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Financial Markets, Human Resource Policies and Flexibility
Financial systems that are bank-based such as in Germany and Japan employ an internal strategy of managing human resources via job ladders and screening whereas in market-based systems such as in the UK and the US an external strategy where recruiting and laying off occurs as demand changes and market signals help set wages. India is a bank-based system that in the organised sector till recently followed the internal strategy of managing employment. But as product markets are liberalised and firms face increased competition, the ability to pass on the costs of worker privileges such as job security diminishes depending on the state of capital markets. The new epoch of competition based on the use of more flexible technologies and forms of work organisation thus calls for job enlargement and multiskilling and in some cases rearranging employees rather than recomposing the tasks they perform.
It has long been recognised that financial systems around the world differ in the ways in which they mobilise savings, allocate capital, and provide risk management vehicles. Economists have classified these financial systems as being bankbased or market-based and have long debated the relative advantages of these two types of systems [ Levine and Zervos 1998]. The examples of Germany and Japan crop up whenever bank-based systems are discussed and England and the US are the prime examples advanced of market-based systems in which securities markets are as important as banks in channelling savings to firms, keeping a check on management decisions, and providing risk management vehicles. It is striking that not only are the financial systems in these two sets of countries – Germany and Japan on one hand, and the UK and US on the other – different, but also that firms in these two sets of countries are organised and managed in very different ways and this has an important influence on how these firms manage their labour. In the management of their labour firms, these two sets of countries tend to do so either internally or externally. For instance, it is well known that some firms undertake extensive training for their workers and organise production using an internal division of labour that results in firm-specific wages and benefits whilst others externalise much of their labour management through subcontracting and temporary work.
The external strategy which is often associated with a reliance on subcontracting also comprises the following practices: (i) recruiting labour in the market which others have trained; (ii) recruiting and laying off as demand changes; (iii) filling higher positions with external as well as internal candidates; (iv) relying on external state or private training agencies to train in externally marketable skills; and (v) accepting external market criteria and signals for the setting of wages. The internal strategy where there is direct organisation of the workforce is associated with the following practices: (i) providing own, firm-specific training; (ii) attempt to adhere to the objective of making staff permanent; (iii) using internal promotion and job ladders; (iv) elaborate and systematic screening and recruitment of workers/ employees; (v) setting wages according to internal administrative procedures rather than market forces – e g, using fringe benefits based on seniority. In the market-based financial systems of the UK and the US employers rely on external regulation of employment matters whereas in the bank-based financial systems of Japan and Germany the internalisation strategy of managing human resources is pursued. The impact of the type of financial system on human resource policies will of course be mediated through the system of governance that is adopted by the firm. Governance systems broadly considered may be indirect, i e, governance is exerted mainly through the market for corporate control, or direct, i e, governance is sought through board representation of those who finance the firm. This suggests that firms may be slotted as belonging to one of the four types of categories of finance cum governance systems that are conceptually possible as has been listed in the table. With two types of financial systems – market-based and bank-based, and two types of governance systems – indirect and direct, firms can operate in a market-based or a bank-based system either through an indirect or a direct governance set up. Interestingly the two sets of countries identified previously are polar cases of this typology of finance cum governance systems.
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