Work, Employment & Society

http://wes.sagepub.com/ 'Commodifying institutions': vertical disintegration and institutional change in German labour relations
Hajo Holst Work Employment Society 2014 28: 3 originally published online 23 May 2013 DOI: 10.1177/0950017012464423 The online version of this article can be found at: http://wes.sagepub.com/content/28/1/3

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WES28110.1177/0950017012464423Work, employment and societyHolst

Liberalization and institutional change: article

Commodifying institutions: vertical disintegration and institutional change in German labour relations
Hajo Holst

Work, employment and society 2014, Vol. 28(1) 320 The Author(s) 2013 Reprints and permissions: sagepub.co.uk/journalsPermissions.nav DOI: 10.1177/0950017012464423 wes.sagepub.com

Friedrich-Schiller-Universitt Jena, Germany

Abstract
The article analyses the impact of vertical disintegration on German labour relations. Previous research argued that the proliferation of outsourcing, divestment and non-standard employment results in a dualism between a core of secure workplaces and a growing fringe of precarious jobs. Evidence from two key sectors, metalworking and telecommunications, however, suggest that this clear-cut division is replaced by a fragmented landscape of labour relations. In terms of institutional change, the analysis reveals a specific form of incremental transformative change, namely a shift in the meaning of formally stable legal-political institutions. Even in the allegedly stable core areas, the institutions of labour relations are gradually transformed from marketconstituting institutions to market-dependent variables. Vertical disintegration plays an important role in this process of institutional commodification. It not only moves the coreperiphery boundary; it is also deployed to subjugate collective bargaining, workplace co-determination and the utilization of labour law to firm-level economic calculations.

Keywords
call centres, economic sociology, Germany, institutional change, labour relations, metalworking, outsourcing, telecommunications, temporary agency work, vertical disintegration

Introduction
During the last two decades, German labour relations have undergone a significant reconstruction: bargaining coverage is decreasing, workplaces without co-determination are expanding and non-standard employment is proliferating (Hassel, 1999). As a consequence, the core institutions of labour relations are losing their previous inclusiveness
Corresponding author: Hajo Holst, Institute of Sociology, Friedrich-Schiller-Universitt Jena, Carl-Zei-Str. 2, 07743 Jena, Germany. Email: hajo.holst@uni-jena.de

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(Jacobi et al., 1998). Until the late 1980s, sector agreements covered the vast majority of workplaces; firm-level co-determination was widespread; and statutory provisions such as dismissal protection and sick pay leave shielded virtually the entire workforce. Due to the legal-political institutions inclusiveness, labour relations contributed to the decommodification of labour, a characteristic of the German model of post-war organized capitalism (Streeck, 2009). It is not surprising that the ongoing decline of institutional inclusiveness results in a tangible recommodification and increasing poverty risks among the lower ranks of the labour force (Drre, 2009). The current erosion of German labour relations inclusiveness cannot be attributed directly to a major legal reform of their basic institutional framework. While the labour market and various product markets have been subject to substantial reforms, the legal-political institutions of labour relations remained formally stable. Neither the regulations of collective bargaining and workplace co-determination, nor the vast majority of statutory labour law provisions have been modified since the 1990s. Instead, employers have resorted to outsourcing, divestment and non-standard employment to bypass formally binding collective agreements, co-determination rights and labour law provisions (Doellgast and Greer, 2007; Haipeter, 2010). Previous research has argued that the proliferation of vertical disintegration results in a dualism between a relatively stable core of secure workplaces and a slowly growing periphery of precarious and vulnerable jobs (Doellgast et al., 2009; Palier and Thelen, 2010). According to this perspective, vertical disintegration represents an instrument to protect skilled, and often highly unionized, core workers from the negative side of competition by channelling pressures to peripheral segments of the workforce. Changes in labour relations are thus largely conferred on the fringes of the labour market (Streeck and Rehder, 2003). Recent developments, however, suggest that the segmentation between core and periphery is not as clear-cut as assumed. Vertical disintegration and, as important, the threat of it not only moves the coreperiphery boundary, it also tends to foster competition between core and peripheral workforces. Vertical disintegration therefore serves as an instrument to discipline works councils and unions even in their strongholds (Haipeter, 2010). While these effects are frequently discussed in public discourse their impact on the institutions of labour relations has not yet been analysed. This is the aim of this article. Based on a dynamic view of institutions, the investigation into the impact of vertical disintegration on labour relations focuses on the reproduction and transformation of its core institutions in the practices of employers, unions and the state (Lawrence and Suddaby, 2006; see also Streeck and Thelen, 2009). Using evidence from two key industries of the German economy, telecommunications and metalworking, the article presents an analysis of how actors, while pursuing their economic interests, refer to and thereby enact institutions such as collective agreements, works councils rights and statutory labour law provisions. Despite significant differences in terms of sector size, world market exposure, political regulation and the means of vertical disintegration, labour relations display a similar pattern of disorganization in telecommunications and metalworking, namely from inclusiveness to segmentation to fragmentation. The changes in the institutional form of labour relations are accompanied by a shift of the societal meaning of their core institutions. In the period of post-war organized capitalism the legal-political institutions of

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labour relations had a pre-economic, and thus political, character, regulating firms labour usage and channelling market developments. The same institutions are nowadays increasingly turned into market-dependent economic variables. As such, the institutions have not only lost their decommodifying impact on labour, they themselves are gradually commodified. In both cases, vertical disintegration played a prominent role in the transformation of labour relations core institutions. Outsourcing and the use of nonstandard employment not only shift the coreperiphery boundary; as a strategic option they also constitute a powerful control mechanism subjugating labour relations and actors deployment of their key institutions to firm-level economic calculations. The transformative role played by vertical disintegration illustrates the interdependence between the core institutions of labour relations and the institutions of neighbouring fields, including the labour market and the public sector. The institutional reforms in the labour market (the deregulation of temporary agency work) and in the public sector (the liberalization of telecommunications) opened up exit-options, which employers utilized to modify the regulatory functions of the legal-political institutions of labour relations and to redefine their societal meaning. The argument presented in the article is developed in the following steps. First, the transformation of German labour relations is discussed against the background of the dynamics of contemporary capitalism. Following a brief presentation of the data and the methods used, the two cases telecommunications and metalworking are scrutinized in detail. In telecommunications, the consequences of outsourcing call centre work are examined; in metalworking the impact of temporary agency work is explored. Lastly, the findings are summarized and discussed against the background of the broader institutional change in the German political economy.

Institutional change in German labour relations from organized to flexible capitalism

International comparisons of labour relations in post-war organized capitalism (Lash and Urry, 1987) stressed the high level of institutionalization of the German model (Jacobi et al., 1998). In the three spheres of labour law, collective bargaining and workplace co-determination, a set of inclusive legal-political institutions channelled actors behaviour in distinct ways. As standard employment was dominant, statutory dismissal protection, holiday remuneration, sick pay leave and other labour law provisions covered the vast majority of the workforce. Non-standard employment was marginal in the 1960s and 1970s, concentrated in the labour market fringes where female and migrant workers were overrepresented (Drre, 2009). Furthermore, bargaining coverage was nearly all-encompassing. Until the early 1990s, almost 90 per cent of the workforce was included in collective agreements, with industry-wide sector agreements covering virtually all workers from one industry. In the core sectors of the German export-oriented economy workplace co-determination was omnipresent and works councils enjoyed strong bargaining power. The inclusiveness of the institutions not only had a stabilizing impact on the labour market; by forcing German firms into diversified quality production, emphasizing innovation, product quality and employee qualification, it had an upgrading effect as well (Streeck, 2009).

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However, since the early 1990s institutional inclusiveness has been continually eroding. Bargaining coverage declined to just above 60 per cent, and the growing number of company agreements and firm-level pacts undermined the market-regulating impact of industry-wide sector agreements. Additionally, the frequent use of opening clauses allowed firms to temporarily undercut sector agreements (Haipeter, 2010), and workplace co-determination is declining due to the expansion of small- and medium-sized firms. Workplaces without institutionalized interest representation are no longer limited to services and crafts but have expanded into manufacturing (Jackson, 2005). Though formally stable, the legal-political institutions of labour law are also subject to a hollowing-out process. Employers use various forms of non-standard employment, including temporary and part-time contracts, temporary agency work and so called mini-jobs, to circumvent statutory labour law provisions (Doellgast and Greer, 2007). It is important to note that labour law formally applies to all forms of dependent employment, but in the case of non-standard employment significant enforcement problems exist, allowing user firms to ignore certain regulations and to delegate employer obligations to other firms (Bosch et al., 2009). From being dominant in the post-war period, the share of standard employment dropped to under 65 per cent of total employment by the early 2000s. As the regulation of labour relations no longer prevented cost-competition, wages returned to the centre of competition (Drre, 2009). The rapid erosion of institutional inclusiveness in the last two decades can only be understood against the background of current economic, political and social transformations (Streeck, 2009), that is, the shift from post-war organized capitalism to contemporary flexible capitalism. Under organized capitalism, competition in the labour market and within major product markets was channelled in certain pre-defined ways by means of welfare state policies, corporatist self-regulation, large inter-firm networks based on cross-shareholding and inclusive labour relations (Streeck and Hpner, 2003). Labour benefited from the taming of the market (Shonfield, 1965: 345) as it limited employers arbitrariness. The regulation of the labour market restricted the use of non-standard employment, and labour relations inclusiveness resulted in a decommodification of labour leading to relative pay rises and decreasing income disparity (Esping-Andersen, 1990). Employers had an interest in the organization of capitalism as well, although this was often overlooked. By stabilizing markets the future economic development appeared to be more predictable, which in turn reduced the risks associated with large-scale investments (Fligstein, 2001). Note that organized capitalism was not tantamount to abolishing competition; rather, it merely channelled market development by setting compulsory boundaries on actors behaviour. While some strategies were exacerbated or even blocked, others were boosted (Wagner, 1995: 123). In addition, the most detrimental effects of unsuccessful market actions were compensated by a set of public and collective provisions based on the insurance principle. The welfare state mitigated the consequences of unemployment, sickness and structural change, while at the same time banks and inter-firm networks provided a safety net for large corporations (Streeck and Hpner, 2003). The crises of the 1970s signalled the end of the post-war boom and, subsequently, organized capitalism. Due to a sharp decline in demand, many employers experienced substantial economic difficulties (Harvey, 1991). Management responded to intensified

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competition and growing business uncertainty in a seemingly simple manner: if markets could not be stabilized politically, organizations needed to be more flexible and responsive. While organized capitalism rested on the attempt to collectively control the development of capitalist markets, flexible capitalism focuses on actors coping with uncertainty, putting a premium on adaptability, mobility and entrepreneurialism (Schimank, 2011). Lean and flexible production, outsourcing and the use of contingent workforces serve as a means for firms to restore profits and safeguard themselves against unexpected market swings (Durand, 2007). At the end of the day, however, none of these instruments is able to effectively eliminate risks; they are merely re-distributed and externalized to subordinate actors such as suppliers, service providers or peripheral workforces. The seemingly never-ending search for flexibility (Locke and Kochan, 1995: 365) changed employers perspectives on those institutions that had previously channelled market development. The 1990s and 2000s witnessed a series of major institutional reforms, including the liberalization of various forms of non-standard employment such as temporary work, mini-jobs and, most recently, temporary agency work (Bosch et al., 2009; for a comparative account see Heyes, 2011). Standard employment thus became only one of several employment options for employers. In addition, product market regulations were abolished, public companies privatized and inter-firm networks based on cross-shareholding dissolved (Streeck, 2009; Streeck and Hpner, 2003). In contrast, and important for this context, the basic institutional framework of labour relations was not subject to any major reform. Research has rarely addressed the impact of the reorganization of capitalism on the institutions of labour relations. The majority of studies adhere to those strands of (neo-) institutionalism which aim at discovering a precise causal chain through which the institutions they identify as important are affecting the behaviour they are meant to explain (Hall and Taylor, 1996: 950). Fundamental to these approaches is the assumption that the impact of institutions on human behaviour is relatively invariant both over time and across different segments of society. Institutionalized legal-political orders structure the strategies of individual and corporate actors, and, by doing so, safeguard their own reproduction (Hall and Soskice, 2002; recently Lallement, 2011). As institutional change is limited to forms of abrupt and exogenously initiated change at critical junctures, institutional continuity represents the standard case (i.e. punctuated equilibrium models). Not surprisingly, these approaches have difficulties accounting for sector or firm-level differences within the allegedly homogeneous national models of economic organization (Crouch and Voelzkow, 2009; Hanck, 1993). Furthermore, and even more important for the purpose of the article, they cannot account for phenomena commonly denoted as incremental transformative change, that is, non-disruptive minor adjustments, modifications or alterations within a seemingly stable institutionalized order that add up to significant discontinuities (Mahoney and Thelen, 2010; Streeck and Thelen, 2005). Without denying the path-creating effects of abrupt and radical change, evidence suggests that continuous incremental transformative change is of equal importance for the historical trajectories of advanced capitalist economies (Streeck, 2009). The concentration on abrupt and radical change limits the analytical potential of conventional institutionalist approaches for the study of the particular trajectory of institutional change in German labour relations. Although industry-wide sector

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agreements, works councils rights or provisions such as dismissal protection are occasionally critiqued as costly and rigid (Drre, 2010; Hassel, 1999), German employers have refrained from any serious attempt to fully abolish them. Instead, employers articulated demands for greater flexibility in the implementation of these institutions. In the absence of any major legal-political reform of the basic institutions of labour relations, the dramatic erosion of inclusiveness thus points to changes under the surface of formal stability. To understand the specific trajectory of German labour relations the following analysis is based on a dynamic view of institutions (Streeck, 2009), stressing the role of agency in processes of institutional change. Although at critical junctures some actors might directly aim to modify the basic economic institutions, in normal times the institutions reproduction and transformation is an unintended by-product of actors pursuit of their economic interests (similar to institutional work, Lawrence and Suddaby, 2006; Lawrence et al., 2009; see also Mayntz and Scharpf, 1995). Due to the recursiveness of social life, the legal-political institutions of labour law, collective bargaining and workplace co-determination represent structuring structures as well as structured structures (Giddens, 1984). Institutions enable and constrain actors economic strategies, but they do not have an independent causal effect on social interactions. Instead, the institutions regulative functions are defined in the continuous processes of their own enactment. In order to scrutinize the specific trajectory of institutional change in German labour relations, the legal-political institutions of labour relations are conceptualized as dependent variables, not as independent variables explaining actors strategies.

Data and case selection

The investigation is executed in two key sectors of the German economy, metalworking and telecommunications. The two cases differ remarkably in several dimensions, including sector size, political regulation, world market exposure and interest representation. In addition, the means of vertical disintegration varies. While the telecommunication case focuses on outsourcing, the metalworking case looks at the deployment of non-standard employment. Case selection follows the principle of the most different systems design, which allows for more general inferences from the comparative analysis to be drawn (Landman, 2006). The cases are based on data from two closely linked research projects investigating the development of labour relations. Each project used a parallel research design that facilitated meaningful comparison. The first case outsourcing of call centre work in telecommunications is an investigation of labour relations in German telecommunication call centres (Holst, 2011). A total of 43 interviews were conducted. The analysis of industry-level collective bargaining builds on interviews with sector experts, trade unionists and representatives of employer associations. In order to scrutinize firm-level labour relations, three company case studies were conducted through interviews with supervisors, managers, works councils and front-line workers. The second case temporary agency work in metalworking draws on 95 interviews conducted with representatives of unions and employer associations as well as managers, supervisors, works councils and manufacturing workers (Holst, 2010).

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Six company case studies were analysed to examine the role of the institutions of labour relations in the firm-level regulation of work and the particular effects of vertical disintegration. Interviews were semi-structured and lasted between 60 and 90 minutes. Similar interview guides were used in both cases. The interviews with union and employer representatives focused on collective bargaining; the company case studies proved to be crucial to analyse the firm-level implementation of industry norms and deployment of legal norms such as works councils rights and labour law provisions. The interviews were recorded, fully transcribed and coded using text analysis software (MAXQDA). The codes reflected the key categories of the analysis, which are the regulation of work, scope and content of vertical disintegration, employerlabour relations and, most importantly, the perception of labour relations core institutions. Secondary material, including union and employer documents, research reports and press releases, provided useful background information.

Outsourcing call centre work in telecommunications

With less than 400,000 employees, telecommunications represents a relatively small sector of the German economy. Prior to liberalization in the late 1990s, the telecommunications sector was dominated by the government agency, Deutsche Bundespost. As union density and bargaining coverage were high, the union Deutsche Postgewerkschaft (DPG) enjoyed significant influence both in collective bargaining and on local work organization. However, in the second half of the 1990s, the sector was deregulated in several steps. The telecommunication branch of Deutsche Bundespost was privatized and renamed Deutsche Telekom. In addition, new challenger firms such as Viag Interkom, E-Plus and Mannesmann entered the market. As attempts by the DPG and the newly created service union Vereinte Dienstleistungsgewerkschaft (ver.di) to organize these challenger firms had very little success, union influence and bargaining coverage in the entire sector declined (Doellgast, 2012; Holtgrewe and Doellgast, 2012). Up to the present day, union membership in the telecommunication sector is concentrated in the establishments of privatized Deutsche Telekom.

Telecommunication call centres in the early 1990s inclusive labour relations

Call centre technology was first introduced by the Deutsche Bundespost in the late 1980s. Traditional customer service units, such as directory assistance and fault clearance, were transformed into call centres characterized by Taylorist work organization, intensive technological control and repetitive work flows. Due to the sectors comprehensive political regulation, the reorganized workplaces remained under the umbrella of the public authoritys traditional regulation of labour relations, and outsourcing was absent throughout most of the 1990s. All front-line workers not employed as public servants were covered by Deutsche Bundesposts collective agreements. Due to DPGs bargaining power, these agreements not only covered wage and work time but also extended to qualitative issues such as technical and organizational control, performance-related

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pay schemes and work organization. The collective agreements did not only apply to the core workforce but also to part-time employees and temporary substitutes. Furthermore, labour law provisions such as dismissal protection, sick pay leave and holiday remuneration covered the entire workforce, and employee representatives exercised considerable influence on work organization and staffing decisions. In the early 1990s, labour relations in telecommunication call centres thus displayed the high institutional inclusiveness that was characteristic of the German model of post-war organized capitalism. All call centre workplaces were covered by collectively negotiated pay and work-time norms, firm-level co-determination was all-encompassing, and labour law provisions constituted obligatory norms that the agencys leadership could not circumvent.

Rapid growth of telecommunication call centres in the second half of the 1990s segmentation of labour relations
In the wake of liberalization in telecommunications in the second half of the 1990s, the number of call centre workplaces expanded rapidly. The previously highly regulated sector was transformed into a contested market as Deutsche Telekom faced increased competition from challenger firms including Mannesmann and Viag Intercom (Brandt and Schulten, 2008). In addition, outsourcing of call centre work became a significant factor. All large actors started to outsource simple services, such as order assistance, fault clearance and sales campaigns to independent subcontractors (Doellgast and Greer, 2007: 62). Vertical disintegration thus led to a tangible segmentation of labour relations in telecommunication call centres. While labourcapital relationships within the realm of Deutsche Telekom remained quite stable, labour relations core institutions were only implemented in a rudimentary fashion in the new workplaces at the periphery of the liberalized sector. Segmentation between the workplaces in Deutsche Telekoms call centres on the one hand, and the new challenger firms and subcontractors on the other hand, was most visible in the sphere of collective bargaining. Deutsche Telekoms workplaces were covered by a series of collective agreements derived from the old agreements of Deutsche Bundespost, while subcontractors as well as the new challenger firms constituted a zone almost entirely free of collective agreements. Management used outsourcing to bypass the otherwise still binding collective agreements (Holtgrewe and Doellgast, 2012: 321). Unions and works councils only half-heartedly resisted outsourcing. A unionist reflecting on the development in the late 1990s stated:
Retrospectively, we [DPG] misjudged the development. We did not oppose outsourcing seriously because it only concerned the overflow and thus reduced the pressure on our core workforces to work unpopular night and weekend shifts. (Unionist, DPG)

Due to union bargaining power, Deutsche Telekoms management refrained from questioning the utilization of the corporations central collective agreements in its call centres. A similar division between Deutsche Telekom and new incumbent firms and service providers occurred in the spheres of workplace co-determination and labour law. Within the realm of the former state agency, works councils exercised considerable

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influence on work organization and corporate strategies. In contrast, works councils in the subcontracting call centres and those of the challenger firms were either powerless or non-existent. In addition, the fast-growing subcontractors resorted to non-standard employment such as work-on-call, freelancing and marginal work in order to circumvent some of the basic labour law provisions (Bittner et al., 2002).

Consolidation of telecommunications after 2003 market-centred control of labour relations in call centres
As a result of the crisis of the new economy in 2001, the telecommunications boom came to an end. Since this time, the major trend among telecommunication call centres has been the spinning-off of formerly internal establishments, with the divestment of Deutsche Telekoms call centres being the most prominent example. In 2007, Deutsche Telekoms management decided to move all 20,000 call centre workplaces of the corporate group into one independent service unit (Holtgrewe and Doellgast, 2012: 321). The dualism of the late 1990s, based on a rather well-defined boundary separating the core of workers covered by a dense network of institutionalized guarantees from the growing precarious peripheries, began to give way to a fragmented landscape of highly dispersed labour relations. Fragmentation is particularly visible in the sphere of collective bargaining. While up to the mid 2000s a relatively stable core of workplaces covered by Deutsche Telekoms central agreement existed vis-a-vis the growing fringe of unregulated workplaces, contemporary bargaining structures are characterized by a confusing melange of isolated firm-level agreements and companies without agreements. Due to their weak membership base and the negative effects of inter-union competition, unions were not successful in unifying labour relations among call centres of challenger firms such as Vodafone, E-Plus and Telefonica; and subcontractors remain a union- and agreement-free zone. The most significant factor in creating a system of fragmented labour relations, however, was the decision of Deutsche Telekoms management to divest all its call centres. The new independent service company is covered by a firm-level agreement with distinctly lower pay levels and employment security than the traditional corporate agreement. As expressed by the CEO of a subcontractor, outsourcing does not only constitute a bypassing of the institutions of collective agreements:
Let us look at Deutsche Telekom. There are several topics, including quality control, which provoke works council and union resistance. One important topic is individual performance surveillance: how has an individual front-line worker performed? The opportunity to do so is an important reason for firms to outsource. If unions and works councils would be more cooperative on these topics many firms would resort much less to outsourcing. (CEO, subcontracting call centre)

Despite the statutory character of these norms both co-decision rights and basic labour law provisions are often only partially enforced in subcontracting call centres. The fragmentation of labour relations appears to be an extension of similar processes that led to segmentation in the late 1990s; however, upon closer examination it becomes

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obvious that outsourcing has acquired a new meaning in recent years. Deutsche Telekoms divestment of its call centres can serve as an example. Divestment not only moved the coreperiphery boundary but also transformed the benchmark for collective bargaining, from Telekoms agreements to the standards of the non-unionized subcontracting call centres. Managements goal is to adjust wages, working time and work conditions to a level typical in the market. Since 2007, bargaining rounds for the 20,000 call centre employees have been almost completely decoupled from regular bargaining rounds for Deutsche Telekoms direct workforce. Wage levels in large subcontracting call centres such as Walter Services, SNT and arvato form the benchmark for negotiations. The threat of outsourcing undermines ver.dis bargaining power, as the head of the unions bargaining unit points out:
Managements main demand was to pay according to the market. They said, we pay more than the market, but our productivity is lower. If we cannot agree on new pay structures we have to outsource these services or sell these units. From the beginning, they used the media: This is our offer. If ver.di does not accept it, we have to go the third way. The third way means divestment; and if they sell it then they sell it to a provider not covered by any agreement. For our employees, this would imply a wage-cut of 50 per cent. They play with peoples fear. (Unionist, ver.di)

Though union density in Deutsche Telekoms call centres is still up to 70 per cent in individual units, ver.di remains virtually powerless against managements demands for pay reductions and work-time extensions. Managements perception of workplace co-determination and labour law changed as well. Direct employment remains only one of the legitimate staffing options; management also considers outsourcing to a subcontracting call centre a valid option. As Deutsche Telekoms management attempts to calculate the costs of direct employment and therewith the costs of previously obligatory institutions such as collective agreements and dismissal protection, the utilization of these institutions is increasingly turned into a firm-level economic decision.

Temporary agency work in the metalworking sector

Metalworking is one of the leading industries in the German economy. It is a much larger sector than telecommunications, both in terms of employment and revenue. Throughout the post-war period, almost 4 million people were employed in automotive, machinebuilding and electrical companies. Though several large firms dominate the field, the sector also hosts a large number of small and medium firms. Employer associations and the metal union (IG Metall) have participated and, as exemplified by their influence on political decision-making during the recent economic crisis, continue to participate directly in the governance of the sector. However, direct state intervention never reached a level comparable to that of the highly regulated telecommunications sector. Despite the general erosion of collective bargaining, union density and bargaining coverage have remained high in recent years; metalworking still constitutes a union stronghold, with firm-level union density up to 80 per cent.

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TAWs legalization in 1972 inclusive labour relations

Since temporary agency works (TAW) initial legalization in 1972, metalworking has been one of the primary industries to use this type of employment. Large firms often engaged temp workers to cope with an increase in workload due to production start-ups; however, until the mid 1990s total deployment of TAW was rather limited. The aim of TAWs regulation was to serve German employers growing demand for flexible labour without clearing the way for excessive profits for agencies. Standard employment served as a role model for TAWs regulation, forcing German agencies to respect full employer obligations, such as the statutory dismissal protection, safety provisions at work and workers co-determination rights. Furthermore, client firms deployment of temp workers was constrained by the legal limitation of the period of assignment (three months) (on the UK regulation, see Forde, 2001). Firm-level deployment of TAW, therefore, did not undermine the existing collective agreements, hollow out workplace co-determination or statutory labour law in client firms. Metalworkings industry agreements represented a minimum wage that could not legitimately be undercut. Although the participation of works councils veto and information rights did not formally apply to the group of temp workers, TAW did not represent a significant challenge to the influence of works councils since client firms deployment remained rather limited. In sum, the utilization of TAW by metalworking firms had only a limited impact on the inclusiveness of labour relations core institutions.

Deregulation of TAW in the late 1990s segmentation of labour relations

TAW was step-wise deregulated in the second half of the 1990s, loosening both the restrictions on temp agencies staffing strategies and client firms assignment of temp workers. The maximum period of assignment was extended to 12 months and the restrictions on the use of temporary contracts were abolished. In particular, large exportoriented firms responded to the deregulation of TAW by expanding their use of temp workers in order to increase flexibility and responsiveness to unexpected market swings. Thus, deregulation opened the way for client firms to bypass binding institutions by employing temp workers. While the core workers of client firms were still fully protected by labour relations core institutions, the peripheral workforces were now only marginally included in the dense network of institutionalized rights and provisions. For employers covered by metalworkings industry agreements, the deployment of TAW represented an instrument to reduce labour costs. Though temp workers were often deployed for a longer period and worked side by side with the core workforce, they were paid significantly less since they were not covered by metalworkings sector agreements, and TAW agreements comprised significantly lower pay levels. Similar effects also occurred in the field of workplace co-determination. As a result of high unionization rates, works councils retained a strong position in large firms, which formed the core of the German export-oriented economic model. Union representatives successfully defended the core workforces work conditions and secured compensations for technologically induced work intensification using their statutory participation and veto rights.

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However, union influence on work and pay conditions for temp workers was rather limited. In general, union and works council positions remained rather ambiguous, as expressed in the words of a works council of globally operating machine-building firms:
In the late 1990, the influential works councils from the automotive sector accepted the liberalization of TAW as a valve for increasing cost pressures. Others, like me, opposed it because it led to the development of a low-wage sector. (Works council, machine-building firm)

Particularly in large export-oriented firms, several works councils accepted the firm-level use of lower-paid temp workers in exchange for concessions for the core workforces. Client firms utilized TAW to circumvent statutory provisions, such as the probation period and dismissal protection, institutions that due to the strong bargaining power of unions were still sacrosanct for core workforces (Noller et al., 2004).

Complete deregulation ofTAW in the 2000s fragmenting workforces

High structural unemployment and persistent employer pressures caused TAW to be further deregulated in the context of the comprehensive labour market reforms in the early 2000s, abolishing both the maximum period of assignment and the remaining restrictions on the use of temporary contracts. In addition, deviations from the equal pay principle were allowed by way of collective agreements.1 In the wake of deregulation, the number of temp workers more than tripled, with the majority of temp workers still employed in the metalworking sector. Large export-oriented firms utilize a sizeable numbers of temp workers and integrate them quasi-permanently into their work processes. One prominent example is the new BMW plant in Leipzig, which regularly operates with 30 per cent temp workers in the workforce. As a consequence, the distinction between core and peripheral workforces has become increasingly blurred in recent years (for similar trends within UK firms, see Forde, 2001: 634). In the sphere of collective bargaining, the rapid expansion of TAW moved the core periphery boundary significantly closer to the formerly stable core of standard employment workers. Employers appear hesitant to hire unskilled or low-qualified workers directly; rather, temp workers are being recruited in their place. Furthermore, a complex conglomeration of fragmented work and pay conditions has emerged in many large firms due to the frequent combination of various forms of vertical disintegration (Haipeter, 2010). A similar effect can be observed in the spheres of workplace co-determination and labour law utilization. The following statement from the HR manager of a world-wide machine-building company illustrates managements rationale behind the utilization of deregulated TAW:
In the eyes of the global corporation, the German statutory framework for industrial relations is of no benefit. It is expensive. It impairs the flexibility to adjust the workforce quickly. To say it openly: We have a complicated works council in this location. If the worker is directly

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employed by [the client firm], the works council takes up the topic. Therefore we recruit people who are not liable to co-determination rules. (HR manager, machine-building firm)

Thus, TAW is used to hollow out works councils participation, veto and information rights as well as several statutory labour law provisions such as dismissal protection and sick pay leave. Management perceives these institutions increasingly as slack, decelerating decision-making processes, impairing flexibility and producing avoidable costs. The effects of the deployment of TAW extend beyond a mere relocation of the core periphery boundary. As a permanent strategic option, TAW contributes to the redefinition of the very nature of the core institutions of labour relations. In the sphere of collective bargaining, the sector agreement of metalworking lost its baseline status, leaving employers able to undercut pay. The collective agreement for temp workers practically constitutes a lower wage level that client firms can legitimately resort to if cost calculations suggest it is needed. The transformed role of TAW is expressed in the words of a works council of a large electrical firm:
In the case of manual labour, the simple tasks, we have much higher costs since manual labour is expensive. It is economically expensive; therefore we need to resort to temp workers in this particular production line. (Works council, electrical firm)

When new tasks are assigned, the labour costs defined in the sector agreement are compared to the costs of a temp worker; thus turning the choice between the collective agreements primarily into a firm-level economic decision. Employers use the threat of extending the deployment of temp workers as an instrument to put pressure on union representatives in collective bargaining, which in turn forces concessions. A parallel development can be observed in the spheres of workplace co-determination and labour law utilization. The statutory dismissal protection, which formed one of the cornerstones of the German post-war employment model, is increasingly perceived as a cost-causing factor that firms enact only if the tasks concerned are strategically relevant.

Conclusions
The article analysed the impact of vertical disintegration on the institutions of German labour relations. Previous research argued that employers use the various means of vertical disintegration as institutional escape routes (Doellgast et al., 2009: 366) to circumvent the legal-political institutions of labour relations, such as sector agreements, works councils co-determination rights and statutory labour law provisions. According to this perspective, changes in labour relations are largely confined to the fringes of the labour force, while the skilled and often highly unionized core workforces of large firms continue to benefit from the formally stable core institutions (Palier and Thelen, 2010; Streeck and Rehder, 2003). New developments, however, suggest that even in the protected core areas, labour relations and the utilization of their basic institutions are not as static as previously assumed. Based on a dynamic view of institutions, focusing on actors enactment of labour relations core institutions, the article investigated the

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changing nature of German labour relations core institutions in two key sectors of the countrys economy, namely telecommunications and metalworking. Despite considerable differences in terms of sector size, world market exposure, political regulation and the means of vertical disintegration, both cases displayed a parallel double transformation of labour relations institutional form, shifting first from inclusiveness to segmentation, and subsequently from segmentation to fragmentation. In the late 1990s and early 2000s, the highly inclusive labour relations indicative of organized capitalism were replaced by a system of segmented labour relations based on a rather clear-cut demarcation between a stable core of secure workplaces and an unregulated periphery. In more recent years, however, a fragmented landscape of dispersed firm-level regulations has evolved. In both sectors vertical disintegration played a crucial role in this process. In telecommunications, firms previously resorted to outsourcing call centre work mainly to move simple and repetitive jobs outside the realm of labour relations core institutions. Outsourcing has now become a strategic instrument to put pressure on wages and discipline the core workforces. In metalworking, the utilization of TAW first led to the formation of a peripheral workforce covered only in the most rudimentary way by labour relations previously all-encompassing core institutions. In recent years, however, the coreperiphery boundary is becoming more and more blurred as employers foster cross-boundary competition. Thus, both cases show that the highly unionized core workforces are much less immune to the growing pressures of competition than previous research has argued. Vertical disintegration not only directly moves the coreperiphery boundary; it also tends to establish cross-boundary competition between different segments of the workforce. In terms of labour relations, vertical disintegration and, equally important, the threat of it serves as a powerful control mechanism subjugating collective bargaining, and workplace co-determination, as well as firms labour law utilization to the economic calculations of individual firms. Underlying the transformation of labour relations institutional form is a parallel twostep shift of the institutions nature, from obligatory to voluntary to commodified institutions. Vertical disintegration not only serves as an instrument to circumvent previously statutory institutions, it is used to redefine the meaning of formally stable legal-political institutions. In the early 1990s collective agreements, works councils co-determination rights and labour law provisions still had an obligatory, predominantly political, character indicative of the traditional German model of labour relations. Employers seemingly infinite thirst for flexibility has turned these institutions into non-obligatory, more or less voluntary institutions that can legitimately be bypassed. However, evidence suggests that the voluntary character of the institutions is not the final outcome. The meaning of the institutions is still in flux and up for contestation. Currently, large and powerful employers are increasingly trying to calculate the price of these institutions to deploy them according to their situational economic value. Management subjectively buys the previously obligatory political institutions, which, by way of these practices, are turned into marketdependent variables. The calculative attitude towards labour relations institutions is clearly expressed in the following judgment of the HR manager of a car-maker: Co-determination is slow; but it gives good financial return. This process of valorizing labour relations core institutions is paralleled by current economic research that conceptualizes these institutions as a tax on labour and attempts to calculate their price (Alewell

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et al., 2009). It is important to note that the institutions of labour relations are not absolutely voluntary for employers; due to their stable legal form they still constitute bargaining resources for German union and works councils. Nonetheless, the consequence of labour relations marketization weakens the previously tight link between unionization rates and the core institutions utilization. Even in the union strongholds, permanent competition with subcontractors or peripheral workforces tends to neutralize the impact of union density rates on bargaining and negotiation. In terms of institutional change, the analysis reveals a specific form of incremental, non-disruptive change with transformative effects. The changes are both incremental, as the legal-political institutions display a remarkable continuity throughout the last decades, and at the same time transformative, since the meaning of these institutions has been significantly altered. Not only did the inclusiveness of labour relations institutions erode, the normative expectations attached to these institutions have also shifted radically. Compliance with the legal-political institutions of German labour relations presupposes very different behaviour today than a few decades ago. In the period of post-war organized capitalism, institutions such as collective agreements, works councils co-determination rights and labour law provisions resembled political institutions in the Hobbesian tradition. Similar to the almighty Leviathan, whose objective was to domesticate the potentially self-destructive human nature (Hobbes, 2005), the obligatory institutions contributed to channelling competition during the post-war decades. With the advent of flexible capitalism the political framing of these institutions was partly substituted by an economic perspective. In other words, the previously obligatory institutions were gradually turned into more or less voluntary economic institutions as portrayed by Williamson (1985) in The Economic Institutions of Capitalism. From the viewpoint of transaction cost economics, institutions are voluntary sets of social rules deployed by actors who are solving their coordination problems. As evidence presented above suggests, the Williamson-type institutions appear to be a rather transitory phenomenon. Powerful actors currently exploit vertical disintegration as a strategic option to turn the institutions of labour relations into what Polanyi (2001), in the Great Transformation, called fictitious commodities. Similar to soil and labour, the institutions of labour relations are not produced for market sales and profit-making. The legal-political institutions are still provided by the state as public goods, yet large and powerful firms increasingly treat them as priceable commodities. Vertical integration does not only function as an institutional bypass, it fulfils the function of a price-setting mechanism. In the absence of a real market for the institutions of labour relations, outsourcing and temporary agency work allow for a permanent cost-centred comparison between internal employment and arms-length contracting. Through the two cases, the transformation of the very nature of labour relations core institutions seems to be ostensibly driven by employer strategies. However, employers roles should not be overstated. The function of vertical disintegration, first as an instrument to bypass the previously obligatory institutions of labour relations, and subsequently as a strategic option subjugating the utilization of these institutions to firm-level economic calculations, is highly dependent on the course of the political-legal reforms accompanying the shift from organized to flexible capitalism. In telecommunications, EU-driven liberalization introduced competition into the highly regulated sector and opened a space to bypass

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former mandatory norms and regulations by way of outsourcing. The metalworking case highlights the effects of labour market deregulation. Prior to reforms, TAW could not be legitimately utilized to circumvent collective agreements, works councils co-decision rights or labour law provisions. By introducing exit-options, the deregulation of the labour market and the liberalization of various product markets constituted necessary preconditions for the transformative strategies used by employers. The outlined redefinition of German labour relations core institutions thus highlights the interdependence between institutional change within labour relations in a narrow sense and the broader institutional development of the German political economy. Acknowledgements
The author would like to thank the workshop participants, Virginia Doellgast, Ian Greer, Helmut Voelzkow and Jennifer Olson as well as three anonymous reviewers for their helpful comments. An earlier draft of the article was presented at the ILPC 2011 in Leeds.

Funding
The research for this article was funded by the Otto-Brenner-Foundation and the German Federal Ministry of Education and Research.

Note
1. In 2010, the opportunity to deviate from the equal pay principle was integrated into EU regulation of TAW.

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Hajo Holst is currently an assistant professor at the Institute of Sociology and associated fellow of the German Research Foundations Research Group on post-growth societies, both at the Friedrich-Schiller-University in Jena, Germany. His research interests comprise corporate governance, work and employment, institutional change and the temporalities of capitalism. He has published in German and in international sociological journals. Date submitted May 2011 Date accepted August 2012