Introducing Varieties of Capitalism and Regulation Theory
The Varieties of Capitalism Approach
Variation in national macroeconomic performance over the last 35 years has stimulated research interest in the institutional foundations of national competitiveness. Two groups of modern institutionalists, the proponents of so-called VOC and RT, have been especially interested in explaining comparative economic performance in terms of institutions. Like Veblen, Commons, and the other old institutional economists, these modern theorists (Gooderham, Nordhaug, and Ringdal 2006, 1492) believe that the "notion of individual agents as utility-maximizing is ... inadequate or erroneous" (c.f. Hodgson 2000, 318). Individual behavior is instead shaped by a social structure and order expressed in, and conditioned by, institutions (Albert and Ramstad 1998), especially legal institutions, in the view of John R. Commons (Hodgson 2003). Institutions can affect individual behavior in three ways. First, they have a restrictive function in constraining behavior. Second, they have a cognitive function in: a) transmitting information to individuals about what others will and will not do; and b) influencing the way in which people perceive reality. Third, and not unrelated, they have a motivational or teleological function in influencing the goals people decide to pursue (Dequech 2002, 566). Both VOC and RT theorists believe that behavior is shaped by social structure, laws, and informal regulation, but RT theorists see legislative interventions varying more in effectiveness, with any accommodation between competing societal interests invariably contested as the balance of social forces and external pressures shift. The RT view of institutions is thus more obviously dynamic: institutions provide a temporary basis for mediating and framing social exchanges, allowing for periods of growth (Hollingsworth 2006).
VOC scholars focus on how societal rules, norms, practices and cultural factors mold specific patterns of firm-level practice (Gooderham, Nordhaug, and Ringdal 2006, 1493). They draw key distinctions between those developed countries characterized as liberal market economies (LMEs), the United States and most other developed Anglophone economies, and coordinated market economies (CMEs), Japan, Germany and most of northern Europe (see Dore 1986; Lincoln and Kalleberg 1990; Hall and Soskice 2001). In general, LME institutions stress the primacy of shareholder value maximization and shareholder rights, whereas CME institutions focus more on long-term national interests and reconciling the often-conflicting interests of key stakeholders, especially organized labor and capital. Each system encourages and constrains particular patterns of organizational practice (Dore 2000). The idea of path dependence, with national varieties of capitalism evolving along distinct, linear trajectories, is central to the VOC literature (Hollingsworth 2006).
Critiques and Developments
In contrast, proponents of regulation theory (RT), though also concerned with cross-national regulatory and governance differences, argue that LMEs and CMEs have both had to change in response to the crisis of Fordism (1) in the early 1970s (Jessop 2001). To regulationists, any form of institutional mediation is necessarily temporary and subject to a non-linear process of evolution. Quite simply, there is no guarantee that a particular set of institutional arrangements functional in one particular time and place will be similarly functional later or elsewhere.
During the 1980s and early 1990s, both schools of thought concerned themselves with critically evaluating the relative merits and demerits of LMEs versus CMEs, often expressing a clear preference for the latter over the former (Jessop 2001; Dore 2000; Lincoln and Kalleberg 1990). However, the resurgent performance of LME economies, particularly the United States, in the 1990s and early 2000s has challenged any assumption that there might be one "best" model of capitalism (Jessop 2001). Nonetheless, VOC and RT scholars remain doubtful about the desirability of the LME model for two reasons. First, LMEs remain prone to speculative bubbles and associated economic volatility (Brenner 2002). Second, in stressing shareholder wealth maximization, LMEs focus too narrowly on one set of interests, those of short-term corporate capital, at the potential expense of other interests and values. Advocates of the LME model claim that this is essential: corporate profitability must receive priority over other goals like the quality of working life; the pursuit of the latter must necessarily come at the expense of the former. However, VOC and RT institutionalists argue for the mutually reinforcing complementarity of labor and capital interests in CME capitalism. In a negotiated, national settlement, the parties can together devise win-win solutions, workplace practices and institutions, which are functional to the interests of both and involve no obvious, major loss of efficiency, at least in the long-run (c.f. Jessop 2001; Boyer 2006).
Legislated Unjust Dismissal Protection
Defining Employment Protection
Legislated employment protection or employment security typically refers to a variety of mandatory practices that deliberately make it harder and/or more expensive to dismiss employees. These practices typically include severance payments and/or advance notice for redundant workers, dismissal procedures that adhere to rules of natural justice, and permitting dismissals only where there is just cause. Where available, severance payments typically vary with years of service and salary. Sometimes, severance payments are only owed if the employer provides insufficient advance notice. The period of advance notice usually depends upon the worker's years of service and sometimes the number of redundancies among other factors. Dismissal procedures are generally quasi-judicial in nature, and entail at least some worker involvement. This may vary from simply informing workers of why and how they have been selected for redundancy to involving workers or their representatives in making dismissal decisions through works councils. Just causes for dismissal ordinarily fall into three categories: worker performance, worker misconduct, and redundancy. Performance ordinarily covers issues like incompetence and incompatibility, where there is no obvious, willful attempt to do harm to the employer's interests. In contrast, misconduct typically involves willful violations of duties or rules that undermine the employer's interests. Examples include dishonesty, disobedience, disloyalty, and negligence. Redundancy may be defined broadly or narrowly. A broader notion of redundancy allows employers to sack employees whenever their jobs are eliminated. No reason for eliminating the jobs need be given. A narrower notion of redundancy permits employers to only eliminate jobs and sack their incumbents in a narrow range of circumstances such as bankruptcy and insolvency.
Employment Protection in Comparative Context
Table 1 outlines the degree of legislated employment protection for a selection of CME and LME countries. It shows that CMEs (like the Netherlands and Germany) have substantially more protection than LMEs (like the United Kingdom and United States), despite a trend toward less protection. CMEs in Europe also differ considerably in the extent and nature of their employment protection (Abraham and Houseman 1993; Bertola, Boeri, and Cazes 2000; Kraft 1997; Morin and Vicens 2001). For instance, just-cause rules allow redundancies in wider circumstances in Germany than France, but, in requiring greater levels of worker involvement, Germany's dismissal procedures are in many ways more onerous than France's (Morin and Vicens 2001). Despite such differences, CME governments have shared a common objective in providing some degree of employment security, at least to permanent, full-time employees.
At the other LME extreme, the United States only affords employment protection to civil servants and, via negotiated provisions in collective agreements, to unionized workers. The bulk of nonunion, private sector workers are covered by an official policy of employment-at-will (Barber 1993, 166). This essentially allows employers to fire people for any or no reason and without having to provide advance notice or severance payments. However, over the last thirty years, the courts have circumscribed this policy, though only marginally, by providing just-cause employment protection in three situations: when the employee is dismissed for complying with U.S. law, when the dismissal involves discrimination on a prohibited ground, and when employer promises of job security constitute an implied term in the employee's contract (Miles 2000). In addition, the 1988 Worker Adjustment and Retraining Notification (WARN) Act requires employers outside the state and federal civil services to provide employees with 60 days advance notice of termination for plant closings and mass dismissals of 500 or more workers (Eger 2004, 396).
Worker Commitment: A Positive Effect of Legislated Employment Protection
Worker Commitment and Varieties of Capitalism
Worker commitment to the firm and its goals is more important to CME than LME capitalism, because of the former's greater dependence on skilled labor. CME firms are particularly reliant on the synthetic or engineering knowledge of workers, often only accumulated with years of experience in the same firm or industry, for a competitive advantage, especially in manufacturing industrial inputs in small batches to particular customer specifications (Asheim and Coenen 2006; Haake 2002; Thelen 2001). Success is achieved through product differentiation, with emphasis given to durability, reliability, and performance (Streeck 1992). LME economies are more bifurcated in their reliance on skills (Estevez-Abe, Iversen, and Soskice 2001)...