Enterprise and jobs: Increased productivity and competitiveness

ILO ENTERPRISE FORUM 96

International Labour Organization

Increased Productivity and Competitiveness

Some experts feel that competitiveness can only be achieved through lowering labour costs. Thus enterprises are constrained from attaining competitiveness by rigid labour markets; that is, wages are too high and wage structures too rigid, labour markets overly regulated, social benefits excessively high and enterprises burdened by too many obligations. Freeing enterprises from these constraints, it is argued, is required to elicit new economic dynamism, boost entrepreneurial spirit, raise profit levels and ultimately create the desired new jobs. Experience has shown, however, that lowering labour costs may at best be a short-lived remedy; this approach, when tried in Europe during the Great Depression for example, had disastrous economic and political results. Lowering labour costs in high-wage countries can also hurt low-wage countries, where competition depends on lower wages.

The other option is through improvement of productivity by expanding the enterprises' capability to pursue process innovations and technology upgrading, increase product and service quality, and expand market opportunities. Recent research in good business performance has shown that while an individual enterprise has limited capacities, it can expand its capabilities by forming partnerships both within and among enterprises. The enterprise can form a partnership with its own workforce through redesign of work organization leading to flatter hierarchies, decentralized decision-making, changed work assignments to gain greater functional flexibility, and the introduction of teamwork. The enterprise can also expand its capabilities by forming partnerships with other enterprises. Through alliances and partnerships, enterprises can share information on technology and processes, form joint-ventures and strategic alliances with competitors and co-operate with suppliers to improve technology, product quality and delivery.

Co-ordinate expansion

In a world characterized by static overall demand, mere productivity improvement and increasing competitiveness are not a panacea for solving the global problem of unemployment. Such efforts can only lead to a situation in which improvement in productivity and competitiveness will alter the distribution of jobs and prosperity between enterprises and even between countries, but the aggregate number of jobs and the overall level of unemployment will not be altered.

What is then needed is an expansion of total demand and markets; only when the global economy is growing rapidly can the success of one enterprise be achieved which is not at the expense and detriment of another. For almost two decades governments have felt it necessary to restrain aggregate demand in order to contain inflationary pressures and reduce fiscal deficit, in the hope that this might lead to increased profits and subsequently an expansion of aggregate investments. That is why the Workers' group has supported calls by the ILO for a co-ordinated expansion in aggregate demand across countries. What both enterprises and workers require is a simultaneous reduction in interest rates across a broad range of countries to boost consumer demand and investment. Action is also needed by governments in the fields of industrial policy, regional development and establishment of infrastructure that is conducive to economic growth and employment expansion.

The approach to improving competitiveness which concentrates on reducing real wages and workers' benefits, downsizing the workforce, making jobs more precarious and increasing use of temporary and casual labour, is short-sighted and reduces workers' motivation, undermines productivity and consequently does not lead to any sustained cut in real unit labour costs. It also encourages strong antagonistic attitudes to industrial relations and promotes trade protectionism.

Emphasis on labour-cost reduction sets off a global vicious circle. As enterprises in industrialized countries cut wages and labour costs to improve their competitive position, they force their competitors in low-wage developing countries to find more extreme ways to cut their own labour costs, even forcing them to resort to child labour, bonded labour and similar forms of human rights abuses. This then leads further effects as employers in the developed countries must make still more cuts in labour costs to keep their shareholders happy.

The first component of co-ordinated expansion is the building of better partnerships between managers and the workforce. This means concentrating on greater functional flexibility, which includes team work, multi-skilling of workers, flatter managerial structures, and increased workers' input in decisions about control of the production process. This approach leads to higher productivity, improved profitability, more harmonious industrial relations and increased job security. To make this approach feasible requires resources for increased education and training and the provision of well defined career structures for workers.

The second component is the establishment of a more co-operative approach between enterprises. Efforts must be placed on striving for constructive competition between enterprises which would encourage more strategic alliances and the sharing of technology and equipment.

Standards on fundamental human and trade union rights must be implemented regardless of their economic impact. However, there is overwhelming evidence that labour standards and institutions also generate positive economic advantages. Far too often it is the short-term results, for example end of the month balance sheets and profit levels, which dictate policy decisions. Thus it becomes expedient to cut labour costs, to resort to precarious forms of employment and to refuse to enter into meaningful collective negotiations without careful considerations of the longer term impacts on productivity and profitability. Without labour market regulations or trade unions, competition between enterprises will take the short-term approach. The main economic advantage of labour standards is that they force enterprises to find more constructive outlets for a desirable competitive force which directs efforts towards more product innovation, improvement in the production process and better marketing strategies.

Profits and sustainability

Despite the striking economic progress in the Asia and Pacific region, for example, which is likely to continue well into the 21st Century, it has been made without due attention to the deterioration of the environment, poverty, inequity in profit sharing and inequality in employment opportunities. The conventional approach to productivity improvement alone (efficient uses of resources, particularly labour and capital) are no longer adequate as strategies for meeting changing needs and requirements. The concept of productivity must therefore evolve to take account not only of economic but also of socio-cultural dimensions, in order to ensure the well-being of all people.

Today there are serious problems of environmental degradation caused by air and water pollution, hazardous wastes, forest depletion, global warming and so on. This is the price which as been paid for the progress achieved so far.

At the same time, no enterprise engages in business activities without expecting profit. Profitability is essential in the business operations of any enterprise. But it should be coupled with corporate social responsibility shared by top management and labour and also by consumers as end-users of the goods and services the enterprise provides. Business activities of the enterprise must also be geared to contribute to balanced socio-cultural and economic development, not only at the national but also at the global level. Priority areas for productivity improvement may change from time to time, but in the long-term there should be a constant search for a better quality of life for all.

Corporate responsibility

Companies grow globally and socially, not nationally only; thus, their responsibility is global. But their social responsibility is also local, because corporate culture has its roots in the country of origin. The process of restructuring of traditional companies through the outsourcing of non-core business and automatization of production and service process on the one hand, and internationalization of production through globalization, networking alliances and franchising on the other, all have a dramatic effect in increasing productivity globally, while at the same time reducing employment in one country and moving it, not necessarily in the same quantity, to another country, where social standards may be much lower. However, the receiving countries may gain more income-generating employment and as a result their social standards may be increased.

Growing competition will result in a reduction in the number of mega-networks of co-operating companies, particularly in aviation transportation. For example, in each major region, only four major alliances consisting of 12 to 15 of the most efficient national companies dominate the global air transport market. These alliances control prices and quality of service, and they could very easily move their assets, people, jobs and cost elements around, ignoring high labour standards of the most advanced countries with excessive labour costs and labour markets rigidities.

At the same time, to operate in this highly competitive environment, companies need to change their business and management philosophies, approaches and modes of operation; from companies focused on assets, controlling investments, reducing head counts and process improvements, they must become companies creating opportunities: new markets, new innovative products, superior customer value, developing human capabilities and improving organizational learning with increased speed and flexibility.

The workforce attitudes and types of employment would also have to change: from job security to employment security; from permanent employment to a fluid, resilient and peripheral workforce. More self-employment, particularly in the service industry, and in professional occupations, is expected. Companies will concentrate more on core workforce and management teams with the highest labour costs in their human resource management strategies.

Human resource management will be concerned mainly with establishing broad multi-skilling employability, the empowerment (mental and organizational) of the employees; career counselling; and developing and maintaining flexible performance management systems and multi-optional management of mobility and careers.

Parallel changes

When considering the new business environment, it is important to recognise the parallel changes taking place in society as a whole. People, as consumers, the drivers of competition, are demanding individual recognition and individual rights in all aspects of their lives, and are, at the same time, accepting the responsibility that goes with them. This phenomenon appears to be particularly marked in the young.

It is also important to remember that no labour market model will be universally adopted. A myriad of different employment arrangements will emerge, structured to meet the needs, circumstances and aspirations of the organization and those who work in it or with it.

In New Zealand, for example, major economic and social reforms have been undertaken. A painful process for many, but one in which there is no room for halfheartedness. In 1991 a radical reform of the labour market was experienced which moved away from institutionalized systems and third-party intervention and placed the collectivity on an equal basis with the individual. The system is driven by the concept of individual choice in all things: memberships, representation, contract type and conditions of employment, all achieved through permissive legislation which allows total flexibility within a framework of minimum standards established by legislation.

It is no coincidence that since the introduction of that legislation, the New Zealand labour participation rate has increased form 63.6 per cent to 65.8 per cent, with 237,300 new jobs being created. Unemployment has fallen from a high of 10.9 per cent to 6.1 per cent at the present time. Seventy-five per cent of the new jobs have been full time. Parallel to this has been a clear trend towards small business development, with a net increase of 29,826 units between 1991 and 1994, some three and a half times more than in the previous period.

As a result, emphasis has moved from job security to employment security, accompanied by some very important changes of attitude. For example, lifelong learning is now an accepted concept. It is seen as a shared responsibility between the public education system, the business community and individual citizens.

Training and consequent qualifications are developed in units of learning, building blocks capable of crossing the traditional boundaries between compulsory schooling, vocational training, and university education. These qualifications, based on competence and common skills, are portable between sectors.

Recognizing the increasing trend of the continuous configuration and reconfiguration of companies, there is a parallel tendency towards individuals as employees, as self-employed contractors or as part of micro-enterprises to work for or with more than one larger enterprise at a time, thus providing some continuity in the face of change.

In moves to combat the potential conflict between the drive for flexibility and the need for employee commitment, a number of initiatives are being taken including developing enterprise consultative structure with increased two-way flows of information. With quality being the key to competitiveness, all employees, contractors and suppliers are considered part of the quality management system of the organization, with full involvement in training and systems development. Finally, a growing number of enterprises are training their employees in skills which will assist them in gaining employment elsewhere, if and when the need arises.

Harmonization of laws is important if an environment of true competition is to be achieved. This does not require uniformity of law or prescription of common practice, conduct or cost, which would reduce flexibility in using natural competitive advantage. Harmonization simply calls for the development of a common framework within which to work.

In this respect, given the inevitable intensification of competition, the ILO will have an even more important role than it now has. The world community will be looking for a set of clearly enunciated, non-prescriptive social/labour principles to form the centrepiece of the global framework.

Different types of competition

Differences should be noted in competition between domestic enterprises, between domestic and global enterprises, and between global enterprises. India, for example, has gone through different stages of economic liberalization. At first, local enterprises operated in a highly protected environment and thus were not exposed to global competition. Even competition between local firms was limited by a licensing system. However, the Indian Government has deregulated the national economy over the past five years. This has resulted in a GDP growth rate of 6.5 per cent and in the creation of seven million new jobs. Increased competition has resulted in a situation that is beneficial to all participants; it is a positive development, provided it takes place in a properly "calibrated" manner.

With regard to labour productivity, technological progress goes on so fast that workers are unable to keep pace; existing human resource development institutions are ill equipped to provide appropriate vocational training to update the skill and knowledge of the workforce. Not enough is being done to train workers in the rapidly changing information technology. There must be a much wider partnership in human capital formation, a partnership that encompasses entrepreneurs, employers' organizations, trade unions and training institutions. The ILO should play a leading role in building such partnerships, with the objective of modernizing vocational training.

As regards labour institutions and labour standards, the future role of trade unions will depend very much on their approach. If they take an antagonistic attitude, trade unions could prove a hindrance to economic progress. If, on the contrary, they co-operate with the employers, they can become a dynamic factor in the economy. Trade unions and employers should take a joint look at labour standards, industrial relations and the work environment, which needs to be adapted to traditional structures and values, however, so as to create a familiar work climate. Workers can no longer expect lifelong job security but must be flexible enough to change jobs and employers, according to market needs.