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|lPolkyRoh 1 WRPS 1earc

WORKING PAPERS

Education
andEmployment

Education
andSocialPolicy
Departmnent
TheWorldBank
February1993
WPS1099
Public Disclosure Authorized

Trade Unions and

Collective Bargaining
Public Disclosure Authorized

HarryC. Katz
SaroshKuruvilla
and
LowellTurner
Public Disclosure Authorized

The ability of developingcountries and the new transitional

economiesto competein the globalmarketplacewill depend on
their ability to transformindustrialrelationspoliciesinvolving
trade unions and collective bargaining so that they promote
flexibility in the workplaceand encouragethe fornation and
effectiveuse of human resources.

ThcyRcsrcWoing Ppcdiabtethcfindugof woknpwgessand eaew pthecxchangcofideasamongBankstaff

andaUlheintcrstcdindevelopmentiscs Tescpapet distbedby teRescah AdvysSutfcarythcenamcs oftheauthou.
eflectdytheuview.andshldbeusedanditedwgly.Ther,din tionanduonsarethcauthnown.They
shouldnot bc attuNtd to the Wodd Bank, it Bourd o Dims, its managnmc or anyof its mcmber coumtiies
 PolicyResearch

Educationand Employment

WPS 1099

This paper - a product of the Education and Social Policy Department - is part of a series of state-of-
the-art studies on employment and labor market issues and reform programs. Copies of this paper are
available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact ESP, room
S6-035, extension 33680 (February 1993, 39 pages).

Katz, Kuruvilla, and Turner assert that changing
world markets and new technologies are driving
industrial restructuring. The ability of developing
countries and the new transitional economies to
compete in the global marketplace will depend
on their ability to transform industrial relations
policies involving trade unions and collective
bargaining so that they promote flexibility in the
workplace and encourage the formation and
-ffective use of human resources.
History has shown, they say, that there are
certain key moments of transition in industrial
relations systems. After that time, systems get set
and are hard to mcdify. Often these key
moments are the result of legislative changes
(such as the National Labor Relations Act and
the emergence of public sector unions after the
burgeoning of public sector legislation ir- mae
United States). Sometimes they are the result of
key historical or economic junctures (such as the
postwar reconstruction in Japan and Germany,
and independence movements in the developing
world).
Recent pressures for structural change in the
developing world present an opportunity for
major transitions in industrial relations.
Drawing on the Japanese and German
experiences, as well as experiences in the
developing world, Katz, Kuruvilla, and Turner
focus on lessons that can be applied in guiding
this transformation.
Worker participation in decisionmaking,
they contend, is critical for bringing about the
essential popular acceptance of changes that will
come with industrial restructuring.
It is also important to coordinate and inte-
grate industrial relations policy with other social,
legal, economic, and educational policies. The
education system, for example, should not be
overproducing college graduates when there is
an undersupply of unskilled and skilled workers.

The PolicyResearchWorkingPaperSeriesdisseminates theftndingsof workunderwayin theBank.Anobjectiveofthe series

is to get these findingsout quickly,even if presentationsare less than fully polished.The fndings, interpretations,and
conclusionsin these papersdo not necessarilyrepresentofficialBank policy.

Producedby the Policy ResearchDisseininatica Center

 Trade Unions and Collective Bargaining

HarryC. Katz,SaroshKuruvillaand LowellTurner

NewYork State Schoolof Industrialand Labor Relations

CornellUniversity

Thispaperis preparedfor the Educationand SocialPolicyDepartmentof the WorldBank. It is part of

a seriesof studiesto improvelaborpoliciesfor managingthe socialcostof economicadjustment.
 Tableof Contents

Introduction:TheEconomicContext .................................... 1
IndustrialRelationsIssuesin DevelopingCountries........................... 3
TheEconomicContext .3
IndustrialRelationsCharacteristics .5
ThePressureson IndustrialRelations.10
BasicPrinciplesof Lawand Institutions.12
TheNeedfor Unions,the Rightto Strike,and Colletive Bargaining. 12
IndependentMediationEntities.14
ProperUnionRoles.15
WorkplaceRepresentation .16
WageSettingand BargainingStructure.18
BargainingStructure.18
TheDisadvantages of FragmentedBargainingStructure.19
TheVirtuesof CoordinatedBargaining.19
TheVirtuesof AnnualPayAgreements.20
TheOccupationalScopeof BargainingStructure.21
RecentMovementto MoreDecentralized BargainingStructures.21
WorkplaceIssues ........... 22
RecentRestructuringin IndustrialRelations.23
ContingentCompensation.23
TeamSystems.................. 24
EmployeeInvolvementin DecisionMaking.25
Difficultiesin DiffusingParticipation. 25
EmploymentSecurity.28
TheNewIndustrialRelationsand the ThirdWorld .29
Trairning
andWorkForceSkilland CareerDevelopment.30
TheNeedfor GreaterInvestmentin Training.30
TheGermanTrainingSystem.31
TheExtensiveJapaneseOn-the-JobTraining.33

TheMismatchBetweenSocial,Educationaland IndustrialRelations
Policiesin DevelopingCountries.33
Conclusions.35

References....... ... ............................................

37
 A. Introductlon: The EconomicContext

We live in an era of industrialrelations reform and transformation. This is true across a

wide range of advanced, newAyIndustrializingand developing countries. While thirty years ago it was

commonplace among social scientiststo assume that in the long run other countries would converge on

variants of the 'most advanced" U.S. model of collective bargaining and industrial relations, this

assumption has been swept aside by history. The rise and successof verydifferent models in countries

such as Japanand Germanyhasdemonstratedboth a cross-nationaldiversityof stable industrialrelations

pattems and new lessons regarding what does and does not work. The purposeof this paper is to draw

out, from both more and less successfulrecent cases,somecontemporarylessonsfor industrialrelations

reform efforts, especially for developing countries, and for the transitional economies of Central and

EasternEurope.

The importantstarting point is a recognitionof the impact of changing world marketsand

new technologies in driving industrial restructuring and industrial relations transformation. Above all,

perhaps, the rapid growth of Japanese economic strength, rooted in part in a successful system of

enterpriseunionismand shopfloor teamwork,has put pressureon firms in other countries to reorganize

production and work and to seek some kind of unewindustrial relations." Within Europe, not only the

advent of Japanesecompetition but the relative success of German industry and industrial relations,

along with the more recent 'relaunch"of Europeaneconomic integration,has pressuredBritish, French,

Italianand Spanish(among other) firmsto reorganize. Everywhere,intensifiedworld market competition

has called into question established relationshipsand ways of doing things, and called forth managerial

imperativesto raise productivity and product quality, achieve new flexibility, and cut costs.

At the same time,and closely related,the past fifteenyears havewitnesseda rapid spread

of new microelectronictechnologies in the workplace. "New production concepts,' often based on the

new technology, aim to make more flexible use of labor, both in the products produced and the process.

As managersdemand more responsibilityfrom (and sometimesevengive "semi-autonomy"to) individual

workers and groups of workers, traditional labor-managementrelationshipsare called into question.

 2

So widespreadare these changesIn the modemworkplace,especiallyin advanced

societies,that manyhavedeclaredthe era of Fordismat its end. "Post-Fordismahas beenvariously

definedandlabeledas flexiblespecialization,
flexibleautomation,leanproduction,anddiversifiedquality
production,to namea few. Criticshavecalledi neo-Fordismm
or management-by.stress,"
implyinga
more sophisticated
form of mrnanaerial
controloverthe workforce(Parkerand Slaughter1988). But
howeverone interpretsthe newdevelopments,
thereis generalagreementthat themodemworkplace
is undergoingmajorchanges.Partandparcelof thesechangesisa widespread
rethinkingof established
pattemsof industrialrelations.

In some cases,employershavegoneon the offensiveagainstunion influencethat is

perceivedto defendrigidiiesin the workplaceand standIn the way of nAcessary
work reorganization.
In other cases,employershavesoughta newcollaborativerelationshipwith entrenchedunions;and

sometimesthesecondstrategyhasfollowedthe first. Unions,for their part,havein somecasesfought

againstthe changesand defendedthe traditionalways on whichtheir poweris based. But in other
cases,unionshavedemonstrateda willingnessto cooperateIn new ways,both to savejobs and to
promotethe human-sidebenefitsof moreflexiblework organization.And in some cases,wherethey
havenotbeenexcluded,unionshaveplayeda proactivereformistrole,pushingmanagement
towardnew
formsof organizationsuchas groupwork.In addition,thestate,throughpublicpolicy,hasoftenplayed

an importantrole (throughregulation,deregulation,or other policychanges)in promotingindustrial

relationsreform.
In the interactionof world mnarket
changes,new technologies,and the strategiesof
governments,employers,and unions,there is, theretore,considerablefermentationand change in

contemporaryindustrialrelationsin advancedsocieties. For differentreasons,althoughnot wholly

unrelated,there is also pressurefor changeand in somecasesfull-fledgedtransformationwithinthe

newiyindustrialized
countries(NlC's),somedevelopingcountries,andthe variouscountriesof Eastem

Europeandthe formerSovietUnion. In this periodof uncertainty,

trial and error,and change,there is
alsoa greatdealof cross-national,
intertirm,andinterunioncommunication
andexchange.No onewants
 3

to reinventthe wheel;less successfulfirms and countriesattemptto leamthe lessonsof the more

successful,especiallyJapanandGermany.Sortingoutthepositiveandapplicablelessonshasbecome
a majorpreoccupation
for managers,
andto a lesserextentforgovemments
andunions.Theopportunity
T ) practiceis one of the
to leamand combinelessonsfromvariousversionsof successful(if not 'best
benefitsof Intensecontemporaryprocessesof economicglobalization.

Nowhereis this needgreaterthanamongdevelopingcountriesand the emergingand

unstabledemocracies
of EastemEuropeandtheformerSovietUnion.Wewantto emphasize,however,
at the outset:it is not possibleto transplantanothermodel,eitherdiscreteelementsor the modelin its
entirety. In everycase,it Is necessaryto build on existingpracticesand institutions,or institutional
remnants.Howthe lessonspresentedin this papercanbe adaptedfor specificuse in specificnational
settingsIs a matterfor carefulcase-by-case
studyand experimentation.

B. IndustrialRellatonsIssuesIn DeveloDinaCountris
Thechangingeconomicenvironment
confronting
thirdworldcountriesmakesit Imperativf,
that theytakeimmediatedecisionsregardingindustrialrestructuring.

The EconomicContext

In the 1980s,the U.N.GeneralAssemblyseta targetof 7 percentfor third worldgrowth.

Thistargetwas basedon estimationsthata 7 percentgrowthratewasthebareminimumfor developing

economiesto providebasicneeds(food,shelter,clothingand education)of theirpopulations.However,

the recordafter 1960has beendisappointing,as most developingcountriesplungedinto deep and

continuingeconomiccrises(Singh1992). On average,GDPgrowthratesduringthe 1980swerewell

below5 percentanda numberof countriesexperienced

substantialdeclinesin nationalincome.Although
Africaneconomiesgrewat 3.5percentbetween1960-73,
therateof growthwas 1.3in 1981,andnegative
thereafter.Mexico'sGDPgrewat 7 percentbetween1977-1981,
but 1982-1988
saw negativegrowth.
Estmates(afterGDPfiguresare adjustedfor termsof tradeand net factorpayments)indicatethat the
 4

averageper capita Incomein LatinAmericancountries was lower by 15 percentand for Africancountries

lower by 30 percent in 1989, relativeto 1980. Real wages in Africa have declined by about 20 percent

and in Mexico, by almost 50 rercent between 1982 and 1987. The inability of third world countries to

competein world manufacturinighasalso resultedin deindustrializationin many countries (e.g.,Tanzania,

where manufacturingproduction shrank by 25 percent during the 1980s).

Theseeconomic pressureshaveforced developingnations into increasedindebtedness,

resulting in an increased burden of debt servicing. In the 1980s interest payments for most Latin

American and African countries comprised about 30 percentof the national budget, seriously affecting

ability to import necessarycapital and technology for production and exports. Sachs (1990) suggests

that the collapse of living standards in the third world in the 1980s(he calls the 1980sthe lost decade

of economic development) is intimately related to the extemal debt crisis and shows that economic

performancehas been disastrousin countriesthat experienceddebt servicedifficulties. In addition, there

was in the 1980sa net outflow of capitalfrom the third world, in spite of large transfer paymentsvia aid

into the third world.

Exceptionsto this bleak scenario are the experiencesof some Asian countries (mainly

the newly industrializingcountries),which showedincreasesin GDPgrowth rates and per capita income,

and achievedboth ILO and U.N. targets. The three main featuresthat appearto account for the dramatic

relativeeconomic success of the Asian nations are: economic structure,economic and industrialization

policies, and lower indebtedness (thus insuring relative protection from changes in world interest rates)

(Singh 1992).

Experts by and large agree that both extemalfactors (world interestrates, terms of trade

that discriminateagainst developingcountries) and flawed domestic colicies are important in explaining

economic decline, although there is debate regarding the relative impact of both. There is, however,

consensus that the central problem for these countries is that & nigh long-term rate of economic growth

is an economic and social imperative.There is also consensus that developing nations are not likely to

reach target growth rates of 7-8 percent withoutfundamentalchanges in the structureof their economies
 5

and economicpolicies. Finally,there is consensusthatthesecountriesneedto improvethe utilization

andmanagement
of theirhumanresources.F'fectiveIndustrialrelationspracticesareneededto achieve
thoseends.
Thekeyaimsof an industrialrelationspolicyshouldbeto fosterstableand participatory
labor-management
relationsso as to facilitateflexibleadaptationsin responseto changingeconomic
environments.Industrialrelationscharacteristics
canhinderthedevelopment
of stableand participatory
labor-management
relationssystems.

IndustrbalRelatlonsCharacteristics
Althoughindustrialrelationssystemsindevelopingcouintries
arediverse,theyoftenshare
certaincommoncharacteristics
that inhibitthe developmentof successfulindustrialrelationspractices.
An illustrative(notexhaustive)
listof such characteristics
includesa centralrolefor the statein economic
planningand industrialrelationsregulation,weak and politicalunions,unwieldydispute resolution
mechanisms,inappropriate
unionandbargainingstructures,thefrequentabsenceof genuinecollective
bargaining,and poorlyeducatedworkforces.
TheStateand IndustrialRelationsPolicy. Thestateis the majoractor in the industrial
relationssystemsof developingcountries,and from a conceptualstandpoint,state policy can be

classifiedintotwo primaryapproaches,the "equityapproach"andthe "efficiencyapproach."It mustbe

remembered
thattherearesubstantialvariationsinthirdworldindustrialrelationspractices,andthatthese
approachesare perhapsoversimplifications,
butare usedherefor illustrative
purposes.Manycountries
haveelementsof both approaches.
The "equity" approachaccepts the principlesof free collectivebargainingand is

characterized
by protectionistlaborlegislationand socialwelfarepolicies. Protectivelaborlegislationis
extensiveunderthis regime,and impingeson the employer'scost and flexibility.Typically,protective

legislationincludes:restrictionon layoffswithsubstantiallayoffcompensation
to be paid(e.g.,halfsalary
forfirst90 daysin India);govemment-required
permissionto closeplants;therequirement
to giveunions
 6

extensivenotice beforealtering plant operations;unfetteredtrade union rights:wEltfareregulations

mandatingtheprovisionof food at subsidizedratesandday carefacilitiesat all Industrialfactories;and
legislationmandatingextensiveemployer-paid
benefits.
a politicalbargainbetweenunions
Themotivationfortheequityapproachoftenrepresents
who wereperhapspartnersin thestrugglefor independence,
and rulinggovernments, but alsoreflects
reactionto populistpressures,and the needfor legitimacygainedfrom ILO membership.A partial
justificationfor the equity approach is that in the absenceof govemment-runsocial securityand
programs,andweaknesses
compensation
unemployment employersmustbear
withinlabormovements,
policy,with
the cost,andlaborshouldbe protected.Adoptionof an importsubstitutionindustrialization
substantialprotectionfor domesticindustriesfom intemationalcompetition,furtherreinforcesthe equity
approach.ManyformerBritishcoloniesin AsiaandAfricaexemplifythisapproach.Itis importantto note
that the equityapproachis notalwaysequitablewithineachcountry,as thesepoliciesoftenapplyonly
to the modemindustrialsector,oftena verysmallpartof developingeconomies.
The "efficiency"model, on the other hand, providesentrepreneurswith considerable.
freedomoverlaborissues.Althoughlaborwelfarepolicies(workinghours,minimumwages,prohibition
of childemployment)are perhapssimilarto the policiesof countriesfollowingthe equitymodel,in the

efficiencyapproachtrade unionrightsare restricted.Examplesof theserestrictionsinclude: prevention

of unionsfrom politicalactivity;curtailmentof the scopeof collectivebargaining(unionsrestrictedfrom

bargainingon promotions,transfers,job assignments,
layoffs,hiring,etc.);prohibitionagainststrikes;

banningof unionsin certainareasof theeconomy(e.g.,in exportprocessingzones);andnoncompliance

withvariousILOresolutionsregardingthefreedomof association.
Theefficiencymodelappearsprevalent
in countriesthat haveadoptedan export-oriented
industrialization
policyduringthe 1970s(e.g.,South

Korea,Taiwan,Malaysia,Philippines)(Deyo1989).
It is importantto notethat countriesoftenfollowboth approachessimultaneously.
Many

countriesenactprotectionistandwelfare-oriented
policiesconsistentwiththeequityapproach,butrestrict

trade union rights.Africanexamplesof this dualityincludethe following:govemmentsin Zambiaand

 7

BurkinaFasohavearrestedunion 'oaders:the Nigeriangovernmenthas restructuredunionsand the

Nigerianlaborcongresswas dissolvedin the 198Ws;
wageceilingshave beenimposedin Tanzania,
Nigeria,and Kenya;the subjectof bargaininghas beenrstricted In Zambia;and manyother countries

haveintroducedstructuralreformsof tradeunionsvia legislation

designedto reducetheirinfluence(e.g.,
Algeria,Egypt,Ethiopia,Nigeria,Tanzaniaand Zambba).

Both approacheshave their problems.The equity approachcan be praisedfor its

enlightened
socialprotectionandadherenceto theprinciplesof freedomof associationenshrinedin ILO
conventions.However,it can be criticizedfor is excessive laborprotection,excessivepoliicizationof
unions,unfetteredtrade union rights,and impositionof socialcostson the employerthat impingeon
competitiveness
and adaptabilityto changingenvironments,

The efficiencyapproachIs advantageous

sinceit oftenappearsto be integratedwith
industrialization
strategiesnecessaryfor rapideconornicdevelopment.Yet,i; can befaultedfor Utslabor
suppression,which,overthe longterm(e.g., SouthKorea)resultsIn conflictand the destabilization
of
industrialrelations.Whatis important,and whatthird worldcountrieshavenotachieved,is an industrial

relationspolicythatbalancesthetwoapproachesandis Integrated
withthebroadereconomicandsocial
policiesthat are neededto meetdevelopmentobjectives.

Unionsand Politics. Thepolitial characterof unionshas beenwelldocumented(e.g.,

Essenberg1981). In muitipartydemocracies(e.g.,India),politicalpartiesdependon trade unionsfor
support, and in single party democracies(many African nations),unions face pressuresto align

themselves
withthepartystructure.Theweaknessofthirdworldunionsvis-a-visemployersforcesunions
to pursuemethodsto gain what they cannot accomplishvia traditionaleconomicand bargaining

methods.

Thispaperdoesnotarguethattradeunionsshouldnotpursuepoliticalactionto achieve
their goals. Rather,we wam againstexcessivelypoliticalunions,and the subordinationof economic

objectivesand methodsto politicalobjectivesand methods.Excessivelypoliticalunions inhibit the

 8

developmentof stableunion-management
relations.Twounfavorableoutcomesof excessivepolitical
unionism,usingIndiaas an example,are cited below.
Unlonleadershipin Indiaisa steppingstoneto partyleadership.Aspiringpartyleaders

also serve as electedleaders of the local trade unions in firms wherethey are not employed.
Consequently,union policiesreflectthe prioritiesof the politicalparty,and are not sensitiveto the
economicsituationof the localfirm. It is common,for instance,for politicalpartiesto call nationwide
strikesfor politicalreasonsthat havelittleto do witheconomicissues(Ramaswamy
1983).
Indianlawallowsmultipleunionsin enterprises.
Sinceeachpartyhasits owntradeunion
wing,thereare multipleunionsin eachenterprise.Sinceeachunionstrivesto increaseits membership,

thereis constantcompetitionfor membershiployalty. Workersin the plantsshifttheir allegiancefrom

unionsthat fail to deliverto unionsthat promiseto do so. Giventhis interunionrivalry,stablelabor-
managementrelationsdo not develop. For stabilityto develop,a single bargainingagent in each
enterpriseis required.Yetlegislativeeffortsin tiis directionhaverepeatedlyfailed,giventhatthis is not
in the interestof competingpoliticalpartiesand unions. Multi-unionism
(alongwith the constitutional
nroceduresthatmandateannualunionelections)thustypicallyrequiresIndianmanagement
to negotiate
with a differentset of leadersat erch contractrenewal. Giventhis, alongwith the politicalnatureof

unions,managements
havelittleincentiveto investin developinglongtermrelationships
withany single
union,and unionleadershavelittle incentiveto pursuelongtermpoliciesthat meetfirms' needs.

WeakUnions.A numberof characteristics

interactin mostthirdworldindustrialrelations
systemsto produceweak unions,which hinderthe establishment
of genuineand stable collective
bargaining.Thesefactorsinclude:therelativelysmallindustrialsectorthat is usuallyorganized(typicaliv,

theunorganized
informalandagriculturalsectorsare muchlargerthantheindustrialsector);therelatively
uneducatedlaborforcewhichcan be manipulatedby leaderswho havegoalsdifferentfromthoseof the

membersand the firm (e.g., the incidenceof nsweetheartcontracts"is estimatedto be 20 percentin

India);theexistenceof multi-unionism
whichservesto fragmentthelabormovementnationallyandatthe
workplacelevel; the absenceof legislationpromotingsingle bargainingagentsinsidefirms and an
 9

orderly bargainingstructure; repressivestatepoliciesthat grant decertificationand deregistrationpowers

to govemment officials;successful employeropposition to union formation; government persecutionof

labor leaders; the absence of a unified employersassociation that could inspire stable industrial level

bargaining; and union constitutionsthat mandateunion elections on a yearly basis thus preventingthe

developmentof long-term plans by union leaders. Needlessto say this list only highlights some of the

problems leading to weak unions. It is relevantto note that union densities in developing countries

(calculatedas a percentageof the non agriculturallabor force) ranges from 1 percent (e.g., Upper Volta.

Haiti) to about 25 percent (e.g., Argentina),with the mean well under 20 percent (Kurian 1985).

Weak unions imply unstable industrial relations as managementsuse their power to

restrict unions and are able to push through agreementsthat leaveworkers unsatisfied,leading to shop-

floor conflict. Consequently,unions turn to the political resolutionof issues that cannot be s3lved via

bargaining. As a result, unions rely moreand more on dispute resolutionmechanisms,particularlysince

their weaknessleadsthem to push everygrievanceto a disputa for fear of otherwise losing membership.

In this environment,unions cannottake a long-termviewof the labor-managementrelationshipas all their

energiesare focused on sh-ortterm issues. Meanwhile,employershavelittle incentiveto deal with weak

and therefore,unreliableunions. Thus, there is littledevelopmentof the trust and cooperation necessary

for quality production, flexibility, and long term stable labor relations.

DisDute Resolution Systems. An effective dispute resolution system encourages the

partiesto reach bilateral solutions to disputes, therebyenhancingthe developmentof a stable collective

bargaining relationship. Most third world systems, however, have the opposite effect: they produce

excessivereliance on third party intervention.

Many dispute resolutionprocedureshave been inheritedfrom the colonial occupiers, or

have been adapted (often selectively)from successfulmodels in the industrializedworld: often they have

been designed primarily to stop interruptions in the production process (Damachi 1986). Although the

range of mechanismsvary, a few central characteristicsare common to developing countries.

 10

Mostdisputeresolution
procedures
Imposeiimitationsonstrikes.Ratherthanallowunions
to usetheir economicstrength,strikes2re curtailed.For example,workerscannotcontinuetheir strike
whilea disputeis underconciliation,mediation,arbitratonor is beingdecidedby a laborcourt.

Govemmentofficialsare oftengiventhe powerto Intervenein disputesand suggest

solutions,or evenmandates ilutions.

Most conciliation,mediation,and arbitrationservicesare carriedout by government

departments.
Thissubjectstheprocedureto politicalinterference
(LansingandKuruvilla1987j.Influential
politicalleaders(whomaybe leadersof unions,or haveinfluenceoverkeyministersand secretariesin
the laborministriesof thesecountries)can oftenexerciseinfluenceoverconciliatorsand mediators.

Theeffectiveness
of the procedures
suffersfromdelaysaswellasthe lackof adequately
trainedofficialsin govemmentdisputeresolutiondepartments.
In mostcases,if thedisputeis notsettled
throughmediationat the locallevel,it is thentransferred
to theregionallevel,andfinallyto thestatelevel
of mediation.If it is still not resolved,it Is transferred
to the Ministerof Laborin eachstate,or referredto
compulsoryarbitration,the labor courtor an industrialtribunal.Resolutionof disputesthus can take
monthsor evenyears.Theauthoritygrantedto concilistorsand mediatorsto referdisputesto binding

arbitration,laborcourts,or industrialtribunalsintroducesfurtherdelayintothedisputeresolutionprocess.

Theweaknessof unionsactuallyencouragestheuseof suchproceduresi.e.,a "narcotic

effect".Unionstendto relyon disputeresolutionproceduresin orderto obtainwhattheycannotobtain

throughdirectcollectivebargaining.In situationswheremulti-unionism
exists,the dependenceis much
higher,giventhat unionshaveto constantlyraiseissuesto attract membership,
as a resultof union
competition.

The Pressureson Industrial Relations

In responseto economicpressures,mostdevelopingcountries(andthisappliesequally
to the middle incomecountriesof EastemEurope)face pressureto liberalizetheir economies.This

liberalization
impliesachangein industrialstrategy,froman isolationist
import-substitution
industrialization
 11

(1S) policy with Its attendant protectionist programs (see for example, the current liberalizationin the

Indian economy), to a more export-orientedeconomy that is integrated with the world market. This

transition Isapparent InAsia wheremanycountries (e.g.,Malaysia,Philippines,Indonesia,Thailand,India)

haveshifted or are shifting into more export-orientedstrategies.The transition is less apparent in Africa,

where there Is nonetheless evidence of moverrent in this direction. The integration of these export-

oriented economies into the world marketplacehas substantialimplications for industrial relations.

Export-orienteddevelopmentrequiresindustrialrelationssystemsthat are flexibleandable

to adapt to change. For many developing countries, this implies a drastic restructuring of industrial

relationspolicies at the national, firm, and work place levels. If third world economiesare to successfully

integrate and compete in the world market (and World Bank policy prescriptions push them in this

direction),they have to compete with modem production and industrialrelations practices. Th;s implies

that late developerscannot just follow the developmentpathsof the advancedcountries with a lag, such

as the traditional U.S. based mass production (Fordist) strategy. Instead, developing countries must

quickly create more flexible systems. For example, many of the NIC's involved in export oriented

industrial relations have had to adopt production techniques similarto those used in the industrialized

world in order to compete successfully. The requirementto compete with best practice implies a

"quantum leapufor most countries,and underscoresthe urgent needto address industrialrelationsissues.

Although the organized sector is very small comparedto the unorganizedand informal sectors of most

developing economies, the need for flexible industrialrelations policies is still paramount, given that it is

the organized sector that plays a central role in industrialization,exports, and structural adjustment.

This is not an easy task, since there are often compelling reasons for the existence of

inefficientindustrialrelationscharacteristicsin the third world. In equity based systems,for example,laws

limiting employer flexibility (e.g., limiting employer freedom to layoff, retrench or close their industries)

exist, in part, because of the absence ef altemative sources of support from the state (such as

unemployment insurance policies, social security systems, and labor market and training institutions).
 12

The lack of resourcesto establishsocial security,for example, also explains why employersare forced

to provide extensiveretirement and health benefits.

As a result, the establishmentof appropriate industrialrelations requiresa rethinkingof

other national policies. A national industrial relations policy is useless if viewed in isolation; it must be

linkedto broaderpoliciesregardingeducation,training, socialsecurity,etc. Thisbroader linkagebetween

industrial relations and other policies has by and large been ignored by policymakers.

Below we examine in detail some of the basic requirementsof any industrial relations

system. We start with basic principlesthat should be followed in industrial relations and then discuss

some of the problemsthat haveappeared in developing countries conceming these industrialrelations

features.

C. Basic Principles of Law and InstitutIons

Although there are wide variationsin the industrialrelations characteristicsof advanced

industrialeconomies,successfulcountriesappear to share certainbasic principlesof law and institutions

germane to industrial relations.

The Need for Unlons, the Right to Strike, and Collective Bargaining

Modemindustrialrelationsrequiresthat workers be affordedthe basic rightto form unions

and those unions should be granted the right to bargain collectivelywith employers and to strike if a

negotiated settlementis not reached. The social advantagesgained from the provision of those rights

are revealedin the experiencesof industrializedcountries. Theadvantagesinclude the fact that workers

are entitled to a say in the determinationof their employmentand working conditions. Not only is such

inputjustified on rightsgrounds, but in addition, contemporaryexperienceshowsthat to compete in world

marketsrequiresthe active participationand commitmentof the work force in order to meet quality and

product performancestandards.

Therealso are clear virtues derived from industrialrelationssystems that give the parties

involved in the production process direct involvement in the determination of work conditions and
 13

employmentterms. Employersand workersand their representativesknowtheir own problemsbest and

also can be remarkably adept at devising practical solutions to problems or conflicts. Interferenceby

outside parties In the resolution of problems often leads to apparent solutions that prove unworkableor

impracticalin the long run.

Furthermore, third party interferenceeliminates the constructive learning the parties

receive in problem resolutionand identificationas they work through their own problems. Evenif a third

party could impose a solution that solves a problem in the short term, this process preventsthe parties

from developing the capacity to solve their own problems. Thus a clear advantage to collective

bargaining is that it avoids a cycle of dependence on third party interference.

Experiencein the industrializedcountriesalso shows that unions, the right to strike, and

collectivebargain.ngare more likelyto produceoutcomesthat are acceptableto workers and employers

as comparedto solutions that are imposed by govemmentsor other third parties. Not only are employers

and workers more likelyto develop solutions that meet their own needs,thesepartiesare also more likely

to feel a commitmentto making such solutions work. Imposed employmentterms in contrast are often

resented and resisted in part because the parties who must live with these terms had little say in their

development. Thus, the process through which employmentterms are set is often as important as the

actual terms themself. Collectivebargaininghas the advantageof beinga process that is "owned" by the

parties involved.

Since collective bargaining is a healthy process, it should be applied widely. This

suggeststhat the right to strike should be granted in nearlyall cases. There may arise some instances

wherean altemativeto the right to strike is necessary,yet experiencedemonstratesthat the use of strike

altematives should be limited. It makes sense, for example, to exempt certain public services, such as

police, firefighter,or emergencymedicalcare, from the right to strike. Experiencein North Americashows

that in these casesthe availabilityof interestarbitration (wherea third party determinesthe terms of the

labor contract if an impasseis reachedin negotiations)can be a successfulaltemativeto the strike (Olson

1988).
 14

A country may also benefitby providinga nationalemergencydispute resolution

procedureto limitthe rightto strikeon a caseby casebasisIn industriesotherthanthose listedabove.
TheUnitedStateshassucha procedureprovidedthroughthe Taft.Hartley
amendments
to the National
LaborRelations
Actandtheseprocedureshaveworkedwell(Cullen1968).Yet,suchnationalemergency
proceduresshouldbe narrowlyappliedso as to avoidregularInterference
into the normalprocessof
collectivebargainingfor all the reasonsoutlinedabove. Careshouldbe taken in the constructionof
emergencydisputeregulationsto avoidthe excessiveuseor influenceof suchprocedures.

IndependentMediationEntitles

A veryconstructiverolecan be playedby independentmediationentitiesin a modem

industrialrelationssystem. As recommended
above,in nearlyall casesunionsand employersshould
be allowedto settlecontracttermsthroughdirectnegotiationsthatallow unionsto engagein strikesif
negotiationsreachimpasse. Yet,third partymediationshouldbe availableto helpthe partiesin their
negotiations.Theproperroleof mediationisto facilitatecommunication
betweenlaborandmanagement
and provideadvice. In the UnitedStatessuch mediationcomesthroughthe FederalMediationand
ConciliationServicewhilein Britainthe AdvisoryConciliation
andArbitrationServicemeetstheseneeds.
Mediationshould be accomplishedin a mannerthat preservesthe centralplace of direct collective

bargainingbetweenlabor and management. Mediationshould not acquirethe power to impose

settlementtermsasthismerelybecomesa vehiclefor thirdpartyinterference

in bargaining(Feuille1979).
For mediationto servesucha functionthere mustbe a sufficientlywelltrainedcadreof
mediatorswhounderstandpracticallaborrelationsissues.Countriesthat haverecentlyexperienced
the
spreadof democraticpoliticalinstitutionsespeciallyneedto devoteresourcestowardthetrainingof such
mediators.

Therealso is an extremelyhealthyroleto be playedby grievanceproceduresor labor

courtsthat solveproblemsthatariseduringthetermsof contractualagreements.Researchshowsthat

grievanceprocedurescanprovideemployeevoiceandtherebyloweremployeetumoveraswellasassist
 15

in the Identificationof problemsand informalresolutionof conflicts (Freemanand Medoff 1984).

Successfulgrievanceproceduresare designedby the partieswho directly use them and not by
govemmentor otherthird parties.

InEurope,govemmentadministered
laborcourtscommonlyresolveindividual
complaints.
Laborcourts,likegrievancearbitration,can effectivelysettleproblemsand providepracticalresolution
of problemsand avoidlargersocialconflicts.It is possiblefor an industrialrelationssystemto contain
bothgrievancearbitrationand laborcourts,yetmostnationalindustrialrelationssystemsemphasize
one
or the other.

ProperUnlon Robe

Theearlierdiscussionhighlightsthe pressingnatureof currentintemationalcompetitive

conditions.Thereis clearlymuchfor employersand unionsto focuson conceminghowthework place
can produce employmentterms that are sociallyacceptableand productsthat are competitively

successful.Thisdoesnot implythatthereis no rolefor unionsto playas polkicalactorsor participants

in politicaldebate. It doessuggest,however,that the representation
of workerinterestsoftenrequires
unionsto focustheirattentionon employmentand workplaceissues.

It also is clearthat socity benefitstromthe presenceof politicallyindependentunions

that are freefrom dominationand govemmentcontrol. Such dominationeliminatesthe democratic
representation
of workerwantsandconstructive
employer-union
interchange.Thedrawbacksfromstate
dominationof unionsare manyincludinga violationof workerrights. Furthermore,state dominated

unionsor statecontrolledindustrialrelationssystemstendto generateexplosiveperiodicconflict.Such

has beenthe casein SouthKoreaand somecountriesin Latinand SouthAmerica(Deyo1989).

As representationand bargainingentities,unions shouldnot servefunctionsthat are

properlythe don
r of govemmentsocialserviceinstitutions. For example,thereare propersocial

serviceneedsin the areasof socialpensions(e.g.,socialsecurity)andvocationaleducationthat should

be regulatedand financedby nationalgovemmentsand/orregionalgovemments.Unionsnot onlyare

 16

poor providers of such services, they also become diverted away from the areas wherethey can make

more substantialprivate and social contributionsby pursingsocial welfareprovisionactivities. We do not

intendto conveythat there is no useful role to be playedby unions in the provisionof any social services.

In some countries (e.g., Sweden and Denmark) unions, for example, play a constructive role in the

administration of unemployment benefits. And in many countries unions are effectivelyinvolved in

vocational education programs.

Unions also should not become the vehicle for the direct provision of consumer goods

such as housing or food distribution as they did in the former SovietUnion. Not only are unions relatively

inefficient as a distribution and pricing system, consumer goods provision through the union or work

place also unfairly and inefficientlyties workers to specific firms.

These concerns do not mean that unions should be blocked from addressing specific

worker health or educational issues. Union administered health and welfare funds have played

constructive roles in many countries (e.g., Singapore). The point is that social programs should in

general be administered by governments, while private programs should have narrower bounds and

focus.

Workplace Representation

There are great advantages to an industrial relations framework that includes parallel

representationat the workplace through institutions such as works councils. In the most successful

examples (as in Germany, the Netherlands and Denmark), basic pay and work standards are set in

collective bargaining at an industry level (for an entire industry or group of industries, either regionallyor

nationally). Plant and firm-level works councils, composed of elected blue and white collar

representatives,enforcethe collectivebargainingagreementsand also engagein ongoing discussionand

negotiationof plant-specificissues. Wellfunctioning works councils typically haveformal rights, backed

up by national legislation or central collective bargaining, to extensiveinformation regarding company

 17

plans, as well as to consultationand in some cases(usuallypersonnel issues)veto rights in management

decision making.

In Germany,works councilshaveintegratedemployeerepresentativesinto management

decision making and provided a flexible instrumentfor restructuringand adaptation. Although works

councils have imposed some extemal rigidity on firms (i is more difficult to hire and especiallyto fire),

this has been morethan compensatedfor by added intemalflexibility (Streeck1984a). Becausethey are

ableto negotiaterelativeemploymentsecurityfor the workforce,works councilsare morewillingto accept

internal flexibility of deployment (Katzand Sabel 1985). Works councils also push firms to increase in-

house training and the hiring of apprentices.

Although management decision making can be slowed in the legally-established,

consensus-building process, managers have important allies in the works councils to smooth

implementation once decisions are reached. Works councilors at large plants often take on co-

managementfunctions, relieving managementof important personnel responsibilities(Turner 1991).

Works councils also provide a voice for white-collaremployeeswho are traditionally underrepresented

in industrialrelations systems; and the councils provide some representationfor employeeseven where

unions are weak or absent.

Where works councils function well, they contribute to a virtuous circle that includes

employee voice on important issues, comprehensiverepresentation, labor-managementcooperation

(since the works council identifieswith the interests of the firm), high trust based on joint efforts, flexibility

in labor deployment, and high productivity and product quality (Streeck 1984a). These plant-level

institutions of codetermination make i possible for works councils, unions (often working through the

works councils), and managersto build successful"productivityct)alitions." it is importantto emphasize,

however, that the virtuous circle is possible not just in isolated cases (as in the U.S. and Britain) but

throughout the economy (as in Germany),and only because works councilsare establishedand defined

in national legislationand/or a collective bargaining agreement.

 18

affordedbyworkscouncilsIsalsobuttressed,andmademore
Theparallelrepresentation
at the strategiclevel. The i tter includebothcollectivebargainingbetween
successful,byarrangements
Industrialunionsandemployerassociations councilparticipation(alsomandatedbylaw
anduniontworks,
in Germany)on companysupervisoryboards.Thepresenceof strongunionsand employment
security
in Germanyalsohelpto makeworkscouncilssuccessful.Enterpriseunionsat largefirmsfulfillsomeof
the works councilfunctionsin Japan.Theseincludeco-management,
facilitatinglabor-management
cooperation,buildingproductivitycoalitions,receivingextensiveInformationregardingcompanyplans,
andgivinga voiceto white-collarconcerns.Enterpriseunionsare alsointegratedto some
consultation,
extentinto managementdecisionmakingthroughfirm-levelbodiessuch as joint labor-management
committees.Butas in theU.S.case,thisformof plant-level hasno legalbackingin formal
representation
participationrightsand is weakor non-existent
for the majorityof workplaceswhichare non-union.

D. Waoo Settlnr and Baraalnlna

Stmueture
Tworelatedissuesthatareof centralimportancein industrialrelationsin any countryare
thestructuresfor wagesettingand bargaining(thelatteris referredto asbargainingstructure).Normally,
thereisa closeconnectionbetweenthesemattersas wagesaresetaspartofthe normalbargainingthat

occursbetweenemployersand unions.

BargainingStructure
A critical choice in the processof collectivebargainingis the degreeto which the

bargainingstructureis centralized.Themostextremecaseof centralizedwagesetting(w',ichdoesnot

involvecollectivebargaining)occursduringincomespolicieswhena govemmentimposespaystandards

thatapplyto allworkersin theeconomy.Wherethereis no govemmentsanctionedincomespolicy,the

commonmosticentralizedK
bargainingstructureoccurswhena largeemployerassociationnegotiates

witha union(orfederationof unions)and setswagesandotheremploymenttermsfor all the unionized

employeesin all the firmsthat are membersof this employerassociation.Bargainingin Swedenuntil

 19

recentlywas a frequentlycited caseof centralizedbargaininginvolvingthe LO and SAF. Mid-range

degreesof centralization
in bargainingoccurwherea singlelaborcontractisappliedto allthe unionized
workersin all the plantsof a singlecompanyor industry.Themostdecentralized
caseis wherewages
andothertermsin the laborcontractare setin a contractthat coversonlythe workersin a singleplant
(or a subsetof the york forcein a plant).

The D1advantagesof FragmentedBargainingStructures

The challengein developingcountriesis to develop wage setting and bargaining

structuresthat meet the parties' needsand the pressuresof intemationalcompetitiveforces. For
instance,highlyfragmentedbargainingunitsshouldbe avoided.A numberof problemshaveappeared
in industrialized
countriesin situationswherebargainingunitsweretoo fragmentedand numerous.In
Britain,for example,the presenceof multiplecraft and industrialunion bargainingis said to be an
impediment
to integrstiveproblemsolvingandtheeffectiveintroductionof technological
change(Ulman
1968). A large numberof bargainingunits also contributesto inflationarypressuresthrough the
promotionof wageimitationand leapfrogging
acrossjurisdictions(Flanagan,
UlmanandSoskice1983).

The Virtuesof CoordinatedBargaining

Onepotentialsolutionto the bargainingunit fragmentation

problemis to conductwage
bargainingat the levelof industrialsectors.In Germany,for example,bargainingoccurswithin16 major
industrialsectors.TheGermanstructurehastheadvantageof inducingunionsto considerbroadworker

economicinterests.So for example,becauseunionsin Germanyoftenincludeworkersfroma variety

of companiesandindustries,therehas beenlesstradeprotectionistsentimentwithinGermanunionsas
theseunionsoftenincludememberswhoselivelihooddependson theexportsuccessof theiremployers.

In thisway,particularfirm orindustryinterestsbecomemutedin thebargainingprocess(Streeck1984a).

Thecoordinationacrosswork groupsprovidedin the Gerrnanbargainingstructuremesheswith other

 20

aspectsof GermanIndustrial relationsto produce was has been called a "coordinatedmarket economy"

(Soskice 1990).

Another successfulaltemativebargainingstructureIs enterprisebargainingof the sort that

occurs in Japan. The advantage of enterprisebargaining is that it is very responsiveto the economic

conditions facing particular firms. The potential problem of inflationaryleapfrogging across enterprise

unions is dampened in the Japanesesystem through the simultaneousoccurrenceof wage bargaining

that occurs in the "Spring Offensive"each year. In the annual offensivethe various enterprise unions

communicateextensivelywith one another and often discusswage demandswith their respectiveunion

federations. In this process, wage demands are coordinated and take account of macroeconomic

circumstances.Japaneseenterprisewage bargainingalso hasthe advantageof often including a sizeable

share of pay increasesin the form of annual bonuses that are influencedby the economic per!ormance

of the firm. The advantage of linking pay directly to economic performance through this and other

altemativetechniques is discussed more extensivelybelow.

The Virtues of Annual Pay Agreements

Both the Germanand Japanesewage bargaininghaverevealedrelativelylittle inflationary

tendencies. This appears to follow, in part, from the fact that in both countries most wage bargaining

occurs on an annual basis, namely, the wage terms of labor contracts extend for only one year. In

addition, in thesecountriesthere arevariousprocesseswhich providecoordinationacross wage bargains.

Thesecoordinating mechanismsseem to be especiallycriticalin avoidinginflationarypressures (Soskice

1990).

In contrast, multi-yearlabor contracts in the United States (and some other countries)

reduce the influenceof contemporarymacroeconomicfactors on wage negotiations. In this way, multi-

year contracts contribute to wage rigidity,a particularlyworrisomeproblem during economic downtums

(Wachter 1976). A countervailingadvantageto multi-yearcontracts comes from the fact that they limit

the possibility of costly strikes that might ensue in more frequent bargaining, in effect, by reducing the
 21

costs and risks of bargaining. Yet, the inflationarytendencies inherentIn multi-yearcontracts appear to

outweigh this virtue.

The Occupational Scope of Bargaining Structure

Another importantaspect of bargainingstructureconcerns whichemployeesare included

in unionsand other representationstructures. In Japaneseenterprisebargaining,whitecollar employees

of the firm, below the executive rank, are included as members of the union. In Germany,whie collar

employeesoften presstheir interestthrough their participationin the codeterminationprocesseswhich

provide these employees with the right to proportional representationon the works councils and in the

election of supervisoryboard members. In addition, white-collaremployeesin Germany belong to the

same industrial unions as blue-collar workers. The provision of representationrights to white collar

employees is an aspect of bargaining structure worthy of attention. Both the German and Japanese

methodsof providing white collar employeeswith representationrights are commendable. An important

industrial relationstask confronting developing countries is to avoid representationstructuresthat only

include "blue collarnemployees.

Recent Movement to More Decentralized Bargaining Structures

In recent years in very many industrializedcountries there has been movementtcward

more decentralizedformal pay setting and bargainingstructures. In addition, in nearlyall countries there

has been a shift toward bargaining structuredecentralizationthrough the elevationin the importanceof,

and an increase in the variation of, the outcomes of plant level bargaining. Greater variation appears

particularlyin the work rules and work practicesagreed to by union and company officialsat the plant

level.

Labor and management have turned to more decentralized bargaining as a way to

developcontract terms that respond to their needsand economic pressures. As well, moredecentralized
 22

bargaining fits well with the shift towards new industrial relations practices such as team systems

discussed later In this paper.

Thecurrent worldwidemovementtowards decentralizedbargainingstructuresareevident

in a few developingcountries as well. During the 1980s,Singapore, Taiwan, Malaysia,Philippinesand

South Korea have adopted elementsof the enterpriseunion system.While Singaporehas achieved,like

the Japanese,a decentralizedsystem buttressed by some degree of coordination at the macro-level

through nationalwage councils, South Koreais moving towards a similararrangement. Mal, ysia permits

enterpriseunions, within an industrialunion frameworkthat allows enterpriseunions to respond to their

firms unique economic circumstance,but are able to rely on their industrialaffiliatesfor support.

These developments, however,are the exceptionrather than the rule in the third world.

While it is perhaps early to evaluate the efficacy of these systems, unions still remain waak and

fragmentedin SouthKorea, Malaysia,and the Philippines. Furthermore,it is unclearwhetherthe benefits

of decentralizationobserved in Germany,Sweden,and other nations will be realized without attendant

improvementsin union security and related policiesin developing countries.

The direction of structural change in Africa reflects trends in the opposite direction.

Restructuringin many African countries (such Algoria, Ethiopia,Egypt, and Nigeria) has produced more

centralized monolithic union structures, with the attendant problems. Yet, recent (1991-1992)political

instabilityconnectedwith movementstowards more genuineforms of democracymay reversethis trend.

By and large, the experienceof the industrialcountries suggeststhat industrial relations outcomes that

reflect economic circumstancerequire decentralizedbargainingthat is over the long run supported by

strong unions and stable labor-managementrelations.

E. WorkDlace Issues

There have been numerous recent changes in work place industrial relations in the

advanced economies.
 23

Recent Restructuring In Industrial Relatiorn

In some countries recent changesamount to a fundamentaltransfotmationin industrial

relations. It virtuallyall countries, aspects of this transformationhaveappeared.

There are many dimensions to this transformation including a shift in the focus of

industrialrelationsactivity away from the collectivebargaining to the *strategic' and *workplaceulevels

(Kochan, Katz and McKersie 1986). In contrast to the traditional arms-lengthand formal nature of

collectivebargaining,the "newindustrialrelationssystem involvesmore continuousand informalrelations

between workers and managers (Windolf 1989). The new system often Includes contingent

compensation,team systemsof work organization,enhancedworker and union participationin decision

making, and employment security.

Contingent Compensation

Contingentcompensationlinks pay directlyto firm or worker performance. The virtue of

more contingent compensationcomes from the fact that it provides responsivenessin wages to current

economic circumstances. As Weitzman argues, if pay quickly responds to economic conditions,

economic systemsare able to lessenthe need for large quantity adjustmentsin employmentand output

and thereby become less prone to stagflationand related macro economic problems (Weitzman1984).

As discussedearlier,the presenceof annualpayagreementsratherthan multi-yearpay agreementsadds

a significantdegree of responsiveness. Yet it appearsthat economiesbenefitfurther from the presence

of direct linkages between pay and measuresof firm and/or worker performance. The use of annual

bonuses that provide one-third of total wage eamings in Japan provides a virtuous high degree of pay

responsivenessto economic conditions. It should be noted that for these bonuses to provide a macro

economic stabilization function they must vary with firm performance which does occur in Japan

(Hashimoto 1979). Other systems would be well servedto develop mechanismsthat fit within their own

fr^,.ework to provide pay responsiveness.

 24

Team Systems

A second important Innovationof many new work systems is the shift to various forms

of shopfloorand office teamwork(Windolf1989). Traditionalassembly-lineorganizationbasedon isolated

work stations, it tums out, contains built-in limitationson worker participationand flexibility. Traditional
t job assignments limit worker contributions to production improvements,commitmentto
'fragmented

product quality,and capacity for flexible deploymentin the workplace. Japaneseteam organization,by

contrast, including cross-training, job rotation, integration of tasks, and regular team meetings, has

demonstrateddramatic potential for productivity and product quality gains.

At the same time, unions in Germany,especiallyIG Metall, havebeen promoting "group

work," both for its production improvementsand as a more humanist ic form of organization(Tumer1991,

pp.111-17). The German version places an emphasis on broad work assignments, broadened

responsibilityand autonomy for the groups, as well as enhanced skills training and broad upgrading of

group members.

Although experiencewith teamworkin the U.S. and Britainshows mixedresults,evidence

from Japanese plants, from Japanese-runplants in the U.S. such as NUMMI,and from German pilot

projects indicates that considerable gains are possible in productivity, quality, and flexibility, with or

without newtechnology (MacDuffieand Krafcik 1992;Katz,Kochanand Keefe1987).Gainsare especially

likely when new work organization is associated with extensiveskills training, so that workers are able

to integratotasks and solve problems that arise, and with cooperative,participatorylabor-management

relations. Team or group systems are thus most likely to work well in countries such as Japan and

Gerrnany, that already have strong institutional underpinnings for training and for worker/union

participation. In other countries,it is necessaryto establishsuch underpinnings,to promote cooperation.

participationand training, along with the introductionof moreflexibleteamor group forms of organization.

The necessary underpinningscan range from joint labor-managementcommitteesat the plant level to

national legislationto promote training and to establish some nationally appropriate version of works

councils.
 25

Employee Involvement In DecisionMaking

A third essential element of innovativework systems and "new industrial relationsuis

mechanismsfor employee and union participation. The relative success of Japanese and German

industry has brought home the virtues of employee and union participation at various levels of

managementdecision making. As changing world markets and new information technologies have

increasedthe need for functionalflexibility in the workplace, production requirementscan no longer be

met only by armies of semi-skilledworkers following orders. Japaneseand Germanindustrialrelations

systems, in differentways, have offered strong mechanismswhereby (i) workers, unions and/or works

councils activelycontribute their own ideas to improvingthe production process; (ii) employeeshave a

better understandingof the broader production processand are more suited for flexible d .ployment;and

(iii) workers, unions and/or works councils receiveadvance information regarding company plans and

participate in decision-makingprocesses,and thereby often support company plans and help smooth

implementation. In an era in which innovation in both product and process has become increasingly

important, institutionalizedparticipation often means that employeesand their representativesbecome

allies of management (rather than enemies or obstacles) in necessarywork reorganization.

A further push for increasedparticipationcomes from the spread of team systems which

provide wider roles for hourly workers as they become involved in production control tasks. Team

systems and the administrationof new employmentsecurityare also often associatedwith a broadening

of worker and union involvementin strategic businessdecisions. In part this strategic involvementarises

as a consequence of the major corporate reorganizationsthat confront the workforce. After watching

plants close and work outsourced, workers and unions have sought avenuesto affectthe decisionsthat

weigh so heavilyon their future.

Difficulties In DIffusing Participation

The U.S., Britainand France,among other countries, haveweak participatorytraditions,

with industrial relations systems that do little to encourage either participation or intermalflexibility.
 26

Historically,managersact (no one tells me how to run my business"),unionsreact (andoftenfight

rearguardactionsagainstinnovation),and workersare supposedto do whatthey are told (but often

sabotageinnovationin moreor lesssubtleways). In thesecountries,a majorchallengeis to reform
industrialrelationspracticessothatnewparticipationandflexibilityarepossible,in linewiththedemands
of contemporaryworld markets. In the face of entrenchedinsttutionsand practices,however,such
reformis quitedifficult.Reformis underwayIn allthreecountries,butthepaceis haltingandthefailures
are many(Milkman1991).
Japanese
andGermanfirms,bycontrast,havebeenlucky:firmsin bothcountriesoperate
withininstitutional
contextsthathavetumedoutto offerparticipation
andflexibilityat an historicaljuncture
wheresuchattributescontributeto marketsuccess(Katzand Sabel1985;Soskice1990).As American,
BritishandFrenchmanagershavenoted,variouskindsof employeeparticipationandfunctionalflexibility

havebeenshownto improveproductivity,
lowercosts,improveproductquality,andincreasethecapacity
of firmsto changeproductofferingsquickly. Casesof successfulreformand innovationwithineachof
these countrieshas furtherbroughthomethe lesson(Eatonand Voos 1992). Fromqualitycirclesto
shopfloor teamworkto joint labor-management
committeesto financialparticipationto increased
employmentand incomesecurity,innovationshave been spreadingin unionizedand non-union

workplacesalike.

Thecrucialdilemmafacingfirms,unionsand policy-makers
outsideJapanandGermany
is not howto importforeignmodelsbuthow to adaptand reformestablishedinstitutionsand practices

to achievethe necessaryparticipationand flexibility.

Participationcan be structuredin a numberof differentways,including:workscouncils

establishedbylaw,informallyestablished
cooperationthroughenterpriseunions;jointlabor-management
committeesestablishedthroughcollectivebargaining;and qualitycirclesand suggestionprogramsin

unionand non-unionworkplaces.

It is importantto note that whereunionsare present,theyneedto be fully aboardand

supportiveof the introductionof new work organization.Management
strategiesthat dividethe local
 27

union to force teamwork on a reluctant workforce are unlikely to work (Turner 1991). Institutional

arrangementsthat ensure union participation,at least at some level,can facilitatethe labor-management

cooperation necessaryfor the high-trust, innovativemodern workplace.

While successful in Germanyand Japan,the patchy track record in the U.S., Britainand

France suggests that participation requires either legal backing or substantial protections and

encouragement throughout the firm. Workers and unions need institutions with clear rules and

protectionsto allowthem to participatein firm decision-makingprocesses:managementneedsthorough-

going reform from the top of the or-anization to the bottom to instill commitment for employee

participation. Both sides need training in participatory processesand trust building to set successful

participation in motion.

The role of middle managementis especially important in this regard. It is here that

employeeparticipation is most often perceivedas threateningto establishedprerogatives,and it is at this

level that participation often fails or is sabotaged. Yet middle managershave a crucial role to play in

participatory processes and can find their influence within the organization enhanced rather than

diminished. They therefore need extra training in the managementof participation, along with special

encouragement, protections and clarity about their own (often quite new) roles.

Participation is most likely to succeed if it occurs and is reinforcedat all three levels of

labor-managementinteraction in the firm: at the strategic level,in r'gotiation and agreement between

top managementand union leadership;at the functional level, in collectivebargaining agreementsand

contract enforcement;and at the workplace level,in team or group organizationand other meaningful

participation programs that havethe full support of the organizationand its management. National labor

policy can play an especially important role in encouraging the spread of participation,through efforts

ranging from education to specific incentivesto enabling or even mandatinglegislation.

 28

Employment Security

There appears to be a direct link between participation, employment security and

workforceflexibilitywithin the firm. To the extent that workers participatein decision-makingprocesses,

they become more flexible in what they are both able and willing to do in production processes. And to

the extent that they have employment security,employees are often willing to go along with even the

most radical shopfloor innovations.

The generationof employmentcommitmentto company goals requiresthat employees

face the prospect of continued employmentwith their firms. This is particularlyimportant in light of the

spread of team systemsand the developmentof more firm specificskills. In the presenceof these skills,

employees become less attractive to the extemal labor market (Osterman 1988; Marsden 1990). If

employees do not then receive more security from the firm, they may well be reluctant to acquire more

extensiveskills and training, or participatein the sort of shop floor decision making that is so crucial to

the maintenanceof competitive and high quality products.

Employment security can come in a variety of forms. In Germany, there has been a

longstandingand successfulrequirementthat if firms seekto reduce the size of their workforcethey must

first negotiate social plans with their work council. These social plans then outline the compensation

received by redundant workers and establishguidelines conceming which workers are to be laid off and

create other adjustment strategies. As a result, the Germansystem also has shown relatively less use

of layoffsas an adjustment strategy in the face of output declines. The "intemal flexibility' provided in

the Germansystemthrough broad jobs and flexiblework ruleshas createdthe possibilityof more intemal

adjustment rather than recourse to extensiveextemal adjustments through layoffs (Sengenburgerand

K6hIer 1987).

In Japan, there is heavy use of the "lifetimeemployment principle". A relatively high

percentageof employees spend long careers,often their whole career, with one firm (Cole 1979). The

key is that employeesare broadly trained and work rules are relativelyflexible. This makes it possible

for firms to make intemal adjustments to respond to reductions in product demand. These intemal
 29

adjustments Include moving workers across parts of the enterprise, or in some cases even "loaning'

workers to other firms.

The use of intemal movementsis, of course, not without its limits. In Japan, lifetime

employmentis afforded to 'permanent' employeesbut is not providedto utemporary'employees. In the

Germansystemas well, the use of foreign workers (particularlyIn the 1960sand 1970s)on limitedterm

employmentcontracts also helped facilitatethe less frequent layoff of native Germanworkers (Streeck

1984a). Other forms of employmentsecurity, rangingfrom explicit employmentguaranteesto retraining

and income support exist in a number of countries(e.g., Italy,Belgium,Netherlands),and in manycases,

the negotiation of such policies is linked to introducLionof more flexible work rules.

The argument here is that labor and managementshould try to find mechanismsthat fit

with their respectiveinstitutionsto makeuse of intemalflexibilityas an altemativeto externalemployment

adjustments. At the same time, it is unreasonableto believethat all extemal employment adjustments

can or should be avoided. The elimination of the possibilityof layoffscan (and in some countries has)

produced enormous inefficienciesand rigidities.

Govemments should also play a role in providing inter-firm and career mobility,

particulariyduring periods of slack economic growth and in regions or industries that confront abrupt

employmentdeclines. In Sweden,for example,there is a long history of successful'active labor market

policies' that have provided such assistanceand mobility to workers (Meidnerand Anderson 1973).

The New Industrial Relations and the Third World

Thereis little evidenceof the emergenceof the 'new' industrialrelationssystemdiscussed

above in the third world. However, we can see changes in this direction in the newly industrializing

countries of Asia. For example, Singapore has gradually moved to a system of considerable worker

involvementboth in national as well as firm level economic decisions. Enterprise unions have been

adopted in many Asian countries as discussed earlier. Furthermore,broad based training practicesare
 30

slowly taking root in Singapore, Malaysia,Thailandand SouthKorea, although much of the diffusionof

these practicesis due to the predom-nanceof Japanesemultinationalsoperating in these countries.

Legislativeframeworksaupporting worker participationin managementdecisionsthrough

works councils and joint labor-managementcommittees do exist in many developing countries, (e.g.,

India, AnglophoneAfrica). And in FrancophoneAfrica, unions have recently been provided with seats

in legislativerule making bodies in parliament(e.g., Benin, Senegal). Nevertheless,genuine participation

has not taken root given the absence of supporting policies and structures. Despite the legal

encouragement for employeeparticipation,and the willingnessof unions to participate,the problems of

weak and fragmented unions, employer resistance,uneven implementationof existing labor legislation,

poorly educated workforces, and most importantly, the absence of stable and cooperative labor-

managementrelations, inhibit the developmentof genuine participation.

F. Tralning and Work Force Skill and Career Development

New workplace systems in the 1990sand beyond, basedon attributes discussedabove

such as shopfloor and office teamwork,employeeparticipation,and careerdevelopmentin intemal labor

markets, cannot succeed without broadly skilled workers capable of continual leaming (MacDuffieand

Kochan, 1991).

The Need for Greater Investment In Training

The economic environmenthas put a premium on industry's ability to produce goods

using batch rather than traditional mass production techniques, and to make changes in product-mix

more rapidly. This has generated new demands on industry's training procedures. More flexible

manufacturingprocessesoften entail the introductionof sophisticatedelectronicallydirected machinery

(such as programmable machine tools) and automated storage and retrievalsystems. These systems

can be most effectively operated by a workforce well informed of fairly advanced mathematics and

statistics. The use of team systems fits into this network of new production techniques as the
 31

organizationalvehiclethroughwhichworkes takeon the responsibilities

to monitorand oftendiret
qualitycontroland productionprocesses.
The training needsgeneratedby now productionand control systemsgo beyond
traditonalrequirements.Notonlymustthe worKforce
havequantitative
analyticskills,it mustbe skilled
in the use of computerand other electronictechnologies. Furthermore,team systemsrequire
communication
andgroupskillsto facilitatetheoperationandcoordinationofteamtasks.Factorystudies
showincreasingpercentages
of skilledworkers,manyof themnewlycross-trained(inadditionalskills),
accompaniedby decliningpercentagasof the traditionalsemi-skilled(see,for example,Milkmanand
Pullman1991). Eventhe latterrequirenewtrainingin organizational
skills(forteamwork,participation,
job rotation)and/ormoresubstantive
skillsdevelopment
for themonitoringof expensive
microelectronic-
run machinery(Kemand Schumann1984).

Trainingand retrainingprogramshavethereforetakenon addedimportancethroughout

theIndustrialized
world. Thisistruebothbecauseof therapidpaceof technological
changeitself,which
meansthatemployeesneedfrequentretraining,andbecauseof thenatureof newworkorganization
and
technologies.Theproblemfor firmsandgovemmentsis howto build up the necessarypool of skilled

workers,how to build up the abilitiesand flexibilityof the less skilled,and how to developreliable

structuresand incentivesfor continualtrainingand retraining.

Unioninvolvement
in thepromotionandoperatonoftrainingprogramscanbe a valuable
assetin successfulupskillingprograms.At the firmlevel,suchinvolvement
can encouragecooperative
labor-management
relationsandformpartandparcelof thebuildingof a *productivitycoalition"(Streeck
1984b)that includesmanagement,
unionand workforce.Localunionsand/orworkscouncilsare often
wellplacedto helprun trainingprogramsin a waythatappearsfairand winsthetrust of the worktorce.

The GermanTraining System

TheGermancasealsoillustratestheconstructive
rolethatunionscan playin therunning
of a successfulnationalsystemof vocationaleducation- as partof a productiviycoalitionat the macro
 32

level.EstAblished
and supportedbycomprehensive
nationallegislation,andfundedboth bygovernment
andemployers,Germany'svocationaleducationsystemoffersthree-yearapprenticeships
acrossa broad
rangeof occupations:blue and whie collar,manufacturing
and service,from bakersto machiniststo
telecommunications
technicians
to hairstyliststo pre-schoolteachersto equipmentprogrammers.
At the
national,regionaland locallevels,the vocationaleducationsystemis tripartite:employers,unionsand
govemmentallplayan activerolein establishing
and updatingoccupational
groupingsandensuringthat
trainingprogramskeepup with employerand workforceneeds.
Becauseunionsarebroadlyintegratedinto vocationaleducation,theyare committedto
promotinga highlyskilledworkforce. Thiscommitmentextendsfrom the nationaland regionallevels,
whereunionshelp set recruitmenttargetsbasedon projectedskill needs,to the plantand firm levels,
whereworkscouncilspressmanagement
to hiremoreapprentices.TheBritish/American
imageof craft
unionsthat restrictentryto the skilledtrades(to maintainstatusand payievelsfor thealreadyskilled)is
contradictedby theGermanpictureof unionsthatactivelypromotewidespread
skillstraining.In partthis
isdueto the industrialunionstructureof representation;
equallyimportantIsthetop-to-bottomintegration
of unionsIntothe runningof the vocationaleducationsystem.

Employershavestrongincentivesto participatein apprenticeship

hiring. Thein-school
trainingthatapprenticesreceiveis govemmentfunded;andapprenticewages,paidby employers,are
low. Theemployerthus provideson-the-jobtrainingand in returngetsinexpensive
and oftenenergetic
andflexibleyounglabor. In addiion, the employergetsa multi-yearperiodin whichto workwith and

observethe youngemployeeasa potentialpermanent,skilledhire. Foremployersasa group(andfirms

participateIn the tripartitegovemingbodiesthroughemployerassociations),the nationalsystemof

apprenticetrainingand vocationaleducationassuresa steadyflow of skillson the labormarket.

Thenationwide,tripartite,comprehensive
systemof vocationaleducationhasoftenbeen
cied as a majorfactoraccountingfor Germany'sindustrialsuccess.A highlyskilledlaborforceis clearly

a centralcomponentof thevirtuouscirclethathaspushedGermanfirmsupmarketInto"diversifiedquality

producUon'(Sorgeand Streeck1988).
 33

The ExtensiveJapaneseOn-the-jobTralning

In contrastto theGermansystem,theJapaneserelyrelativelylittleon formalapprentices

and yet accomplishextensivetraininginsidefirms. TheJapaneseproductionsystemincludesjobs that
are relativelybroadlydefinedand workersareoftenrotatedacrossjobs throughouttheircareers.These
productiontechniquesarefacilitatedbytheextensiveamountsof on-the-jobtrainingreceivedby workers.
In addition,skill acquisitionand work placeflexibilityare assistedby the high levelsand qualityof
educationprovidedIn the Japaneseprimaryand secondaryschools.

Theprovisionof extensiveon-the-jobtrainingin Japanis linkedto otherfeaturesof the

Japaneseindustrialrelationssystem. Thelongtenureof workersin firmsprovidesstrongincentivesto
both workersand firmsfor investmentsin trainingby guaranteeing
retumsto traininginvestments.In
addition,theheavyrelianceon seniority-based
paymakesjob rotationeasyandtherebyfacilitates
training
acrosstasks(Cole1979).

First line supervisorsin Japan commonlycarefullyplanworkrs' trainingand career

progression.Someof thisplanningandheavyfirst linesupervisorinvolvement
takesplaceas partof the
performance
and associatedmeritpaythatcovers bluecollar workersin Japanesefirms(Koike1988).
Thus,extensiveinvestmentsin trainingdo not occur accidently,but ratherare linkedcloselyto other

practicescommonto Japanesefirms (particularly,

the largefirms). In this way,the Japanesesystem
illustratesthe linksthat existacrossvariouspartsof an industrialrelationssystem.Developingcountries

mustevolvetheirown methodsof employeeeducation,boththroughtheeducationsystemandthrough

trainingin industry.

G. The MlsmatchBetwen Social, Educationaland IndustrialRelatlonsPollees

In DeveloDingCountries

Theprevioussectionshaveshownthat successfulcountrieshavemanagedto achieve

an integrationof industrialrelationspolicieswith socialand educationalpoliciesin waysthat enhance

workforceskill developmentand facilitatecooperativelabormanagement

relations.
 34

Developingcountriesunfortunately,exhlbitslittleintegrationacross policies.Fundamental

mismatchesexist.For example, lacking appropriate education and labor market policies, Malaysiahas

a labor surplus at the professional level and a labor shortage at the skilled, semiskilled,and unskilled

levels. The Philippineshas a labor surplus at the unskilled level and a shortage at all levels of skilled

personnel, primarily due to emigration. This skill shortage ensures the continuance of low cost labor

intensive production systems. Weak unions, and the absence of policies and structures that promote

cooperativeindustrialrelations further ensure the continuanceof low cost, low skill production.

The absence of unemploymentInsurance,social security,and skill developmentvia the

educationsystemforces employersin manythird world countriesto take on costs which in other nations

are handled by the government, thereby inhibiting the competitive position of employers wishing to

compete in the world mark.t. Aithough many countries have apprenticeship programs and Industrial

training systemsmodeled after Britain and Germany,the quality of training is below standardfor various

reasons,most notablybecause of a lack of resources. Developingnations need to restructureeducation,

labor market, and Industrialrelations policies to compete effectively.

Thereare movementstowards the ntegrationof educational and labor market policies

in certain countries. Most of the NIC's (Korea, Singapore,Malaysia),for example,are making strides in

both upskilling their workforces and ensuring that the education systems meet their industrial strategy

needs. South Korea, having accomplishedthis link, is now working on other necessarysocial policies

such as the establishment of a social security system, although Korea has not yet articulated an

appropriate industril relations policy.

Singapore has achievedeffective links between Industrialization,social, educationand

industrialrelationspoliciesand providesan Interestinglesson.Havinginvestedsubstantiallyin education,

Slngapore was faced with continuing low labor cost labor intensiveinvestmentby foreign investors. In

order to attract more high technology based Investmentthat would result In upskilling, Singaporeused

its wage policy. Wages were increased by 12 percent for three years, successfullydriving out the low

cost producers.
 35

Theseare,unfortunately,
isolatedexamples
Inthethirdworld.Someof theseinnovations
aregraduallytakingrootin moreadvanceddevelopingcountrles,buteventhere,not in asystematicway.
Althoughresourcesarea criticalconstraint,developingcountriesmustmakeeffortsto integratevarious
economic,social,educational,labormarket,andindustrialrelationspoliciesin waysthatwillenhancethe
abiliy to competein the intemationaleconomy.

H. Concluslons
Theeconomicpressuresfacingthethird worldsuggestthe needfor the restructuring
of
their economiesand industrialrelationssystems.But changein industrialrelationssystemscannotbe
accomplishedovernight.

Historyhas shownthatthereare certainkeymomentsof transitionin industrialrelations

systems,afterwhichtheyget set and are hardto modify. Oftenthesekeymomentsare as a resultof
legislativechanges(e.g.,the establishment
of the NationalLaborRelationsAct and the emergenceof
publicsectorunionsafterthe burgeoningof publicsectorlegislationin theUnitedStates).Otherfactors
are also importantin facilitatingindustrialrelationssystemchange,such as importanthistoricalor

economicjunctures(e.g.,the postwar reconstruction

in GermanyandJapanweresignificantmoments
of Industrialrelationstransition).

In the developingworld,previouskey momentsof nationaltransitionhavebeen the

independencemovementsin the late 1940s(India,Pakistan),1950s(Malaysia,Singapore,and many

Africancountries)and the early1960s.Transitionsin industrlalrelationshavealso occurredin the NIC's

due to shiftsof industrialstrategy:for example,the shiftto an exportorientedindustrialization

strategy
froman importsubstitutionstrategyhas resultedin far reachingand fundamental
changesin industrial
relationsIn Malaysia,Philippines,SouthKorea,and Singapore.

Therecentpressuresfor structuralchangein the developingworldpresentyet another

opportunityfor majortransitionsin industrialrelatlons. A key questionis whethercountrieswill take

advantageof this opportunity.

 36

AnotherimportantissueIsthe needto recognizethatvariousindustrialrelationspolicies

and proceduresfit togetherand reinforceoneanother(i.e.,the systemicnatureof Industrialrelations).

For example,changesin pay systemshaveimplicationsfor work organization.Work organization
meanwhilehas strongImplicationsfor employeeparticipationandskill development.Thechoicethen
is not just to emulateelementsof Industrialrelationspolicyfrom the experienceof the Industrialized
countriesandmakeincremental
adjustments,
butratherto strivefor the reconstruction
of entiresystems
so variousnewpoliclesfittogetherin waysthat reflecttheuniqueinstitutional
background,politics,and
historyof eachcountry.Therefore,we arenot suggestingthat Germanyand Japanarethe bestmodels
for the thirdworidand EasternEurope. However,we useGermanandJapaneseexamplesto highlight
successfullinkagesbetweenindustrialrelationspolicies.

Thispaperemphasizes
thegoalsofan industrialrelationssystemandthesystemicnature
of Industrialrelations. Most Importantlywe emphasizethe necessityof coordinatingand integrating
industrialrelationspolicy with other economic,social, educational,and legal policies. Developing
countriesmustdeveloptheir own uniqueinstitutionalmechanisms
to achievethesegoals.Perhapsthe
pointsmadein thispaperwillserveasa guideto the principles.

WhileIt is clearthat manyoftenfar reachingchangesare necessaryto bringaboutthe

alignmentof industrialrelationssystemswith currenteconomicpressures,the processthroughwhich

changeoccursalsois important.Foronething,theprocessof changehasto be managedso asprovide

for the active participationof the parties. Participationcan help to achievethe necessarypopular
acceptanceof changes.Experience
hasconsistentlyshownthatthetop downintroductionof Industrial
relationschange(whetherit Is policyat the nationallevelor systemsat the companylevel)failswithout

popularacceptanceof the needfor changeand parUcipation

in thechangeeffort. For manydeveloping
countries,the changesrequiredin industrialrelationsinvolvea "quantumleap",implyinga longgestation
period(our viewsare basedon the establishment
of stableand flexiblelabormanagement
relationsin
thelongterm).Therefore,changeeffortsshouldhaveclearlongrun goalsbut mustalsoaddressissues

of transitonin the shortterm. A stage-wise 3 may be appropriate.

approachto systemsof ^bestpractice
 37

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