Workforce segmentation in Germany: from the founding era to the present time

Eichhorst, Werner; Kendzia, Michael J. Article Workforce segmentation in Germany: from the founding era to the present time Journal for Labour Market Research Provided in Cooperation with: Institute for Employment Research (IAB) Suggested Citation: Eichhorst, Werner; Kendzia, Michael J. (2016) : Workforce segmentation in Germany: from the founding era to the present time, Journal for Labour Market Research, ISSN 2510-5027, Springer, Heidelberg, Vol. 49, Iss. 4, pp. 297-315, https://doi.org/10.1007/s12651-016-0211-3 This Version is available at: https://hdl.handle.net/10419/158823 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Kendzia2 Published online: 23 September 2016 © The Author(s) 2016. This article is available at SpringerLink with Open Access. Abstract Despite a more recent debate about ever deeper segmentation, the authors argue that since industrialization, Germany has continually experienced a dual labor market. One segment contains the primary segment of better paid and more attractive jobs, while the secondary segment encompasses rather low paid, less stable and less attractive jobs. Dualization is the result of firms which are likely to hire full-time and long-term workforce for its core activities while relying on more flexible forms of employment for other activities. Based on an in-depth examination of the structure of the workforce since 1871, the article investigates the factors which account for the origin, evolution and the peculiarities of the country’s core workforce. The authors show that a non-negligible part of the working population has always been subjected to marginalization, but that the dividing line between the two segments has changed over time as has the character of the respective groups. Keywords Core workforce · Industrialization · Peripheral workforce · Workforce segmentation JEL classification N34 · J42 Werner Eichhorst [email protected] Michael J. Kendzia [email protected] 1Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), Schaumburg-Lippe-Straße 5–9, 53113 Bonn, Deutschland 2ZHAW SML, Stadthausstrasse 14, 8401 Winterthur, Schweiz Die Segmentierung der Belegschaft in Deutschland: von der Gründerzeit bis heute Zusammenfassung Trotz der jüngsten Debatte um eine zunehmende Segmentierung des deutschen Arbeitsmarkts, argumentieren die Autoren, dass Deutschland bereits seit der Gründerzeit eine duale Ausprägung des Arbeitsmarkts erfahren hat. Hiernach verfügt das primäre Segment über besser bezahlte und attraktive Arbeitsplätze, wohingegen das sekundäre Segment eher gering bezahlte und weniger attraktive Arbeitsplätze aufweist. Diese Form des dualen Arbeitsmarkts resultiert aus Vollzeitstellen und zugleich langfristigen Beschäftigungsverhältnissen, die rundum der Kernaktivitäten eines Unternehmens angesiedelt sind. Hingegen wird bei weniger relevanten Tätigkeiten auf flexiblere Beschäftigungsformen zurückgegriffen. Der vorliegende Artikel untersucht die Belegschaftsstruktur innerhalb Deutschlands seit dem Jahr 1871 und gibt Einblick in die Gründe für die Entstehung, die Entwicklung sowie die Besonderheiten der Stammbelegschaft in Deutschland. Die Autoren zeigen auf, dass ein nicht unerheblicher Teil der Belegschaft in Deutschland seit jeher einer gewissen Form der Marginalisierung ausgesetzt gewesen ist. Jedoch unterlagen sowohl die Trennlinien als auch der Charakter dieser beiden Segmente im Verlauf der Zeit einem deutlichen Wandel. 1 Introduction In recent political discourse, the marginalization and precariousness of a part of the workforce is discussed either as a menacing phenomenon that looms large over the past decades (Vosko 2000; Kalleberg 2009;Ross2009)oras a much needed mechanism to increase a firm’s flexibilK 298 W. Eichhorst, M. J. Kendzia ity (Saint-Paul 1996; Kalleberg 2001). However, research on employment indicates that the workforce has always been subjected to some sort of segmentation (Blossfeld and Mayer 1988; Pollert 1988) and that, from a historic perspective, the discourse on the use of a core and a peripheral workforce appears exaggerated (Gallie et al. 1998). Against this backdrop, this article seeks to examine the factors contributing to the emergence and change in the demarcation of a core workforce and its counterpart since the founding era (Gründerzeit), beginning with the establishment of the German Reich in 1871, to the present time in Germany. The core workforce can be defined as workforce, including a longer duration of employment and significant firm-specific skills. In this article, these conditions serve as criteria to differ between the core and the peripheral workforce. In doing so, the authors further specify that a longer duration of employment comprises at least two years of employment for the same company. The main reason for this is that a fixed term contract within the industrial sector in Germany today is not allowed to last longer than two years. Plus, firm-specific skills are understood as specific capabilities, knowledge, and experiences within a strictly defined field of application – often comprising only a certain section, production facility or part of the production process (Lutz 1987, p. 2–49). The investigation of the workforce is carried out according to two basic segmentation theories which will be presented in the next section. The investigation focuses primarily on workers and employees of industrial companies. Only in the end of this analysis, the service sector is addressed, as the structural change within the German economy led to a strong increase of service-related workplaces. Thereby, a workplace is understood as the overall sum of all tasks assigned to an individual worker or employee (Lutz 1987, p. 55). Ever since the industrialization, the chemical, electrical, metal and steel industry as well as the machine and automobile construction have occupied the largest amount of workers and thus served as flagship industries. For this reason, the survey focuses on these branches across Germany. 2 Theoretical background According to Reich et al. (1973), the segmentation process inside the labor market can be described as a historical process, whereby political-economic forces promote the division of the market into segments. Those segments, in turn, differ by certain labor market characteristics as well as behavioral rules (Reich et al. 1973, p. 359). Referring to further literature on this issue, Loveridge (1983)examines the labor market dichotomization between a core and a peripheral workforce. According to him, the primary segment of the labor market is marked by long-term and stable earnings, whereas the secondary segment is characterized by unstable earnings. Likewise, Hakim (1990) notes that the central workforce of a company consists of workplaces related to a primary internal sector. In particular those workplaces are permanent, full-time and associated with firm-specific skills and result in long-term, stable earnings. Conversely, the secondary external sector comprises rather seasonal, casual and shortterm contract work, work from home as well as some unskilled work (Hakim 1990, p. 160). For this investigation it is essential that the dividing factors or mechanisms are categorized according to two underlying explanatory approaches (Lutz 1987): firstly, the economic-functional dimension and secondly, the political-institutional dimension. The first argument contains the evolution of a core workforce, which results from firms aiming at profitability and a long-term interest to survive. This approach entails the view that a stable and long-term workforce, protected against employment risks and major competition, shows a highly favorable cost-benefit ratio. According to the transaction cost theory (Williamson 1984,1985), employers aim at safeguarding revenues resulting from firm-specific investments, such as investments into human capital. Thus, it is more cost-effective to retain a stable workforce and create an internal market than hiring new workers for each new work task (Nienhueser 2014). The individual’s qualification serves therefore as a dominant pattern for both the horizontal and vertical division of labor within a firm. Following the basic logic of stairs, workplaces equal certain skill requirements, which increase step by step. If a worker or employee fulfills the duties of his workplace, it becomes most likely that even the requirements of the next, and more demanding workplace, are met. Thus, those internal climbers generate only low costs for the company. The second approach includes a political-institutional dimension. This approach focuses on measures taken by social partners, such as welfare-state arrangements in order to protect the workers and employees. Further literature, in particular the radicals literature, see for instance Rubery (1978), Bruno (1979), and Craig et al. (1982), interprets firm-internal segmentation as a strategy to divide the working class. Those radical segmentation theorists argue that the workforce strategy in view of the promotion of internal labor markets, and thus retaining workers within their firms, can be due to the intention to repel or push back the influence of unions (Lutz 1987, p. 7–152). The political-institutional dimension goes in line with Piore (1983, p. 251), whereupon large parts of the labor market are regulated by institutions. An important example constitutes labor market regulations, which are frequently shaped by the bargaining power of workers (Blanchard and Giavazzi 2001). Thereafter, union power, union coverage K Workforce segmentation in Germany: from the founding era to the present time 299 as well as the degree of coordination of wage agreements (Layard et al. 2005, p. XV) significantly impact labor market legislation, including, for example, employment protection legislation. By applying the political-institutional explanatory approach, it is possible to analyze as to how the relevant actors influence the emergence of a peripheral and core workforce (Layard and Nickell 1999). To explore this issue further, the new institutionalism can be divided into three major strands: The rational choice approach, the view of the historical institutionalists, and the sociological institutionalism. According to the historical institutionalists, institutions can be described by all formal or informal procedures which are embedded in the organizational arrangement of the political economy. This approach takes into account the asymmetries of powers concerning the relevant actors in view of the development of institutions. Furthermore, this view includes the assumption of path dependent social causation. That is, the historical institutionalists investigate how institutions produce paths in the sense that they create a response to new challenges, such as, for instance, the creation of the accident insurance in the course of the industrialization. The rational choice approach is based upon rather heroic assumptions such as the prescience of actors, including their capacity to influence the exact outcome of the institution, which, from a more realistic point of view, can only hardly be predicted (Hall and Taylor 1996, p. 936–951). Nevertheless, according to the rational choice approach within the historical institutionalism, institutions can be regarded as independent variables, explaining the pattern of a certain result and thus the dependent variable, which is in this case the formation of a core workforce. More specifically, the historical institutionalism highlights that institutions can be considered as a product of temporal processes. These institutions encompass rules, policy structures or certain norms. In this respect, historical institutionalists deal rather with the origins than the functions of newly created institutions. Hereafter, the evolution of the German model was not synchronous and marked by rather unintended consequences. For example, in Germany the intensive confrontation between the so-called social partners, namely employers and employees, led to the introduction or changes of institutions such as the vocational training system and the social welfare institutions. In that sense, path dependency includes parts that are kept (continuity) and parts which are modified (change). This implies for the article that the origin or rather development of institutions has to be viewed in their political and social setting. This approach recognizes that institutions are socially constructed and reflect a cultural understanding of the world (Thelen 1999, p. 382–386). Advocates of the economic-functional strand (Doeringer and Piore 1971,1975; Dickens and Lang 1985,1988), however, claim that labor market segmentation arises mainly because it is functional. That said, the segmentation process is caused by a change in the production strategy of firms for economic efficiency reasons. Schmiede (1997) characterizes the economic-functional dimension as an instrument to safeguard and protect the overall productivity of a company. Closely linked with the economic-functional explanatory approach or theory is the concept of skill formation. In this approach, a firm’s staff can be divided into two groups based on either high or low skill levels. Core activities require high and firm-specific skills that enhance a company’s competitiveness (Friedman 1977). This kind of qualification can be achieved through training and further education (Hall and Soskice 2001, p. 6–7; Emmenegger 2009). The other group belongs to the periphery, comprising rather unskilled work. As Williamson (1985) has amply demonstrated, skill specificity exposes the owner of the skills to ex post opportunism. Therefore, workers need assurances that they can remain in the company for a long enough period to reap the returns on such skill investments (Estevez-Abe et al. 2001). Consequently, jobs including core activities are usually paired with long-term contracts. This is also advantageous for the companies themselves because firm-specific qualifications might be lost through high fluctuation between different factories (Lutz 1973, p. 58–59). This implies that even with very flexible and universal labor market institutions, some sort of workforce segmentation emerges for economic-functional or rather operational reasons. To further analyze the segmentation process of the workforce, taking place in Germany from 1871 to the present time, we use the two previously mentioned explanatory approaches: firstly, the political-institutional arrangement of the labor market, comprising labor legislation and the role of interest groups, such as unions and employers associations. Secondly, the authors shed light to the economic-functional logic behind production strategies. The latter allows considering investments in skill formation, which are attributed to the emergence of diversified quality production in Germany (Streeck 1991,1997;Thelen2004). Beyond this, Streeck’s investigation regarding the political economy in Germany points to certain institutional arrangements, for instance the vocational education and training system as well as collective bargaining, which not only influence the strategies of companies but also strengthen them. Both mentioned institutions facilitate and support strategies, depending on high-skill and high value production, and thus contribute to succeeding in international markets (Thelen 1999, p. 393). As regards collective agreements, it is possible to further differentiate between secK 300 W. Eichhorst, M. J. Kendzia Economicfunctional: Diversified quality production; skill formation Hybrid form: Vocational training system Politicalinstitutional: Labor legislation; collective bargaining; social security Fig. 1 The different dimensions of the segmentation process toral and occupational collective agreements. While the first takes place at branch level, for instance agreements regulating wages and working time solely for the machinery industry, the latter encompasses specific professions. Both sectoral and occupational collective agreements as well as the vocational training system and the social security system stabilize the existence of so-called inter-company labor markets, whereas company-sponsored social benefits as well as dismissal protection foster the rise of internal labor markets. Inter-company labor markets constitute central elements for workers and employees and are essential to meet the demand for labor. Nonetheless, it is worth noting that only few articles within the German literature deal with this phenomenon (Grund 2001, p. 392). The intercompany labor market functions as equivalent for workplace security. For example, occupational labor markets for specific professions combine flexibility and security, since standardized qualifications reduce the transaction costs of firms. That is, the recruitment of workers and employees is incentivized. For those employed, this market offers both entrance and exit possibilities (Krause and Köhler 2012, p. 32). Occupational qualifications, and thus the existence of inter-company labor markets, are closely associated with the German craftsmanship (Köhler et al. 2007, p. 389). However, contrary to mass production, diversified quality production depends on a workforce with various levels of skills. This means that workers or employees are able to develop new technologies through intense and close cooperation with other workers or managers. This often includes long lasting and relatively stable relationships, or rather partnerships, between the economic actors within the firm and their external partners, such as suppliers and customers. In addition to this, specialized firms have to innovate constantly. To do so, they rely on training to create a skilled workforce (Hollingsworth and Boyer 1997, p. 22–25). Hereby, the vocational education and training system is marked by two key features: First, after a short training period, workers are enabled to cope with all tasks and problems they face within their profession. Second, with passing a vocational education and training, workers possess characteristics of a branded product, which goes in line with a highly reliable employability in the form of foreseeable capabilities (Lutz 1987, p. 42–44). For this reason, long-term employment relationships guarantee that employers receive a return of investment to compensate their costly training effort. The formation of a skilled workforce inside a firm can therefore be considered as a measure to combat the poaching problem (Thelen 2007, p. 249). In addition to the previously explained approaches, we introduce another approach to address the vocational training system in order to analyze the upcoming scenario. The vocational training system entails elements of both the economic-functional and political-institutional explanatory approaches. For example, on the one hand, from the economic perspective, it makes sense for a company to invest in training and development of the workforce to further innovate. On the other hand, from an institutional perspective, vocational training systems require the participation of social partners to initiate, maintain and agree to such a system. At the same time, the government must invest in training facilities such as vocational training schools. Against this background, the vocational training system reflects a hybrid constellation, including elements of both views, as shown by the overlapping circles in Fig. 1. To summarize, political-institutional and economic-functional approaches reveal diverging drivers of segmentation. Nevertheless, both perspectives can be combined. It is an empirical question of how the exact interplay and extent to which institutional and functional factors shape the workforce in a dynamic perspective. Following the rational choice approach within the historical institutionalism, but extending this model slightly, institutions and the economic logic of firms both constitute independent variables, describing certain pattern of results (the dependent variable), which is here the formation of the core workforce. 3 From the founding era until World War I From a broad economic perspective, the timeframe between the ‘founding era’, defined by the period just after the establishment of the German Reich in 1871, and World War I (1914–1918) was marked by the industrialization process. During this time, the general working conditions for the vast majority of the industrial workforce were poor, including long working hours, heavy physical work, and a general absence of any kind of social insurance institutions. As addressed earlier, and to first analyze the segmentation process within this workforce, the duration of employment of a worker within a specific company and firm-specific skills K Workforce segmentation in Germany: from the founding era to the present time 301 are chosen to serve as criteria for the differentiation of the workforce. Ditt (1994) estimates that during the time of early factory workers only one fourth of the entire workforce belonged to the core. Schmiede (1997) concludes that for the 1880s amongst all industrial workers the average duration of employment lasted not more than one year. As during this time Germany can be characterized by a rather rural society, often including farmhands shifting their activities between classic farm work and handicraft activities, depending on the season. Thus, it took some time before workers fully bound themselves to this new and often unstable form of production in factories. Contemporary discussion denoted high fluctuation rates as the childhood disease of the early days of the factory system (Schmiede 1997). Various companies, such as those in the chemical industry, which experienced especially high fluctuation rates due to imminent health risks, introduced measures on a voluntary basis to attract and stabilize its workforce through a wide range of social services (Riemer-Schäfer in press, p. 111–155). Phoenix Ironworks provides an example for the early German metal industry. Here, the core workforce was rewarded after a longstanding period of employment by guaranteeing job security and offering corporate social benefits. Another example is Alfred Krupp who created a company health insurance fund. The number of workers covered by all three branches of the social security system increased considerably during 1890 and 1913, with a significantly high number of workers covered by accident insurance right from the beginning (Kendzia 2010a). In accordance with the economic-functional explanatory approach, factories were established as the general organizational form of production, out of which, larger companies developed (Vetterli 1979; Stolle 1980). Craftsmen with specialized knowledge formed a privileged group within the broad mass of workers. In order to keep those workers in the factories, employers attempted to create incentives for long-term employment relationships. This was realized, for instance, by higher wages for skilled workers, establishing occupational pension schemes and building apartments for a particular part of the permanent workforce. In contrast, the unskilled and semi-skilled workers still fluctuated between different factories to a high degree during this time (Lutz 1987). Within the machinery and iron industry in Berlin, Heiss (1909) observed a significant correlation between the age and the wage level. A similar relationship could be found between the duration of employment and the wage legel (Heiss 1909, p. 182–185), indicating an early example for the phenomenon of seniority wages. Siemens extended the occupational pension scheme already in 1872, comprising all workers and employees. The pension claim came into place after ten years of employment for Siemens. When a worker or employee left the company at an earlier stage, the claim was lost. Prior to World War I, the occupational pension scheme amounted to 50 % of all voluntary social benefits Siemens paid. Another example constituted Krupp’s Gussstahlfabrik in Essen which constituted a typical factory city. The workers and inhabitants of the companies’ apartments were considered to be the real “Krupps”, knowing that they were the last to be dismissed and amongst the first to be again hired. Furthermore, their sons had good chances to get one day an apprenticeship within the firm. The extensive construction of apartment for the companies’ workers became one of the most important instruments to build up a core workforce (Schmiede 1997, p. 52–53). Owing to the increasing technological requirements within the production process, large firms sought to form a core workforce to safeguard the availability of skilled workers. For this purpose, vocational training systems were established. Thus, the vocational training system can be interpreted as a hybrid form of the segmentation process where institutional aspects (interest of the government) and operational aspects (training of workers) converged. In the beginning, apprentices were often recruited among the relatives of the already employed workers due to the expected positive effect on solidarity and stability in the workforce (Deutschmann 1985, p. 124–217). Since then, the vocational training system in Germany has been combining work experience by learning on-the-job with classroom education, including in general a rather smooth transition into employment (Zimmermann et al. 2013, p. 41). This procedure further reduced the fluctuation of the workforce (Harney and vom Hau 2010, p. 11–13). For example, MAN (Maschinenfabrik Augsburg Nürnberg)introduced its own institutionalized training workshop in the 1890s. By designing a training program which met the firmspecific needs, the company established a core of skilled workers. Another example of this increased stability of the workforce in the machinery industry is provided by Daimler-Motoren-Gesellschaft. Given that a fixed term contract within the industrial sector in Germany today must not last longer than two years, a core worker is considered to be employed longer than two years in the same company. Table 1 and 2indicates that in 1910, already more than 70 % of the overall workforce belonged to the core group (Schudlich 1994, p. 78–79). Regarding the political-institutional dimension within the first section of the analysis, it is worth noting that the first collective wage agreement in Germany was settled in 1873. Yet, the state refused to accept the agreement. It took until 1899 before collective agreements began to spread across Germany and other western European countries. Prior to that time, wages were usually negotiated individually between the workers and their potential employers. K 302 W. Eichhorst, M. J. Kendzia Table 1 Duration of employment at the Daimler-Motoren-Gesellschaft in Stuttgart-Untertürkheim in 1910, % Duration in years All workers Locksmiths, toolmakers Lathe operators Shapers Operatives, grinders Less than 1 20.2 20.3 25.1 23.3 12.0 1–2 8.2 8.3 2.9 27.9 2.1 2–6 51.5 52.2 44.4 46.5 53.1 7–10 16.5 15.7 21.4 0.0 26.6 10–16 2.6 2.9 4.5 2.3 4.7 17–20 0.8 0.6 1.6 0.0 1.6 Total 99.9 100 99.9 100 100.1 Source Schumann (1911, p. 48–56) Table 2 Duration of employment at the Daimler-Motoren-Gesellschaft in Stuttgart-Untertürkheim in 1910, % Duration in years Platers, plumbers, saddlers, coppersmiths, painters, varnishers Blacksmiths, fine forging Carpenters Day laborers Less than 1 19.7 18.2 34.3 17.6 1–2 4.1 11.0 6.1 10.5 2–6 55.1 37.9 45.5 61.3 7–10 19.0 21.2 10.1 9.0 10–16 1.4 0.6 3.0 0.9 17–20 0.7 0.0 1.0 0.6 Total 100 99.9 100 99.1 Source Schumann (1911, p. 48–56) That is, soon after the beginning of our investigation, starting with the foundation of the German Reich in 1871, wage work experienced its first central institutional framework. Only a short time later in 1875, the first trade unions in Germany were installed. Thereafter, employers set up the first employers’ associations to oppose the growing numbers of workers organized in unions. In 1891, a law regarding employment protection included a ban on employment for school-children, the restriction of the maximum working day to 10 h for young people and to 11 h for women and the legal possibility to install work councils in factories. Through these regulations, the position of workers was significantly strengthened. Despite this, until 1899, collective agreements were not widely spread across Germany (Kendzia 2010a, p. 26–36). Between 1883 and 1891, the social security system was politically introduced, including accident and health insurance, old-age and disability as well as the pension insurance. As such, the government responded formally to a phenomenon which already existed within firms through labor negotiations. Owing to the deep engagement of political as well as industrial actors, the line between the institutional and functional dimensions cannot be drawn precisely. This aggravates the assessment regarding the true driving forces behind the segmentation process. The implementation of the social security system constituted an appropriate mechanism to protect workers against risks in their working lives. By reducing the prevailing high fluctuation of the workforce during this time, it seemed to be a useful instrument to stabilize the workforce and laid a foundation for the creation of a core workforce inside firms. In the metal, electrical and chemical industry even more examples can be found, which highlights the importance of loyalty towards a firm. Within the largely expanding electric industry, high employment fluctuation was common among young workers and even skilled workers, of which many aimed at becoming self-employed (Bienkowski 1910, p. 19–20). In contrast, within the chemical industry, the most important criterion to climb up the career ladder was linked with long employment in the same company rather than the achievement of additional qualifications. Referring to Schulz (1978) and Schäfer (1979), the parallel development of both high fluctuation and increasing steadiness for some workers emphasizes the existence of a core workforce and a fluctuating peripheral workforce. And yet, the early core workforce could not be identified by certain qualifications. Instead, the loyalty to the employer, in the form of a long duration of employment, was a key factor in this respect. That is, the early differentiation between the core and peripheral workforce during industrialization depended to a large extent on the duration the individual was working for the same firm. Prior to the outbreak of the First World War, already more than 12,000 collective agreements existed for somewhat less than 200,000 firms employing 1.8 million workers. Surprisingly, these agreements were being conducted K Workforce segmentation in Germany: from the founding era to the present time 303 Fig. 2 Occupational groups according to the profession census, Source Federal Statistical Office 1972, p. 142 within the context of heavy state repression of the worker’s movement between 1890 and 1900. Despite these repressions, the workers’ movement grew continuously, amounting to 2.5 million unionized workers in 1914. At the same time, employers began forming associations, resulting in meetings between workers and employers at the association level. Despite this, the state did not allow any party greater legislative involvement in the process of fixing wages and thus did not approve collective agreements. This remained to be the case even though the Supreme Court of the German Reich decided to consider those collective agreements as legally binding in 1910 (Kendzia 2010a, p. 30–31). Around the year 1895, as Fig. 2displays, the proportion of workers related to all occupational groups peaked. After this, the groups of employees and civil servants as well as the family workers began to grew, whereas the amount of the self-employed decreased. And yet, until the beginning of World War I, workers built the largest occupational group across Germany. 4 World War I and the Weimar Republic World War I and the mobilization of the armed forces in 1914 constituted a tremendous challenge for the labor market. Additionally, employees’ institutions, such as work councils and trade unions, became more influential. To stabilize the working relationships of workers with firm-specific knowledge, firms advanced vocational training. Following the conscription of male workers, the unemployment rate among women rose strongly. In particular, the conscription of skilled workers led to the closure of many establishments, or parts thereof, which resulted in lay-offs of unskilled workers. However, in the course of the war, more and more women replaced men in the essential industries of the war economy, including the machine construction, metal, electrical, and chemical industries (Daniel 1989, p. 28–44). During World War I (1914–1918) itself, market mechanisms were largely replaced by regulations imposed by the state. Within the unions, more unskilled workers started to become members, and thus a significant drop of the proportion of skilled workers occurred. Compared to their role during industrialization, trade unions acquired more power, and workers’ rights were strengthened significantly as collective bargaining and collective agreements became the basis for the organization of work. Already in 1916, in the wake of the Auxiliary Service Act (Hilfsdienstgesetz), the state accepted the unions as legitimate representative of the workforce. By 1924, the coverage of collective bargaining amounted to roughly 61.2 % of the entire German workforce, whereas in 1913, coverage was only 20 %. As job-hopping was reduced, industry-wide bargaining had a very positive impact on the decrease of the fluctuation rate (Thelen 2004, p. 68–79). Consequently, sectoral bargaining contributed markedly to stabilizing employment relationships. Nonetheless, as firm-specific skills characterize the core workforce, World War I undermined the distinguishing criterion of the core workforce. This ‘take what you can get’ employment policy resulted in a dilution of the quality in view of the overall workforce and led to a delimitation problem between the core and peripheral workforce. K 304 W. Eichhorst, M. J. Kendzia At the end of the war, the collective actors, such as the unions and employers’ organization had great influence on the regulation of the labor market. Through the revolutionary events of the November Revolution of 1918–1919 and the establishment of the Weimar Republic, the bargaining power of the employers was severely weakened. Employers were not in the position to oppose the current revolutionary tendency and feared the expropriation of their establishments. Against this backdrop, an ‘alliance of purpose’ between industry and the unions was built, resulting in the so-called Stinnes-Legien-Agreement (taking the names of the main negotiators) of 1918 which recognized trade unions for the first time as a bargaining agent of workers. Hugo Stinnes was then the leading industrialist from the Ruhr, a heavy industrialized region in the western part of Germany, while Carl Legien was chairing the general commission of the free trade unions. The agreement constituted a breakthrough for the unions, as collective agreements became legally binding and the employers approved unions as social partners from that day on. In 1920, the Works Council Act (Betriebsrätegesetz) was adopted, allowing councils to co-determine the terms of social and personnel affairs within companies. Furthermore, dismissals were restricted and the first regulation of severance pay was laid down (Kendzia 2010b, p. 9–18). This restriction of hiring-and-firing practices had a positive impact on the emergence of internal labor markets. In 1927, the so-called ‘standard employment relationship’ of the core workforce encompassed dismissal protection, accident insurance, health insurance, pension insurance as well as unemployment insurance. These social benefits provided incentives to invest in skills by guaranteeing income for highly skilled workers in the case of possible layoffs. As a result, more and more workers were covered by the benefits of the social security system. During the time of the Weimar Republic, to avoid overproduction, company coordination replaced the markets mechanism. The strategy behind this proceeding aimed at fixing prices in times of an increased fear due to a reduction in the demand. To safeguard predictable profits for creditors further helped to limit the inflow of external financial means. Until 1923, in the absence of any laws against cartels, free competition inside Germany faced tough resistance. In contrast to this scenario, other major economics during this time, such as the USA, England, and France, had already introduced anti-cartel legislation prior to the outbreak of World War I. The protection of the interests of cartels and the widespread use of company cooperation reflected the spirit of the time (Zeitgeist) and was based on a wide societal consensus, assuming that organized markets would achieve better results than pure competition. As a result, large trusts were implemented across Germany. In 1925, in the steel industry, the Vereinigte Stahlwerke (Vestag), including the Thyssen and Phönix Group as well as other coal and steel groups, was created. In the chemical sector, former competitors such as Bayer, BASF and Hoechst merged into the IG Farbenindustrie. In 1926 Daimler and Benz merged, however, an intended large automobile trust, including BMW and Daimler-Benz, could not be realized (Höpner and Krempel 2003). Within the steel industry, other large producers purchased new industries which led to a higher concentration. In 1930, the Vereinigte Stahlwerke (Vestag) achieved a market share of almost 50 % of the German steel market. The machine construction industry faced fragmented product markets, which contributed to further specialization and emphasis on quality production due to a stagnating domestic market and increasing international competition. Hence, production relied heavily on a skilled workforce. Another remarkable feature regarding the machine construction industry was the rise of the diversified quality production, which motivated employers to keep their skilled workers instead of reducing the workforce during an economic downturn (Herrigel 1996, p. 67–104). A plausible reason for the retention of a core workforce, even during a longer economic downturn, can be explained by the incompatibility between a short-term hiring and firing and a longterm availability of a qualified workforce within a company (Lutz 1987,p.4). The growing demand for skilled workers, both in the machine construction industry and by the German production model itself, including an increasing degree of specialization and high quality production, thus had a strong impact on the emergence of the core workforce. Against this backdrop, during the Weimar Republic, market segmentation was determined by stabilized working relationships. Those workers who were already employed within firms were protected by trade unions, sectoral bargaining, dismissal protection, diversified and large-scale production as well as occupational skills gained by vocational education and training. Nonetheless, these protections limited the access to the labor market of those workers who were not yet employed. Compared to the industrialization era, institutional arrangements became more crucial in determining labor market segmentation. And yet, the valuation of skills by employers increased due to a shift towards a high quality production and the spread of the apprenticeships, owing to increasing international competition, display strong features of the economic-functional dimension regarding the segmentation process. Consequently, during this period, both dimensions promoted the segmentation process in Germany. K Workforce segmentation in Germany: from the founding era to the present time 311 Fig. 4 The workforce in Germany according to the employment status, 1992–2012, Source Socio-economic panel (SOEP) 1992–2012, own calculations by IZA ized components global sourcing opportunities were observed. To remain competitive, superior quality, higher flexibility, and lower costs were deemed necessary. Moreover, due to technological changes, broader skills were demanded (Thelen 2007, p. 250). These general skills encompass both a high level of often tertiary education, in connection with project work or freelancers, and a low level from employees qualified for other occupations or (re-)entering the labor market, in connection with marginal employment or agency work. Independent of these skill requirements, the prevalent contracts are atypical and therefore consist of limited employment protection, a low tenure and high wage dispersion (Eichhorst and Marx 2009). Following the argumentation of Eichhorst and Marx (2009), in accordance with Keller and Seifert (2007), atypical employment is equated with the peripheral workforce in this article. During the financial crisis, employment stability in the observed industries was accomplished through shorttime work and working time accounts, whereas temporary agency workers and fixed-term contract holders were made redundant. In doing so, peripheral workplaces face today major employment risks and acts as a buffer easing the adjustment pressure on the core. Yet, peripheral workplaces contribute to better labor market access and additional job creation, which, in turn, generates additional income from work (Eichhorst and Tobsch 2014). Today, within the manufacturing sector, many temporary contracts are transformed into long-term contracts. Since firm-specific skills can only be achieved after longer periods of employment, those workplaces often reveal an above-average tenure (Eichhorst et al. 2013). In this context, Castel (2000a, 2000b) for example raises the question, where discontinuous career paths and the potential threat of social exclusion through precarious workplaces or implications for those, being out of the workforce for longer periods are leading. Despite the fact that the author particularly addresses France, other authors (Kalleberg 2009; Scherer 2004; Kalleberg et al. 2000)aswell deal with similar questions regarding the future of social cohesion through atypical employment or rather non-standard employment relationships. The adjustments made in terms of part-time work, the expansion of temporary work and other changes indicate an increased flexibility in the external labor market. Numerous employment relationships in the internal labor market, which still are legally and formally standard employment relationships, for instance by individual working-times, flexible payments, sabbaticals and others, do not longer comply with the idea of a traditional standard employment relationship (Pierenkemper 2009, p. 14). Against this background, a certain decrease K 312 W. Eichhorst, M. J. Kendzia of structural rigidities regarding the working relationship for the core workforce is observable today. 8 Conclusions As correctly noted by Reich et al. (1973), the segmentation process in Germany constituted a historical process where political-institutional and economic-functional factors were responsible for the division of the labor market. In the beginning of our analysis, from the founding era until World War I, the bargaining power of workers was heavily restricted. At the same time, the fluctuation rates were high, amounting to average employment durations of one year. According to estimates made by Ditt (1994), in the beginning of the industrialization only roughly one fourth of all workers belonged to the core workforce. Over the course of time this picture changed as workers were bound closer to the employing companies, primarily within the German metal, electrical and chemical industries. In the same vein, and in accordance to the survey made by Loveridge (1983) and Hakim (1990), it was shown that through these processes the labor market could be characterized by a dichotomization between a core and a peripheral workforce. This became particularly evident when looking at the observed industries. In later periods, we found that suppliers often employed a peripheral workforce, including low or semi-skilled workers. However, in 1910 at Daimler-Motoren-Gesellschaft for instance, more than 70 % of the overall workforce belonged to the core workforce. As Piore (1983), Blanchard and Giavazzi (2001)and Layard et al. (2005) show, large parts of the labor market are regulated by institutions. In particular after the major ruptures following World War I and World War II, the asymmetry of bargaining power shifted from the employers’ to the employees’ side. The development of the German welfare state after World War II embedded many elements which were already created during the Weimar Republic. Thus, the formation of the standard employment relationship was influenced by certain exceptional historical and political constellations. This became particularly evident when the role of work councils and the power of the unions were strengthened. According to data from the federal statistical office, in the 1970s approximately 48 % of the entire workforce can be assigned to the core workforce. Regarding the economic-functional explanatory approach (Friedman 1977; Layard and Nickel 1999; Emmenegger 2009;HallandSoskice2001), the segmentation process is influenced by a change in the production strategy of firms for economic efficiency reasons. This theory along with the concept of skill formation explains that core activities require high and firm-specific skills that can be achieved, for instance, by a vocational training system. This system proved to be successful within the observed industries as both parties, employers and workers, were responsible for the creation and maintenance of this system. Moreover, we found evidence within the metal, chemical and machine construction industries for the protection of skill investments by retaining a core workforce. This assumptionmadebyLutz(1973), Williamson (1985), Hollingsworth and Boyer (1997) as well as EstevezAbe et al. (2001) stress the importance of firm specific knowledge and highly specified workers. Those activities, including core activities for the production process of a firm, are today embedded into long-term contracts. This is particular true for the manufacturing industry, where the service sector is more strongly segmented for various reasons. Thereby, the dividing line between the core and peripheral workforce becomes increasingly blurry, since often skilled workers or employees only belong to the peripheral workforce, owing to their absence of a standard employment relationship. This is the case, although the peripheral and core workforce frequently execute the same extensive range of tasks. In addition to identifying a mixed system, namely the apprenticeship system, including elements following an economic-functional and politicalinstitutional logic, we found that during industrialization, a more functional approach segmented the labor market. Later, a shift towards a stronger institutional structuring of the workforce occurred. The latest development of the segmentation process is again marked by a more combined logic. This can be explained by the maintenance and adaptation to diversified quality production in a more ‘purified’ industrial core still dominated by standard employment relationships. Yet, this core is supported by a secondary segment of increasingly important atypical contracts and service occupations. As a general conclusion the authors argue that the labor market in Germany has always been segmented, but the dividing line between the primary segment of the employment system – the core – and the secondary segment – the margin – has been redefined over time. Functional considerations added by political decisions regarding labor law and social protection led to the establishment of an increasingly institutionalized standard employment relationship that is still dominant in the industrial sector. The size and the composition of the marginal workforce changed based on business restructuring, available labor supply and institutional options for employment deviating from the standard. And yet, in 2012 41 % of all employees and workers possessed a standard employment relationship. Given that not all of them have been working for the same employer for two years, as the criteria of the core workforce is defined, this indicates that almost approximately 41 % of the entire workforce today can still be K Workforce segmentation in Germany: from the founding era to the present time 313 attributed to the core workforce. Hence, it would certainly be wrong to assume that the dualization of the German labor market is a peculiar phenomenon of the last 20 to 30 years, but it is becoming more visible in the more prominent role of non-standard employment relationships in particular in the increasingly important service sector. 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Michael J. Kendzia is currently the Program Director for the Bachelor in International Management and the Deputy Program Director for the Master in International Business at Zurich University of Applied Sciences. After having studied economics and business administration at University of Cologne and Warsaw School of Economics, he received his Ph.D. from the University of Cologne in 2010. From 2008 to 2013 he was working for the Institute for the Study of Labor (IZA) in Bonn. During this time, he was mainly responsible for scientific policy advice for various institutions and organizations. Most of his studies were conducted together with Werner Eichhorst in an international consortium for the Employment and Social Affairs Committee of the European Parliament. K