...upon individuals. Knowledge has been increasingly embodied in firms themselves, which has played an important role in lowering the relative cost of human resource management strategies based on external labour flexibility. As a consequence, recourse to external labour markets has developed, which may harm firms' innovative capabilities in the long run.

Keywords: Competences; knowledge codification; information technologies; internal labour markets

JEL Classifications: B52; O33; M51

Introduction

For almost 20 years now, labour markets in the industrialised countries have been undergoing profound changes. The most striking of these changes--or at least the one that has attracted most attention--is certainly the increase in the share of skilled workers in the total volume of employment and in wage bills and the corresponding deterioration in the employment and pay prospects of less skilled workers (Katz and Autor, 1999). Several factors have been suggested as explanations for these developments, among them technological and organisational changes (see Chennells and Van Reenen, 2002) and international trade, which all increase the demand for high-level skills in industrialised countries.

A second stylised fact, less closely examined but nevertheless very striking, concerns the destabilisation of internal labour markets following the adoption of management methods based on external labour flexibility. According to Doeringer and Piore (1971), internal labour markets are characterised by the existence of long-term relations between employers and employees, progression along a pre-defined career path, a limited number of 'ports of entry' in the course of a career and the existence of a stable pay hierarchy, both between the various jobs and over time. For Marsden (1986), internal labour markets stand in contrast to so-called occupational labour markets. In the former, vacant positions are mainly filled by promotion or internal mobility, while in the latter firms use the external labour market.

Traditionally, internal labour markets were particularly highly developed in France and the United States, whereas occupational markets predominated in Germany and the United Kingdom. Over the past two decades, however, human resource management has changed. In particular, internal labour markets have been profoundly destabilised, whereas the use of external flexibility, which used to be a characteristic of the occupational model, has increased to a hitherto unknown extent. In the United States, job instability increased for all categories of employees during the 1980s (see Neumark, 2000). The 1990s saw a reduction in long retention rates for workers with high seniority (1) (Neumark et al., 2000). Valletta (2000) also points to an increase in job insecurity as reflected in an increase in dismissal rates among employees with high seniority over the period running from 1976 to 1992. Using the Displaced Worker Survey between 1984 and 2002, Farber (2003) also finds an increase in involuntary job loss in the mid-1990s. Finally, rates of transition between employment and unemployment increased for highly skilled workers with high seniority during the recession of 1990, which was not the case in the more severe recession of 1982.

In France, the trend has also been to call into question long careers within the same company (Berton, 2001). Although there exists some evidence of internal labour markets continuing to function in larger firms for R&D occupations (see Beret, 2001), on average, job insecurity seems to have increased in the recent past. On French data, Givord and Maurin (2004) find an upward trend in annual transition rates from employment to unemployment over the period 1982-2002. Using the same definition of job insecurity over a longer period of time (1975-99), Behaghel (2003) finds that job insecurity increased strongly for older workers (aged more than 55), and for workers with less than five years of tenure. This result is consistent with Gautie (2004), who emphasises that internal markets have shrunk to include only workers in the intermediate age groups. According to him, young people and older workers have been gradually excluded from this so-called 'primary' segment of the labour market and are now largely located in a secondary segment in which external flexibility is the rule. Beffa et al. (1999) summarise this development by stressing that internal labour markets are seeing their scope reduced, in favour of occupational markets in the case of more skilled workers and in favour of a 'market flexibility' regime characterised by intensive use of mobility or even precariousness for less skilled workers.

In what follows, we propose a theory of the decline in internal labour markets based upon the nature of the knowledge processed in the firm. Our main line of argument is that the current process of increasing knowledge codification may have contributed to the development of new modes of human resource management based on use of the external labour market. In order to carry out our analysis, we deploy a particular theoretical framework, namely that provided by the competence-based approach to the firm. This approach seeks to offer an alternative to the standard neo-classical theory of the firm and its most immediate extensions. Since the early 1990s, a very large number of studies have adopted this approach in order to examine, in particular, the sources of firms' competitiveness and the dynamics of technical change. However, little use has been made of this new concept of the firm as defined by its competence base to deal with issues related to human resource management and, more generally, labour economics. However, in our view, it provides a particularly suitable framework for doing this, since the factors driving the changes taking place in the labour market are closely linked to the development of new technologies, which have had a major effect on firms' competence base.

The core of our theory is that the labour flexibility strategy chosen by a firm strongly depends on its competence base. We start from the observation that whenever competences lie to a large extent with individuals, internal flexibility is crucial for firms' performance. On the contrary, when the organisation itself is the main repository of competences, a firm may afford to choose an external flexibility strategy without putting at risk its competence base. Moreover, we argue that this alternative is endogenous to the nature of the knowledge processed in the firm. When knowledge is essentially tacit, keeping core workers through internal labour flexibility proves to be indispensable to the development of competences. On the other hand, if the knowledge is largely codifiable and embodied in the firm itself, then external flexibility may be less costly without being any less efficient, at least in the short run.

This very simple model of the relations between competences, knowledge and labour flexibility leads us to highlight the key role of information and communication technologies (ICTs) in the development of external labour market flexibility. We argue that one possible reason for the decline in internal labour markets is that the spreading of ICTs has shifted the balance away from tacit towards codified knowledge, which has made, in turn, external labour flexibility more profitable.

The competence-based approach to the firm is outlined in the first section of this article. We briefly present the view according to which competences are the basis of firms' performance and highlight the fact that, according to this approach, competences may lie either in individuals or in the organisation itself. In the second section, we show that firms' decisions in respect of labour flexibility are closely linked to the nature of their knowledge base. This gives rise to two polar labour flexibility configurations depending on how tacit/ codifiable knowledge is. In the third section, we adopt a more dynamic perspective and suggest that one reason for the development of external flexibility strategies may lie in increasing knowledge codification due to the diffusion of the new information and communication technologies. By way of conclusion, we examine the long-term sustainability of human resource management strategies based on external flexibility.

The competence-based approach to the firm

The competence-based approach to the firm emerged during the 1990s (2) with the aim of shedding light on firms' internal workings. For a long time, indeed, economic theory had regarded the firm as a 'black box', the substance of which could at best be reduced to a contractual nexus (agency theory) or to a less costly form of coordination than the others (transaction cost theory). However, it would seem impossible to explain, on this basis alone, a number of established empirical facts in industrial economics. In particular, persistent differences in performance between firms within the same sector remain unexplained if firms' internal...

NOTE: All illustrations and photos have been removed from this article.



Looking for additional articles?
Search our database of over 3 million articles.

Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication name or publication date.

About Goliath
Whether you're looking for sales prospects, competitive information, company analysis or best practices in managing your organization, Goliath can help you meet your business needs.

Our extensive business information databases empower business professionals with both the breadth and depth of credible, authoritative information they need to support their business goals. Whether it be strategic planning, sales prospecting, company research or defining management best practices - Goliath is your leading source for accurate information.