Human resource management and performance still searching for some answers

Human resource management and performance: still searching
for some answers
1. David E. Guest
Article first published online: 24 DEC 2010
Abstract
Over the past 20 years, there has been a considerable expansion in theory and research about
human resource management and performance. This paper reviews progress by identifying a
series of phases in the development of relevant theory and research. It then sets out a number of
challenges for the future on issues of theory, management processes and research methodology.
The main conclusion from the review is that after over two decades of extensive research, we are
still unable to answer core questions about the relationship between human resource management
and performance. This is largely attributed to the limited amount of research that is longitudinal
and has been able to address the linkages between HRM and performance and to study the
management of HR implementation.
INTRODUCTION
When the Human Resource Management Journal was launched in 1990, it was able to capture a
rising wave of interest in human resource management and in particular the relationship between
human resource management (HRM) and performance. The following decade provided the initial
sound evidence about a positive association between HRM and firm performance (see, e.g.
Arthur, 1994; Huselid, 1995; Delery and Doty, 1996). A decade later, the number of studies had
grown to such an extent that two major reviews of the research (Boselie et al ., 2005 ; Combs
et al ., 2006 ) confirmed that the large majority of published studies demonstrated an association
between HRM and performance; but both also emphasised that their analysis provided evidence
of an association rather than causation. Both reviews also concluded that there was insufficient
evidence to explain why there was an association. It is this lack of an explanation that provides
the point of departure for this paper. Its aim is to provide an analysis of how after 20 years of
extensive research we are more knowledgeable but not much wiser, in that we have not been able
to explain the demonstrated association between HRM and performance with any conviction,
and to outline possible lines for developing research that might provide some answers.
While it is always easy to be critical of developments in a complex area of organisational
research, it is also important to acknowledge the considerable progress that has been made in

research on HRM and performance. This is a rapidly evolving field that has gone through a fairly
typical series of steps towards a perhaps wiser and more reflective perspective on the subject
(see, e.g. Paauwe, 2009). I will argue that in retrospect several overlapping phases can be
identified, reflecting the ebb and flow of theory, research and application and it is useful briefly
to consider these, both to recognise the progress that has been made and to highlight the
distinctive challenges for future research that each reflects.
The beginnings
The first phase in the development of theory and research on the association between HRM and
performance occurred in the 1980s. In this period a series of articles and books by, for example,
Fombrun et al . (1984 ) and Miles and Snow (1984) began to link business strategy to human
resource management. Others such as Walton (1985), writing from more of an organisational
behaviour perspective had highlighted the need for a shift from control to commitment as the
basis for management of people at work. In the work of the Harvard group (Beer et al ., 1984 )
and Schuler and Jackson (1987) we began to see an integration between a strategic view, that
highlighted the importance of ‘external fit’ and organizational behaviour with its focus on
‘internal fit’ to produce a conceptual perspective or ‘map’ (Noon, 1992) that forms the basis of
contemporary HRM. In the UK, this was contrasted with the pluralism of an industrial relations
perspective to highlight a distinctively normative perspective on HRM (see, e.g. Guest, 1987 and
Storey, 1992). In parallel with this, Foulkes (1980) and Peters and Waterman (1982), among
others, had provided glimpses of evidence about successful organisations that seemed to apply
the ‘high commitment’ HRM principles. This first phase, therefore presented the promise of
HRM in the form of semi-prescriptive analytic frameworks alongside somewhat anecdotal cases
that appeared to confirm this promise of an association between HRM and performance.
Empiricism
The second distinctive phase occurred in the 1990s when the first set of survey-based,
statistically analysed studies of HRM and performance began to appear. The seminal paper was
by Huselid (1995) but equally useful sector specific research was reported by Arthur (1994) and
by Ichniowski et al . (1997 ) in steel mills, by MacDuffie (1995) in the auto industry and by
Delery and Doty (1996) in banking. All indicated that the adoption of more HR practices was
associated with higher performance and in so doing began to provide an evidence-base for the

claim about a link.
Backlash and reflection
A backlash swiftly followed as it was recognised that the rush to empiricism had occurred at the
expense of sufficient consideration of some key conceptual issues, and a third phase emerged.
Articles by Dyer and Reeves (1995) and by Becker and Gerhart (1996) demonstrated that the
published studies used an array of different HR practices, measured in different ways. There
were similar though less strongly voiced concerns about the measures of performance. The
implication was that we needed a sounder conceptual basis for determining the appropriate HR
practices and needed a serious debate about generalisability highlighted in the discussion of
universalist, contingency and configurational perspectives (Becker and Gerhart, 1996; Delery
and Doty, 1996).
A rather different kind of backlash had been developing among a number of critics, particularly
in the UK, who viewed the emergence of HRM in general and of a normative high commitment
approach in particular as a new and insidious form of exploitation of workers (see, e.g. Blyton
and Turnbull, 1992; Legge, 1995; Keenoy, 1997), a view that still persists in certain quarters
(Hesketh and Fleetwood, 2006). The response to the concerns about the need for greater
conceptual clarity and worker exploitation ushered in two further streams of conceptual and
empirical work that overlap chronologically but which I will describe as phases four and five.
Conceptual refinement
The fourth phase focussed on conceptual refinement. Guest (1997) had argued that we needed a
better theory about HR practices, about outcomes and about the link between them. Both he and
Becker et al . (1997 ) had advocated an approach that drew on expectancy theory (Vroom, 1964;
Lawler, 1971) as a basis for determining core elements of HRM content and its link to
performance. Variants of this approach were subsequently widely adopted in the work of
Appelbaum and colleagues in the US (Appelbaum et al ., 2000 ) and by Purcell and colleagues in
the UK (Purcell and Hutchinson, 2007) in what has come to be known as the Ability, Motivation,
Opportunity (AMO) model. This approach represents an essentially universalist perspective.
A rather different approach emerged out of the theoretical work of Barney (1991) who had
presented the resource-based view of the firm. This has been developed and applied to HRM by
others (see, e.g. Wright et al ., 1994 ; Lepak and Snell, 1999; 2002) as a basis for focusing

investment in human resources and predicting the types of investment most likely to result in
superior performance and competitive advantage.
A third shift in emphasis was presented by Paauwe (2004) who highlighted the importance of an
institutional perspective and reminded us that in Europe the legislative framework as well as the
institutions relating to education and training and to employee representation ensured that a
minimum set of HR practices were in place in most organisations. This meant that any
competitive advantage was more likely to come either from the way in which these standard
practices are implemented or from the use of additional distinctive practices. The refinements
that emerged from this period arguably continue to dominate our conceptual thinking about
HRM and performance today and are reflected, for example, in the burgeoning interest in human
capital.
Bringing the worker centre-stage
The fifth and overlapping phase in the development of research that has emerged as more central
in the past decade concerns the key role of workers and the importance of workers' perceptions
and behaviour in understanding the relationship between HRM and performance. The workers'
voice had been surprisingly neglected in some of the early research and its absence had been
cited as a major issue in some of the more critical writing about HRM. More generally, there was
a frequent call to ‘open the black box’ to explore the process linking HRM and performance and
this invariably led to a greater focus on the way in which workers responded to HRM (see, e.g.
Wright and Boswell, 2002). In recent years therefore this neglect has been remedied. In the UK,
the inclusion of a survey of employees in the Workplace Employment Relations Surveys of 1998
and 2004 provided a large national data base with which to study workers' perceptions. Some
initial interpretations of these results led to a claim that HRM might not be in workers' best
interests (Ramsay et al ., 2000 ). In the North America, some surveys critical of HRM on the basis
of workers responses began to emerge (see, e.g. Cappelli and Neumark, 2001; Godard, 2004)
giving greater credence to the view that any gains in performance from HRM might be at the
expense of workers rather than because of their positive reaction to it. Subsequent research has
offered a more nuanced view. One result has been to focus on worker outcomes as a central issue
in HRM and to consideration of how far it is feasible for HRM to result in both higher
performance and enhanced workers' well-being (Peccei, 2004).

Growing sophistication
The final, in the sense of the most recent phase of development of theory and research on HRM
and performance can be defined in terms of growing sophistication and complexity. This
includes increased sophistication in particular with respect to theory and research methods and it
provides a stepping off point for considering future developments. An important starting point
for consideration of both sophistication and complexity is the work of Bowen and Ostroff
(Ostroff and Bowen, 2000; Bowen and Ostroff, 2004). In their first paper (Ostroff and Bowen,
2000), they presented a conceptual multi-level framework suggesting that the HRM –
performance relationship could be considered at both the individual and organisational levels and
through the linkages between them. The second paper (Bowen and Ostroff, 2004) offered a
theory of HRM implementation. In this paper, they suggested that to understand the HRM –
performance linkages, much of the emphasis needed to be placed on processes, reflecting the oft-
cited view that it is not enough to have good practices if they are not properly implemented.
What this does is switch the focus to line management and places greater emphasis on HRM
effectiveness.
A further indication of growing sophistication is the use of models from organisational and social
psychology. An interesting reflection of this can be found in the work of Nishii et al . (2008 ) who
argue that it is not just the presence of practices that is important but perceptions about the
intentions behind the practices. They have used attribution theory to explore the way in which
workers interpret practices and to show how this interpretation can shape their response. This is
further confirmation that it is not sufficient to restrict our focus to the presence of practices and it
points to the need for organisations to pay much more attention to how they communicate the
purpose as well as the content of HR practices.
Bowen and Ostroff set out the case for a ‘strong’ HRM climate and HR system and researchers
are acknowledging that we gain a limited picture by collecting information on HR practices
without paying full attention to the context within which they are enacted. The need to link
organisation, unit, group and individual level climates, inputs and outcomes requires a complex
research methodology and sophisticated statistical analysis. The use of structural equation
modelling, with the discipline required to specify linkages, has become commonplace in HRM
research. We are beginning to see more multi-level analysis and where this is allied to

longitudinal data, we are entering a more sophisticated level of methodology. At the same time, it
makes researching much more difficult, particularly if the aim is to research across rather than
within organisations, since gaining a sufficient number of organisations for multi-level analysis
with detailed information on internal climates, is daunting. Recognition of the requirements this
presents has led to an optimistic call for ‘big research’ (Wall and Wood, 2005) and the associated
funding.
A methodological issue that continues to be debated concerns who should provide information
about HRM. There have been persistent calls for multiple informants about the presence of
practices (Gerhart et al ., 2000 ). It has been suggested that, particularly in the context of large
organisations, senior HR managers are not very reliable informants and that it is more sensible to
seek information from those experiencing the practices, namely workers. Bowen and Ostroff
suggest that consensus about HR practices is one indication of a ‘strong’ HRM climate and Liao
et al . (2009 ) provide some empirical support for this view.
If the contemporary picture of HRM is one of growing complexity and sophistication, it also
implies a risk of fragmentation. By raising the bar in terms of complexity of research methods
and statistical analysis, a growing number of researchers may feel excluded from the field. There
is also a risk that the research ceases to be accessible to practitioners and policy makers. This
highlights a need for regular integrative reviews. However, it also neglects the many areas of
potential research on HRM and performance that are still amenable to a variety of quantitative
and qualitative research methods.
This paper has reviewed some of the key stages in the development of theory and research from
20 years of exploration of the relationship between HRM and performance as a basis for
highlighting where future priorities might lie. It is most unlikely that funding for a single big
study will emerge; but the experience of 20 years has made us more aware of some of the
avenues that are likely to be more or less fruitful. For example, the core research question has
been somewhat refined over the two decades. It started out as ‘What impact does HRM have on
performance?’ It has extended in two directions. The first is the contingency question: ‘Under
what circumstances does HRM have an impact on performance?’ The second concerns process
and asks ‘What is the process whereby HRM can have an impact on performance?’ Building on
these questions the next sections outline an admittedly idiosyncratic overview of certain

priorities under three broad headings covering understanding of theory, management processes
and research methods. There is no attempt at a comprehensive review; that can be found
elsewhere (Guest et al ., 2011 ). Rather, it is an attempt to highlight some key issues and some that
risk being neglected.
SOME CHALLENGES FOR THEORY OF HRM
We might have thought that the debate about a universalist versus a contingency approach would
have been settled long ago in favour of contingency theory. It has a strong logic, particularly in
the context of strategic fit with the external environment. However, the empirical evidence
appears to favour a universalist model (Combs et al ., 2006 ). An initial challenge is therefore to
provide insights that will help to resolve this apparent contradiction between logic and evidence.
A related challenge linked to the contingency approach, concerns the alternatives to HRM. Is
there just one high commitment form of HRM that is associated with high performance? What do
the alternatives look like? Is it the ‘control’ model set out by Walton (1985), perhaps reflected in
management of some call centres, or is it something else? We need to pose the contra question; if
not a form of high commitment HRM, then what other ways of managing the workforce lead to
high performance and other positive outcomes?
A further challenge we may need to address is the possibility that our theory is too narrow. What
if any positive impact of HRM on performance is simply picking up good management? To
address this, our research models need to contain appropriate controls, perhaps going beyond
those that are conventionally used, and to consider more explicitly alternative explanations rather
than focussing just on HRM and outcomes. In this context, the research of Birdi et al . (2008 ) is
interesting in suggesting in a longitudinal study that HR practices have more impact on
productivity than operational and lean management approaches. Advocates of the influence of
leadership will tell us that it is good leadership that makes a difference; and leadership will have
an impact on the content and practice of HRM as well as on management activities. Taking this a
step further, we need to develop theory about how much independent influence we expect ‘good’
HRM to have and the conditions under which its impact will be larger or smaller. Allied to this,
we need to shift our analysis of impact away from concern for statistical significance to a
concern for effect size. The question then becomes – how much of the variance in outcomes do
we expect to be explained by HRM? The review by Combs et al . (2006 ) found that the effect size

was greater in manufacturing than in services, implying that one of the benefits of good HRM is
that it can leverage other resources. We could speculate that in highly complex services such as
large hospitals, its impact might be further diminished.
A topic that has been under-theorised in HRM research concerns the assumptions about the
motives and commitment of the workforce. There can be a tendency to assume that workers have
a propensity to display high commitment in response to the kind of policies implied by Walton's
model and reflected in the contemporary advocacy of employee engagement (Albrecht, 2010;
Rich et al ., 2010 ). However, this assumption needs testing. There has been much written in
recent years about Generation X and Millenials and about changing workforce values (Smola
and Sutton, 2002; Tulgan, 2000; Hewlett et al ., 2009 ). Within an HRM framework, this could be
viewed as a selection issue, leading to selection on the basis of values, motivation and
commitment as much as on competencies. Leaving aside the difficulties of doing this, it assumes
a degree of stability. Yet work experiences and changing personal circumstances can alter
priorities. Already we are beginning to see research on HRM for older workers (Kooij et al .,
2010), where the argument is that older workers have different priorities and respond more
positively to HR practices that reflect these priorities. Similarly, at certain stages, workers may
give greater priority to achieving an acceptable work-life balance. Research on HRM and
performance has largely neglected theories of workers' values and motives and individual
differences, despite some recognition of the need to build in ‘micro’ issues (Wright and Boswell,
2002). It is time to build these in to attempts to understand the processes that might link HRM
and performance.
Finally, after considering a range of challenges for theory, we need to retain a focus on the basic
and as yet unresolved question of what combination of practices are likely to have the greater
impact on performance and other outcomes. If we opt for a universalist perspective, we probably
need to offer clear hypotheses based on the AMO model or some variant. The alternative is to
offer a form of ‘high performance HRM’ that is distinctively different from ‘high commitment
HRM’ although, as noted earlier, it is not at all clear what this might look like. If we adopt a
contingency model, then we need to consider under what conditions certain practices are likely
to be more effective. And if we prefer a configurational approach, the question is what
combinations of practices can be effective in given circumstances. It may be that these questions

are ultimately unanswerable; but it is probably too early to give up on them.
SOME CHALLENGES IN UNDERSTANDING MANAGEMENT PROCESSES
AFFECTING HRM
Researchers face a challenge in recognising that management behaviour may not be aligned with
traditional methods of collecting data about HR practices. For example, advocates of a human
capital perspective have argued that organisations should invest in those human resources that
will provide a good return (Wright et al ., 1994 ). Lepak and Snell (1999) have presented a
classification of human capital and a justification for high investment in core workers who are
valuable, scarce, inimitable and non-substitutable. Following this logic, other categories of
worker will require different levels of investment and therefore different human resource policies
and practices. Many large organisations are likely to have a number of quite highly differentiated
internal labour markets, each of which can have a distinctive set of HR policies and practices. In
short, one size does not fit all creating problems for research that assumes that an organisation
has an overall set of human resource practices. At one level, it may have such practices,
including, for example, careful selection based on best methods and general use of goal setting as
part of performance management. But the way these are applied to specific groups will differ in
important ways. This suggests that management is not about the universal application of standard
HR policies and practices, so collecting data at the level of the firm will provide limited
information. An alternative, that has been quite widely debated, is to focus on an identifiable key
category of staff within and across firms. But again, that will provide only limited information
about firm practice in general and may therefore provide a misleading picture, especially if the
core group is small in relation to the overall workforce, as might be the case in some banks.
A second major challenge for much of the research on HRM is that it collects data on the
presence of practices whereas Wright and Nishii (2006) and Khilji and Wang (2006) among
others have highlighted the need to distinguish between intended and implemented practices.
Collecting information on the presence of practices, from whatever source, may be misleading.
There is the risk that line managers simply fail to implement practices or may implement them
badly. As noted earlier, Nishii et al. have shown how workers' attributions about the rationale
behind practices affect their response to them. We can assume that the same process affects how
managers choose to implement them. Indeed, there is evidence from research on the

implementation of change initiatives showing how middle managers interpret, and therefore
adapt for implementation, new policies and practices promulgated by senior management
(Balogun and Johnson, 2005). Managers' priorities between market, financial and human
resource issues will also affect the priority they give to HRM implementation. The importance of
some kind of strategic integration, whereby line management values and priorities are integrated
with those of the human resource strategy was identified long ago. But it has been largely
neglected in research. It is line managers, not HR managers who implement HRM. This is
beginning to be recognised (see, e.g. Bos-Nehles, 2010) and it implies a shift from studying the
presence of HR practices to how well they are applied, and by implication, a shift in focus from
HR managers to line managers.
Bowen and Ostroff (2004) have offered a theoretical framework within which to address the
kinds of management behaviour that might determine the effective implementation of HRM. One
of the factors they highlight is the consistency of messages about HR practices, both in terms of
what is communicated and the sources of communication. By implication, the messages need to
come from the top management team not from the HR department. We are beginning to see
research exploring the consequences of top management support for HR implementation
(Stanton et al ., 2010 ) and there is scope to expand research on this process.
One of the problems arising from the limited data from longitudinal studies is that we do not
know when good HRM was introduced or by whom. This points to the need for more studies of
the genesis of new HR practices. An alternative is to explore firms that have had a marked
change in performance and to identify the causes of this. Previous research on this topic (see, e.g.
Grinyer et al ., 1988 ) has generally highlighted the importance of leadership. There is evidence, at
least for the UK, that HR professionals play little role in HR innovation (Guest and Bryson,
2009). This raises the question of who takes decisions about HR innovations. We need two
additional kinds of research. The first is research that explores the genesis of new HR practices;
greenfield sites might provide one kind of fruitful environment (Guest and Hoque, 1996). The
second is the study of contexts where there is significant HR change taking place with respect
either to the presence and content of certain practices or to the ways in which they are
implemented. Some of this is likely to be case study research with room for mixed methods
approaches.

CHALLENGES FOR RESEARCH METHODS
A frequently cited problem with most of the research on HRM and performance is that it is cross-
sectional. This makes it difficult to be confident about cause and effect. The problem is
exacerbated when we review the small number of longitudinal studies (see, e.g. Guest et al .,
2003; Wright et al ., 2005 ). They tend to show that HRM leads to performance, but this link
ceases to be significant when we control for past performance. Invariably, past performance is
much the strongest predictor of current performance and this can knock out any impact of HRM.
Research at a rather different level of analysis on job satisfaction and performance, particularly
the longitudinal study by Schneider et al . (2003 ) also challenges the standard assumption that
satisfaction, perhaps resulting from good HRM, leads to higher performance and concludes that
the opposite direction of causality is at least as powerful an explanation. This reinforces the need
for better theorising about the likely size of the HRM impact and for research that tries to take
into account the timing of the introduction and updating of relevant HR practices or other key
changes. Allied to this, we need to give more attention to the largely neglected issue of the
anticipated lag between the introduction, implementation and impact of HR practices. This is a
well-recognised concern in longitudinal studies but has not been extensively discussed in relation
to research on HRM and performance.
Other problems with the dominant research methods have been widely cited (see, e.g. Gerhart,
2007). There is a need for multiple sources of information about both the presence and the
implementation of HR practices. As already noted, it is naive to assume that a senior HR
manager can provide information about local practice either in terms of whether practices are
implemented or whether they are effective. We also need to explore more carefully the
effectiveness of practices. Goal setting may be present but it might be poorly formulated.
Everyone may get an appraisal but it may be based on a poor system. The research evidence
suggests generally low levels of agreement on the presence of practices when management
accounts, usually from HR managers, are compared with workers accounts (for an exception, see
Liao et al ., 2009 ) with managers invariably reporting more practices in place than reported by
workers. Since the intended impact is on workers, and they are closer to the point of
implementation, there is a strong case for assuming that their views should be given more
credibility. Perhaps the key message is that research needs to move beyond simply reporting the

presence of practices.
Despite the presence of quite well-established models linking HRM to performance through the
impact of HRM on workers' attitudes and behaviour, their link to internal performance such as
productivity and quality and through this to external measures such as sales and profit per
employee, very few studies have explored this chain. We would expect a stronger association
between HRM and proximal rather than distal outcomes. Yet the meta analysis by Combs et al .
(2006) indicated a stronger link to financial outcomes than to productivity. This may reflect a
problem of measurement, bearing in mind that the measurement of productivity in the service
sector can be particularly problematic (Atkinson, 2005), whereas it may be easier to obtain
standard, comparable financial data. Overcoming the methodological requirements for testing
these linkages presents considerable challenges, perhaps requiring the big research called for by
Wall and Wood. But we can get closer within specific organisations such as banks and retail
businesses where there are numerous branches.
In summary, the research is riddled with error both with respect to data on HRM and on
outcomes. As some have argued, this may hide the size of any true effect (Gerhart et al ., 2000 ).
But is also leaves room for considerable doubt about the processes at play. We therefore need to
recognise the need for more careful formulation of research and perhaps less research with a
wide sweep. Indeed, we probably need to move away from the ‘big research’ concept.
There is a risk that research sophistication, and more particularly statistical sophistication can
become an end in itself, driven in part by the publishing policies of some top journals. It can also
lead to a focus on the use of established measures, even if their appropriateness for the research
context is questionable. It would be unfortunate if this deterred some good researchers, including
qualitative researchers, from entering the field since there are still some basic methodological
questions that remain unresolved. For example, we remain uncertain about how to measure HR
practices and HR implementation. We have made little progress in establishing ways to measure
an HR system. Indeed, it is salutary that we still do not know which practices or combinations of
HR practices have most impact nor when, why or for whom they matter. There is a risk of
neglecting some core questions in favour of statistical rigour and abstracted empiricism.
In conclusion, after 20 years of HRMJ, we can reflect on impressive progress and a lot of ground
clearing in theory development and research on HRM and performance. But there is a danger

that we will let the weeds grow under our feet as we try to raise our sights to new challenges.
Many of the basic questions remain the same and after hundreds of research studies we are still
in no position to assert with any confidence that good HRM has an impact on organisation
performance.
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The great mismatch
In the new world of work, unemployment is high yet skilled and
talented people are in short supply. Matthew Bishop explains
Sep 10th 2011 | from the print edition
“FAR AND AWAY the best prize that life offers is the chance to work hard at work worth doing,”
observed Theodore Roosevelt, then America’s president, in a Labour day speech on September
7th 1903. Today the billions of people the world over who seek that prize are encountering
simultaneous feast and famine. Even in developed economies that are currently struggling, many
people, perhaps more than ever, are doing the job of their dreams, taking home both a good
salary and a sense of having done something worthwhile. In booming emerging countries such as
China and India, many at least have a better job than they ever thought possible. Yet at the same
time in much of the world unemployment is persistently high and many of the jobs on offer are
badly paid, onerous and unsatisfying.
This has serious political implications, not least for America’s current president, Barack Obama,
who risks losing his own dream job because of his perceived failure to have created enough work
for his fellow citizens. As Mr Obama entered the White House in January 2009, the country’s

unemployment rate was about to climb above 8%, up from around 5% a year earlier. It has not
recovered since and is currently around 9%. Until the presidential election in November next
year Mr Obama is likely to be dogged by the phrase “jobless recovery”—always assuming that
the recovery does not double-dip into an even more jobless recession.
In this special report
• »The great mismatch
• Winners and losers
• Bottom of the pyramid
• My big fat career
• Free-for-all
• Got talent?
• Lending a hand
• More feast, less famine
Sources & acknowledgements Reprints
Related topics
• Silicon Valley
• Lagging Economic Indicators
• Job growth
• China
• Nobel Prize
Much as Americans complain, compared with some other countries their economy presents a
picture of good health. In the weaker economies of the euro zone, jobs have been sacrificed in
the name of austerity, especially in the public sector, to avoid defaulting on debts built up by
free-spending governments. Anger at high unemployment has caused unrest and may have been a
contributory factor in the riots in Britain last month. In late July thousands of unemployed young
Spaniards, known as los indignados (the indignant), having protested in cities across their own
country, began a long march to Brussels to draw attention to the shockingly high jobless rate of
over 40% among their age group.
Outside the rich world, the Arab Spring that brought down the governments of Tunisia and Egypt

earlier this year was triggered in part by the lack of decent work for young people. Even in
booming China and India policymakers worry about how to ensure there are enough decent jobs,
especially for young people and graduates. Both countries still have hundreds of millions of
people living in abject poverty, especially in rural areas. A good job would be the best way out.
Yet even as many people face a job famine, a minority is benefiting from an intensifying war for
talent. That minority is well placed to demand interesting and fulfilling work and set its own
terms and conditions. But above all the pay of such people—from executives to investment
bankers and software engineers in Silicon Valley—is soaring. The most talented increasingly get
a multiple of the salary of the average performer. This has led to rising inequality in incomes in
many countries which may be increasing social tensions.
Mr Obama can reasonably point out that he was elected in the wake of a financial meltdown that
had threatened to bring about another Great Depression, with an unemployment rate that would
make the current one look like a lucky escape. The co-ordinated global stimulus by members of
the G20 in 2009, though far from perfect, helped save the world from something much worse—
though that probably provides little comfort to the 205m people round the globe who are now
unemployed. Nor is there much scope for further stimulus.
But today’s jobs pain is about more than the aftermath of the financial crisis. Globalisation and
technological innovation are bringing about long-term changes in the world economy that are
altering the structure of the labour market. As a result, unemployment is likely to remain high in
the rich economies even as it falls in the poorer ones. Edmund Phelps, a Nobel prize-winning
economist, thinks that in America the “natural rate” of unemployment (below which higher
demand would push up inflation) in the medium term is now around 7.5%, significantly higher
than only a few years ago.
Michael Spence, another Nobel prize-winning economist, in a recent article in Foreign Affairs
agrees that technology is hitting jobs in America and other rich countries, but argues that
globalisation is the more potent factor. Some 98% of the 27m net new jobs created in America
between 1990 and 2008 were in the non-tradable sector of the economy, which remains relatively
untouched by globalisation, and especially in government and health care—the first of which, at
least, seems unlikely to generate many new jobs in the foreseeable future. At the same time, says
Mr Spence, the mix of jobs available to Americans in the tradable sector (including

manufacturing) that serves global markets is shifting rapidly, with a growing share of the
positions suitable only for skilled and educated people.
Fear of continuing high unemployment also made a bestseller of Tyler Cowen’s book, “The
Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick,
and Will (Eventually) Feel Better”. It argues that for much of its history America (and to some
extent other rich countries) enjoyed the benefits of free land, lots of immigrant labour and
powerful new technologies. But over the past 40 years these advantages have faded and America
has found itself on a technological plateau, he says. To the obvious question about the internet,
he retorts that the web has provided lots of utility for users but much less in the way of profits—
and relatively few new jobs.
Lowering this new natural rate of unemployment will require structural reforms, such as
changing education to ensure that people enter work equipped with the sort of skills firms are
willing to fight over, adjusting the tax system and modernising the welfare safety net, and more
broadly creating a climate conducive to entrepreneurship and innovation. None of these reforms
is easy, and all will take time to produce results, but governments around the world should press
ahead with them.
As this special report will explain, the changes now under way will pose huge challenges not
only to governments but also to employers and individual workers. Yet they also have the
potential to create many new jobs and substantial new wealth.
To understand why these changes are so exciting for some people and so scary for others, a good
place to start is the oConomy section on the website of oDesk, one of several booming online
marketplaces for freelance workers. In July some 250,000 firms paid some 1.3m registered
contractors who ply their trade there for over 1.8m hours of work, nearly twice as many as a year
earlier.
ODesk, founded in Silicon Valley in 2003, is a “game-changer”, says Gary Swart, its chief
executive. His marketplace takes outsourcing, widely adopted by big business over the past
decade, to the level of the individual worker. According to Mr Swart, this “labour as a service”
suits both employers, who can have workers on tap whenever they need them, and employees,
who can earn money without the hassle of working for a big company, or even of leaving home.
It is still small, but oDesk shows how globalisation and innovation in information technology, the

two big trends that have been under way for some time, are moving the world nearer to a single
market for labour. Much of the work on oDesk comes from firms in rich economies and goes to
people in developing countries, above all the Philippines and India. Getting a job done through
oDesk can bring the cost down to as little as 10% of the usual rate. So the movement of work
abroad in search of lower labour costs is no longer confined to manufacturing but now also
includes white-collar jobs, from computer programming to copywriting and back-office legal
tasks. That is likely to have a big impact on pay rates everywhere.
Who ate my job?
This is causing alarm among middle-grade white-collar workers in the rich world, who saw what
happened to manufacturing jobs in their economies. But workers in emerging markets who have
those sorts of skills and qualifications are delighted. “I’m making in a week on oDesk what I
made in a month as a schoolteacher, and I get to spend far more time with my family,” says
Ayesha Sadaf Kamal, a freelance copywriter in Islamabad. Conversely, Janet Vetter, who used to
have a full-time job as a copywriter for a magazine in New York, lost her job and now moves
between part-time and freelance work. “I feel isolated as a freelancer and have had no health
insurance since the start of the year; it’s too expensive,” she says.
It is tempting to think of the globalisation of the labour market as a zero-sum game in which Mrs
Kamal in Pakistan is benefiting at the direct expense of Ms Vetter in America. But economists
point out that such calculations suffer from the “lump of labour fallacy”—the belief that there is
only a fixed amount of work to go round. A better explanation, they say, is the theory of
comparative advantage, one of the least controversial ideas in economics, which suggests that
free markets make the world better off because everyone can concentrate on doing what they are
best at.
A global labour market will not make every individual in the world better off: there will be losers as well
as winners
All the same, a global labour market will not make every individual in the world better off: there
will be losers as well as winners, and they may put up stiff resistance to change if the losses
prove too painful. For instance, total global GDP could double if all barriers to the free
movement of labour were removed, argues Michael Clemens in a recent paper, “Economics and
Emigration: Trillion-Dollar Bills on the Sidewalk?”. Yet the political implications of such mass

migration make it improbable that governments, especially in rich countries, would
unconditionally open their doors.
Compared with previous bursts of global integration and technological upheaval, the changes
now taking place in the labour market may produce an unusually large number of losers, partly
because they have coincided with a particularly deep recession and partly because they are
happening exceptionally fast. The priority for policymakers must be to keep the number of losers
as small as possible.
This special report will look at what this new world of work means for individuals and what they
can do to ensure they are on the winning side. It will also look at the challenges facing
companies as they compete to recruit the best talent. And it will examine what governments can
do, even in these tough economic times, to equip their citizens to claim the prize described by Mr
Roosevelt—and to protect the losers.
from the print edition | Special report
Labour-market trends
Winners and losers
Divisions are getting deeper
Sep 10th 2011 | from the print edition
•
•
THIS YEAR MORE than 3.1 billion people the world over will be in work. That is a greater
number than ever before, yet there is a sense of crisis about jobs. That is not just because
globally 205m people—many more than a few years ago—are now officially unemployed, or
because young people have been hit especially hard. It is also because the quality of such jobs as
are available often seems to be declining, especially for routine white-collar workers in rich
countries.
The latest Gallup Underemployment Index now stands at 19% of the global workforce. It is
made up of the unemployed (7%) and those who have part-time jobs but would like to work
more (12%). According to the International Labour Organisation, in 2009 some 1.53 billion
people, roughly half the global workforce, were in “vulnerable employment”, either working for
themselves or in badly paid family jobs.

In this special report
• The great mismatch
• »Winners and losers
• Bottom of the pyramid
• My big fat career
• Free-for-all
• Got talent?
• Lending a hand
• More feast, less famine
Sources & acknowledgements Reprints
Related topics
• Economic Inequality
• Economics
• Lagging Economic Indicators
• Unemployment rate
• Economic indicators
Until the global financial crisis of 2008 it had been widely believed that the world was enjoying
a period of “Great Moderation”. The business cycle that had previously caused bouts of high
unemployment seemed to have been abolished by a combination of wise, independent central
bankers, fiscally prudent rich-world governments and increasingly flexible labour markets. The
governments of the G20 had to administer a huge co-ordinated fiscal and monetary stimulus to
prevent the Great Moderation from turning into a Great Depression. But unemployment has not
returned to its pre-crisis lows, and few governments have much capacity for further stimulus.
In many countries long-term unemployment has soared both in absolute terms and as a
proportion of total joblessness. In America the long-term unemployed now account for 30% of
the total, up from 10% in 2007 (see chart 1), shocking experts who believed that America’s
famously flexible labour markets would protect it from “European” levels of long-term
joblessness.
Young people have been the biggest victims of the crisis. In 2007 the youth unemployment rate
in the OECD was 14.2%, compared with 4.9% for older workers; in the first quarter of this year

the rates were 19.7% and 7.3% respectively. Some countries fared far worse than others: in Spain
youth unemployment soared from 17.6% to a vertiginous 44% over the same period. A big part
of the explanation there is that flexible contracts which make it easy to fire people were
introduced for new entrants to the labour market but not for people already in work, so when
firms had to make cuts the axe fell disproportionately on those flexible younger workers. Perhaps
the most alarming rise is in the number of young people in the OECD classified as NEETS (not
in employment, education or training), to 16.7m—some 12.5% of all 15-24-year-olds.
One reason why the young have suffered disproportionately is that older people have been less
keen to leave the workforce than in previous downturns, when juicy early-retirement packages
were on offer. Such offers have become rare, and as laws to prevent discrimination on age
grounds are spreading, more people are working longer.
In some countries government policy has made a big difference. Germany, for example, was able
to buck the trend of joblessness and youth unemployment thanks to measures that included a
government subsidy for those on short-time work (of which more later). In America, Mr
Obama’s decision to extend unemployment benefits from 26 to 99 weeks may have contributed a
little to the increase in long-term joblessness (adding about half of one percentage point to the
rate, according to the Federal Reserve Bank of San Francisco), but it also slowed the rise in
poverty. Longer-term social trends may also have played a part, says James Manyika of the
McKinsey Global Institute. He cites Americans’ greater reluctance to move home to find work,
which may be partly due to the growing number of dual-career couples. Many people also have
negative equity in their homes.
Unemployment benefit has been made harder to get in many countries, which has increased the
number of people claiming disability benefits. In 2010 they made up 5.9% of the workforce in
America, 6.2% in Britain and over 10% in Norway, up from 3.6%, 2.2% and 6.5% respectively
in 1980.
These are serious problems. Young people who are out of work for long stretches at the start of
their career can become permanently scarred by the experience and may never get back on track.
The longer that people of any age are out of work, the less likely they are ever to find another
job. And “once a person is on disability benefit that is in effect the end,” says Robert Reich, an
economist at Berkeley who was America’s labour secretary under Bill Clinton.

Never waste a good crisis
Many of the labour-market trends that are currently troubling rich countries were already
apparent long before the financial crisis, though the bubble that preceded it helped to hide them
and the recession that followed it accelerated them. “It has given employers the excuse to do
what they wanted to do but had resisted before the crisis,” says Mr Reich. “Many employers are
substituting technology for people. A lot of us were looking for jobs to be displaced by
technology a few years ago and were surprised it wasn’t happening faster. Employers didn’t want
a reputation for firing when the jobs market was tight.”
Firms are relying more on part-time, contract and temporary workers who are inherently more
flexible. In America in 2010, the number of part-time workers reached a new high of 19.7% of
all employees. According to a recent survey of American firms by the McKinsey Global Institute,
over the next five years 58% of them expect to use more part-time, temporary or contract
employees, and 22% expect to outsource more jobs.
There has been growing demand for temporary staff provided by employment-services firms
such as Manpower, and outsourcing and offshoring has continued to grow, despite reports that
some jobs are being repatriated. Routine legal work is the latest activity to find its way from
America and Europe to Bangalore. And bringing work to geographically distant workers is
becoming easier all the time, with online marketplaces such as oDesk and freelancer.com, and
services like Mom Corps for professional women. Mechanical Turk, owned by Amazon, lets
people with a few spare minutes work on “micro-tasks” such as transcribing podcasts or image-
tagging.
“These trends don’t necessarily affect the number of jobs, but they do the quality of jobs, the
security of jobs, how much people are paid and the benefits they get,” notes Mr Reich. David
Autor, an economist at the Massachusetts Institute of Technology, calls this the “hollowing out”
of middle-grade jobs, resulting in the “bipolarisation” of the labour market between good jobs
and commoditised ones in America and many other rich countries. There is a strong correlation
between a good education, higher earnings and a lower (though not negligible) risk of becoming
unemployed. In America, the jobless rate among graduates rose from under 2% in 2007 to nearly
5% in 2010, but for non-graduates it jumped from 5% to over 11%.
Even before the crisis, America was on track for its worst decade for job creation in at least half a

century, says Mr Manyika of the McKinsey Global Institute. As the institute sees it, there are
three main types of work: transformational (typically involving physical activity, such as
construction); transactional (such as routine jobs in call centres or banks, often still done by
people but capable of being automated); and interactional (relying on knowledge, expertise and
collaboration with others, such as investment banking or management consultancy).
Transformational work has been in long-term decline in most rich countries, shifting to emerging
markets, particularly China, though wages in Chinese factories are now soaring.
Now a wave of labour arbitrage and the substitution of technology for humans is starting to
sweep through transactional work, wiping out many routine white-collar jobs in rich countries.
But interactional work, says Mr Manyika, is unlikely to go the same way, because it is inherently
difficult to standardise. In this kind of work technology tends to enhance human capabilities,
often creating a “winner-takes-all” market in which the best performers are paid
disproportionately well. Transformational and transactional work tend to suffer from fierce
competition, slim profit margins and low pay, whereas the best interactional knowledge-work
companies continue to earn fat margins.
In the two decades leading up to the global financial crisis real disposable household incomes
increased in all OECD countries. In most of them the incomes of the richest 10% of households
grew faster than those of the poorest 10%, so inequalities widened. In 2008 in the OECD as a
whole the average income of the richest 10% was nearly nine times that of the poorest 10%.
Globally, the rise of many people out of poverty has reduced income inequality, though many
people in informal and illegal work have not benefited. But within most countries inequality, as
measured by the Gini coefficient, has increased in recent decades (see chart 2). Many rich
countries are also seeing a decline in social mobility, suggesting a growing inequality of
opportunity as well as of income.
In most countries inequality seems bound to keep growing. Even in these difficult economic
times talent is in short supply and the world’s leading companies are competing fiercely for it. In
America unfilled vacancies have risen over the past couple of years despite high unemployment.
According to Manpower’s latest annual survey, 34% of employers worldwide say they are
having trouble filling jobs, with technicians, salespeople, skilled trades workers and engineers
the hardest to find (see chart 3). So what can individuals do to make themselves sought after?

from the print edition | Special report