IV. JOB SEARCH IN THE NEW ECONOMY: WHAT ARE WORKERS DOING AND WHO IS HELPING THEM?

Tracking Internal Labor Market in Four Industries

PHILIP MOSS
HAROLD SALZMAN
CHRIS TILLY
University of Massachusetts–Lowell

Abstract

      It is widely claimed that core firms in the United States have sharply reduced their reliance on internal labor markets. We undertake case studies of internal labor market evolution in low-skill jobs as firms engage in outsourcing and the creation of remote sites, such as call centers. We examine four industries: electronics manufacturing, food preparation, financial services, and retail trade. We find both that successive iterations of restructuring may have diametrically opposed implications for internal labor markets and that these implications differ radically across industries. Recent restructuring in these industries involves strengthening and rebuilding job ladders as well as dismantling them.

Introduction

      It is widely claimed that core firms in the United States have sharply reduced their reliance on internal labor markets, which traditionally provided long-term employment and opportunities for skill development and advancement. For instance, in a comprehensive analysis of corporate restructuring, Cappelli et al. (1997:4) report that with the breakdown of “traditional methods of managing employees and developing skilled workers inside companies . . . pressures from product and labor markets are brought inside the organization . . . [establishing] market-mediated employment relationships.”

      In earlier work, we questioned this depiction of dramatic change (Moss, Salzman, and Tilly 2000). We conducted case studies that followed corporate restructuring over time, assessing the impacts on low- and moderately skilled jobs at four electronics manufacturers and four insurance companies. We discovered that businesses did indeed replace long-standing internal labor markets with more market-mediated relationships, including outsourcing, temporary employment, and the creation of new greenfield facilities cut off from job ladders—a process of deintegration of activities and/or segments of their workforces. But, while addressing some goals (reducing costs, refocusing the firm), deintegration created other problems with workforce commitment, skills, organizational learning, and coordination of objectives between firms. These problems are ones that internal labor markets mitigate and, thus, in every case, they subsequently rebuilt internal labor markets in a variety of ways. This ranged from switching to larger suppliers that themselves had internal labor markets, to partially incorporating temporary workers into internal labor markets, to establishing job ladders at greenfield sites where none had existed.

      This paper reports on new research, still in process, that aims to replicate, broaden, focus, and deepen our earlier study. It replicates the earlier work by looking at new companies, again tracing the trajectory of restructuring over time. It broadens it by adding two new industries, retail sales and food service. It focuses by zeroing in on two particular restructuring processes: outsourcing and what we call “geographic deintegration,” the creation of remote, functionally homogeneous establishments such as call centers or back office facilities.

      As in our earlier study, we find that corporate restructuring is highly iterative, consisting of a long series of large reorganizations and small adjustments rather than a small number of decisive changes. Indeed, successive iterations may have diametrically opposed implications for internal labor markets.

Data and Methods

      The larger project of which this is a part couples qualitative company case studies with quantitative analysis of publicly compiled large microdata sets. Preliminary quantitative findings are discussed in Lane and Luque (1999). This paper is limited to discussion of preliminary qualitative findings from the case studies.

      We examine restructuring in four industries: electronics manufacturing, financial services, retail sales, and food preparation, focusing on jobs that require no more than a 2–year college degree. In each industry, we conduct case studies of a small number of companies. In electronics manufacturing and food preparation, in which outsourcing is a central issue, we look at organizational clusters consisting of final producers along with their suppliers. The cluster is defined as an electronics OEM plus a number of its suppliers in electronics; in food, we define it as a food distributor plus a number of suppliers (food manufacturers) and customers (restaurants, cafeterias, food service contractors), since the distributors are the central actors in this sector. In financial services and retail sales, in which geographic deintegration is common, we look at headquarters along with their associated remote sites. We have gained varying degrees of access to companies, but our goal—in most cases successfully realized—is to speak to top managers, human resource officials, and frontline managers at each site we visit. We learn about the trajectory of change in internal labor markets primarily by asking retrospective questions. In addition, the unintended benefit of the long time it takes to complete the cases (often due to the logistics) is that we are able to observe the changes in real time.

      Our sample currently includes eleven businesses:

• In electronics, our cases are a large company we call Blitz Electronics and the middle-sized Jupiter Systems, both of which manufacture high-technology electronic components. Jupiter was acquired shortly after we began studying it, delaying completion of the case study.

• Our financial services sample includes Bedrock Financial, a large company that primarily provides wholesale banking services, and Insurall, a diversified insurance company. We published initial results on Insurall in earlier work (Moss, Salzman, and Tilly 2000), and have continued to follow the case as it evolves.

• We are examining two retailers, Clarendon’s and Marketplace Stores. Both are large mid-market department store chains that have substantial call center operations and a strong Internet presence.

• Our food service sample includes firms at several points along the “food chain.” Final food servers include Masterfood, a national institutional food service company, and the Ourtown School System. At the food distribution level, we are studying Food King, a national distributor, and Joe’s Produce, a regional one specialized in fruits and vegetables. Finally, our study includes one food producer, Maritime Seafood.

Findings

      As corporations restructure, they make several kinds of decisions with momentous implications for internal labor markets. In this paper, we focus on two. First, firms decide which activities to keep within their organizational boundaries and which to shift outside, either through outsourcing or through using external workforces such as temporary employees. Second, for those activities retained within the firm, businesses develop mobility patterns and skill levels for the relevant set of jobs.

What Activities to Keep

      In various ways, the firms we studied are continuously evaluating what the “firm” should be, what it should do, as well as what should be inside and outside of the organizational boundary. To the extent that these businesses articulate principles of what should be retained within the firm, they come up with something like the following list of activities to keep inside the firm:

1. High value-added, higher-skill activities.

2. “Core,” or strategic, activities that provide it with a competitive advantage and/or a unique product, service, or capability.

3. “Necessary evil”—those that cannot be done effectively outside the firm or outsourced.

4. Activities that make use of the firm’s capital for high return on investment that may have been outside the original production of the firm’s goods or services.

What is interesting is that although the companies under study would agree on the importance of keeping high value-added activities and core competencies while discarding others, the implications of these principles have played out quite differently in different settings.

      In the electronics industry, OEM companies following the logic described above initially restructured by outsourcing lower value-added activities, vertically deintegrating to the point of becoming primarily systems integration and marketing businesses. In food preparation, food service businesses such as restaurants and cafeterias have likewise outsourced, but the process has been driven by large food distributors that, in some cases, have vertically integrated by adding what for them are high value-added activities of food preparation and, in other cases, have shifted these activities farther up the supply chain.

      In earlier work, we documented the outsourcing strategies of several large electronics firms (Moss, Salzman, and Tilly 2000). The new case of Blitz Electronics confirms the general trends toward outsourcing. Nearly all of Blitz’s manufacturing is outsourced and/or conducted offshore. We have not seen evidence of rebuilding of internal labor markets by Blitz, though the case is still in process. Jupiter Systems’ acquisition has delayed us from comparing that company’s sourcing activities.

      In electronics, outsourcing has moved basic production and commodity production out of the firms producing and selling the final products. Jobs at the firms to which the activities have been outsourced typically pay lower wages, are less likely to be unionized, and are separated from the formerly integrated activities that might have provided enhanced upward mobility. Increasingly the supplier firms are very large, sometimes larger than their customers, but operating on low margin, they tend to hire low-skill and low-wage workers. The manufacturing processes that are retained in the firm are final-stage assembly/test, specialty component production, and early-stage production. The redistribution of labor, in these cases, is toward retaining only high-skill or high value-added labor in first tier firms, whereas previously these firms had a more heterogeneous workforce, all of whom were paid well relative to workers in peripheral firms.

      In food service, our research design includes the three major segments involved in food preparation: food service, food suppliers/distributors, and food manufacturers.¹ Consolidation in each of the food preparation segments has increased in recent years, increasing the amount of work done in, and control by, very large firms and spurring the geographic redistribution of food preparation work. Consolidation is occurring throughout the industry, among food distributors, food manufacturers, and food service companies such as restaurant chains and institutional food services.

      Large distributors such as Food King have a significant role in shaping food preparation. Major changes in location and, consequently, quality of food preparation jobs were supply driven by distributors rather than demand driven by food service firms. For example, Food King found that purchase of salad preparations lowered transportation costs over shipping component ingredients separately. Prepared food has less weight and bulk because the waste is removed, and prepared food is better preserved, reducing spoilage and easing shipping constraints by allowing greater latitude in delivery and logistical tolerances. Interestingly, restaurants report that the most significant cost savings of prepared food is in lower workers’ compensation costs due to less use of dangerous tools such as knives.

      Joe’s Produce actually moved into the food preparation business to increase their sales. Some foods that were difficult to prepare, such as cauliflower, or were labor intensive, such as fruit salad, would be purchased in greater quantities if the restaurant or food service provider did not have to do the preparation. Like Food King, this distributor found that preparing some foods close to the growers reduced transportation weight 40 percent. By shifting to higher value-added activity with higher profit margins, firms such as Joe’s Produce and the food manufacturers are able to increase profits.

      The shift in food preparation work may decrease entry-level opportunities in restaurants and cafeterias, particularly opportunities for non–English speakers, since it reduces the number of jobs that do not require high levels of communication with either customers or co-workers (with notable exceptions depending on the location of the restaurant, of course). However, the shift in jobs from small food service settings to larger food manufacturing establishments, while making these jobs less geographically disperse, should improve their quality. Wages and skills tend to be higher in food manufacturing, and job ladders are more likely simply due to the size of the establishments.

      The pay level in food manufacturing tends to reflect that of the manufacturing sector, with median wages of $11.80 an hour (SIC 20) compared to $6.70 an hour in the food service sector (SIC 580; U.S. Bureau of Labor Statistics 1998). Looking at pay levels of occupations affected by the food preparation shift, food preparation workers in restaurants average $6.10 an hour as compared to machine tenders and operators in the food manufacturing industry, who receive $10.50 an hour. Even the same occupation wage differentials between industries are striking: bakers in restaurants have median wage of $7.60 an hour as compared to $10.20 in the food manufacturing industry.

      In electronics manufacturing, then, the decision on what activities to keep has led in general to a shedding of activities by formerly vertically integrated firms to smaller firms. Due to consolidation among food distributors, manufacturers, and food service firms, higher value-added activities are shifting from smaller, lower wage settings to larger firms that now have taken on more activities.

Evolving Mobility Patterns and Skill Levels

      We examine businesses’ skill and mobility policies as they undertake geographic de-integration—creating remote facilities such as call centers or back offices. Breaking up activities geographically in this way self-evidently creates significant barriers to job mobility within the firm. Therefore, the creation of remote facilities offers a useful context in which to observe a firms’ decision making about mobility and about the closely related issues of skill acquisition and retention.

      The retail and finance companies we studied all created remote sites. They did so primarily to tap new workforces and, to a lesser extent, to gain the advantages of locating in multiple time zones and climate zones (the last to reduce vulnerability to localized weather emergencies). How does one accommodate workers’ desires for upward mobility opportunities in this sort of dispersed geographic configuration? The businesses in our sample adopted three strategies.

      A first strategy is to be the dominant employer in an area—the largest and/ or highest-paying employer of workers in the relevant skill range—so that lack of mobility is offset by compensation or simply by a lack of other options. The problem with this strategy is that, typically, it does not last. Once one company discovers a capable and willing workforce available at wages lower than elsewhere, other companies typically follow suit.

      A second strategy is particularly common: structure remote sites to permit mobility within them. Firms can do this both by concentrating (creating a few large sites rather than many small ones) and by creating job layers within a site. Managers at Bedrock Financial are wrestling with a number of decisions about geographic concentration. Bedrock operates nationwide, and regions have a great deal of autonomy in deciding the degree to which operations are concentrated in a regional headquarters or dispersed among branches. Some regions have chosen high levels of concentration; others have chosen dispersion. We visited the regional headquarters in a region that has opted for concentration. Managers described a decision about whether to locate a newly created department in the headquarters or in a branch. Staff at this department are in frequent contact with customers (in this case, other financial institutions) to exchange information, but the contact is almost exclusively by phone, fax, and letter, so the activities themselves do not dictate location. But the department manager told us, “We decided that because of the importance of the data, we had to keep it close [to other headquarters activities].” This keeps lateral and upward mobility channels open for the department’s employees.

      The other step companies have taken to facilitate mobility is to create multiple job levels. In earlier work (Moss, Salzman, and Tilly 2000), we described the case of Steadfast Insurance, which sited a new customer service call center in a remote location, with the initial intention of creating a very flat organization with few opportunities for promotion. Somewhat reluctantly— since they were moving away from the corporate-mandated flat job structure— they eventually instituted a new job hierarchy as a means of retention.

      Remarkably, every business in our sample that has made major investments in call centers ended up reinventing the same wheel as Steadfast. This includes InsurAll, as well as the two retailers, Marketplace and Clarendon’s. The Clarendon case is sufficiently striking that it seems worth recounting in some detail. Clarendon stores had seven levels of jobs in the sales organization (recently reduced to six). In contrast, the first call center, opened in the early 1980s, used only three levels (facility manager, shift managers, and customer service representatives). By 1990, the call centers had added three more workforce levels for a total of six, citing in part the need “to create career growth opportunity”. Around this time, Clarendon’s executives called for reducing management head count in the centers; interestingly the centers did this by decreasing the number of managers, but increasing the number of (sub-managerial) supervisors so as to maintain a 60:1 ratio of workers to managers and supervisors.

      While it is certainly noteworthy that so many finance and retail companies appear to have independently gone through the learning process, adding layers to an initially flat internal labor market structure, it would be a mistake to assume that the results are uniform. When the call centers are viewed primarily as cost centers, managers emphasize productivity and cost savings, leading to use of part-time workers, heavy reliance on time-per-call metrics, and other practices that degrade job quality. When they are viewed as opportunities for adding value, managers lean toward high-performance practices that enhance jobs.

      A final strategy for handling mobility in geographically dispersed companies is the simplest one: let workers fend for themselves in the external labor market. Although the widespread image of call centers as “electronic sweatshops” might suggest that this strategy is the most common, we did not find it so. Indeed, companies that ran high-turnover call centers did so reluctantly.

Conclusion

      Our evidence, both from our earlier study and from our current case studies, strongly suggests that organizational restructuring is an iterative process rather than a linear movement towards an end state consistent with the requirements of a “new economy.” Businesses still find it necessary to integrate substantial portions of their workforce into the firm via established internal labor markets and that much movement in the last several years has been toward reintegration. Firms in retail and finance that geographically relocated customer service call centers away from corporate centers, again for cost reasons, have also bumped against a constraint on recruiting and retaining the skill they seek because isolated operations have such limited upward mobility. Whereas outsourcing in electronics typically involves creating lower-quality jobs within smaller organizations, outsourcing in food service usually shifts work from small restaurants and cafeterias to large distributors and manufacturers, often improving job quality in the process.

      The recent movement back toward stronger internal labor markets responds in part to the tighter external labor markets generated by a strong economic expansion. But in our cases, we also saw deintegration during the tight labor markets of the late 1980s (e.g., outsourcing by Blitz and Jupiter, creation of remote call centers by Clarendon’s) and reintegration during the recession of the early 1990s (e.g., Clarendon’s adding managerial layers to its call centers). So, while tight labor markets may reinforce certain types of restructuring, they do not dictate the path of restructuring.

      We anticipate that with our longitudinal research design, we will likely uncover further iteration in organizational form and job structure. The external environment continues to encourage firms to pursue cost reduction through restructuring, so we forecast a continuing interplay of efforts to reduce costs, and efforts to recruit, retain, and develop skilled workers.

Acknowledgments

      We wish to acknowledge Radha Biswas’s participation and invaluable research assistance throughout this project. We also thank the Russell Sage and Rockefeller Foundations for financial support.

Endnotes

1. This section on the food industry draws extensively on the work of Radha Biswas, research assistant on this project.

References

Cappelli, Peter, Laurie Bassi, Harry Katz, David Knoke, Paul Osterman, and Michael Useem. 1997. Change at Work. New York: Oxford University Press.

Lane, Julia, and Adela Luque. 1999. “Low Wage Workers and the Future of Work: Firm Personnel Policies and Job Outcomes.” Unpublished paper, Urban Institute, Washington, DC.

Moss, Philip, Hal Salzman, and Chris Tilly. 2000. “Limits to Market-Mediated Employment: From Deconstruction to Reconstruction of Internal Labor Markets.” In Francoise Carré, Marianne Ferber, Lonnie Golden, and Steve Herzenberg, eds., Nonstandard Work: The Nature and Challenges of Changing Employment Arrangements. IRRA Research Volume. Madison, WI: Industrial Relations Research Association.

U. S. Bureau of Labor Statistics. 1998. Statistics from Industry-Occupation Employment Matrix for 1983–1995. Unpublished Data Provided by BLS staff.