Impact of flexible labour market arrangements in the machinery electrical and electronic industries

Report for discussion at the Tripartite Meeting on
the Impact of Flexible labour market Arrangements
in the Machinery, Electrical and Electronic Industries

Part 9    

Copyright ® 1999 International Labour Organization (ILO)

9. Export processing zones:
Another form of flexibility⁽¹⁾

Export processing zones (EPZs) are usually purpose-built industrial parks with dedicated infrastructure designed to suit the needs of foreign investors. In order to tempt foreign investors into the zones a variety of inducements are offered, including tax holidays, tariff- and duty-free imports and exports, an ample supply of relatively cheap labour and access to markets. Generally speaking, two main industries can be found in EPZs: textiles and clothing and electronics manufacture and assembly. Most of the early zones were enclaves, but there is a trend towards granting the same privileges to factories outside the EPZ, providing they meet certain criteria.

Many developing countries have in fact succeeded in attracting substantial amounts of electronics investment to their EPZs that would otherwise not have materialized. In the Philippines, for example, 74 per cent of zone investment was in the electronics sector in 1997, up from 61 per cent a year earlier. In Penang, Malaysia, 164 of the 743 plants were in the electrical and electronics sectors, but their employment effects were much greater with 116,955 persons employed (as at June 1997 -- see figure 9.1). Of the S$8.5 billion invested in Singapore in 1997, 46 per cent went to the electronics sector. In the maquila sector in Mexico, television sets have become one of the biggest categories of manufactured exports, with over US$3 billion worth going to the United States each year.

Although the ILO has been reviewing the question of EPZs for almost two decades⁽²⁾ there is still a considerable debate on why investors choose to locate in EPZs. Some commentators accuse investors of exploitation because of the very low wage rates by international comparison and point out that working conditions are sometimes basic. And although governments may provide incentives and infrastructure, the availability of health and safety measures and the quality of housing, public transport and social services are often questioned. In addition, trade union rights are generally not enjoyed by zone workers.⁽³⁾

Investors defend their presence in EPZs by pointing out that the wages and conditions of work inside the zones are normally better than those on offer in the local economy. In many cases the labour market on which the zones rely has tightened somewhat and wage rates have been rising. Investors maintain that it is not the wage rate per se that attracts them, but the quality and productivity of the workforce, which reduces the unit labour cost.

It may well be that one of the main incentives to investors is not the cost of labour or the tax and duty concessions but the flexibility which the zones provide in terms of pay, hours of work, hiring, firing and allocation of functions. How much flexibility do enterprises enjoy in EPZs? Most zones are covered by the national labour legislation, and some specify their own minimum standards, which are higher than those in the domestic economy. There are very few cases, however, of zones exempting investors from the basic provisions of labour law, and such exemptions usually concern trade union rights, not minimum standards applicable to pay, hours of work and safety and health.

However, in most zone-operating countries the labour administration system does not have the resources to monitor zone enterprises effectively, and the zone authorities are often loath to antagonize investors for fear of driving them away. The reality is that zone enterprises have a high degree of discretion in the way they choose to recruit, terminate and pay workers and how they organize production. The fact that the majority of EPZs do not have active trade unions or collective agreements gives enterprises even more leeway.

There seem to be two broad approaches to flexibility on the part of zone investors. The first concerns enterprises which are generally characterized by inefficient practices and low standards, compete in a low value added, price-sensitive segment of their sector, and seek to progress through constant intensification of work rather than through improvements and innovations. These less scrupulous investors take advantage of the lack of regulation:

• to avoid issuing regular contracts to workers in order to evade minimum standards and to permit arbitrary hiring and firing;
• to avoid paying minimum wage rates;
• to impose overtime work or double shifts; and
• to ignore health and safety requirements.

The second category of enterprise typically competes in a high value added segment on the basis of speed and quality (as well as price) and seeks to improve constantly through innovation, not only of their products but in the organization of work and utilization of human resources. Examples of flexibility in such enterprises include:

• incentive-based pay systems, which are very widely used in the electronics sector in Singapore and Malaysia, for example;
• continuous production using a variety of shift systems (such as 12-hour shifts four days a week at electronics plants in the Philippines) designed to meet the company's need for optimum operation while at the same time accommodating the workers' need for time off to travel home or the difficulty of getting to work at odd hours as required in a three-shift system;
• multiskilling, for example in the case of operators who are trained to service and troubleshoot their own machines in electronics plants in Malaysia;
• team-based production, in which the functions of multiskilled team members may be varied according to the demands of production, rotation or career development;
• worker participation in setting production targets and scheduling and organizing work, with the result that workers often decide to work very long hours, agree to work through holiday periods, and adapt production processes in ways which more regulated environments would not accept.

An important factor determining the degree of flexibility available to investors is the state of the labour market. In tight labour markets zone investors are having to make very special efforts to attract and retain workers. Many electronics firms in Malaysia explicitly or implicitly offer their workers lifelong employment. Most of these firms, however, also have to import labour from abroad and could always decide not to renew those contracts if they needed to cut employment.
 

EPZ-operating countries with basically full employment such as Malaysia and Mauritius are seeing a sharp increase in the use of labour-saving technology. The capital-intensive nature of their operations requires a more highly skilled workforce and companies are investing more in human resource development. In order to encourage highly trained workers to stay and to resist the attempts by rival firms to lure them away with offers of higher pay, investors are providing career paths for their workers, with each step determined by units of training provided by the company. Investors making hard disks, microprocessors and other computer components in Penang in Malaysia for example, train their operators to perform the tasks of technicians, and encourage technicians to train as assistant engineers, while professional engineers are streamed into management or research and development.

In loose labour markets, on the other hand, many firms are overstaffed. Zone manufacturers in Sri Lanka, for example, carry extra staff to fill in for absentees on a day-to-day basis. Even in labour surplus economies like Sri Lanka and Bangladesh, however, investors are having to pay a premium for skilled and experienced workers, but this has not reduced the high rates of turnover in the workforce. Nor has it led to the job enrichment and career development strategies typical of tight labour markets, although these might come as production activities are upgraded and more sophisticated technology is introduced.

How do investors choose a zone?

A high-tech company making telecommunications equipment told the ILO's action programme that they had relocated to Costa Rica from Mexico because of the unacceptably high rates of labour turnover they experienced in Mexico (4.5 per cent per month). Given that they provide over 120 hours of training to their workers each year, labour stability is essential. Labour turnover in the Costa Rican plant was only 0.5 per cent per month. In addition, they found the procedures for setting up in the free trade zone to be exceptionally quick and easy, and thanks to the high standard of education and training their plant reached 70 per cent efficiency in less than a year, instead of the anticipated 18 months.

This network of services formed part of the package that also convinced the United States multinational enterprise Intel to invest in Costa Rica. The Government of Costa Rica put together a special package for Intel consisting of human resource development provided by leading technology and training institutes, streamlined administrative procedures and a new source of electric power at a reduced rate. Intel's US$500 million investment in Costa Rica represents the largest single private investment ever made in Central America. The plant, which employs 3,500 workers, manufactures Pentium II processors with 35 per cent local added value. Intel expects to earn US$700 million in exports from this operation in 1998, which could be worth more than coffee and bananas, Costa Rica's two main traditional exports, combined.

Impact on the home country

Box 9.2, published in the World Labour Report,⁽⁴⁾ also demonstrates that investment in an EPZ is not simply a one-way street. It shows how a medium-sized Australian home appliance manufacturer was able to use the results of its investment in China to challenge existing practices and performance standards in its home-based plant.
 

1.  The information in this chapter was originally collected in 1996-97 as part of the ILO's action programme on labour and social issues relating to export processing zones. Since most of the companies in the zones are either in electronics or in textiles and clothing, it was relatively easy to separate out examples of flexible practices by electronics companies. The results of the action programme will be presented to a Tripartite Meeting of Export Processing Zone-Operating Countries (28 Sep.-2 Oct. 1998). This report and the Note on the Proceedings of the meeting will be made available upon request.

2.  See for example Chapter IV "Employment effects of MNEs in free trade zones and similar sites in developing countries", in ILO: Employment effects of multinational enterprises in developing countries (Geneva, 1981), pp. 77-90. Since 1980, the ILO's Committee of Experts on the Application of Conventions and Recommendations has also been examining the question of EPZs on a regular basis.

3.  See box 2.3: Industrial relations in EPZs, in P. Bailey, A. Parisotto and G. Renshaw (eds.): Multinationals and employment: The global economy of the 1990s (Geneva, ILO, 1993), pp. 62-63.

4.  ILO: World Labour Report: Industrial relations, democracy and social stability (Geneva, 1997), p. 92.

10. Summary and points for discussion

Summary

Under increasing pressure from global competition, major regional and sectoral shifts have taken place during the past two decades, associated with intensified international outsourcing. High-income OECD countries have been moving into medium and high-technology employment, which is reflected in a faster growth of output and of employment in electrical machinery than in non-electrical machinery. Simultaneously, employment has also been relocated to lower wage countries. This relocation was especially pronounced in the relatively slow-growing non-electrical machinery industries, and it accelerated in the 1990s. Low-income countries were the main beneficiaries, although Eastern Europe and Asia are becoming preferred destinations as firms build regional production networks. However, labour in the South is still struggling to recover its former share in value added. The global decline in labour's share of value added was more marked in the South than in other regions, but the situation was improving in the 1990s.

Parallel to this move into high-technology employment, many high-income OECD countries ventured into labour-saving restructuring that sustained an expansion of output and real wages, in electrical machinery in particular. However, these countries have not yet fully recovered from the job losses that occurred in the sector between 1980 and 1992. Thus, in spite of a few bright spots, performance was globally worse in the 1990s than in the 1980s, especially for the non-electrical machinery industries in high-income OECD countries; reductions in employment and output were more frequent, while wages adjusted sluggishly in both directions. Ironically, several of the best performers in these sectors until recently are now currently struggling with the aftermath of the Asian crisis. Ireland, on the other hand, stands out as an exception with respect to its overall economic performance and is considered by some to be an "emerging tiger".

Aggregate data for the machinery industry provide some evidence that is consistent with a trend towards more flexible labour market arrangements. Working hours, and sometimes overtime, have generally decreased, especially in higher income countries and non-electrical machinery industries. Shorter working hours provided an impetus to reorganize work in order to maintain (or increase) operating hours, especially in larger firms which have more scope to reorganize. Innovative firms have been able to decouple working and operating hours. Thus, in a few countries, the rate of capacity utilization in the sector increased while working hours declined.

More extensive "external" flexibility (i.e. recourse to the market, changing the nature and type of contract) also shows up as a general increase in part-time and temporary employment. In contrast to temporary employment, part-time jobs are still predominantly held by women. However, two developments indicate that more profound changes are affecting the machinery industry. First, most of the growth in part-time employment among men is attributable to prime-age workers, a group which is not traditionally associated with this form of employment. Second, temporary employment seems to have become the normal mode of (re)entry into the labour market for young people in particular. These two forms of employment have also become more widespread in the machinery industry, but temporary work is more common than part-time employment, given the low share of women in the sector's workforce. This contrasts with the pattern found in the economy as a whole.

The gender composition of the non-electrical machinery sector also seems to have influenced the type of working-hour flexibility that has been implemented. Men primarily provide flexibility through overtime and annualized hours, whereas women do so mainly through part-time and casual employment. However, there has been some convergence in gender composition between electrical machinery, which is more feminized, and non-electrical machinery.

External flexibility affects labour turnover. Tenure with the same employer is relatively high in manufacturing in general; but for less educated and less skilled workers, both job tenure and five-year retention rates are low and have been declining; this is consistent with a shift to flexible, high performance and more skill-intensive working systems. Short-term instability in the economy as a whole seems to have increased in OECD countries, but is not reflected in job tenure and five-year retention rates, which do not exhibit a consistent downward trend in overall employment stability. However, participation rates of older men have declined, and this trend has more recently affected a younger cohort, while for women the shift to early retirement has been offset by an increase in their overall participation rate. Finally, greater reliance on external flexibility also seems to have led to a closer alignment of unemployment and business cycles, and can be expected to reduce variability of labour productivity, as has been observed in the United Kingdom, for instance.

In high-income OECD countries, labour's shares of value added are generally lower in electrical machinery than in non-electrical machinery. The same applies to real earnings and supplements to wages (non-wage labour costs), although labour productivity is generally higher. Conversely, in other countries, wages are generally higher in electrical machinery, on a par with the higher labour productivity. It is the more feminized subsector, where gender wage differentials are smaller on average than in non-electrical machinery. However, in both subsectors, it was found that when women's wages reached at least 80 per cent of men's wages, they declined more frequently than in the sample countries as a whole; this suggests that a glass ceiling keeps wages from reaching parity. These patterns might explain in part the more sizeable relocation of employment to low-cost countries that took place in non-electrical machinery. Nevertheless, the slower growth of real wages (and labour productivity) in that sector in high-income OECD countries leads to some convergence between the two subsectors with respect to wages.

High-income OECD countries with high labour costs do not necessarily have high labour shares in value added. In Denmark and Germany high labour costs were compensated by a shift to higher value added production, although most countries where this shift occurred did not have high labour costs. Moreover, countries with similar levels of labour productivity tend to have similar labour costs, regardless of the rate of social contributions imposed on gross earnings. This suggests that some of these social costs are borne by employees in the form of lower relative wages, thus leaving the competitive position of firms untouched. Thus, in spite of a rapid increase in labour costs in low-cost countries, the gap between high and low labour-cost countries has not narrowed; in fact, it is somewhat larger in electrical than in non-electrical machinery.

Employment preservation and creation is a main objective of unions in demanding reductions in working hours in exchange for more flexible arrangements. Such measures, in conjunction with early and phased retirement schemes, have had some success in preventing redundancies. Their employment-generation potential, however, is more limited for several reasons: productivity gains offset part of the reduction in working hours; skills shortages; and hiring practices of firms, which tend to discriminate against long-term unemployed persons in particular. Technological and organizational innovations may also negatively affect employment, although this impact remains difficult to assess. Various technological and organizational changes are involved and their net effect depends on their combined use. Also, the positive indirect impact on employment, due to productivity gains and improved competitiveness, might outweigh the direct negative effect. Nevertheless, in advanced manufacturing as for the machinery industry, reducing working hours is less problematic than in other sectors because productivity gains offer scope for compensating workers.

While there are many large enterprises in the non-electrical machinery industry, the vast majority continue to be very small companies, especially in the machine tool segment, with few companies having over a hundred employees and most averaging much less. The opposite is true for the electrical and electronic industries. Here the degree of concentration is very high, with multinationals from the United States and Japan dominating, especially in computers. Whereas Japanese companies loom large in consumer electronics, half of the manufacturers of telecommunications equipment are European. Nevertheless, in this age of outsourcing and global production networks, the particular competitive position of an individual company does not necessarily mean that its home country will enjoy the same advantage.

Export processing zones (EPZs) are increasingly becoming havens for the production and assembly of electrical and electronic goods under very flexible conditions. EPZs can be thought of as the vehicle of globalization. When global production networks or chains are constructed EPZs provide the links, and with the trend towards decentralized production the scope for zone development is increasing. The liberalization of capital and product markets serve to reinforce this trend, as does the increased need for flexibility in production.

The adoption of more flexible labour practices has tended to make countries and firms more competitive in both the electrical and non-electrical machinery industries. Overall, the countries that emerge as having made the largest gains between 1985 and 1994 are Canada, the United States, the United Kingdom, the Netherlands, Japan, and the Republic of Korea. The picture for France and Germany is mixed, while, for the most part, Greece, Italy and Spain have seen a decline in their competitiveness in the MEE industries. Germany has only recently begun to introduce innovative and flexible labour market arrangements, which therefore may not yet show up in the data concerning competitiveness.

There is a complex interrelationship between a number of factors related to flexible labour market arrangements. In countries where legislation was not considered sufficiently flexible, amendments aimed at deregulation have been introduced. These have related, for example, to lifting the ban on night work for women, extending daily working hours, permitting weekend work, introducing the possibility of less secure contracts of employment, reducing social security benefits, etc. Beyond legislation, collective agreements can open up further areas for flexibilization, as mutually agreed between the bargaining agents themselves. There is a tendency in a number of countries to make the national or branch-level collective agreement more flexible by encouraging plant-level arrangements which may deviate from the general agreement. This continuation of the bargaining process is more difficult to follow because of the vast number of individual plant-level agreements.

The evidence available has shown that with respect to flexibility in the mechanical and electrical engineering industries, much of what is covered by collective bargaining is related to hours of work. While the workers have in many cases secured shorter weeks, this tends to be not on a daily basis but averaged over an extended period of time (whether weekly, monthly, quarterly or yearly). Thus, shorter hours have been granted in return for a more flexible work schedule which may entail longer periods of work (without overtime pay), compensated by time off at a later stage. Movable working hours, however, cannot simply be introduced into factories without a reorganization of the way work is done and the shop floor is laid out. The layout of the factory and organization of work (batch, cellular, flow) are also connected to other concepts such as just-in-time, zero inventory, quality control, etc. In most cases, none of these principles or practices can be introduced without training or retraining.

The advent of flexible manufacturing has also meant the introduction of flexible pay systems. Increasingly there is a blurring of job grades and demarcations and the introduction of single-status contracts. This lower base pay for all is then supplemented with bonuses and other elements that reward the ability to work flexibly and productively and that reflect the company's financial performance. However, incentive systems are related to broader labour market institutions. Shifting to new pay systems -- to match changes in work organization, hiring and training practices -- has far-reaching implications, and cannot be divorced from other elements of employment. New pay systems raise several difficult issues. There is a need for a proper balance between individual and group incentives so as to avoid free-rider problems while encouraging cooperation. The elimination of job grades and hierarchical levels shortens career ladders. Firm-specific training might prove difficult to transfer, especially with the elimination of traditional job classifications. Moreover, new skills that are being sought often do not constitute recognized qualifications. The link between skills and pay might therefore become more tenuous and subject to greater variations across firms and industries.

Unless more comprehensive changes are made, new pay systems may exacerbate the problem of growing earnings inequalities that have been observed in recent years (except in Finland and Germany, where they decreased). OECD countries with the most pronounced overall earnings inequalities also had the highest incidence of low-paid employment. The United States stands out in this respect; here, upward mobility out of low-paid full-time jobs was the lowest among eight OECD countries, although overall it had the largest absolute changes in individual earnings between 1985 and 1992. Higher minimum wages and more generous unemployment benefits do not seem to increase unemployment of youth, women and unskilled workers; this suggests that other factors are more important.

The evidence available shows a need for a more highly skilled workforce in the MEE industries. However, higher skills do not necessarily mean narrow specialization. Generally speaking, employers seem to be looking for workers with a well-rounded education, open to troubleshooting and problem-solving, who can communicate effectively with colleagues and clients. This presupposes an aptitude for teamwork, job-sharing and job rotation. In other words, workers are being asked to assume greater responsibility in taking decisions over matters that affect them and their work.

Teamwork and other flexible work practices require multiskilling and a willingness to work with others, attributes which can be sought in new recruits, but which may not be present in an existing workforce. In this case extensive retraining, whether internal, on-the-job, or external, is essential.

Generally speaking, the introduction of new work practices such as JIT and TQM/TQC cannot be fully implemented without providing employees with training and information. When firms are not able to provide sufficient training to their employees, as is more likely to be the case with smaller firms, public and private training institutes may be an alternative. In such cases, however, close discussion between the firm and training institutes tends to make the training more effective than it would otherwise be. For workers to obtain and hold more secure employment, training needs to be provided throughout their entire careers, i.e. from initial training as an apprentice to further training by the firm or at training institutes. Both schools and vocational training institutes have a role to play in providing trainees with transferable and durable skills and attitudinal requirements. Since highly skilled workers adapt more easily to changes in technologies and work practice, employers are inclined to provide the former with further in-plant training, which may lead to increased polarization of high and low-skilled workers. Collective bargaining may serve to limit this tendency.

Current taxation and social security systems are not well adapted to new, more flexible forms of employment, in particular more extensive numerical flexibility. It can therefore prove difficult to maintain coverage and entitlements as workers move between employers and different employment statuses: unemployed, salaried employment, self-employment, and temporary or part-time jobs that may not provide coverage. Remedying these shortcomings, however, would call for comprehensive reforms and coherence among policy instruments.

Suggested points for discussion

Employment and training

1. What factors cause companies to initiate more flexible work arrangements? What role do governments have in creating an enabling environment?
2. What steps can technical and vocational institutes take to develop the wide range of skills that are better suited to today's increasingly diversified workplace, such as entrepreneurial outlook or interpersonal skills? What are the employment prospects for those workers who do not fit into high-performance workplaces? How can the curriculum and schedules of training institutes be adapted to the demands of workers who are now available during less predictable and shorter time slots as a result of more flexible work schedules? What pedagogical skills do equipment suppliers need in this new situation? Although in-plant and modular training -- tailor-made to the requirements of the task -- is gaining in importance, smaller firms may not have the resources to provide it. What arrangements can be envisaged to enable them to offer such training opportunities to their workers?

Industrial relations

3. How does the move in some countries to more decentralized collective bargaining in the MEE industries affect national labour standards? What implications does decentralized bargaining, or individual contracts, have for central employers' and workers' organizations? What steps are needed to ensure that workers at the local plant level have the necessary information and skills to engage in bargaining?
4. What role should trade unions play in communications between management and the workforce in the MEE industries, especially with respect to decisions regarding restructuring?

Conditions of work

5. What implications do arrangements for flexible working time -- such as annualized hours -- have for labour-management relations and for the future of wage policy (especially if overtime is compensated with hours off instead of pay)? What measures are needed to protect workers in cases of premature termination of contracts or plant closures before hours credited to their "time accounts" can be taken?
6. With the reduction of working time in some countries (e.g. to 30 or 35 hours a week) what measures are needed to guarantee that wages and salaries (especially for lower paid workers) are sufficient without resorting to overtime?
7. With the introduction of increasingly flexible working time arrangements -- rotating shifts, variable hours, weekend work, workers "on call", etc. -- what measures are needed to permit workers in the MEE industries with family responsibilities to have sufficient predictability and to allow all workers to enjoy an adequate social life?
8. For MEE workers whose employment status frequently changes between unemployment and periods of part-time, temporary, or even full-time work, what steps are necessary to ensure that they enjoy social security coverage comparable to that of regular workers and that their acquired rights are adequately protected with respect to pensions, healthcare and unemployment insurance?
9. Although it can be argued that many practices associated with flexible manufacturing systems, such as job rotation and multiskilling, may lead to increased responsibilities (such as preventive maintenance and quality control), thereby breaking the monotony of repetitive tasks and resulting in greater job satisfaction, it can equally be maintained that the intensification of work with the reduction of idle time, the frequent switching of tasks and work on unfamiliar machines may at the same time lead to stress and increase the likelihood of accidents. What evidence is there to support either hypothesis so that measures could be undertaken to reach an optimal situation?
10. The ability of smaller firms in the mechanical and electrical engineering industries to decide on flexibility for themselves is shaped by delivery schedules to the larger firms they supply (such as those in the automotive industry). What measures, if any, should be envisaged to limit the hours worked by workers in such supplier firms?
11. To what extent has the introduction of flexible labour market arrangements had an impact on productivity and competitiveness?

Export processing zones (EPZs)

12. What is the relative importance of different types of flexibility in attracting enterprises to export processing zones, such as numerical flexibility, working hours, wages or restrictions on freedom of association?

Role of the ILO

13. In order of priority, what measures should the ILO take to assist its constituents in the MEE industries to meet the challenges of flexible labour market arrangements?

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