Beyond the Flexibility/Security Divide: Skills, Work Organisation, and External Employment in the German Knowledge-Based Economy

Continental European economies share a pattern of employment institutions, characterised by strong employment protections, investments in workforce training, and employment-based inclusion in social security and other welfare protections. In the German economy, as elsewhere, employment protections limiting dismissals constitute a key regulatory mechanism. Dismissal restrictions pose constraints on employment strategies, by blocking the ability of firms to easily adjust employment levels in response to market downturns and uncertainties. In the face of such constraints, firms in protected employment economies like Germany have found alternatives through more flexible use of internal labour markets. Labour market theory has pointed to the benefits of internal employment and the long-term employment relations they imply for reducing transaction costs and moral hazards, especially in skilled work contexts (Marsden 1999). Research on comparative capitalism has viewed employment protections as ‘beneficial constraints’ (Streeck 1997), since firms are forced to abandon strategies of hiring and firing (numerical flexibility) in favour of training and rotating staff to gain (functional) flexibility. Employment protections and the flexible internal labour markets they create contribute strongly to Germany’s successful alignment of strong economic performance with relatively high employment and social security for workers, rendering Germany one of the best cases of the coordinated market variety of capitalism (Hall and Soskice 2001).