Report examines pay setting in new service sectors

Wage formation in most new service sectors - such as information technology and other professionals, or call centres - differs considerably from traditional pay negotiations between the social partners, and this could pose a threat to Sweden's traditional model of pay setting. These are among the findings of a report published by the Royal Swedish Academy of Engineering Sciences in summer 2000.

June 2000 saw the publication by two researchers at the Royal Swedish Academy of Engineering Sciences (Kungliga Ingenjörsvetenskapsakademien), Eric Giertz and Henrik Blomgren, of a report on wage formation and employee reward and motivation in new service industries in Sweden (entitled Tillväxt och lönebildning. Om löne- och anställningsvillkoren på tjänstesamhällets nya arbetsmarknader). The background is the development of new service businesses, notably in information technology (IT), which have introduced new business and management models and new ways of rewarding the workers.

The questions which the researchers seek to answer, in a study based on interviews with around 100 people in various types of company, include the following. Does the traditional Swedish model of wage formation neglect the role of wage formation in economic growth? Will there in future be more than one labour market, with the creation of a new labour market where wage formation occurs outside the control of the social partners? What are the consequences of such developments for growth and productivity in the economy as a whole, or for competition for skilled personnel from more traditional sectors covered by collective bargaining?

The report finds that new types of enterprise have grown up outside the established Swedish system of industrial relations - the unionisation rate in the IT business, for example, is very low. Salaries in these new service sectors have deliberately been used by employers to stimulate, motivate and reward labour. Management in many of the new enterprises has found that the structure of the pay system at the level of the individual employee has great effects on productivity. This finding has not always been reflected in the structure and behaviour of the actors in the mainstream labour market, the two researchers remark.

The new service sectors

In 1997 (the year for which the new report provides figures), 2% of Swedish workers were employed in farming, fishing, forestry and mining, while 19% were employed in manufacturing and other industries. The rest of the labour force (nearly 80%, or 1.9 million people) was employed in the service sector - for example, in transport, cleaning, car leasing, real estate and collective services like the police, electricity, national defence and education. The report divides the various types of activity in Sweden's "service society" (tjänstesamhället) into a number of groups:

1. "spider companies" that purchase a number services on the market instead of performing the work themselves, along with brokers and "chain-organisers" (such as franchising operations);

2. local manual service provision, such as car repair or cleaning;

3. service provision carried out by highly skilled and specialised professionals on a commission or fee basis (kunskapsintensiv uppdragsverksamhet), such as the work of accountants, lawyers, IT consultants and other consultants and in the areas of consumer services, leasing, education, computer support, distance support and artistic production; and

4. various other groups, covering government and local services, goods distribution, and services to manufacturing industry and the primary sector (such as farming and fishing).

The report focuses on three fast-growing and more or less new service sectors:

• highly skilled and specialised professionals (such as lawyers, chartered accountants and IT consultants);

• local manual service provision organised by large companies (such as cleaning, repair works and temporary work agencies); and

• "distance-support" services (call centres).

Specialised professionals

The researchers state that the highly-skilled professionals sector has been widened by the appearance of new kinds of consultants. In 1997, there were 240,000 people working in consulting and professional services, or 13% of the whole service sector workforce. The activities covered under his heading are, says the report, those based on the talent to make diagnoses of, or propose solutions to, clients' precise needs and problems. Architects, building consultants, advertising professionals, chartered accountants and lawyers traditionally belong to this category, but its ranks have been swelled considerably over the past decade by the intense growth in the number of IT and internet consultants. Many IT consultants and management consultants have appeared as a result of "outsourcing" by companies and other organisations. Companies like Ericsson and ABB have spun off some hundreds of technical consultancy companies. Another trend in this sector is that companies that formerly operated only on the national market have been involved in mergers and takeovers with international companies. The result is international or global groups with activities in many different countries, such as Price Waterhouse Coopers (chartered accountancy), Andersen Consulting (management consulting), Cap Gemini and Razorfish (IT). Many Swedish companies in this sector have become parts of international operations.

Local manual services organised by large companies

In 1997, 391,000 workers, or 21% of the service sector workforce, were employed in local manual service provision, such as cleaning, security and staffing through temporary work agencies. Groups like Securitas (security) Manpower (temporary agency work) and ISS (cleaning) have become strong and small local businesses have been out-competed, bought up or joined the large companies. Firms such as Pressbyrån (sweet and book stalls), Sibylla (hot dog stands), Proffice (temporary work agencies), Praktikertjänst (opticians) and Statoil (petrol stations) are now running chains of local service providers.

Distance support services

New information and communication technology has made it possible to provide certain personal services at a distance from the client through call centres, help-desks, telemarketing centres, client reception desks and telebanking. In 1997, 30,000 people worked in distance support services. There were about 500 call centres in Sweden in 1997, about half of which had more than 30 employees, and a 10th more than 100 employees.

Wage formation in the new sectors

While not providing a complete survey of the pay and wage-setting situation in the new service sectors, the researchers note that the main companies in local manual services and the cleaning business have concluded local collective agreements through employer's organisations, sometimes with as many as four different trade unions. In the security business, there are a number different collective agreements covering the same job, resulting in different pay terms for the members of different unions, which compete with one another. Only in the distance support business (call centres) are wages collectively agreed with one trade union, with the collective agreement having normative effect for the whole sector.

Bonuses, stock options, shares and other kinds of rewarding pay systems are fairly common in the knowledge-intensive service sector. Many companies give young employees coming from university a monthly starting salary that is SEK 1,000 to SEK 2,000 higher than that laid down in the relevant collective agreement. There is a wide variety of different types of individual rewards linked to the performance of the individual worker and the company's results.

Today, in the "traditional" sectors pay is not seen as an instrument to create growth, the researchers argue, criticising the existing collective bargaining model and comparing it with the situation in the new service sectors. The wage no longer seem to be regarded as payment for an achievement, but as a fixed cost (by the employer) and at the same time as a policy issue or a means of achieving a fair distribution of income (by the employees). Centralised wage formation runs the risk of restraining economic growth. In the Swedish bargaining system, employees with similar positions, similar work tasks and equivalent formal qualifications receive collective pay adjustments in central sectoral collective agreements. It has become more and more difficult for individual workers to relate their wage development to their own effort, to the company's results or competitiveness, to the local labour market situation, or to supply and demand within their own profession.

Many employees, claims the report, have instead come to regard it as more or less self-evident that their pay should be based on the degree of difficulty of the work and their own formal qualifications, but be independent of other factors. Furthermore, the government is said to have an ambition to control the development of pay. For example, the recent establishment of the new National Mediation Office (Medlingsinstitutet) to mediate in labour conflicts and work towards satisfactory wage formation (SE9912110F) is a means of establishing a governmental income policy, many critics asserted in the public discussion on the issue.

Commentary

The two researchers representing the respected Royal Swedish Academy of Engineering Sciences assert that the traditional industrial relations system, with its centralised bargaining and collective agreements, may be under the threat of collapse because wage formation in the new service sectors differs quite considerably from the traditional model. In the opinion of the current author, this prediction is exaggerated. True enough, in the labour markets for highly skilled professionals, there is an increasing number of examples of variable pay and of salaries above the level set by collective agreements for civil engineers and other university graduate workers in other business sectors. However, this has been the case for a long time without causing any troublesome effects, on the whole. Rather, the wage level of higher-paid employees has possibly supported pay increases for the lower-paid groups, it is often argued.

Beyond highly skilled professionals, the workers in the other two service sectors focused on in the report - local manual services and distance support - are organised, where they are union members, in the white-collar Salaried Employee's Union (Tjänstemannaförbundet, HTF) and various blue-collar trade unions affiliated to the Swedish Trade Union Confederation (Landsorganisationen, LO). There are local collective agreements for large companies in these sectors, and a sectoral agreement for distance support (call centres). For the temporary work agencies there are two national sectoral collective agreements, one for white-collar employees (SE0003127N), and the other - effective from September 2000 - for blue-collar workers organised in LO unions. The collective agreements set a basis for wage formation, and employers and employees may agree locally on further pay increases. There are some problems for LO in organising the workers in these sectors, largely over the "old-fashioned" issue of which union organises which worker. The unions could choose to solve their problems with a redrawing of the borders between unions, in some cases possibly through mergers.

The report examined above is more of a pamphlet for public discussion than a normal scientific report, but the social partners might obtain many ideas and suggestions for further debate from it. (Annika Berg, Arbetslivsinstitutet)