs.

So far. But the big question is: can Japanese firms retaintheir ‘employee-sovereignty’ character, and continue totreat their shareholders in so cavalier a fashion, in a worldof global capital markets?

The transitional pains necessary which would make thispossible are likely to be severe. The trouble is not just thebursting of the bubble of 1989-90 about which we hear somuch, but the definitive ending of forty years of steadyasset inflation of which the bubble was only the last crazyculmination. Land prices and share prices rose and rose,partly, justifiably, as a result of population growth and rapidoutput growth, partly reflecting a permanent tendency forsavings to outrun even Japanese industry’s voraciousinvestment needs. The notion took firm hold that ‘right-hand-shoulder-up curves’ as the Japanese call them, werepart of the Japanese order of nature.

The Japanese are great savers; their present problems stem largely from their refusal to consume and their determined exemplification of the backward-sloping supply curve – the lower go the returns on their excess savings, the more they save.

The Ma g a z i n e o f E c o n o m

i c P e r f o r ma n c e

V o l u me 3

I s s u e3 A u t u m

n 1 9 9 8


I SS

N 1

36

2- 3

76

1

£ 4 . 0 0

¥ 8 9 0

Ce n t r e Pi e c e


So people went on buying shares, and using shares ascollateral to buy land and vice versa, in the confident expectation that – a few odd ‘corrections’ here and there –it would go on forever. At the end share prices reflectedaverage price-earnings ratios around 80. Dividend yields ofaround 0.5% were no deterrent. Capital gains were thething. Foreigners weighed in as the powerful export perfor-mance of Japanese manufacturing added expectations ofconsiderable exchange rate gains too.

The challenge for the futureAll that is a thing of the past. There’s more populationgrowth; no longer any investment momentum derived fromthe high growth period of the past. Two issues are centralto the survival of the current system.

First, the ‘fundamentals’ of international competitiveness.Will Japanese manufacturers retain the productionengineering competence, the capacity for innovation, and product quality which they have shown in the past –qualities plausibly attributed to the co-operative commit-ments that the ‘employee-sovereignty’ firm can command?And will banking and insurance come to gain matchingproductivity levels? In other words, can Japan maintainvalue-added per-employee productivity at a high levelrelative to the US and Europe, even if they ‘waste’ capital– get lower value added returns for unit of capital than their competitors.

Second, assuming that maintaining theemployee-welfare orienta-tion requires devoting lessof that value added todividends – much less thanin the US or Britain – canJapan successfully bringstock prices and dividends

into a reasonable relation? The Germans, for example, havesomething closer to a Japanese than to a British orAmerican view of shareholders. They give a much smallershare of value-added to the providers of capital than Britain.Dividend yields are not so very different, however, becausethe German stock market values assets so much morecheaply. Japan too could get to reasonable yield ratios andprice-earnings ratios, if the Japanese stock market ceasedto be supported by artificial PKO (price keeping operations)and fell to around half of present values – less than aquarter of the 1990 peak. The trouble is that, thanks to thecross-holdings, such a process of ‘paper-wealth-destruc-tion’ would wreak havoc on the balance sheets of corpora-tions, banks, and pension funds. Japan would still have thephysical assets and human capital which give the economyits fundamental dynamism (and which is, after all, what thepresent generation have to rely on for their pensions,whether they are paid through invested savings out of thecapital share, or ‘as you go’ out of the labour share, ofnational product). But managing the transition so that thoseresources would still be fully employed in spite of thegloom-spreading potential of the ‘reverse wealth effect’would tax any government’s ingenuity. A sumo wrestlerslimming to become a pole-vaulter might well wonder abouthis energy levels when he got to the right weight.

The alternative, of course, is to bring dividend yields intobalance with stock prices by raising dividend levels, andmaking the shareholder, not the employee, the centre of themanager’s universe. That is what nine out of ten Japanesewould say they prefer, but somehow, it seems to me thatJapanese managers have lost the habit of the sort ofruthless macho-management that would require.

I suspect that, while all the talk will be about this lattersolution, shareholders, voting with their feet, will graduallybring about the former. It will be a painful transition, but thepole-vaulter should eventually get back into practice again.

Further readingHenk de Jong, European capitalism: Between freedom and socialjustice, Review of Industrial Organisation 10, 1995.Fukao Mitsuhiro, Japanese financial instability and weaknesses in the corporate governance structure, MITI ResearchInstitute,March 1998.Jim Rohwer, Japan’s quiet corporate revolution, Fortune, 30 March 1998.Paul Sheard, Japanese corporate governance in comparativeperspective, Journal of Japanese Trade and Industry.

This Japanese corporate system seems to fit quite well with the behaviouraldispositions and personality characteristics of a lot of Japanese – the commitments

it requires, the security it offers, the sense of a co-operative common endeavour.

Ronald Dore is a Senior Research Fellow at the CEP and VisitingProfessor at the University of Bologna.

C e n t r e Pi e c eT h e M a g a z i n e o f E c o n o m i c P e r f o r m a n c e V o l u m e 3 I s s u e 3 A u t u m n 1 9 9 8 £ 4 . 0 0I S S N 1 3 6 2 - 3 7 6 1


T h e Ma g a z i n e o f E c o n o m

i c P e r f o r ma n c e

V o l u me 3

I s s u e3 A u t u m

n 1 9 9 8


I SS

N 1

36

2- 3

76

1

£ 4 . 0 0

¥ 8 9 0

Cen t r e Pi e c e


ic Performance

Volume 3

Issue3 Autum

n 1998


ISS

N 1

36

2-3

76

1

£ 4 . 0 0¥ 8 9 0

CentrePiece


Most European companies and workers arelooking forward to 1999 with a mixture ofexcitement and not a little apprehension – nextJanuary sees the long-awaited start ofeconomic and monetary union in most EU

countries, though not Britain. But British employers andworkers have another reason to be if not excited, thenapprehensive about 1999: next April sees the introductionof the first ever national minimum wage in Britain. Thosewho’ve advocated this for years argue that it’s an importantstep towards alleviating poverty and exploitation. Its criticstalk ominously of lost jobs and rising inflationary pressureswhich might bring higher interest rates in their wake.

But who’s right? Will there be a transformation in thefortunes of the poorest members of society? Or will theminimum wage create a large new group of unemployed –workers who’ve lost their jobs because employers can’tafford to pay the new minimum rates? And will the impacton wages be such that the Bank of England feels the needto raise interest rates in response? As with most economicchanges, no-one can know for sure until the minimum wageis actually introduced. But work at the CEP has concen-trated on trying to establish the most likely outcome in viewof what is already known about the UK labour market; andon cutting through the political gloss which has tended toinfluence the debate until now.

Looking into the crystal ballPredictions about the minimum wage’s impact don’t need tobe made entirely in the dark. Enough is known to be reason-ably certain about the groups likely to be affected and thelikely impact on their economic well-being. There is alsoplenty of evidence about the economic impact of the muchmore limited system of minimum wages which used tooperate in the UK – the Wages Councils. This enables us,for example, to draw some conclusions about the ratechosen for the minimum wage with a fair degree of certainty.

All this evidence suggests that the arguments on both sideshave tended to be exaggerated. There’s no reason toexpect large-scale job losses after next April – indeed it’spossible the minimum wage will draw more people intowork. But the modest rate chosen for the scheme’s incep-tion would also counsel against expecting a dramatic shiftfor those living in poverty. Where it does affect poor workers, however, the impact on those workers couldbe more substantial than most commentators have so far recognised.

New Labour and low wages In June 1997, the month after Tony Blair’s election victory,the new government fulfilled its pre-election pledge and setup the Low Pay Commission, which it charged with recom-mending the appropriate rate for a National MinimumWage. The Commission’s remit also extended to issues ofexemption, the make-up of pay, tips, allowances etc; andthe Commission members were also specifically invited toconsider the case of young people under 26 years old.After the best part of a year taking evidence from a widerange of people, the Commission’s report was published inJune 1998, although its main findings had been widelyleaked at the time the Commission reported to Ministers,about a month earlier.

The Commission recommended a minimum rate for adultsof £3.60 per hour, with a lower rate for 18-20 year olds, of£3.20 per hour. The government accepted the standardrate recommendation, but at the Treasury’s insistence, therate for young people, which now includes 21 year olds,was fixed at £3 an hour, rising to £3.20 in April 2000 –when the rate for 21 year olds will be reassessed.

There are at present no arrangements for any kind ofautomatic uprating of the minimum wage. But the Low PayCommission will continue its work, and will examine theimpact of the new arrangements. Most employees over

A National Minimum Wage will become a reality in April 1999,

but can it actually help to alleviate poverty and exploitation?

Richard Dickens and Stephen Machin investigate.

Minimum wage:maximum impact?


18 are covered by one or the other of the new minimumrates; the only exceptions are share fishermen, prisoners,the armed forces, volunteers and apprentices.

What it means in practiceThe main adult rate of £3.60 an hour strikes manycommentators as very cautious. Evidence from the oldWages Councils – which used to set minimum rates insome low-paying industries – suggests that the Councilsdid not have a negative effect on employment in the indus-tries they covered. Up-rating the (employment-weighted)average of the rates in force at the time of their abolition inAugust 1993 gives a figure of about £3.90 at April 1999prices. Even this is probably an overly cautious figure,since the ‘bite’ of the Wage Council minimum rates hadbeen diminished by the time the Councils were abolished.

So who will the new national minimum affect? Table 1 usesevidence from the Quarterly Labour Force Survey (QLFS)to show the proportion of employees who will be affected(divided into two groups, young people aged between 18

and 21, and adults 22 and over), along with the rise inwages and the rise in the total UK wage bill. Overall, 7.6%of employees will be directly affected by the minimumwage: on average these workers will see their wages riseby 28%. The wage bill will rise by around 0.7%. The youthrate will affect rather more workers – 12% – and put thetotal wage bill for this group up by 1.8%.

But some groups of workers are much more likely to beaffected than others. Table 2, again using data from theQLFS, shows selected characteristics of those affected.Women, part-timers, young workers, non-whites,homeworkers, those with low job tenure, those whousually work weekends and those employed in workplaceswith no union recognition are all more likely to be minimumwage workers. Some categories of work – personalservice, the private sector in general, the Hotel andCatering industry and small firms – also have an aboveaverage proportion of low wage workers. The bottom tworows of Table 2 also show that single parents and thosewith no-one else in the household at work are also morelikely to be low paid. All this suggests that the new

by Richard Dickens and Stephen Machin

Source: QLFS; Office for National Statistics, supplied by The Data Archive.

Table 1 The National Minimum Wage% Increase in wage

Percentage affected % Increase in wage bill of affected workers

1% 100% 1% 100% 1% 100%Aged 18 – 21 12.0 1.9 30.6Aged 22+ 7.3 0.7 27.3All over 18 7.6 0.7 27.7

Source: QLFS; Office for National Statistics, supplied by The Data Archive.

Table 2 Which workers will the National Minimum Wage affect?

% of Minimum Wage % of all Workers% of Group Affected Workers in Group in Group

1% 100% 1% 100% 1% 100%Female 11.3 69.8 46.9Part-time 18.5 57.3 23.5Private sector 9.0 87.2 26.8Non-white 10.0 5.9 4.5Personal service workers 22.7 17.8 6.0In job for under 6 months 14.2 20.4 10.9No union recognition 11.2 82.8 55.7Non-permanent job 11.1 9.9 6.7Hotels & restaurants 27.9 14.9 4.0In firm with under 10 employees 16.9 40.0 17.9Home-worker 21.9 4.5 1.6Works Saturdays 11.2 33.0 22.3Works Sundays 12.0 18.7 11.9Single parent 17.4 6.5 2.8No other worker in household 8.5 30.8 27.4

All workers 7.6 100.0 100.0


Percent Affectedby Minimum Wage

Distribution of Affected Workers

Household Income DecileAll Individuals

12

minimum wage does have the potential to help at leastsome households out of poverty.

Helping the poorApart from any more general impact the minimum wagemight have on the labour market, it’s obvious that it can’thelp some of the very poorest households in society –pensioner households, for instance, and those where everyhousehold member is unemployed or inactive. But to theextent that there is a link between poverty and low pay, theminimum wage can help alleviate poverty, even at therelatively cautious rate chosen for its introduction.

Table 3 uses data from the British Household Panel Survey(BHPS) on the percentage of workers affected by theminimum wage according to their household income decile.(The bottom decile contains the poorest 10% of house-holds in terms of income, the top decile the richest, again interms of income). The Table also shows the distribution ofminimum wage workers across all income deciles. Thefigures are shown separately for all individuals (includingpensioners and the non-employed); for all individuals ofworking age (including the non-employed); and for all thoseof working age and in employment.

If pensioners and the non-employed are included, theminimum wage only affects 3.8% of individuals. Thiscompares with 4.5% of all working age individuals; and7.4% of those in work (a slightly smaller figure from thatderived from the QLFS in Table 1). When looking at thefigures for all individuals, the minimum wage has mostimpact on those with incomes in deciles 3-5, towards the

middle range of household incomes. Only about 20% ofworkers affected are in households in the lowest twoincome deciles, suggesting that this is not a particularlyuseful tool for reducing poverty.

But if we look at those of working age, and those in work,we find that the minimum wage can be far more effective ineasing poverty. More than 30% of those individuals ofworking age affected are in the lowest two income deciles.And when we look just at the of people in work, we seethat nearly 60% of those affected by the minimum wage arein the bottom two deciles – reinforcing the point that forthose individuals in work, the minimum wage can be animportant instrument of poverty reduction.

The size of the impactBut none of the above tells us about the relative importanceof these gains from the minimum wage. The minimum wagemay increase household income for two individuals by thesame amount: but if one is in the bottom decile and the otherin the middle household income decile, the rise in income willclearly be far more important for the former. The BHPS dataalso shows that the minimum wage is far more important forindividuals at the bottom of the household income distribu-tion, even including the pensioners and non-employed.

For all individuals, household incomes rise by 0.35%, witha 0.79% rise in the lowest income decile. For individuals inemployment, overall household income rises by 0.7%; butfor those households in the lowest decile, income rises by4%. For those households on low incomes, then, thebeneficial impact of the minimum wage can be substantial.

Table 3 Minimum Wage Workers in the Household Income Distribution

Percent Affected byMinimum Wage

Working Age Individuals


To the extent that there is a link between poverty and low pay, the minimum wage can help alleviate poverty, even at the relativelycautious rate chosen for its introduction.

Source: BHPS; ESRC Research Centre on Micro Social Change, supplied by The Data Archive.

1% 10% 1% 20%1st Decile 3.2 8.42nd Decile 4.5 11.63rd Decile 6.7 17.44th Decile 5.9 15.65th Decile 5.2 13.96th Decile 4.5 12.07th Decile 2.4 6.38th Decile 2.5 6.59th Decile 2.1 5.710th Decile 1.0 2.6All Deciles 3.8 100.0


is the much larger and apparently more permanent inflation-ary impact of bonus payments in the flexible compensationpackages increasingly prevalent in UK firms.

The Low Pay Commission is not being abolished: it willhave a crucial role in monitoring what actually happensonce the minimum wage is introduced. Nevertheless, it isreasonably safe to conclude that while the minimum wagewill not have a dramatic impact on the UK economy it doesoffer the prospect of an improvement in living standards forsome of the poorest workers in society.

Richard Dickens and Stephen Machin are both members of theCEP’s Industrial Relations Programme.

The macroeconomy – jobs and interest rates Critics of the minimum wage have consistently argued that itwill cost jobs, as employers lay off workers they cannotafford to pay. But the evidence from the Wages Councilsseems clear and it is difficult to imagine that the wholeeconomy will behave very differently than the sectors previ-ously covered by the Wages Councils. There was noevidence that the minimum rates set by the Councilsaffected employment rates during their existence: and theexperience of those sectors since the Councils’ abolitionsupports the view that their employment effect was negligible. Pay rates of those workers covered by theCouncils fell after their abolition – but employment did notshow any rise.

Much more significant in the short-term is the potentialimpact of the minimum wage on monetary policy. TheMonetary Policy Committee (MPC) of the Bank of Englandhas already talked about the inflationary impact of the intro-duction of the minimum wage – and some fear that theMPC may respond by raising interest rates as the date forits introduction draws closer. This would seem to be afoolhardy move. The minimum wage will have an impact onwage inflation: but it will be a one-off transitory impact. Thenew minimum wage will, as we saw earlier, directly push upthe wage bill by 0.7%, a figure which might ultimately beslightly higher because of the possible knock-on effects onother wage levels. This might indeed push up wage andprice inflation beyond target levels.

But this would nevertheless be a fully anticipated increasethat will be reflected as a temporary blip in inflation. A muchmore serious problem, which should pre-occupy the MPC,

Working Age and In Employment

Percent Affected byMinimum Wage


A much more serious problem, which should pre-occupy the Monetary Policy Committee, is the much larger and apparently more permanent inflationary impact of bonus payments

in the flexible compensation packages increasingly prevalent in UK firms.

SOCIAL EXCLUSIONAND THE CITY

A conference at the RGS-IBG

Speakers include: Geoff Mulgan, No 10 PolicyUnit; Professor John Hills, LSE; Professor Nigel

Thrift, University of Bristol; Dr Sarah Curtis,QMW plus case studies from practitioners

Thursday 29th October 1998

Presentations include: researching socialexclusion; education; health; housing;

employment and finance

Aimed at: ◆ practitioners, researchers and policymakers in health, housing, education, socialwork and employment ◆ local government,

central government ◆ ngos, charities and trustswith an interest in social policy

Cost: £40 - £60

Call: Alison Glazebrook on 0171 591 3006 oremail [email protected]



People leave their jobs for many reasons. Manyleave because they want to, usually becausethey’ve found another job. But many people findthemselves out of a job not because they wanted

to, but because the firm they work for is in trouble – suchas it might be at a time of general economic recession – orthe job they do is disappearing: perhaps their company isclosing down, relocating or restructuring, or perhaps, as isincreasingly the case, technological change makes somejobs redundant.

A voluntary change of job is not usually going to causeeconomic hardship: most people move on because theycan get more money elsewhere. But what about those wholose their jobs for reasons outside their control? Whathappens to them: do they end up in the dole queue? Willthey be able to find another job that pays as well as the onethey’ve lost? Who are the big losers in this process?

The displacedEconomists like to call people who lose their jobs in thisway, displaced workers – people who’ve been separatedfrom their jobs involuntarily. But even though such displace-ment occurs for reasons outside an individual’s control,they share some characteristics with each other. They willgenerally be less skilled than those who don’t getdisplaced; they are also more likely to be at the start of theirworking lives, with less on the job experience – and, moreoften than not, they will be men.

Every year about one in five workers will lose or changejobs in Britain. About one in fourteen – that’s around

1.8 million people – will lose their jobs because of redun-dancy, dismissal or the ending of a temporary contract.These are the displaced workers.

But these broad figures conceal large variations. Abouttwice as many men as women are affected by displace-ment; it’s also twice as high for young workers undertwenty five as it is for the rest of the workforce. Thosewho’ve been in a job for less than a year are three times aslikely to be affected as those who’ve been with the samefirm for five years. (The average length of time a displacedworker had been in the job they lost is about three years.)Job loss is more likely in manufacturing than in the servicesector. And while the average displaced worker takesabout three months to find a new job, around one fifth takemore than six months, and one in twenty take more than ayear to find new work.

The financial costWorkers who lose their job take with them the skills, knowl-edge and experience they acquired while with their firm.This firm specific capital might well have been rewardedwith high rates of pay in the old job. But it may not bevalued by new firms seeking to hire displaced workers.Mining skills are not much use in McDonalds. Wages couldtherefore be lower in the new job: the resulting wage gaprepresents an additional financial cost for workers who aredisplaced. Moreover, it might be reasonable to assume thatfor more experienced or highly-skilled workers – for whomdisplacement tends to be a relatively rare event – this costis higher. True, they might be able to use some of their skillsand experience in a new job. But the more specific those

What it costs to lose your jobWhen someone loses their job they obviously lose the income that

goes with it. But what happens when they get another job – can the

temporarily unemployed expect to recover their standard of living?

Here Paul Gregg, Genevieve Knight and Jonathan Wadsworth

present evidence suggesting that the financial impact of losing

one’s job can be long-lasting.

skills to the occupation or industry, and the more thatoccupation or industry is declining, the harder it will be tofind a job that will value those skills and so pay the samelevels of renumeration as before.

There may be other reasons for this wage cost of displace-ment. Some firms offer good, well-paid jobs with goodworking conditions, regardless of how long an employeehas worked there. If workers in such firms are unluckyenough to lose their jobs; and, even more unluckily, end upworking for a firm which pays lower wages and offers lessattractive working conditions, they will be faced with asignificant wage cost as a result of their displacement.There is some evidence from other CEP research tosuggest that new jobs in Britain do now offer lower wages,relative to other jobs, than in the past. Similarly thosemoving from unionised to non-unionised firms would beexpected to lose out, since unionised firms typically payhigher wages. It would also apply to workers who hadmoved quite a distance up a tenure-related pay scale andthen had to start afresh at the bottom of a new scale.

Measuring the cost...But can we put figures on these displacement costs? It’sdifficult, because it’s hard to identify the precise cause of achange in earnings. But by using data from the BritishHousehold Panel Survey (BHPS) for 1991-96 we cancalculate the size of the displacement penalty. It appearsthat the average displaced worker will end up in a job thatpays around 10% less per week than the job they lost, asthe table shows.

That’s a large gap. But it may not tell the whole story. Aworker who stays in a job might normally expect a wagerise from year to year. Over the period surveyed, thesewage rises averaged about 5% a year. As the table alsoshows, the actual gap experienced by displaced workers isthese two figures added together – around 15%.

...and the variationBut just as the chance of displacement varies widely, sodoes the cost. Those who move from full-time work to otherfull-time work lose around 7% on average – with littledetectable change in hourly wage rates. There may even bewage gains – of around 15% – for part-time workers whomove to other part-time work.

Displacement tends to be more costly for women than men– a 16% loss in wages as against 6%. Older workers areworse off still, experiencing a 22% drop in their wagelevels. And the least qualified face weekly wage losses ofaround 14%. Length of time spent finding a new job alsoaffects the subsequent wage loss: those out of work formore than six months can expect on average to lose around14% of their previous pay rates, twice that for someonewho gets a new job within a month.

There is also evidence that earnings losses rise with thelevel of seniority in the old job. Those with more than fiveyears experience in a job can expect to be about 30%worse off if they are displaced – four times as high as thosewho lose a job after less than a year. This suggests that theaverage cost of job loss could fall if someone repeatedlyfinds themselves displaced.

Losers all roundLosing one’s job is widely acknowledged to be a traumaticexperience. The evidence from our study shows that it isfinancially costly as well – with the average displacedworker ending up 10% worse off then they were in their oldjob. But the large variation in the experience of differentgroups of workers underlines the extent of the problemswhich older workers and, above all, the less well-educatedface. Not only are they more likely to lose their jobs, and tofind it more difficult to get new work; but they are alsogoing to face the largest financial losses once they arefinally re-employed.


by Paul Gregg, Genevieve Knight and Jonathan Wadsworth

Paul Gregg, Genevieve Knight and Jonathan Wadsworth are allmembers of the Human Resources Programme at the CEP.

Table 1 But the costs of disparity vary

Displaced Stayers Displaced-weekly weekly stayer gap% wage % wagechange change

female –16.1 6.3 –22.4male –6.5 4.7 –11.2

Age groupyouths < 25 1.3 14.1 –12.8prime 25-49 –12.9 5.4 –18.3mature 50+ –22.7 1.4 –24.1

Qualifications0 level/below –14.0 5.1 –19.1Intermediate –10.3 5.7 –16.0Degree/further ed. 6.7 5.8 0.9

Every year about one in five workers will loseor change jobs in Britain. About one in fourteen– that’s around 1.8 million people – will losetheir jobs because of redundancy, dismissal orthe ending of a temporary contract.


The world of work is ahighly contested area.Researchers and policyanalysts are dividedabout the interpretationof past trends and

prognoses for the future. Dramaticclaims about trends often turn outeither to reveal movements whichare glacial rather than rapid, or toshow a rather old phenomenon in a new guise. The Victorians would have had no difficulty incomprehending job insecurity or the contract culture, though theymight be disappointed that we had not made more progress inimproving our education system and vocational qualifications.

In political terms, the world of workmarked the battleground in Britishparty politics, with strongly heldviews vigorously expressed beforethe General Election on issues suchas the National Minimum Wage, theregulation of working time and theEuropean Union’s social chapter. The first parliamentary session of thenew Labour government has seenrapid progress on many issuessurrounding the regulation of thelabour market, as well as theintroduction of the New Deal –though it is worth remarking howsmooth the introduction of theseonce contentious set of issues has been.

My aim here is to assess recenttrends in the world of work from atrade union perspective, reflect onthe regulatory changes and considersome issues for the future, inparticular the importance of thedevelopments in the economy as a whole.

The late 1990s workplaceA full description of changes in theworld of work is beyond the reach ofthis article, but it is clear that therehas been no collapse of work as has

The future of work: a challenge for partnershipBill Callaghan, Head

of Economic Affairs

at the TUC, looks at

the changing world

of work and argues

that partnership

between government,

unions and employers

is more important

than ever.

GUEST COLUMN

0

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

5

10

15

20

25

30

35

40

45 Figure 1 The earnings distribution has widened

Rea

l ful

l-tim

e ho

urly

ear

ning

s, 1

983

= 1

00

Key■ Lowest decile■ Median■ Highest decile

Source: New Earnings Survey (NES).


been fashionably and wronglypredicted at each period of highcyclical unemployment. Indeed thereare perhaps some modest groundsfor optimism, in that theunemployment peak of the early1990s was not as severe as that ofthe 1980s, though the level ofunemployment at whichpolicymakers become nervous aboutinflation remains worryingly high.Trends that were well establishedthirty years ago, such as thegrowing importance of the servicesector, the increased feminisation ofthe workforce, and the growth ofpart-time work, have continued into the 1990s, but reports of the death of the full-time job areclearly exaggerated.

Perhaps most striking, however, isthe growing polarisation in oursociety: I would highlight the massiverise in wage inequality as one of thekey changes over the last 20 years.The Low Pay Commission (LPC)were also struck by this trend andRichard Dickens of the Centre forEconomic Performance contributed aresearch paper on this subject whichis appended to the Commission’sreport. Figure 1, taken from theLPC’s main report, contrasts the lessrapid earnings growth of those at thebottom decile with those at themedian or top decile.

Of course, such cross sectional datado not tell us about the fortunes ofindividuals: but such longitudinal datathat do exist do not support thehypothesis that the cross-sectionalpicture is a misleading one. It doesnot appear to be the case that a poorjob is better than no job at all in thelong run, since far too high aproportion of those on low paid orinsecure jobs find themselvesunemployed or inactive within a shortperiod of time.

Trade union representatives seethese trends in practice every dayand it is perhaps no surprise thatthey are suspicious of the flexibilitymodel that gives priority tomanagerial discretion over pay and

jobs. They would support the viewthat one explanation for the growth in inequality has been the weakeningof institutions.

By the summer of 1998 the NationalMinimum Wage Bill had receivedRoyal Assent and the first stage ofthe consultation process of theFairness at Work White Paper wascomplete. Progress has sometimesseemed slow from the trade unionside, particularly during theprotracted discussions over thevoting threshold for unionrecognition, but a hindsightjudgement must be that there hasbeen more rapid and far reachingchange in the labour market that at

by Bill Callaghan

The Victorians would have had no difficulty incomprehending job insecurityor the contract culture,though they might bedisappointed that we had not made more progress in improving our education system andvocational qualifications.

17

Towards minimum standards


any time over the last 30 years.Remember that the Thatcher/Majorchanges were introduced piecemealthroughout the ’80s and the first halfof the ’90s.

Perhaps the third way is already inplace and working. In my view theinvolvement of the social partnershas been key to the successfulintroduction of these measures. Thiscan be seen in the New Deal, thoughelements of this are also to be foundin the union recognition debate,given the Prime Minister’s appeal tothe TUC and the CBI to narrow thegap. But it is in the Low PayCommission that the value of socialpartnership can most clearly be seenand few areas of my work at theTUC have been as satisfying as mymembership of this body.

Of course, the Commission’sapproach was not itself revolutionary:a balanced membership, recourse toevidence, and rational debate andconsensus building have all beentried and tested before in Britain. In the light of recent history, however, the approach can bedescribed as new.

Challenges for the futureIf much progress has been made,much remains to be done, and itwould be fanciful to think that thegrowth in inequality in the ’80s and’90s could be reversed in oneparliament let alone oneparliamentary session. But thesehave to be addressed in a systematic

way. Perhaps the most pressing ofthese is the economic situation. Thegovernment have put in place amedium term framework that hasmuch to commend it, and the basisof the post-monetarist consensuswas set out in the last issue ofCentrePiece by Ed Balls.

But to negotiate the medium termsuccessfully, the government has toget through the short-term, and atpresent there is a distinct danger thatthe policy set out in the Budgetstatement to create a ‘negativeoutput employment gap’ will prove tobe damaging. A combination of tightmonetary and tight fiscal policy hasproduced policy overkill. Risingunemployment next year could putgreat pressure on the New Deal, andthe OECD has already warned of its‘ballooning costs’. Meanwhile thesuccessive monthly earnings dataand the Monetary Policy Committee’sreaction to these confirm that there isa pay problem.

At the very least there is scope foran informed and sharedunderstanding by the social partnersabout divergent pay trends, thereasons for these and the scope, ifany, for remedial action. For example,how realistic is it for the pay in thepublic and private sectors to divergeover the long term? What are theconsequences if divergencecontinues? What will be the effect ofcatch up? What impact do skillshortages and bonuses have onprivate sector pay? Given theimportance of these issues and the

reaction of the Monetary PolicyCommittee to earnings data, it issurprising that there is so littledialogue about these issues. It wouldbe premature to think that socialpartner discussions in this area couldmatch the success of the Low PayCommission, but the foundationsought to be laid now.

An essential feature of any modernapproach to the world of work has tobe the promotion of best practice.The extent of the UK’s poorperformance, particularly on a GDPper-hour-worked basis, has becomeincreasingly clear, helped by someexcellent benchmarking work in theDTI. A major TUC priority in thecoming year will be the promotion ofbest practice through workplacepartnerships. Six key principles havebeen identified: recognition oflegitimate interests, joint commitmentto success, commitment to employeesecurity, focus on the quality ofworking life, transparency, and addingvalue. Following an analysis of trainingneeds, a training and a developmentprogramme for trade unionrepresentatives will be drawn up tohelp put these principles into practice.

The current reforms will giveindividual employees much neededprotection in the labour market; theywill help provide an institutionalbulwark against inequality andunfairness. But the task of tradeunions has to move beyond this: theaim must be to promote bestpractice through improved education,training, communication andinvolvement, investment and newmethods of working. This agenda willbe at risk if economic growth falters.Rising unemployment is a breedingground for defensive attitudes. Muchof the medium term and structuralframework is in place. At the veryleast the Chancellor should ensurethat he, the CBI and the TUC have acommon appreciation of the issuesand a common understanding abouthow any problems might be solved.

Bill Callaghan is Head of the EconomicAffairs Department at the TUC.


When, in 1993, the then Conservativegovernment announced the launch ofthe Modern Apprenticeship scheme, itwas also announcing a dramatic rever-sal of policy. For years apprenticeshipin Britain had been in decline, a decline

paradoxically hastened by the successive training policiesof the Thatcher and Major governments. The decision tomodernise and relaunch apprenticeship as a central featureof government training reflected a growing awareness thatearlier policies were mistaken or inadequate and that thereexisted a significant skills gap at the intermediate level. Thenew scheme – still in its infancy – almost certainly repre-sents the last opportunity to revive employment-based train-ing in Britain. Will it succeed?

A long slow declineUp to the early 1960s, apprenticeship provided the Britisheconomy with an adequate supply of skilled labour of areasonable, though variable, quality. In contrast toGermany, however, it did not extend much beyond tradi-tional occupations. Apprenticeship tended to be based onsome kind of formal or informal agreement, and lasted forsomewhere between three and five years. After the secondworld war, it became accepted practice for apprenticeshipto provide training in broad occupational skills. Work andon-the-job training alternated with periods of off-the-jobtraining in technical colleges. Apprentices usually acquiredqualifications, in particular City and Guilds (C&G) orBusiness and Technology Education Council (BTEC)certificates. Regulation through collective bargaining waseither by informal custom and practice at workplace level orby more formal agreements at industry level, though thesewere usually minimal and not legally binding.

But as far back as the early 1960s, there were growingcriticisms of apprenticeship training by employers andpolicymakers. It was said to be too exclusive – entry was

restricted to young males in certain trades; to involve alarge amount of time-serving rather than training tostandards; and to perpetuate outdated restrictions anddemarcations. In response to these criticisms, reformswere attempted by governments, employers, and unionsthroughout 1970s and 1980s. But progress was unevenbetween and within industries and there was little successin extending apprenticeships to non-traditional occupations.In retrospect, an opportunity for the sort of fundamentalreform which was taking place in Germany was missed atthat time.

By the 1980s, too, apprenticeship training was beingadversely affected by other changes in training provision inBritain. Youth Training – YT – provided young people with agovernment allowance but without the employed status ofapprentices. Although YT did spread formal training beyondthose who might have taken up apprenticeships, the qualityof this training was often poor, since YT was primarilyaimed at cutting youth unemployment. State-basedschemes acquired a bad reputation among employers andyoung people. Some firms which traditionally had appren-ticeship programmes replaced these with cheaper YTtrainees; others used YT as a screening device and laterupgraded selected trainees to apprenticeship status. By theearly 1990s, around two thirds of first-year apprenticeswere on YT. Simultaneously, therefore, YT both supportedapprenticeship by providing subsidies; and undermined itby providing a state-based alternative.

Under successive Conservative governments, a series ofother changes had a profound effect on education andtraining. The government encouraged vocationalism inschools (to little effect) and sought to increase the numberof those staying on beyond 16, which had a significanteffect on the participation rates of those in some form offurther or higher education (see Figure 1 overleaf). In termsof training, most of the old style – and tripartite – IndustrialTraining Boards and levy arrangements were replaced by

ReinventingApprenticeship

by Howard Gospel

Howard Gospel assesses, what could be the last chance

to revive the tradition of on-the-job training in Britain.


voluntary, ‘employer-led’ Training and Enterprise Councils(TECs). At sector level, Industry Training Organisations(ITOs), again largely employer-dominated, replaced thetraining boards. In line with market-based ideas, measureswere introduced to reduce the pay of young people; privatetraining providers were encouraged; and credits were intro-duced to be exchanged for approved training.

In a major reform of the qualification system, from 1986onwards, ‘competency’ based National Vocational Quali-fications (NVQs) were introduced. The aim was to institutea nationwide and rationalised system of transparent and

transferable qualifications. But critics argue that NVQshave merely superimposed another layer of qualificationswithout much effect on the quantity of training and a largelynegative effect on the quality.

Perhaps not surprisingly, the decline of apprenticeshipscontinued. Figure 2 (below), using data from theDepartment of Employment (DoE) and the Labour ForceSurvey (LFS), shows that the most precipitous falls inapprentice ratios were in the late 1960s and early 1970s,in the early and mid 1980s, and again most dramatically inthe early and mid 1990s.

0

1

2

3

4

5

6

1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

10

20

30

40

50

60

0

Figure 1 Apprentices as a percentage of employment in manufacturing, engineering and construction servicesKey ■ Construction ■ Manufacturing ■ Services ■ Engineering

■ Manufacturing post YT ■ Engineering post YT

Source: Education statistics for the UK (various issues) and LFS for apprentices.

Figure 2 Educational and economic activities of all 16-18 year olds male and female, GB 1979-96Key ■ Employed ■ Continuing education ■ Umemployed ■ YT ■ Apprentices

Per

cent

age

Per

cent

age

From the mid-1970s, with growing market uncertainties and rising unemployment, many firms tookthe short-term option of not training and recruited labour directly from the external market.

Source: DoE figures 1964-90; LFS figures 1979-96. Engineering covers metal goods, engineering, vehicles. Manufacturing covers engineering and other manufacturing. Services covers distribution, hotel and catering, transport, communications, banking and finance, public sector, and other.


But why?It’s not clear why the decline in apprenticeships was sosteep. It could be argued that young people have becomeless willing to enter an apprenticeship, preferring to stay infull-time education. That might have had some truth in theearly 1990s, when participation rates increased markedly;but it doesn’t explain the decline over a much longer period,since 1960. It is also argued that technical change and thecontraction of traditional trades reduced the need forapprentices. Clearly some trades, for example printing,have declined. But the decline in apprenticeships is seeneven after correcting for this. Nor does it correlate closelywith the decline in trade union membership and power.Unions are important in supporting apprenticeship arrange-ments, but alone they have insufficient power to initiate orsustain them.

A more convincing explanation lies with the attitudes ofemployers. From the late 1960s, companies became lesswilling to take on apprentices. Costs rose and the failure toreform the system made this form of skill preparationincreasingly unattractive to employers. From the mid-1970s, with growing market uncertainties and risingunemployment, many firms took the short-term option of nottraining and recruited labour directly from the externalmarket. Where entry training was unavoidable, someemployers resorted to informal, in-house arrangements;while others looked to state-sponsored YT schemes. Asalready suggested, government too played an importantpart. The Conservative administrations in power after 1979distrusted apprenticeship training and undermined existingsupport for this form of training.

It was different abroad...Yet apprenticeship remained strong in Germany and neigh-bouring countries such as Austria and Switzerland, where italso covers more occupations and a larger proportion ofthe age cohort. It even remained strong in Australia, acountry with similar traditions to Britain. In these countries,it is underpinned by legal frameworks and state support, byregulation through employers’ organisations and chambersof commerce, and by employee involvement through tradeunions and works councils. It is true that, even in thesecountries, there have been growing pressures on thesystem in recent years. But in the mid-1990s, in Germany,the system still covered around 5% of the labour force. InAustralia, up until recently, apprenticeship has alsoremained significant, covering about 2% of the labourforce. By contrast, in Britain, apprentices represent lessthan 1% of the employed labour force.

A break with the pastHaving recognised deficiencies in training policies, the thenConservative government decided to revive work-basedtraining in 1993 with the Modern Apprenticeship, a schemewhich incorporates both traditional and novel features.

There is a written agreement on traditional lines betweenthe employer and apprentice, specifying rights and obliga-tions. This also outlines the training to be provided, qualifi-cations to be attained, and a commitment to completion. Assuch the agreement is intended to signify a mutual andlong-term pledge to a significant period of training. Theagreement is underwritten by the local TEC, with theexpectation that, should the employer cease trading, alter-native training will be found. A corollary of this sort ofagreement is that the young person has employed statusand is paid a wage by the employer. This is seen as a wayof signalling employer commitment and as a means ofattracting young people. The signs are that in the fewinstances where there is not employed status (as in somebusiness administration apprenticeships) or where off-the-job training involves the whole of the first year in college (asin some chemical companies), the scheme in less attractiveto young people.

Though no time period is specified, the expectation is thatthe average apprenticeship will last about three years. EachModern Apprenticeship is linked to a sector frameworkbased on training to NVQ Level 3; there is also a require-ment that the apprentice be taught ‘key’ skills (numeracy,communication, IT, problem solving, and personal skillssuch as teamworking), though in practice there is greatvariety in how these are delivered and whether they arecertificated; and employers are concerned about the sizeand funding of this element of the scheme. Since 60% ofentrants are 18 or over, Modern Apprenticeship appears tooffer young people the option switch to an apprenticeshipfrom further studies at school or college – and, because ofthe provision of NVQs and key skills, the option to switchback into full-time education. This flexibility fits with the newnotion of alternative, but inter-linking, pathways within theBritish system.

The aim of the new scheme, from its inception, was to give‘ownership’ to industry, which, in practice, as with previousConservative reforms, meant giving leadership and controlto employers. This was seen as necessary to establishmanagement commitment and to avoid the appearance thatthis was yet another government scheme for theunemployed. Vocational education colleges, traditionalcertifying bodies, and trade unions have tended to play alesser role.

A new role for the stateA crucial part of the Modern Apprenticeship is that the wholeof the wage and part of the training costs are borne by theemployer. But government also contributes towards the costof off-the-job training, establishing for the first time in Britainthe principle of state support for part-time education andtraining for employed young people. It is unclear how muchpublic money has been put into the programme and howmuch is paid out to employers by way of subsidy for training:the subsidy varies between localities and occupations.

The Conservative administrations in power after 1979 distrusted apprenticeshiptraining and undermined existing support for this form of training.


In practice, the DfEE sets target numbers for TECs which inturn decide how much they will spend on whichprogrammes, giving them latitude to decide, for instance,whether to fund more engineering and IT places, which maybe difficult to fill, or more hairdressing and retailing appren-ticeships, which may be easier and cheaper. On average,government funding covers about £6,000 per capita of theaverage gross cost of £25,000 of a three year apprentice-ship. This is about twice as much as the YT subsidy.

So far, more than 70 sectors (covering the majority ofBritish industry and commerce) have developed ModernApprenticeship programmes, (see Table 1). Some, such asthose in engineering and electrical installation, built on wellestablished arrangements; some, such as construction,have tried to revive traditions which were fast dying out;and others, such as those in IT, retailing, and businessadministration, had a bigger challenge to develop frame-works from scratch, from existing loose qualifications, orfrom YT arrangements. In this respect, the programme hasextended apprenticeships on the lines of the more broad-ranging German system. There was some initial fear thatyoung people would be insufficiently interested because ofthe stigma of government schemes and a growing prefer-ence for staying on at school. But in practice it has gener-ally been relatively easy to recruit. The average level ofeducational attainment of the early intake has been high andhas included many who might have stayed on at school orgone to university.

Still not enough though

Documents

ISSN 1362-3761 CentrePiece · 2004. 10. 6. · CentrePiece The Magazine of Economic Performance Volume 3 Issue 3 Autumn 1998 £4.00 ISSN 1362-3761 A profitable occupation?