Low wages and job insecurity as a destructive global standard

How economic globalization is undermining economic development by driving many workers into low-paid, insecure jobs.

It is a political choice to allow the spread of insecure employment conditions, for example by deregulating the relationship between employers and employees. It is also a political choice to reverse this trend, but one that requires a broader understanding of the global economic context in which policy decisions have to be made. And this should be a concern for all, not only for the ‘losers’ of globalization. Increasing job insecurity and low wages have a negative impact on macroeconomic development and growth. (This is a discussion paper in preparation for the FNV Mondiaal conference on precarious work on 27 and 28 November 2014. Download the report as a PDF file.)

While highly-regulated labour markets were well suited to the relatively closed economies of the period up to the 1970s, the intensity and range of competition since the onset of globalization has called for more adaptable production systems and labour markets. Neoclassical economists argue that such flexibility is an inherent precondition for employment creation and economic growth in today’s global economy. ¹  Dynamics over the past three decades have challenged what Leah Vosko, Professor in Feminist Political Economy at York University, calls the existing ‘standard employment relationship’ (SER). Reliance on a traditional relationship between employer and employee, structured in a permanent and full-time contractual engagement, proved no longer suitable to cope with the new pressures and demands of the global economy. These include outsourcing production processes across borders and competitive pricing enforced by growing international competition. This has led to a decline in the significance of full-time and permanent employment in favour of the expansion of ‘non-standard’ flexible forms of employment, such as temporary and part-time work. ²

In practice, flexibilization refers to the externalization of labour, meaning that companies hire an increasing share of their workforce from outside. While companies used to organize their workforce internally, employers have now created new types of employment relationships that allow them to adapt more easily to market-related fluctuations. This structural change in the nature of the labour market thus implies not only a transformation of the employment relationship, but also a shift in responsibility for the risk from the principal employer to the employee. These new flexible arrangements signify a move towards work that is insecure, unpredictable and risky from the point of view of the worker, because of a lack of protection and the associated social benefits. ³ This combination of uncertainty and the absence of labour protection reduces the quality of work. ⁴

Even if flexibilization is argued to be good for job creation and growth, it has become more and more synonymous with lower pay, insecurity and more regular unemployment. This increase in insecure employment conditions is often explained using the concept of ‘precarious work’. The formal labour market is seen as being divided between better-off workers protected by national regulatory frameworks and a ‘legion’ of precarious workers with no job security.

Debating precarious work

In the debate on precarious work, the concept is used to describe a situation which tends to be beneficial to employers but disadvantageous to employees because they face the negative consequences of insecure and unstable working conditions. For employers, flexibilization allows them to keep their labour force large and their labour costs low: Flexible forms of employment are key enablers for businesses to retain and create jobs whilst staying adaptable and competitive. ⁵ Overall, flexibilization is more often seen as advantageous for employers than for employees, as the former are in the position to decide on the latter’s working hours and pay, which may change on a week-by-week basis.

It is this irregularity that leads authors like Arne Kalleberg, Ronald Dekker, Martin Oltshoorn and Paul de Beer to argue that, while flexible forms of employment may offer freedom and opportunities to certain groups, the insecurity and instability that accompany them can affect the physical and mental wellbeing of those who do not choose irregular working hours and pay. ⁶  Others, such as Gerry Rodgers and the ILO, note that the temporary contracts characteristic of flexible and precarious work do not always oblige employers to offer their workers certain rights and security, including fixed wages or opportunities for skill development. ⁷

Although the concept of precarious work is defined in different ways, ⁸  it tends to focus on the formal relationship between employer and employee. Cynthia Cranford and Leah Vosko argue, however, that it is important not to focus too narrowly on “the form of employment and on work arrangements” when defining precarious work. It represents “a multi-dimensional phenomenon” embracing many dimensions, including “the employment relationship/contract, additional dimensions of precarious employment (such as income), occupational/industrial context, and social location”. ⁹

This discussion paper applies a broad definition of precarious work, encompassing all factors contributing to a trend in which more and more people are being pushed in the direction of unstable, irregular, unprotected and insecure work, due for a large part to global processes that will be described below.

Measuring precarious work

Half of all jobs worldwide are now considered precarious. ¹⁰  In many developing and emerging countries, precarious work may be older and more widespread, and may have a more far-reaching impact on workers when solid social protection systems and the protection of workers’ rights have not been fully established. As the concept of precariousness is ambiguous and difficult to measure, hard data on the number of precarious jobs in different regions of the world cannot be given. Trends in precarious work can, however, be approximated by examining elements of precarious work that can be measured more reliably, such as temporary and part-time work, in-work poverty and low wages.

By way of example, more than 10% of employees in OECD countries currently have an employment contract for half a year or less. ¹¹  Prevalence is especially high among young people entering the labour market; according to the ILO, 40.5% of employed youth had a temporary contract in 2011. ¹² As figure 1 shows, the incidence of temporary work increased in OECD countries and the European Union between 1985 and 2007. The financial and economic crisis has also led to a rise in temporary work since 2008. In transition economies in Eastern Europe, the prevalence of temporary work has also increased, as figure 2 shows.

Another phenomenon that can be measured is part-time work, which can indicate a precarious working situation, especially when it is involuntary. Not many data are available on the number of people who involuntarily have a part-time contract, but OECD calculations show that the number of people with part-time contracts in developed regions has increased in recent decades. ¹³  In 1985, around 9% of workers in OECD countries had part-time jobs, while this had increased to 12% by 2007. According to John Evans and Euan Gibb, part-time work is generally higher among the elderly, young people and women. ¹⁴  The ILO calculates that in 2011 a quarter of employed youth worked part-time and often involuntarily. ¹⁵  One study shows that 22% of part-time work in advanced economies is involuntary, 40% is due to ‘family or personal responsibilities’, and about one-third is voluntary. The proportion of involuntary part-time work suggests that it is not always a choice but a refuge from unemployment. ¹⁶  The ILO attributes the trend of more part-time work to “the increase in the number of women in the labour market, but also to attempts to introduce labour market flexibility in reaction to changing work organization within industry and to the growth of the services sector.” ¹⁷  In transition economies in Eastern Europe, the incidence of part-time employment between 1991 and 2006 shows a mixed picture. In some countries, most notably Slovenia, part-time work increased, but in others, especially Romania, it sharply decreased, as can be seen in figure 3.

For developing countries it is more difficult to measure precarious work, because a large part of the labour force works in the informal sector. Some commentators, however, argue that labour market reforms in developing countries have also facilitated the use of temporary contracts and subcontracting arrangements. This has not only had an effect on the formal employment relationship but the presence of an abundant informal sector has allowed the use of informal wage and salary work arrangements to generate significant tax and dismissal cost savings and hiring flexibility by comparison with permanent work arrangements. This has pushed even more people into the informal sector. ¹⁸

The conclusion is that there is clear evidence of an increase in all elements of precarious work in advanced and developing economies, although the patterns differ significantly from country to country. And this changing employment pattern has an effect on the distribution of household wages and opportunities on the labour market between employees with standard and precarious work. The increase in these forms of employment could therefore represent a new source of income inequality in many parts of the world.

The wages of precarious workers

Low wages can also be an element of precarious work. In 2009, almost a quarter of employees in the United States were in low-wage work, earning less than two-thirds of the median income. ¹⁹  As figure 4 shows, some other Western countries have similarly high percentages. A quarter of all workers worldwide earn US$2 a day or less. According to the ILO, the number of working poor – those who have paying jobs but who still cannot make ends meet – in developing countries is decreasing, ²⁰  but more than 30% of the workforce still live in poor households and another 25% live in households just above the international poverty line of US$1.25 a day. ²⁰ Another trend can be seen in Europe and the United States, where working poverty is increasing, although the figures in industrialized countries remain well below the global average. According to Eurostat figures for 2010, 8.2% of workers in the Eurozone earned less than the region’s average poverty rate of €10,240 euros a year for a single adult worker, up from 7.3% in 2006. These figures are nearly double in Spain and Greece. In addition, according to Alderman, the US Labour Department estimated that 7% of single adult workers in the United States were living below the poverty threshold of $10,830 (or approximately €7,873) in 2009, up from 5.1% in 2006. ²²

Research also shows that ‘non-standard’ (e.g. temporary and part-time) jobs pay less than permanent jobs, even when controlled for different sectors, the seniority of the wage earner or skill intensity. Both temporary and part-time workers in the service and industrial sectors are paid less than workers with a permanent contract in the same sectors, showing that working without a permanent contract reduces wages and widens the wage gap, at least in advanced and transition economies. ²³  The only exception was Ireland where until the start of the economic crisis in 2008, the two types of work paid equally in both sectors. The extreme cases, however, are Spain, Portugal, Greece and Germany, where wages for flexible and part-time work are about 25% per cent lower than standard work in the industrial sector. In the service sector, the wage gap is even higher, with flexible and part-time workers receiving 40% less than full-time workers in the years prior to 2008.

And although it is certainly true that having an insecure, temporary contract can help workers to obtain a permanent contract, there is also evidence that such upward mobility is far from common. It depends on the nature of the contract: well-defined fixed-term contracts offer more opportunities for job mobility and an increase in wages than indefinite contracts.²⁴ Subcontracting also forces many into insecure and low-paid jobs, through a shift in power relations. This varies, however, between skill levels and sectors.

Working in the global market

The above-mentioned trends relating to precarious work reflect a shift in the formal relationship between employers and employees, which is permitted and even stimulated by governmental policies aimed at deregulating labour markets and decreasing the power of trade unions in favour of employers’ organizations. These political choices gained ground after the widespread adoption of an economic model based on economic globalization and the free market. The employment relationship was allowed to change in this way so that it could adapt better and easily to market-related fluctuations. This was necessary due to international competition generated by trade liberalization and the free movement of capital.²⁵

To reverse the trend towards more insecure, unstable, unprotected and low-paid work currently affecting many workers all around the world, the solution must also take account of the broader context of power relations within the global economy. This is becoming even more important as, at global level, economic power relations are pushing workers more and more in the direction of job insecurity. Many may not yet be in a situation that qualifies as precarious, but they face a near future of increasingly insecure, unstable, unprotected and low-paid work.

Many commentators argue that economic globalization is one of the drivers behind changing employment relations, one trend in which is the increase in precarious work and another is job polarization. ²⁶ Job polarization means that jobs that are associated with the middle class are losing out in the globalized world, especially tradable and routine jobs that easily can be offshored to lower-wage countries, pushing the workers that lose out into the direction of precarious work. ²⁷  And this especially makes sense in light of the correlation between the decline in manufacturing jobs in advanced economies during the 1990s and start of the 2000s and a steep increase in imports from emerging economies. ²⁸  It is estimated that at least one-third of the total decline in US manufacturing jobs can be attributed to increased imports from emerging markets. ²⁹ In some cases, trade unions agreed to a percentage of temporary workers in order to save jobs. In other cases, workers had to move to jobs in the non-tradable service sector, where not only is the pay lower, but the work is generally irregular, unstable and insecure. US workers who leave manufacturing to take jobs in the service sector suffer a wage decline of between 6% and 22%, and mostly without job security or labour protection schemes. ³⁰

This is supported by evidence from the US that workers in the auto industry are forced to accept lower wages and insecure work when other auto plants relocate some of their operations abroad. ³¹  This threat is less serious when affiliate activities are established in Europe, where wages and working conditions are more or less the same or even higher. However, most firm relocations are to developing countries and exert downward pressure on wages and working conditions. This means that firms that find it easier to relocate to regions with lower labour costs have an advantage in bargaining with trade unions on lower wages for the remaining workers and use this situation to change the relationship between employer and employee. ³²

In short, foreign competition has an impact on wage-setting and other labour practices, at least in the US. Although most research comes from the US, however, there is a substantial body of evidence showing that foreign competition from low-wage economies can displace low- and medium-skilled workers in all advanced economies, particularly those performing high routine tasks with a low service component and that require little abstract thinking. ³³This pressure is being used to enforce different employment relationships between employers and employees and lower wages. Even in export economies like Germany, for example, a large percentage of the workforce in the manufacturing sector is engaged in precarious work, specifically temporary and agency work, which can at least partly be accounted for by increasing international competition.

The impact of financialization on insecure work and low wages

One specific aspect of economic globalization is the financialization of the economy. Due to financial liberalization, financialization is a global trend without borders, where money is moved from one country to another. ³⁴ The ILO argues in its World of Works report of 2011 that the switch in the 1980s to corporate governance systems based on maximizing shareholder value and the rise of private equity funds, hedge funds, institutional investors and investment banking put pressure on firms to increase profits, especially in the short-term. ³⁵ As a result, the profit share has increased since the mid-1970s, but this has been accompanied by a fall in productive investment. Rather than being invested in productive sectors or in human capital, profits have been used to get the highest profit for investors and shareholders, mainly in speculative capital markets. ³⁶ Although some groups of employees, particularly top executives, may have benefited from financialization through deferred salaries in the form of pension funds and other types of capital gains, such as bonuses expressed in shareholder value, the evidence shows that for the average worker, such gains are much more limited. In particular, financial globalization has weakened workers’ bargaining positions, as capital is much more mobile and can move more easily to other regions. ³⁷ Consequently, while the rising profit-share has not been associated with investment-boosting activity for the economy and in particular for labour, the parallel fall in the wage share has led to lower pay, and insecure, less protected work for a large part of the workforce. ³⁸

In other words, within the logic of financialization, labour – and particularly in lower skilled jobs – became more and more an excessive cost. To achieve higher profits, labour costs had to be kept as low as possible, which impacted not only on wage levels, but also on the formal relationship between employer and employee. It was better to subcontract work, which would make it more flexible, create more temporary, unprotected and insecure jobs within a triangular relationship, where employment agencies mediate between employers and employees. Furthermore, in the debate on the rise of self-employment in the countries of the European Union, it is increasingly argued that self-employment is both low paid and highly insecure. Most self-employed people do not have enough work to work full-time. Self-employment has less to do with creativity and entrepreneurship and more with precarious work; it is better to have at least some income rather than nothing and being dependent on social benefits. As such unemployment is declining, but precarious work is on the rise, hidden in rising self-employment figures.

On the other hand, senior positions, management and more creative jobs are seen as investments in quality. Not all these jobs in the top segments are based on permanent contracts, but even if they are subcontracted, the pay remains significantly higher. Financialization therefore generates not only an increase in income inequality, but also a strong push towards precarious work for workers who cannot compete at a higher level. Indeed, while the formation of a global financial class could be described as a new integrating and collectivizing element in the global economy, the shadow side is the emergence of a global precarious work society. ³⁹ Wherever a global financial class emerges, a precarious layer of work relationships is not far behind. ⁴⁰

A shifting debate

It would be easy to conclude from all this that the rise of job insecurity and low wages affect only part of the workforce, those who are losing out in the process of economic globalization. However, the ‘winners’ of globalization should also be concerned about insecure work and low wages as they have a negative impact on macroeconomic development and growth. Insecure and flexible work, for example, pushes up mental health and security costs. ⁴¹  When more and more people have no access to secure employment, they are not able to secure loans, which impacts on the housing market and educational investments in children, contributing to social security payments and lower tax revenues. In the US, for example, according to economist David Autor, the costs of all kind of benefits outpace the benefits of cheaper imports due to free trade.

There is increasing evidence suggesting a link between precarious work and income inequality. Significantly, wage differentials between workers with a permanent contract and those with unstable and temporary contracts are particularly high in OECD countries among low earners, while earnings remain almost the same among high earners. ⁴²  Other studies show that a lack of upward job mobility, especially for those with unstable and indefinite contracts and low wages, is exacerbating income inequality. ⁴³ The conclusion is that the changes in employment patterns associated with insecure jobs are affecting the distribution of household income as the wage gap between ‘standard’ and insecure, unprotected, temporary work widens.

The link between precarious work and rising income inequality ties in with the current hot debate on inequality. For a long time, income inequality was not an important topic in economics and politics. There was widespread optimism that competitive markets would generate a trickle-down effect ⁴⁴ as a result of economic growth. Inequality is now seen as a problem that cannot be addressed by the market alone. High income inequality is recognized, also by economists at the World Bank and IMF, as a major threat to future well-being and sustainable economic growth that cannot be solved by the trickle-down effect.  High-level IMF economists Andrew G. Berg and Jonathan D. Ostry, for example, found that inequality leads not to sustainable economic growth but interrupted growth of a relatively short duration. ⁴⁵ They also discovered that longer growth spells are robustly associated with more equality in income distribution. It is safe to conclude that there is now a growing consensus that assessments of economic performance should not focus solely on overall income growth, but also take account of income distribution. ⁴⁶ This can be illustrated by a quote from an IMF working paper in 2007: ‘Surprisingly, we find that the welfare costs of inequality outweigh the benefits of growth in most cases.’ ⁴⁷

If there is a causal link between precarious work and income inequality  – and though there are many indications that this is the case, there is still much debate about it – this would mean not only that a rise in precarious work harms economic development by driving up the costs of health care, security and social security costs and reducing tax revenues, but that the resulting rise in income inequality also negatively impacts on sustainable growth in the long term. And arguably, this pushes precarious work higher up the political agenda.

The role of trade unions in securing growth

This is where trade unions step in. Richard Wilkinson and Kate Pickett, authors of the bestselling book The Spirit Level on the social impact of increasing inequality on society, conclude in a new paper that the widening income gap “seems…to reflect a lack of any effective democratic constraint on top incomes”. ⁴⁸  ‘Democratic constraint’ refers mainly to the labour movement and the role it played in reducing inequality, increasing job security and securing labour protection schemes during the 20th century. The weakening of the labour movement in the last quarter of that century has had a significant impact on the ability of working people to influence their standard of living and quality of life.

The link between inequality and the power of trade unions has been analyzed in many ways, and there appears to be a clear correlation between the increase and decrease in trade union power and the fall and rise of inequality within nations (see figure 5). There is broad consensus in qualitative and quantitative international research that increases in inequality have been associated with declining unionization rates in developed and developing countries alike. Works by Laurence Mishel, Daniele Checchi and Jelle Visser have found that unions’ impact on the labour share of income has been positive and redistributive. ⁴⁹ This trend has been observed worldwide, with the OECD reporting on the existence of a negative correlation between union coverage and income inequality. ⁵⁰

Though there is sufficient evidence to prove that there is a link between rising inequality and declining trade union power, a direct link between the declining power of unions and an increase in precarious work has not been found. However, it seems safe to conclude that the declining bargaining power of workers has also impacted negatively on job security, labour protection and permanent contracting.

One of the main causes of these problems is that powerful corporations have been able to successfully lobby for economic policies that reflect their interests, especially tax cuts for the rich which have contributed to rising inequality. Unions’ decreasing strength, due to changes in the institutional landscape and specifically in the employment protection legislation that has contributed to their weaker bargaining power, has led to stagnant wages and a weakened political voice for workers, and no countervailing power to offset the voices that are louder.⁵¹ But the costs of more unequal societies, of the rise in precarious work and of redistribution could be considerably reduced if labour movements and trade unions could increase their power base in this globalized world.

How can this be achieved? Different approaches have been suggested over time to find a balance between a competitive and dynamic labour market and continued job security and protection for workers. One such approach has been pushed by trade unions working globally. These global union federations actively negotiate Global Framework Agreements (GFA) with transnational companies, based on voluntary compliance and enforcement. In 2012, Volkswagen signed an agreement limiting temporary work at their plants and setting principles for the use of temporary contracts in the entire Volkswagen Group worldwide. This GFA was encouraged by the global trade union IndustriALL and came as a response to a growing body of ‘precarious workers’ that were employed by Volkswagen as a “key flexibility tool”. ⁵² The work and growing relevance of IndustriALL is an example of contemporary responses to the global labour market.

As this example shows, increased mobility of capital has challenged workers’ bargaining power and rights. ⁵³ A lack of a central workplace and social representation perpetuates marginalization and vulnerability for precarious workers. Reportedly, since the 1970s, fewer workers have joined or continued their membership with trade unions, according to the ILO an indication of an increase in global insecurity and inequality. ⁵⁴ Global unions like IndustriALL have adopted one way of addressing the global movement of capital and labour: with labour rights beyond the reach of nations and regular labour movements to regulate, they attempt to negotiate them across national borders. ⁵⁵

The ILO finds that, without workplace empowerment through trade unions and collective representation, legal provisions and regulations for this group of flex workers often do not materialize in practice. Corporations that largely rely on subcontractors should be urged to take steps to decrease this rate of flexibility and make no distinction between employees and subcontracted workers. This could can be achieved through negotiations with global or local trade unions, but can also be encouraged by governments. However, as UK think tank the Policy Network finds, traditional social protection systems are often poorly equipped to negotiate such demands following the structural changes in labour markets. ⁵⁶

Policy recommendations

As precarious work was legally created and allowed to develop, there are remedies to reverse these trends. First of all, there must be a legal framework regulating the relationship between employers and employees. Governments should encourage companies to take steps to improve the contracting of workers, with a minimum level of flexible work hours, differentiated by sector. It is therefore important that the bargaining power of workers improves. Trade unions should be empowered to act, especially on a global scale, to deal directly in negotiations with international corporations.

What this paper aims to add to this debate is that the broader global economic context must be included in measures to combat insecure work. Measures on wage-led growth, inclusive growth, redefining the ownership of capital, and regulating the financial sector must be all part of an effort to rebalance the economy in favour of creating more secure jobs. This is not only the domain of labour market policy. As long as financial globalization, trade liberalization, the under-taxation of capital related to labour, and the weakening of the bargaining power of employees continue, the creation of insecure work will remain a problem, because it continues to increase the pressure to change the legal relationships between employers and employees, resulting in more temporary and agency work, while also reducing workers’ bargaining power. Job insecurity and low wages should therefore not be the sole domain of labour economics and policy. Reversing the vicious cycle of mutually reinforcing elements of the current globalization regime, in which precarious employment is a key element, will require a comprehensive set of policy responses that reach far beyond labour market policies. Monetary, fiscal, financial, social, economic, labour, gender and environmental policies need to be geared towards reducing inequality, strengthening democracy in the workplace, and providing income security, good working conditions and employment opportunities.

For example, an alternative trade regime should be designed that gives governments more tools to increase job opportunities and encourage investment in productive sectors rather than for speculative purposes. Trade and investment policies must stimulate and protect sectors that can become the job-generating motor of the future. The obsession with reducing production costs to compete internationally must be refocused, away from the current fixation on lower labour costs, which includes the incentive to change forms of relationships between employers and employees. Instead, policy should support innovative attempts to reduce other production costs.

All this fits with the conclusion of the outcome document to the Workers’ Symposium on Policies and Regulations to combat precarious work with the title From Precarious Work to Decent Work. To quote one of the main conclusions: ‘Combating precarious work requires a comprehensive policy response that includes economic, fiscal and social policies geared towards full employment and income equality, a regulatory framework to reduce and ultimately eradicate precarious work, and greater efforts to empower workers by promoting the extension of collective bargaining and ensuring that all workers can access and exercise their right to associate, and to bargain collectively, freely, and without fear. Minimum wages globally, basic income security through a universal Social Protection Floor and policies to combat the erosion of the employment relationship are indispensable to limit precarious employment, indecent working and living conditions.’

And the debate on precarious work can benefit from the current political debate on inequality. High income inequality is nowadays accepted as a damaging force for economic development. As there are many indications of a causal link between precarious work and income inequality, this could push precarious work higher up the political agenda.

This paper was commissioned by FNV Mondiaal in preparation of their Precarious Work Conference in Amsterdam on 27 and 28 November 2014. The Broker would like to thank Tuur Elzinga and Karen Brouwer (both of FNV Mondiaal), Paul de Beer (University of Amsterdam), Jenny Holdcroft (IndustriALL), Carolin Vollmann and Jeffrey Vogt (both of ITUC), Sahra Ryklief (Labour Research Service) and Naome Chakanya (Labour and Economic Development Research Institute of Zimbabwe) for co-reading and commenting on draft versions of this paper.

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