University of London Varieties of Capitalism Paper

QUESTION
Required:
You are required to write a 2000 words (+10%) essay on one of the following topics:
 

• Critically analyse the Varieties of Capitalism (VOC) approach and discuss its strengths and limitations within the context of employment relations.

 
NOTE: Your answer should include related key concepts, issues, theories, examples and research evidence.
 
You need to discuss:

• The Varieties of Capitalism approach
• Its main features and examples of countries
• Implications for employment relations and HR
• Strengths and advantages
• Its limitations

 
You must provide examples to support and illustrate your arguments. For example, the USA and UK are examples of LMEs

• What are the main features of these economies
• How does this affect employment relations systems in these countries
• What are the implications for companies wishing to invest in these countries.

What about CMEs such as Germany

• What are the main features and implications for employment practices and MNCs wishing to invest in Germany
• How helpful is the analysis of these economies for businesses
• What are the limitations etc

Varieties of Capitalism:

• Two types of economy;
• CME (Coordinated Market Economy) such as Germany
• LME (Liberal Market Economy) such as the US and the UK

Convergence

• As capitalism develops, the economies of different countries tend to become more similar
• Because…..over time countries naturally select the models which yield the best results
• Globalisation pushes for convergence between counties
• But, Hall and Soskice argue institutional differences in different countries limits this convergence and pushes more for divergence

 
Divergence

• Hall and Soskice in identifying different Varieties of Capitalist economy argue that different economies are generally ‘path dependent’. i.e. the changes they adopt over time are likely to be shaped by their own particular models.
• Hence, far from converging, European economies are actually becoming more different

 
 
For example: changes both in the UK and Germany but still differences
The UK
Since 1979, the IR system has experienced substantial change from a voluntarist system to one of increased state intervention
Despite increased juridification, there is still not a strong and centrally regulated IR system. This has resulted in employer autonomy to pursue either a:
– low-road/contract approach of cost-minimisation (majority approach)
– high-road/status approach of high-commitment
 
Germany
Traditional highly integrated, highly regulated, ‘dual system’ is eroding.
Since 1990s, changes to the key institutions and procedural rules have led to greater variation in ER practices and an increasing resemblance to the Anglo-American model, though complete convergence is unlikely
Decentralisation –balance of power between unions and employer associations, and employers and works councils has shifted as the scope of negotiations at the enterprise level has broadened
 
The Core Difference between CMEs and LMEs
 

• CME institutions are there to encourage cooperation between economic actors,
• LME institutions are there to encourage competitive market-based relationships between economic actors
• However, the important thing is the nature of the relationships between firms and other economic actors

 
 
 
 
Five Actors
Five areas in which these relationships are needed:

1. Industrial relations (i.e. bargaining mechanisms)
2. Vocational training and education
3. Corporate governance
4. Inter-firm relations
5. Employees (i.e. participation, consensus-building, etc)

In each of these categories, firms must find ways to coordinate to maximise their capabilities, but they find very different ways of doing so
 
LMEs

• Tend not to provide for collective bargaining
• More decentralised, adversarial and voluntarist industrial relations systems
• Likely to appeal to governments to enhance managerial power over unions in the workplace
• Highly generalised systems of education and weak apprenticeship programmes and little commitment to enable industry-specific or firm-specific training schemes.
• Transferable skills rather than industry specific
• There are strong hierarchies in LME corporate governance answerable to shareholders

LME

• There is little effort to coordinate with others to develop mutually beneficial industry norms.
• There is very rarely any encouragement towards employee participation and consensus-building
• Power is more likely to rest unilaterally with the CEO
• Inter-firm relations are competitive

 
CME

• Key issues are more likely to be addressed through non-market based coordination
• Centralised bargaining regimes- perhaps on the national level (e.g. Sweden) or else on the sectoral level (e.g. Germany)
• More likely to coordinate their training expectations in the longer term e.g. employers in a CME engineering sector might collaborate to develop a list of skill requirements, and then cooperate with government in developing specific training programmes geared towards these priorities

 
CME

• Firms are expected to cultivate corporate governance that furthers these norms; managerial unilateralism in pursuit of shareholder value is frowned upon. Financial investments in companies tend to be more ‘strategic’.
• A strong reliance on employers’ associations and dialogue between firms; cooperation between firms to develop industry-wide standardisation
• An emphasis on employee consensus e.g. German Works Councils which have responsibility for various issues of work organisation at shop floor level

 
So VoC’s

• Are interested in the reciprocal relationships and expectations that develop between firms and the state/organised labour for strategic purposes.
• Are concerned with how institutions can encourage the kinds of strategic interaction appropriate for the type of economy. A key question is why firms would buy into the kinds of coordination discussed above with CMEs (or in the case of LMEs, why they wouldn’t).
• Is it the role of the state to facilitate and encourage the appropriate kind of interaction between firms?
• Should the state provide incentives for interaction between firms?

 
Employer Associations

• Extremely important actors in this analysis
• Their role can be massively different in different economies e.g. The CBI or IoD in Britain wanted trade unions to be crushed, and have lobbied MPs to this end.
• However, CME equivalents play an integral role in developing training programmes, standardisation regimes, employment norms, industry strategies, etc.
• What about Employer Associations in other countries?

 
Complementarity and Comparative Advantage

• LMEs and CMEs have their own systems and their own advantages
• LME: better economic performance may demand policies that sharpen market competition
• CME: may benefit more from policies that reinforce the capacities of actors for non-market coordination
• State strategies and firm strategic interests are bound together in a reciprocal and self-reinforcing way
• Distinction here is between ‘radical innovation’ (LME) and ‘incremental innovation’ (CME)

LME
In LMEs, companies are more responsive to unilateral managerialism so:

• They don’t bother so much about taking risks with employees’ jobs,
• They don’t have to plan in advance what kind of skills they are going to need,
• They don’t have to cooperate with other firms over standardisation regimes

Hence, they are suited to a ‘radical innovation’ model in which it is relatively easier to begin new projects which are disconnected from things that have gone before. 
 
CME
The reverse is true in CMEs. Because:

• They need to get employees on board
• They need to adhere to standards and training regimes, etc

Eg The Japanese model of Total Quality Management in which shop-floor employees are a key part of the quality control process
Hence CMEs are more inclined to the gradual improvement of the quality of existing products and ‘Incremental Innovation’
 
Institutional Complementarity

1. The co-existence of two or more institutions enhances the functioning of each institution
2. A situation of interdependence among institutions
3. The degree of institutional diversity that can be observed across and within socio-economic systems, and its consequences on economic performance

Institutional Complementarity

• Hall and Soskice argue that rather than there being one “best” set of institutions, there are certain sets of institutions in the economic and the political realm that fit together better than others – they form “institutional complementarities”.
• They distinguish “liberal” from “coordinated” market economies in which mutually related mechanisms reign with regard to areas such as industrial relations between employers and employees (or unions), institutions for vocational training and education, corporate governance, or inter-firm relations
• Institutions: the market, state, MNCs…

 
Criticisms of V0C
Over simplified and Generalised:

• Divides the world into two models
• LMEs and Radical Innovation: future focused industries?
• CMEs and Incremental Innovation: declining industries?
• Marginal differences between radical and incremental eg. new products or improved products

What problem do economic systems solve?

• Lack of coordination
  • Industrial relations: tendency to compete for workers => wage-price spirals
  • Vocational training and education: why invest if other firms will just poach
  • Corporate governance: how to ensure that finance goes to right places
  • Inter-firm relations: risk of exploitation in R&D, technology transfers, standard setting
  • Employees: how to get them to cooperate

 
Which is Better?
Be careful of generalizing current trends:

• 1950s-1970s: Germany and France strong, US and UK sluggish
• 1980s-1990s: US and UK grow quickly, France and Germany sluggish

• Does this mean liberal model is better?
• Or coordinated model?

 
Liberal Market Economy
Fundamental principle: Market relations between firms and between workers and firms

• Raising investments: international and domestic capital markets
• Corporate governance: outsider control, shareholders
• Industrial relations: pluralist, few collective agreements
• Education and training: general skills, high spending on R&D
• Transfer of innovation: markets & contracts, movement of workers

Logic of LMEs
Privilege creative destruction, innovation, and flexibility

• General skills means that workers can be quickly redeployed
• Weak unions and pluralist labour relations restrains wages and maintains flexibility
• Stock market and takeovers discipline firms

Problems of a Coordinated Market Economy
Firms depend on highly skilled labour force and long-term plans

• But this creates dangers:
  • Other firms can poach workers after trained
  • Workers can hold management hostage because hard to replace
  • Workers will only invest in specific skills if guaranteed a job
  • Other firms can steal projects while being developed
  • Investors get cold feet

Solutions in CMEs
Long-term relations with banks

• Firms don’t have to change path with daily changes in stock market – can retain skilled workers even in downturn
• Financers have access to inside information, not just public reports

Long-term job contracts, publicly subsidized training, industry-wide wage settlements & work councils

• Little incentive to poach workers – wages same
• Workers willing to invest in skills – guaranteed jobs

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