Dualism in the German labor market? A nonparametric analysis with panel data

American Journal of Economics and Sociology, The,  July, 1998  by Matthias P. Beck

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In the 1990s, as unemployment figures increased and labor market deregulation initiatives were launched, there has been renewed interest in the possibility of a segmentation of the German labor market. Whereas most studies have relied on qualitative evidence, this paper utilizes data from the first five waves of the German Socioeconomic Panel (1984 to 1989) in order to investigate whether "good" or "bad" job characteristics tend to cumulate or to compensate each other. Using a nonparametric procedure that evaluates the simultaneous occurrence of case-characteristics, we show that evidence for compensating differentials in job quality characteristics for the aggregate labor market is weak. There are, however, some indications of a cumulation of "bad" and "good" job characteristics in the non-market sector (i.e., public, non-profit, and semi-public employees). We interpret the inconsistency of our results with the hypothesis of compensating differentials, as well as with dualist assumptions, to show the need for a differentiated assessment of job quality patterns in European labor markets.

I

Introduction

Economic orthodoxy suggests that the variance of non-wage aspects of employment gives rise to comparative wage differentials.(1) These differentials consist of the extra remuneration an employer must provide to compensate employees for an undesirable job characteristic, such as job insecurity or intermittent unemployment (McConnell and Brae 1986, p. 390). As an equilibrium condition the theory of compensating differentials posits that, due to the need to compensate employees for undesirable job characteristics, positive and negative job characteristics should - ceteris paribus - rarely coincide.

Observing a split of labor markets into segments providing either multidimensional "good" or "bad" jobs, dual labor market theory has, since the late 1960s, denounced the notion of compensating differentials. According to the dualist view, job quality characteristics tend to cumulate within labor market segments which generally provide either high-quality or low-quality employment.

Although there is no necessary connection between the decline of the middle class and dualization documented in the US (see, e.g., Bluestone and Harrison 1988; Kuttner 1983; Rosenthal 1985; Thurow 1987), the past years have seen a resurgence of dualist labor market analysis that, in part, links the two issues together. These studies have suggested that dualist scenarios mirrored labor market realities more closely than the neoclassical assumptions of continuity (see, e.g., Dickens and Lang, "The Reemergence of Segmented Labor Market Theory," 1988).(2) In Europe, similarly, rising unemployment rates have led researchers to re-examine the possibility of labor market segmentation, particularly as labor market deregulation initiatives were implemented (Blossfeld and Mayer 1987; Schettkat 1993; Sengenberger 1987; Syblick 1990).

Dualist labor market theory originally evolved from an effort to identify inner-city workers' obstacles to steady employment. In the late 1960s, several studies of the urban labor markets of Boston (Doeringer 1968), Chicago (Baron and Hymer 1968; Rees 1968), Detroit (Bluestone 1970; Ferman 1967; Fusfeld 1968; Wachtel 1970) and Harlem (Vietorisz and Harrison 1970) suggested that the United States economy was split into two segments. A center or primary economy, characterized by large firms, produced high-paying jobs in which workers could expect job security and advancement over time (Averitt 1968). By contrast, the peripheral or secondary economy was confined to highly competitive markets and generated jobs characterized by low pay, intermittent unemployment, and little or no possibility for advancement. Certain groups of workers were confined to secondary jobs because of a complex set of interrelated factors including, among others, their geographic location, limited access to secondary education or occupational training, and previous intermittent work experience (Doeringer and Piore 1971). These studies consistently confirmed a racial dimension of labor market dualization (Albelda and Tilly 1994; Darity et al. 1996; Torres 1991). Some researchers, moreover, suggested that the specific work experiences of secondary-sector employees reinforced their behavioral attitudes, placing them in a self-propelling cycle of poverty (see e.g., Beck and Allen 1994 for a methodological critique of this argument).

In the early 1980s, proponents of dualist theory suggested that job-dualism was characteristic not only of the U.S. labor market, but of industrialized societies in general. Piore (1980) identified elements of labor market dualism in the Italian and French context (Beck 1996 provides a brief intellectual history of dualist analysis). Adapting Adam Smith's dictum - that the size of product markets limits the division of labor - to labor market theory, Berger and Piore (1980) opined that a division arose throughout industrialized nations between firms and workers who produced for stable markets, and those who worked and produced for the unstable segment of the economy. Said Berger and Piore, ". . . dualism in the labor market is at root connected to the variability and uncertainty of modern industrial economics. . . . Dualism arises when portions of the labor force begin to be insulated from uncertainty and variability of demand and their requirements begin to be anticipated in the process of planning" (p. 23-24).