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discuss-lon papers

FS I 88 - 7

The Growth in the U.S. Contingent

Labor Force

Eileen Appelbaum''

June 1988

ISSN Nr. 1011 - 9523

Revised September 1987

* Department of Economics Temple University

Philadelphia, PA 19122

and

Wissenschaftszentrum Berlin

fUr Sozialforschung

D - 1000 Berlin 30

The author wishes to thank Judith Gregory for her contribution to this

research.

Forschungsschwerpunkt

Arbeltsmarkt und

Beschaftlgung (IINV)

Research Unit Labour Market and

EqiloyDent (UN)

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Labour Market and Employment (IIM) Reichpietsch-Ufer 50

1000 Berlin 30

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1 -

The Growth in the U.S. Contingent Labor Force

Abstract

This paper analyzes the reasons for the remarkable growth in the U.S.

since 1980 in the number of workers who either are not permanently employed by the firms where they perform their jobs or who lack full-time status. Two distinct phenomena are involved in the expansion of the con tingent employment.

In the primary labor market increased use of temporary workers and sub contracting arrangements are the result of a number of developments which have reduced the importance of internal labor markets in this decade.

These include (1) a tendency for U.S. firms to use information and com puter technologies to routinize jobs and reduce firm-specific, though not computer-related, skills; (2) the transferability across firms and indus tries of computer-related skills; (3) the disruption of internal mobility ladders; and (4) the rising proportion of college graduates in the U.S.

labor force and the increased possibility of staffing higher level pos itions through the external labor market.

Employment growth in the secondary labor market has been fueled by two developments. The first is an abundant supply of workers to this labor market segment as the labor force participation rate of women has con tinued to increase and as men have faced a relative displacement from the manufacturing sector. The second is a relative decline of wages between 1980 and 1987 in traditionally low paying, low productivity jobs. This has offset the tendency for low productivity growth to raise relative costs in this segment of the economy, and has encouraged the expansion of employment. The secondary labor market, however, has long been charac terized by the use of part-time workers; and employment growth here has inevitably implied an increase in part-time work.

The growth of part-time jobs cannot be said to meet the needs of U.S.

workers, and women in particular, for flexibility in scheduling work.

Most of the increase in part-time employment between 1979 and 1986 was involuntary part-time employment as workers unable to find full-time jobs accepted part-time work.

Die Expansion prekSrer BeschSftigungsverhSltnisse in den USA

Zusaninenfassung

Dieses Papier analysiert die Griinde fiir das bemerkenswerte Wachstum der Zahl der Beschaftigten in den USA, die entweder Teilzeit arbeiten oder nicht permanent beschaftigt sind. Zwei unterschiedliche Phanomene stehen hinter dieser Expansion der prekaren Beschaftigungsverhaltnisse.

Im primaren Arbeitsmarktsegment sind der zunehmende Einsatz von Leihar- beit und Werkvertragen das Ergebnis einer Reihe von Entwicklungen, die die Bedeutung interner Arbeitsmarkte in diesem Jahrzehnt reduziert haben.

Hierzu zahlen (1) eine Tendenz der US-Firmen, Informations- und Computer- technologien zur Routinisierung von Arbeit und zur Reduktion firmenspezi- fischer - aber nicht computernaher - Fahigkeiten einzusetzen; (2) die

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universelle Anwendbarkeit von Computerkenntnissen in anderen Firmen und Wirtschaftszweigen; (3) der Abbruch interner Karriereleitern und (4) der steigende Anteil von College-Absolventen an den Erwerbspersonen der USA und die zunehmende Mbglichkeit, hbhere Positioner Uber den externen Ar-

beitsraarkt zu besetzen.

Das BeschSftigungswachstum im sekundaren Arbeitsmarkt wurde durch zwei Entwicklungen geprbgt: zum einen durch ein Uberangebot von Arbeit in die- sem Arbeitsmarktsegment - bedingt durch den anhaltender Anstieg der Frauenerwerbsbeteiligung - sowie einer relativen Freisetzung von Mannern im Verarbeitender Gewerbe; zum anderen durch die relative Absenkung der Lohne zwischen 1980 und 1987 in traditionell niedrig bezahlten und wenig produktiven Jobs. Diese Entwicklung hat die Tendenz zur Kostensteigerung als Folge geringen Produktivitatswachstums in diesem Teil der Okonomie Uberkompensiert und die BeschSftigungsexpansion begUnstigt. Der sekundbre Arbeitsmarkt war large Zeit durch den Einsatz von Teilzeitbeschaftigten charakterisiert, und Beschaftigungswachstum bedeutete hier einen Anstieg

der Teilzeitarbeit.

Es kann nicht behauptet werden, daB das Wachstum der Teilzeitbeschafti- gung, insbesondere bei Frauen, den WUnschen der amerikanischen BeschSf-

tigten nach Flexibilitat in der Arbeitszeitgestaltung entgegenkommt. Der grSBte Teil der Zunahme der Teilzeitbeschaftigung zwischen 1979 und 1986 war unfreiwillige Teilzeitarbeit, weil Arbeitnehmer, die keine Vollzeit- beschaftigung bekommen konnten, sich mit Teilzeitarbeit begnligten.

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Introduction

Contingent work arrangements in the U.S., in which firms routinely use workers not on their own payrolls or only casually employed by them, have increased substantially in recent years. In an institutional environment almost entirely free of constraints on managerial behavior, and with U.S.

firms facing both deregulation and increased international competition in foreign and domestic markets, the U.S. economy has experienced increases in involuntary part-time employment, temporary jobs, at-home work, employee leasing, and contracting out for labor services of extraordinary proportions.

U.S. firms are responding to competitive pressures with strategies designed largely to shore up short-run profits. Prominent among these strategies are the downgrading of job skills and the substitution of lower paid workers for skilled employees; replacement of permanent employees with rights to training, promotion, fringe benefits, seniority, and due process by contingent workers; and attacks on the real wages of workers through give-backs and two-tier wage contracts that reduce pay or hours. One consequence has been the increased marginalization of workers through assignment to part-time or temporary jobs or to other contingent forms of work. Another has been disappointing productivity growth as firms embark on campaigns to reduce wage costs without regard for the effects of such strategies on productivity growth and, hence, on their labor costs over a longer time period. Immediate cost reductions prop up short-run profits for some firms, but at a high cost to the U.S. economy in lost opportunities for skill development and, thus, for increased adaptiveness and longer term productivity gains. Despite increased reliance on measures that cut costs by driving down wages, benefits, hours or skills, U.S. firms continue to find it difficult to stem the tide of imports or to compete effectively in world markets.

U.S. policy makers have declined responsibility for reversing the deterioration in the wages and hours of workers or the competitiveness of firms, appealing instead to a belief in the ability of unregulated mar kets to achieve optimal outcomes for both. The growth of employment since

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which U.S. employment growth has been dominated by the increase in con tingent jobs.

Average annual employment in the temporary help industry has grown by more than 100 percent since the end of the last decade. This is 3 times the rate of increase for the rapidly expanding services sector of the economy and 8 times the rate for all industries (Carey and Hazelbaker, 1986). While the temporary help services industry filled about 807,000 jobs a day on average in 1986 (Employment and Earnings, July 1987: 203), the number of people placed in a temporary job by an agency at some time during the year was well over 5 million (Sacco, 1985). These figures refer only to jobs filled through temporary help agencies. There is no estimate available of the number of temporary jobs filled directly by hospitals, government agencies and other employers, but the figure may be quite large. The federal government, for example, employs over 250,000 temporary workers (Madison, 1985).

Part-time employment has grown more quickly than full-time employment. As a result, the proportion of workers employed less than 35 hours a week has increased from about 16 percent of the labor force in 1967 to 20 per cent today (Appelbaum, 1987: 286-287). If full-time workers who have been placed on short hours are excluded, the increase is from 14 to 17 percent (Nardone, 1986). The disturbing feature of this increase is that almost all of it consists of people who want full-time work and are working part time involuntarily because they can't get it. Involuntary part-time employment has increased in this time period from under 3 percent to more than 5 percent of employed workers. Thus, while it is true that most people with part-time jobs prefer part-time schedules, the number who work part time involuntarily has been steadily increasing. Involuntary

T This is the increase in jobs since the bottom of the last recession.

Compared with 1979, the last peak year, employment has grown by less than 9 million jobs.

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part-time employment increased from 1.6 million in 1967 to 3.2 million

ten years later and 5.5 million today (Appelbaum, 1987).^

To a large extent, the growth in contingent work arrangements is the result of two processes that are transforming the U.S. labor market.

First, there are the developments which, in the U.S. context, have reduced the importance and undermined the existence of internal labor markets over the last decade and a half. These developments include the spread of microprocessor-based technologies, increased emphasis on reducing labor costs, and the growth of higher education. And secondly, there is the expansion of the secondary labor market as a result of the combination since 1979 of declining unit labor requirements in the high productivity growth, high wage sectors of the economy and prolonged overall macroeconomic slack. In these circumstances, unbalanced growth effects favor the expansion of low skill, low productivity growth sectors provided that a sharp differential in wage rates between high and low productivity growth sectors is maintained. This condition is met in the U.S. economy. We also consider, and reject, the argument that the in crease in contingent jobs is simply a result of the labor market respond ing to increased demands for flexibility on the part of both workers and

fi rms.

Internal Labor Markets

In the last half century, internal labor markets, through on-the-job training and promotion along well-defined job ladders, have generated significant numbers of professional and managerial jobs, as well as blue collar jobs offering middle-class wages and employment security. Though women and blacks were systematically excluded from these job ladders and often consigned to dead-end work in jobs in the secondary labor market, internal labor markets did provide avenues of upward mobility for many white male workers, thus contributing substantially to the size of the

•5 Detailed figures on contingent jobs are given in Appelbaum (1987: 268-

312).

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Disruption of Job Ladders

The spread of computer information and microprocessor-based technologies in offices and factories is one such force. An important characteristic of these technologies is that they automate not only routinized jobs but the routine or repetitive aspects of skilled craft, technical and professional work as well. In the process, these technologies eliminate the jobs that traditionally formed the rungs of career ladders from semi skilled to skilled work. Natural learning sequences are disrupted as more routine tasks performed by skilled workers are automated. Concommitant with this, the possibility of learning more complex tasks on-the-job, without lengthy, formal training diminishes. .

Clerical workers in the insurance industry, for example, can no longer acquire the skills for entry into professional underwriting jobs through a combination of on-the-job experience and company-sponsored education.

Insurance rating has been wholly automated and routine underwriting of personal lines like life and automobile insurance have, with the assist ance of the computer, become clerical functions. The remaining under writing jobs are quite specialized and require extended formal training and professional credentials (Appelbaum, 1984). Similarly, drafting has largely been eliminated as an occupation in architectural firms by computer-aided design technology. Formal training and professional credentials are now the only avenue for entry into architectural design jobs. Or, to take still another example, consider the progression through a sequence of jobs characteristic of the classic machine shop. Workers typically progressed from operator of a simple machine (e.g., a drill press) to set-up operator on such machines (translating blueprints or job-order specifications into machine settings) to journeyman machinist (operating, setting-up, and monitoring more complex machines), to master machinist. It has been noted that "the full sequence of (jobs) ... pro-

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vide(d) a natural learning sequence of physical skills and nested hierarchy of logical routines. Training through work is a significant externality within this technique." (Albin, 1984: 136) This sequence is abruptly interrupted in the extreme version of computer numerical control (CNC) of machine tools and machine shop automation that is, perhaps, more prevalent in the U.S. than in other industrialized nations. In this case, the set-up function is performed by an engineer/programmer who translates product specifications into input data for a microprocessor that will control a complex machine tool. A single master machinist may supervise six or more of these complex machines, dealing with unforeseen difficult ies. The only other shop floor jobs that remain are those of the oper ators, for whom skill requirements, training, and promotion possibilities are now sharply limited by the new organization of production.

This example illustrates another point as well. The organization of production and the distribution of worker skills within a firm as CNC technology is implemented vary widely, and programming tasks of varying degrees of complexity have been integrated into the machinist's job rather than removed from the shop floor. Thus, the effects of the technology in eliminating a range of job skills are sometimes a charac teristic of how the technology has been implemented, rather than of the technology itself (Albin, 1984). Clerical work in the insurance industry provides another illustration of this point. Some companies are making use of computer and information technologies to integrate tasks and decentralize decision-making. Multi-activity, skilled clerical positions requiring substantial firm-specific training and product knowledge, have been created to handle routine technical and professional tasks as well as clerical functions involved in selling and processing applications for personal insurance. While possibilities for promotion to professional jobs are no longer common, and pay is relatively low, these new forms of clerical work have themselves become quite skilled and require sub stantial formal training by the firm. Data entry is done as it arises in these firms, and no one's job consists entirely of entering data. Such firms require a clerical labor force with a strong attachment to the firm, and hence have incentives to extend internal labor market struc tures to encompass these workers.

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In contrast, many large insurance carriers have utilized telecommuni cations technology to remove the processing of insurance applications from field offices and have centralized these operations in large clerical processing centers located in suburban or rural areas, far from the carriers' other operations. Insurance applications are sent to the processing centers for entry into the computer. Many workers are employed in these processing centers as data entry clerks, in jobs that are often part time and that provide few or no fringe benefits. There are no avenues of upward mobility both because there are no opportunities for

workers to learn the insurance business at these remote locations and

because workers are geographically removed from higher level jobs at field offices or corporate headquarters. Women work in "pink collar"

ghettos outside the firm's primary labor market and far from its other activities (Appelbaum, 1984). The organization of production in these firms lends itself to the use of a more casual work force, and to increased employment of contingent workers. Here, again, it is the implementation of the technology, and not the intrinsic characteristics of the technology itself, that sharply curtails worker skills. Moreover, the traditional reluctance of employers to train female clerical workers, whose jobs are on the cutting edge of office automation technologies, may influence these implementation decisions.

Regardless of the way in which these technologies are implemented and of their effects on skill requirements, however, the job skills which remain are more likely to require formal training and are less easily acquired through work experience. Barriers between production or clerical jobs and craft, professional or managerial jobs become more impermeable and opportunities for upward mobility more limited. Internal labor markets are weakened, and their importance to firms is diminished, when oppor tunities for on-the-job learning and promotion are disrupted.

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Transferability of Skills

Technology has reduced incentives for firms to provide for skill acquis ition through internal labor markets in other ways as well. Sales, clerical and administrative support jobs in firms that have reorganized production so that tasks are integrated and decision-making is decentralized require mastery of a range of worker skills not previously associated with such work. These include (1) social and communication skills in order to meet and integrate the needs of customers, clients, marketers, and product designers; (2) managerial skills related to plan ning, organizing time effectively, thinking more comprehensively about the enterprise, and acting in a strategic manner; and (3) general skills related to computer technology - how to hook up microcomputers to larger networks via modems and telephone lines, how to access a data base to store and retrieve data, how to turn data into useful information

(perform searches, identify potential customers), and how to use standard software packages (word processing, graphics, spread sheets).

These skills are required in a large number of emerging jobs that are more properly classified as "paraprofessional" than as clerical or sales occupations. Examples include "para-printers" who use word processing and graphics softwre to do layout and design work for company newsletters,

"para-accountants" who use accounting software to prepare tax returns,

"para-underwriters" who use insurance software to sell, underwrite, rate and issue personal policies. Bank tellers trained to market the bank's full line of financial services and loan or credit clerks authorized to

make decisions about issuing credit are other examples. In addition to important skills which are specific to the particular industry in which the job is located these jobs require the skills indicated above - skills that are common across industries and hence transferable from one job to

another.

In the U.S., the question of how workers are to acquire these transfer able skills is a pressing one. These skills fall outside the usual categories of (1) basic skills which in the U.S. are provided through a state-funded system of public education; (2) specialized skills which

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individuals pay for themselves, though public subsidies may be available;

or (3) employer sponsored programs that provide training in firm-specific skills. Because of the transferability of these skills, U.S. firms are reluctant to utilize internal labor market mechanisms to provide them.

The problem is exacerbated by the fact that many of the jobs in which these skills could be utilized are held by women and fall outside the traditional boundaries of the internal labor market in many firms.

The widespread availability of these high level skills in the working population reduces the costs and increases the incentives favoring the development of multiactivity, integrated and responsible jobs.

Conversely, the absence of such skills, combined in the U.S. with a mana gerial bias towards more routinized work and fragmented jobs and an unwillingness to invest in training clerical workers, has led some firms to utilize technology to reduce the human skill and knowledge require ments of jobs. In these more routinized applications, the computer is used to limit the possibilities for decision-making and creativity in the jobs of many workers and to centralize and control these functions higher up in the bureaucracy, away from the shop of office floor. Knowledge is embedded in the information system controlling the production process.

Knowledge of the nuances of the product, the customer, or the environment of workers is redundant. Since the system can't use the knowledge of workers, firm-specific worker skills are devalued. Internal labor markets are weakened because the importance, to employers who follow this path, of a trained and loyal work force declines.

When technology is implemented in this way, jobs are not necessarily deskilled; but the job skills that do remain depend on the relationship of the job to the computer and information technology and to the extent of software development. They require little knowledge of the company's products, services, or operating environment. With skills related to software, and not firm-specific, employees become much more interchange able. This facilitates the use of contingent work arrangements by the company. With production organized to minimize the role of worker knowl edge and problem-solving capabilities, temporary workers who demonstrate proficiency with data entry or word processing are quickly able to perfom

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the required tasks. Moreover, tenure on these jobs does not increase a worker's knowledge of the firm or its outputs and, therefore, does not

lead to upward mobility within the firm.

Whether the technology is used to upgrade skills, integrate tasks and decentralize decision-making or it is used to embed knowledge in the information system and centralize control over production and decision- making, the gap between the skills of professional and non-professional workers widens and possibilities for upward mobility for non-professional workers are curtailed. Again, internal labor market structures are weakened. At the same time, the extensive overlap in job skills in seemingly different occupations across industries suggests the possi bility that lateral mobility through the external labor market may increase as vertical mobility within firms decreases. Little attention has been paid in the U.S. to the development of labor market institutions to facilitate such external mobility. In the meantime, however, temporary help service firms may have begun to fill this role..

Increased Contpetition

Other forces are at work reducing the importance of internal labor markets as well. Internal labor markets play a special role in meeting the needs of companies that anticipate future increases in employment.

They guarantee that the company has workers already in the pipeline at every skill level trained and ready to move up the job ladder should an increase in demand warrant an expansion of the firm's labor force. Under these conditions, assistant managers are not an unnecessary layer of bureaucracy; rather they are a pool of workers, loyal to the company, steeped in its culture, and possessing the requisite skills to assume the position of manager whenever the company expands its operations. The cost of having such workers on the payroll does not appear excessive when weighed against the costs of quickly recruiting, hiring, and training workers from outside the firm in order to respond to market opportunities in a timely manner.

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Today, however, many companies do not routinely anticipate growth. Com petition for markets has increased and, in addition, many firms expect a decline in unit labor requirements as the labor-saving potential of com puter, information and microprocessor-based technologies are realized. In this context, a pipeline filled with workers trained in skills beyond those needed for their current jobs appears to the company to be an unjustifiable expense rather than an investment in its future.

Deregulation in the U.S., changes in federal payments to hospitals, increased international competition, and increased macroeconomic instab ility following the demise of the Bretton Woods agreements in 1972 and the oil price shocks of 1973 and 1979 have replaced the steadily growing demand and high profits that many U.S. firms enjoyed in the 1950s and 1960s with fluctuating demand and unstable profits. In the U.S. context, in which a weak labor movement is excluded from participation in decisions about economic restructuring and the business community rather than the state directs the process, competiton unleashes powerful press ures for cost containment. One response of firms has been to reduce instantaneous labor costs by organizing on a ring and core basis. The goal is to limit the number of employees in the core with permanent full- time jobs to the minimum feasible number and to meet staffing needs through the use of a ring of contingent workers, with savings realized through reduced wages, fringe benefits, and training expenditures, and through the intensification of work. This approach is widely perceived by firms as a means of shoring up profits and achieving flexibility in the

allocation of labor resources.

Yet the gains associated with such a one-time reduction in labor costs are likely to prove ephemeral. It is the flexibility associated with using a trained and knowledgeable work force to improve quality, variety, responsiveness to customer needs and delivery time that allows firms - whether in service or goods producing industries - to find new market niches and protect old market shares; that is, to be competitive. Never theless, cutting payroll costs and reducing the permanent, full-time work force are measures often pursued by U.S. firms in preference to the more difficult management task of developing strategies for raising total

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revenues with a given labor force. In the meantime, opportunities for reducing unit costs by raising productivity or for increasing worker skills and shifting to the production of higher value-added products are forgone.

Computer Rationalization of Production

The reorganization of production within firms, in response to the challenge of increased competition and the opportunities presented by the diffusion of computerized control and information technologies varies widely in the U.S. Even within a single industry, the range of systems architectures and associated possibilities for implementing computer rationalization is large. Firms have wide discretion in assigning control of the production process to human or machine controllers. Organizational outcomes span a continuum whose polar extremes Peter Albin and I have termed "robust" and "algorithmic" organization. The organizational design goal in more algorithmic forms of computer rationalization is to adapt the organization as fully possible to the conditions it currently faces and then to use the technology to routinize work tasks and reduce decision-making to a set of rules (algorithms) capable of being implemented by a computer. Robust computer rationalization, in contrast, proceeds by using the technology to increase the information available to workers at every level. Tasks are integrated, decision-making is decen tralized, and a knowledgeable labor force enables the organization to adapt quickly to further changes in technology or demand conditions (see Appelbaum and Albin, forthcoming 1988 for a more rigorous description of algorithmic and robust organizations of production, and Albin and Appel baum, cited in U.S. Congress, Office of Technology Assessment, 1987:

Chapters 7 and 8 for a discussion of related issues).

The initial costs associated with a more robust organization of production - where workers at even the lowest levels require training in firm-specific skills and the firm will want to encourage the permanent attachment of its work force, and for which a rearrangement of the shop

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or office floor as well as the development of innovative management tech niques may be required - tend to be high. Moreover, more robust organiz ations require increased communication between levels within the hier archy as well as among workers at a given level, for which they pay an overhead. The returns to such expenditures by more robust organizations are earned only over a longer time horizon as the advantages of a more rapid development of new or customized products and services, a smoother adjustment to new production techniques, imporovements in quality control and timely detection and correction of errors, and the cumulative produc tivity gains from experiential learning and extensions of current technological capabilities are realized.

Not all firms will want to incur the higher initial costs of more robust organization. Where products are standardized, technology changes slowly, and demand conditions are stable, firms may prefer, instead, to be adapted to the conditions in which they operate. The logic of the emphasis on cost containment and short-run profits, however, is to favor more algorithmic organization because of its lower initial costs even where firms face a changing environment in which higher initial costs are less important to long-run profitability than the ability to innovate in the development of new products or processes and to adapt quickly to new conditions. The result is a preponderance of U.S. firms in which production is organized along algorithmic lines.

In the changeover from older technologies to computer rationalization, even algorithmic firms experience productivity increases; but where work is routinized and firm-specific skills devalued, these increases are quickly exhausted. Further gains must await development and installation of the next generation of hardware. Algorithmic organization reduces the role of internal labor markets and facilitates the use of contingent workers; while slow productivity growth in subsequent periods provides firms with further incentives for cost containment. Higher short-run pro fits are obtained, but at the expense of the cumulative gains in pro ductivity and the internal flexibility that affect the firm's competitive position over time and its long-run profits.

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Education and New Skills

Decreasing reliance by U.S. firms on internal labor markets and company- sponsored training to provide themselves with skilled workers has been facilitated by the growth of higher education. In the U.S., nearly one- fourth of those between 25 and 29 years of age had 4 or more years of college education in 1980 compared with about 10 percent in 1960 (Noyelle, 1987: 383). Firms have shifted to outside hiring to fill ad ministrative, professional, and managerial positions that until recently would have been filled from within. In the process, they have used formal credentials to create significant barriers to entry into these occu pations and have required workers to self-finance the acquisition of oc cupational skills through formal training and higher education.

Morever, new skills, especially in an era of rapidly changing technology, are found in the recent recipients of such education and training. Older, experienced workers within a firm may be passed over for promotion or laid off, and the jobs requiring higher level skills filled from outside

the firm. The result is a further erosion of internal labor market struc

tures, and of the implicit contracts promising employment security to workers in the core of the economy.

Declining Importance

Thus, traditional job ladders in the internal labor markets of firms are being dismantled, and the earlier link between occupational mobility and company-sponsored training or on-the-job experience has been weakened.

For many firms, flexibility in allocating labor has come to mean increased use of contingent workers; and the ability to retrench quickly has begun to take precedence in the U.S. over the desire for a loyal, well-trained labor force and low turnover rates. Firms are turning to contingent work arrangements to shift the costs of fringe benefits and the risks associated with a cyclical downturn or a labor-saving advance in technology to workers. Wage differentials and non-wage compensation.

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such as health Insurance, pension plans, and promotion schedules, asso ciated with internal labor markets were once viewed as benefiting em ployers by permanently linking employees to the firms that provided them with training and skills. This ceases to be the case, however, where the training function is truncated and flexibility is identified not with internal responsiveness to changing conditions but with managerial dis cretion in hiring, firing and assigning hours. Economizing on labor costs then becomes a major force driving the expansion of part-time and con

tingent work arrangements (Ichenowski, 1985).^

Expansion of the Secondary Labor Market

A review of employment gains in the U.S. in the last two decades, and of Department of Labor projections for 1984 to 1995, shows that the expansion of jobs in the secondary labor market accounts for a signifi cant proportion of new jobs. Above average employment gains have occurred

(a) in eating and drinking places, where employment increases represented 10 percent of all new jobs created between 1969 and 1979, 16 percent of those created since 1979, and are projected to account for 7.6 percent of all new jobs to 1995; (b) in janitorial services where they are projected to continue to grow at their current rate (about 4 percent per year); (c) in retail trade except eating and drinking places where 2.4 million new jobs have been added since 1973 and another 1.7 million jobs are pro jected to be added by 1995; and (d) in nursing homes and outpatient care, which continues to be the fastest growing U.S. industry, having registered 7.3 percent employment growth per year between 1959 and 1984 and expected to average 4.3 percent per year to 1995. Employment growth rates in these service industries are well above the overall average

The fundamental reason for the expansion of contingent work according to Audrey Freedman, a labor economist for the Conference Board, is the desire of firms to contain costs. As Freedman put it, "What the com panies are doing is organizing so they don't have to pay for vacations, holidays, health benefits, or pensions. In addition, they don't have to allocate money for training and for promotion." (Quoted in Collins,

1985: 81)

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employment growth rate projected for the economy of 1.3 percent a year (Personick, 1986).

These industries have traditionally offered a high proportion of part- time jobs, • and this continues to be the case. Since 1973, 40 percent of new jobs in retail trade have been part time. This has raised the pro portion of part-time workers to more than one-third of all workers in retail trade (Haugen, 1986). Thus, expansion of the secondary labor mar ket is a major factor contributing to the growth of contingent work. In the following sections we examine the dynamics underlying this expansion.

Unbalanced Growth Effects

Unbalanced growth refers to the fact that productivity growth does not occur at the same rate in every sector of the economy. Some sectors, such as manufacturing or communications, may experience high rates of produc tivity growth while other sectors, such as education, government ser vices, retail trade or personal services, remain labor intensive and experience low rates of productivity growth.

Baumol (1967) has shown that if wages are the same across sectors, then the cost of producing the goods and services of the low productivity growth sectors, and hence their prices, will rise steadily in relation to the costs and prices of manufactured goods or other outputs of the high productivity growth sectors. This occurs because firms in sectors experiencing higher productivity growth can either reduce prices without adversely affecting profits or raise wages without incurring higher unit labor costs. In the first instance, output prices in the high produc tivity growth sectors will fall relative to those in other sectors. In the second instance, with the wages of workers in all sectors ap proximately uniform, wages will rise in the low productivity growth sec tors despite the lack of offsetting productivity gains, causing unit labor costs and prices to rise.

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Assuming that wages are approximately the same across sectors, the con tinued provision of goods and services produced in sectors with per sistent low rates of productivity growth requires either (a) public sub sidy of the market price or (b) public supply of the good or service.

Thus, much of higher education in the U.S. is subsidized either through grants to colleges to reduce tuition or through aid to students to help them pay for it. The government also directly supplies goods and ser vices, such as traffic control or the administration of the court system, which provide the social infrastructure necessary even in a market economy. Unbalanced growth cost pressures explain why education and pub lic services, where wage rates are approximately the same as in manu facturing or communications, become increasingly expensive over time in a developed economy.

However, the assumption that competition among workers for jobs will lead to approximately uniform wage rates is not a reasonable one to make in

describing the U.S. economy.^ The persistence of labor market segmen

tation according to race, gender and educational credentials provides an institutional setting in which widely different wage rates in different sectors of the economy can coexist over extended periods of time. Bar riers to human capital accumulation (outright discrimination in education and hiring, unequal funding for public school education, unequal access to higher education) guarantee a steady supply of workers to industries that pay low wages.

The continued existence of traditional services, despite their low pro ductivity growth, depends crucially on the existence of substantial wage

differentials between workers in these sectors and workers in the tech

nologically progressive sectors of the economy. These wage differentials are necessary on the production side to restrain the growth of unit labor costs in the low productivity sectors. They are necessary on the con sumption side to guarantee that there are high income groups in the society with sufficient discretionary income to purchase these services.

See Albin (1978) for a discussion of labor market segmentation and un balanced growth dynamics.

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- 19 -

Workers in the traditional service sector industries experiencing employ ment growth in the U.S. are, in fact, low paid. They often work part-time as well, and receive few fringe benefits. 70 percent of part-time workers in the U.S. are not covered by a retirement plan and 42 percent have no health coverage (Business Week, 1986). About 6 million U.S. workers earn

$ 3.35 an hour (the prevailing minimum wage) or less. Half of them are in service activities, with food services and janitorial services having the highest concentrations of low-paying jobs. Another 20 percent of minimum wage workers are in retail sales (Mellon and Haugen, 1986). Pay in the retail trade industry, where two-thirds of hourly employees earn less than $ 5 an hour, has historically been substantially below average, and the disparity has widened. Weekly earnings in the industry are now about

$175. This is only 58 percent of overall average earnings, down from 66 percent in 1973 (Haugen, 1986). Women workers are especially vulnerable to low wages. Women working part time account for 45 percent of minimum wage workers, and 15 percent of all women paid hourly rates earn the minimum wage or less (Mellon and Haugen, 1986).

Employment growth in traditional, low productivity growth services depends on the payment of low wages, and these are in fact characteristic of the expanding service industries. Like the public subsidies for edu cation or public broadcasting, low wages of workers in traditional ser vices act as a subsidy to firms in these industries and make possible their continued existence and growth.

High Productivity Growth Sectors and Macroecononric Slack

The substantial wage differentials between traditional services and the technologically progressive sectors of the economy are necessary to the continued existence of those low productivity growth industries. Employ ment expansion in those sectors, however, requires an increasing supply of workers to the secondary labor market. The increased labor force par ticipation of women and their continued segregation into "female"

occupations is one main source of this increasing supply. The decline in

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unit labor requirements of technologically progressive industries, oc curring during a period of macroeconomic slack, is another.

In periods in which output grows slowly (and no reduction in the standard work week is negotiated), the combination of population growth and rapid productivity growth in technologically progressive sectors must lead to one of the following outcomes:

(1) rising unemployment

(2) employment growth in high wage, low productivity growth services pro

vided or subsidized by the public sector

(3) where wage differentials are sufficient to allow it, employment growth in the low wage, low productivity growth sectors

(4) involuntary reduction in the average work week.

High productivity growth in some sectors while output grows slowly will usually mean a relative, and in extreme circumstances absolute, shift in employment away from the high productivity growth sectors. Relative dis placement means that new entrants into the labor force will find it in creasingly difficult to obtain jobs in these sectors. From this perspec tive, the stubborn persistence of occupational segregation on the basis of gender this late into the twentieth century appears to be a mechanism for the orderly allocation among workers of a (relatively) shrinking num ber of high wage, high productivity jobs.

The relative displacement of labor from high productivity growth sectors is evident in the U.S. Employment and output in the U.S. manufacturing sector, which in 1979 employed 21.4 million people, were both hard hit by the 1980-1982 recessions. By 1984, output had recovered and even sur passed its 1979 level. Manufacturing employment also increased, but never reached its 1979 level (Kutscher and Personick, 1986). Productivity growth in the U.S. began a turnaround in 1983 and 1984, with much of the productivity improvement centered in manufacturing industries. The dif fusion of new technologies, already in existence, is expected to result in an average annual increase in productivity in manufacturing of 2.4 percent a year between 1984 and 1995. Manufacturing output is projected

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21

to grow at an annual rate of 3 percent a year. The continuing role of imports and only modest growth in consumer expenditures on manufactured goods makes higher output growth improbable. As a result, manufacturing employment is expected to increase by only 0.6 percent a year, and manu facturing employment will decline as a proportion of all jobs, from 18.5 percent in 1984 to 17.2 percent in 1995 (Personick, 1986). Though overall manufacturing employment will grow slightly, this sector will not be able to absorb much of the net increase in the size of the labor force; and there will be a relative displacement of workers from this sector.

Similar results can be observed in other high productivity sectors. Com munications continues to have the highest rate of output growth of all the major sectors of the U.S. economy. Output in this sector is projected to grow at about 6.2 percent per year from 1984 to 1995. Increases in these services will not require much additional employment, however, and employment will increase only slightly from its current level of 1.2 million. The financial services sector, which employs over 6.3 million workers, is another sector in which increases in demand for output, though large, lead to small increases in employment as the diffusion of office automation technologies and automatic banking machines reduces unit labor requirements. Despite continued high demand for financial ser vices, employment in banking and credit agencies is expected to rise more slowly than in the past, when it increased by more than 4 percent a year.

Employment growth in insurance has already begun to slow, as the result of the automation of rating and some underwriting functions; and will

slow even more in the future. For the financial services sector as a

whole, employment growth between 1984 and 1995 is expected to average only 1.5 percent a year (Personick, 1986).

Part of this relative displacement of labor is offset by continued rapid increases in employment in relatively new, high productivity growth sectors which, unlike manufactured consumer goods, are still far from saturation. The computer and data processing services industry, for example, will have employment growth of 8.4 percent a year to 1995, and is projected to be the fastest-growing 3-digit (i.e., narrow) industry in the U.S. economy despite the fact that employment growth in the data pro-

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cessing portion of the industry has already begun to slow. The industry is small, however, employing less than one-half of one percent of the labor force, and the actual number of jobs it will create over the 11 years from 1984 to 1995 is only about 650,000 (Personick, 1986). Unfortu

nately, the same is true of other rapidly growing, high technology indus tries. The U.S. Department of Labor reports, "(w)hile faster growing than the average for all sectors, ... high tech industries are projected to account for only a small proportion of new jobs through 1995" (Personick, 1986: 35).

U.S. workers displaced from high productivity growth sectors are not able, as in the 1960s, to find good paying jobs in the public sector. The rapid run-up in the defense budget in this decade combined with fiscal restraint in other areas of government budgets has held public sector employment constant in recent years, and little growth is expected through 1995. Hospital employment, which is subsidized through federal Medicare and Medicaid payments, added 2 million jobs between 1959 and 1984. Changes in the federal payment system have effectively reduced this subsidy. As a result, hospital employment has stopped growing and little growth is expected to 1995.

Thus, relatively fewer jobs are being created in the high productivity growth sectors or in government or publicly subsidized services. Social insurance programs like unemployment compensation do not cover new entrants into the labor force in the U.S., and workers unemployed for more than 6 months have usually exhausted such benefits. Young people in some states are excluded from the welfare rolls, and in any event welfare payments are quite low. The result is an increase in the supply of workers who have accepted the lower wages and, often, shorter hours available in traditional service industries. Unemployment, while still high for the expansion phase of the business cycle, is lower than in Western Europe and continues to decline slowly. But the secondary labor market, with its low wages and involuntary reductions in work time, has expanded.

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- 23

The Myth of Flexibility

One of the myths surrounding the expansion of contingent work is that it is a response to the need for increased flexibility on the part of both management and workers. Workers, supposedly, are able to choose their own hours and days of work; and women workers, in particular, are presumed to choose part-time or temporary jobs because they desire more flexibility in order to coordinate family and career responsibilities. Firms, mean while, find that to be efficient and compete in world markets they require greater flexibility in responding to change and in allocating their labor resources. Supposedly, they achieve this flexibility and increase efficiency by organizing on a ring and core basis - hiring, firing, and changing the hours of work of contingent workers in order to respond quickly to changing conditions. Contingent workers in the ring provide a buffer for permanent, full-time employees in the core, pro tecting them against the vissicitudes of the competitive market-place.

The rapid growth of contingent jobs in the 1980s, according to this view, is simply the happy outcome of labor markets functioning as they should to match the changing preferences of workers and firms for contingent work arrangements.

The evidence, however, does not support such a sanguine view of recent labor market developments. While the number of women workers and the pro portion of mothers of young children in the U.S. labor force have risen (Hayghe, 1986), there is little evidence that the preferences of women workers explain the rapid increase in contingent work. On the contrary, while the proportion of workers employed part time has continued to increase during the decade, voluntary part-time employment peaked in 1979 and has edged down since then for women as well as men. In fact, the num ber of people who usually work part time increased by 2.4 million between 1979 and 1986, but only 600,000 of these workers voluntarily sought part-time employment (Nardone, 1986: 15). The rest, though they usually work part time, do so because they can't find full-time jobs. Involuntary part-time employment of women has risen steadily.

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The kinds of flexible work arrangements that parents, particularly mothers, desire are those that allow time off from work to care for young

children and the modification of work hours and vacation schedules to

accommodate family pressures without sacrificing hourly wages, fringe and retirement benefits, access to training, or opportunities for advance ment. Unfortunately, this kind of flexibility is not widely available in the U.S.; and contingent work arrangements, even when they are a poor alternative, are often the only choice.

The increase in contingent jobs during the 1980s has occurred largely at the discretion of managment. Economic restructuring has proceeded in the U.S., as it has in other developed economies, as a result of both chang ing conditions in the international economy and the diffusion within industries of microelectronic and information technologies. Labor has largely been excluded from participation in decisions affecting the direction of investment, the reorganization of work, or the distribution of the burdens and rewards of restructuring. The business sector in the U.S. has been able to respond to the new conditions of production and trade without strong, central direction from the state or the counter vailing force of a strong trade union movement.

The results are notable for what they have not produced: a long-term investment perspective and emphasis on long-run profits; long-term man power planning and the training and retraining of workers; the flexible use of new production technologies (Jaikumar, 1986); the ability to compete on the basis of diversified, quality production (Business Week, 1987). The emphasis, instead, is on short-run profits. As a result, pro duction fundamentals take second place, and pressures for cost contain ment dictate the firm's training and investment decisions. The initial costs associated with increased training of workers, the reorganization of work for internal flexibility, and management for quality, high value added production tend to be high. This is especially true in the U.S., where workers without college education generally have little formal preparation for work and few technical job skills. The returns to such expenditures can only be realized over a much longer time period. The logic of this emphasis on short-run profits is to curtail such expendit-

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25

ures. While some U.S. firms have made the necessary investments in training and reorganization (often on an "experimental" basis as in the Digital Equipment Corporation plant in Enfield, Connecticut), most have not taken the steps necessary to achieve internal flexibility. These firms have had to rely on their ability to control the hours, terms and conditions of employment in order to contain costs and achieve some measure of responsiveness to changing market conditions. One result has been rapid growth in contingent work arrangements. The other has been a short-term improvement in competitiveness that is likely to be lost in international competition with firms elsewhere that have begun to reap the benefits of flexible, diversified, quality production.

Need for Flexibility In Scheduling Work

Thus, the implementation of contingent work arrangements in order to drive down labor costs is largely self-defeating. Apart from the devas tating effects on the living standards of workers in these jobs and the implications for political democracy of an increase in income inequality and the growth of a second class labor force, the increase in casual employment has serious negative ramifications for the development of a skilled labor force, and hence for the pattern of U.S. economic develop ment and for the position of U.S. producers in world markets over a longer period of time.

Yet, there is an articulated need by workers at various points during their lives for flexibility in scheduling work on a daily, weekly or

annual basis. The demand for flexible work schedules comes from workers

with family responsibilities, older workers, disabled workers, workers who wish to further their educations or who require retraining, and from highly educated workers who prefer greater independence and control over their work day. Firms, too, may require flexibility in scheduling work for a variety of reasons; to handle peak load problems; to serve con sumers who, themselves, work full time; to respond to temporary increases in demand; and to obtain fuller utilization of expensive and, perhaps.

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soon-to-be obsolete equipment. Changes in work schedules in response to these needs for flexibility, and not as a strategy to prop up short-run profits by reducing the number of permanent employees, need not involve an increase in the number of contingent workers. Rather, flexible work schedules can be introduced as an option in permanent jobs, including permanent part-time employment."' Moreover, changes dictated jointly by production requirements and worker preferences will, presumably, improve the functioning of labor markets by increasing individual freedom of choice and the efficiency of firms in allocating labor resources.

The unconstrained pursuit of flexibility by U.S. managers does not appear to have yielded either of these results. It can be argued that the countervailing weight of a more equal role for U.S. workers at both the national level and the enterprise level may lead to improved outcomes for both workers and the future path of U.S. economic development. Certainly, this will be the case if it results in a better trained, more highly skilled labor force and provides incentives for firms to utilize these skills through upmarket restructuring and the production of high quality, specialized and/or high value-added goods and services. Managerial choice may also be responsive to policy cues and incentives that reduce the higher initial costs of developing and managing a skilled work force.

These might include investment tax credits to firms for investments in human capital or publicly funded post-secondary training programs for non-professional workers.

Conclusion

The growth in contingent jobs is driven by two distinct phenomena. The first of these is the effort by technologically progressive manufacturing

and service industries in the core of the U.S. economy, where internal

•5 Permanent part-time employment is distinguished from casual employment by its voluntary nature, equitable wages, full package of benefits (which may be prorated), access to training, and opportunities to bid

on full-time jobs.

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27

labor markets have been strong, to adapt to increased international com petition, domestic deregulation, and the diffusion of microprocessor and information technologies. The second is the expansion of traditional ser vice industries, in which secondary labor markets characterize employment relations, and where the unbalanced growth cost pressures associated with slow productivity gains mean that employment increases are predicated on the availability of low wage workers.

The links between these two phenomena are subtle. Increased employment in traditional services is largely a passive response to overall conditions of macroeconomic slack, brought on in part by the failure of increases in domestic and foreign demand for the output of the technologically pro gressive sectors to outpace the declines in unit labor requirements. The relative displacement of workers from these sectors fuels the growth of employment in traditional service industries. Suboptimal productivity gains by domestic firms exacerbate the displacement of workers from tech nologically progressive industries. Systematic differences in success in restructuring production as demand conditions change and technology ad vances, occurring among economies that trade with each other or compete for world markets, undermine the competitive position of the less suc cessful trading partner. Efforts by firms in core industries to reor ganize work so that more of it is done by contingent workers in order to save on labor costs is, at best, a short-term expedient for remaining competitive and shoring up profits. It is rarely an effective substitute for a long run strategy designed to raise labor productivity and achieve diversified quality production. Driving down wages and fringe benefits, economizing on training costs, and substituting gadgetry for quality in the design of products may improve profits temporarily. But it can only postpone the necessity for U.S. firms to develop a competitive strategy based on the development and utilization of labor skills, productive use of new technology, and attention to quality and customer requirements in the design of innovative products.

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Albin, P.S. (1984), "Job design within changing patterns of technical de velopment." In: E.L. Collins and L.D. Tanner (eds.), American Jobs and the Changing Industrial Base. Cambridge, MA: Ballinger.

Appelbaum, E. (1984), Technology and the Design of Jobs in the Insurance Industry. Report to the Institute for Research on Educational Finance and Governance. Stanford University, Stanford, CA.

Appelbaum, E. (1987), "Restructuring Work: Temporary, part-time and at- home employment." In: H. Hartmann (ed.). Computer Chips and Paper Clips. Washington, D.C.: National Academy Press.

Appelbaum, E./P.S. Albin (forthcoming 1988), "Computer rationalization

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Kutscher, R.E./V.A. Personick (1986), "Deindustrialization and the shift to services." Monthly Labor Review, June, 3-12.

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The Growth in the U.S. Contingent

Labor Force

Discussion Paper PS I 88 - 7 Wissenschaftszentrum Berlin fUr

Sozialforschung 1988.

MIT6LIEDER DES PUBLIKATIONSKOMITEES PUBLICATION COMMITTEE MEMBERS

Friederike Maier (Vorsitz) Egon Matzner GUnther Schmid Christoph Deutschmann Bernd Reissert

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