Global Recession, Labour Market Adjustment and International Production Networks: Evidence from the Thai Automotive Industry

Article excerpt

I. Issues

Global recession triggered by the U.S. sub-prime crisis has affected countries around the globe including East and Southeast Asian economies, which have experienced precipitous export contraction since the last quarter of 2008 (Athukorala and Kohpaiboon 2009). Even though there are clear indications that the recovery process is setting in, it will take several years for the world economy to regain the growth dynamism of the pre-crisis period (Shiller 2008; IMF 2009). The crisis-affected developed countries will have to save more and import less in order to pay their massive accumulated debts. Hence, the expected slow recovery process will have a negative effect on East and Southeast Asian economies and create adverse effects on their labour markets.

In general, when firms experience considerable output contraction, reducing employment is a possible response by firms (Bernanke 1989; Bernanke and Powell 1986). Nevertheless, reducing a number of workers also incurs dollar cost to firms in the long run. Hence, retrenching workers is not always the impulse response in the presence of recession (Oi 1962; Topel 1982; Fair 1985; Bernanke and Parkinson 1991). Nonetheless, with workers being heterogeneous, each type of worker faces varying chances of being retrenched. Usually, trained, highly educated and permanent workers are less likely to be retrenched. It is also related to institutional factors and past development strategies such as trade openness, entrepreneurship, labour unionization, and overall incentive structure (Manning 2000; Freeman 1993; Bernanke 2004, Ehrenberg and Smith 2009).

Labour market adjustment is also related to the likelihood that workers can find another job in other industries, including running their own business, and in the informal sector. For example, according to Huynh et al. (2008, p. 22), in the first quarter of 2009 the number of own-account and contributing family workers in Thailand combined increased by 566,000 compared to the previous year, reflecting a flow of workers shifting from the formal sector (wage employment) to lower productivity and informal activities in the recession.

This issue has become even more complicated in the context of the increasing importance of global production network. In the network, countries become more specialized in different segments of the production process, and workers would gain more and more industry-specific skills. Sometimes, such skills are tacit knowledge, but not necessarily codified. This makes firms even more reluctant to resort to lay-offs. Meanwhile, cutting output price to boost sales is also unlikely under the network system simply because of the interconnection among value chains under the quasi-hierarchy structure.

All in all, there is a need for an in-depth case study of how the labour market has adapted to the sharp decline in national output. The purpose of this paper is to examine how workers in international production networks have adjusted to the recent global recession, using the Thai automotive industry as a case study. The automotive industry is a classic example of a "global industry" in which the decisions of how much and which vehicle models to produce and for which market have to be combined with decisions of where to produce and with what degree of intra-product specialization. Thailand has become a regional hub within the global automobile production network for many leading auto makers as the industry has become more export-oriented since 2000. Hence, the industry is inevitably affected by the global recession. A group of automotive firms are clustering, in which a car assembler is at the centre of the cluster and surrounded by numerous suppliers (Kohpaiboon 2009). Hence, probing the auto-motive industry will allow us to illustrate how the global crisis is passing through to suppliers and local communities.

The research methodology in this paper involves a flexible questionnaire approach. …