View from New York: Down-sizing towards a disposable workforce

IBM, faced with a choice between two highly regarded computer-industry executives and a manager best known as a 'down-sizer', opted this week to name the latter, Lou Gerstner, as its new chief executive. Last week, the world's most sought-after manager was Jose Ignacio Lopez de Arriortua, the Spanish engineer who achieved near-cult status at General Motors for his zeal in rooting out unnecessary costs.

That America's two best-known corporations are focused on cutting staff is hardly surprising, given their huge losses in recent years. What is more alarming is that neither of these corporate giants, nor any of the other big Fortune 500 names such as Sears, General Electric or AT&T, ranks as America's largest employer. That distinction, according to Time magazine, now falls to Manpower, the Milkwaukee-based temporary employment agency that deploys a 'staff' of 560,000.

With big companies continuing to sack full-time employees at a rate unprecedented in the middle of an economic recovery, American business is grappling with an upheaval that Apple Computer's chairman, John Sculley, compares to the Industrial Revolution.

Unemployment is striking not only at money-losing companies that face shrinking demand, such as automobile and aircraft makers and defence contractors. Healthy, profitable corporations are also 're-engineering' their businesses to reduce the labour content of their products. Other employers, trying to maintain maximum flexibility and avoid the extra costs that come with a full-time labour force, are turning work over to 'contingent' workers - part-timers, temps, consultants, freelances and subcontractors.

More than 6 million Americans have been made permanently redundant since 1987. At the same time, the number of workers temporarily employed has risen 10 times as fast as full-time employment in the past decade. Part-time work accounted for almost all the 365,000 jobs created last month by US companies. One in four Americans is now 'self-employed' and that ratio is expected to rise to one in two by the end of the decade.

The old terms 'right-sizing' and 'restructuring' have given way to 'just-in-time employment' and 'the disposable workforce'. The trend has prompted a flurry of new management theories and cover stories, noting that job security in America is more tenuous than at any time since the Depression. With each new set of employment figures, the Labor Secretary, Robert Reich, has complained that these 'are not real jobs'. Hollywood has even played its part in exploiting the phenomenon, releasing a murder thriller called The Temp.

The most immediate evidence of stagnating employment is to be found in what economists are calling the productivity-led recovery in the US. Rather than take on new workers as demand rises, American businesses are investing heavily in technology to increase their output per worker. Average productivity rose by 2.8 per cent last year, the best showing in 20 years, and was up by 4.8 per cent in the final quarter.

The most obvious reason for the reluctance to take on new workers is fear of additional social costs likely to be imposed by President Bill Clinton, notably in healthcare. By one estimate, temporary workers cost employers anything from 20 to 40 per cent less than permanent ones. The US tax code, the unemployment insurance scheme and contract law are also structured in ways that make mass redundancies, the use of contingent workers and excessive overtime easier and less risky than work-sharing and new hiring.

What appears to be emerging in America is a truer marketplace for labour, one that is ultimately turning every worker into a contractor judged in the raw terms of how much value he or she adds to production and at what cost. Individual employers who provide benefits when competitors don't are operating at a comparative disadvantage.

This market is a global one, with real price competition already coming from low-wage workers in Latin America, free-trade agreement or not. As the economist Milton Friedman recently noted in the Wall Street Journal, it's not yet recognised how enormous the effect of political liberalisation will be on Western workers. A billion people in China are suddenly available for use with capital, he points out, and half a billion more in the former Soviet Bloc.

Technological productivity and exposing the labour market to competition should make the American economy more efficient, and allow it to compete internationally on a price basis. If history is any judge, this will create new jobs in the long run. America's strength, some economists argue, has always been in flexibility and its ability to adapt to change; the reorganisation of the workplace is only the latest in a history of economic revolutions.

In the meantime, America 'is working essentially without a social contract', as one commentator put it recently. No one's job is safe. Labour standards, benefits packages and union contracts cover fewer and fewer US workers each year. Layoffs and contract employment also mean vast transfers of social costs from businesses to the taxpayer, as governments are left not only with higher social security and medical expenses, but also rising payments for welfare and crime control.

There is also plenty of evidence emerging that much down-sizing is in fact 'dumb-sizing', as one recent study put it: two thirds of the companies that have made workers redundant in the past five years report no increase in efficiency, and less than half have seen any improvement in profits.

In the long run, the move to shed full-time staff runs directly counter to Washington's belief, articulated by Mr Reich, that the only way to ensure future prosperity is through a quality workforce. In a world where capital and production is increasingly portable, Mr Reich argues, the only way to create and attract high-wage jobs is through investment and empowerment of the American worker, through education, training and technology. A 'disposable workforce' suggests disinvestment in human capital and the breaking down of loyalty to companies - and therefore of incentives to 'work smart', innovate and compete.

In the face of this paradox, American business - which has long regarded government mainly as a source of regulatory nuisance - is only now coming around to an appreciation of an appropriate role for the public sector. Detroit's car makers, with some of the highest benefits costs in the country, were not surprisingly among the first businesses to favour what was once disparagingly called 'socialised medicine' in the US.

Universal public programmes are now increasingly viewed as the best hope for improving America's competitive position - making life easier for its growing contingent workforce but, more importantly, removing some of the artificial disincentives to hiring full-time, long-term, quality employees.