Labour Market Flexibility, Human Resource Management and Corporate Performance
| Author | Jonathan Michie,Maura Sheehan‐Quinn |
| Date | 01 December 2001 |
| Published date | 01 December 2001 |
| DOI | http://doi.org/10.1111/1467-8551.00211 |
Introduction
This paper investigates labour market dynamics
and corporate performance with a particular em-
phasis on the financial performance and innovative
activities of firms. The paper contributes to a
growing literature that seeks to test the relation-
ship between, on the one hand human resource
management (Hoque, 1999; Patterson et al.,
1997), ‘high-commitment management’ (HCM)
British Journal of Management, Vol. 12, 287–306 (2001)
© 2001 British Academy of Management
Labour Market Flexibility,
Human Resource Management
and Corporate Performance1
Jonathan Michie and Maura Sheehan-Quinn*
School of Management and Organizational Psychology, Birkbeck College, Malet Street, London WC1E 7HX, UK
and *University of Dallas, 1845 East Northgate Drive, Irving, TX 75062
corresponding author email: j.michie@bbk.ac.uk
Labour market flexibility is often portrayed as a key to the competitive success of the
UK and US economies. We surveyed several hundred firms in the UK, and using the
resulting data (on over 200 manufacturing firms) this paper investigates the relation-
ships between firms’ use of flexible work practices, human resource systems and indus-
trial relations on the one hand, and corporate performance on the other hand. The
results suggest that ‘low-road’ practices – short-term contracts, a lack of employer
commitment to job security, low levels of training and low levels of human resource
sophistication – are negatively correlated with corporate performance. In contrast, it
is found that ‘high-road’ work practices – ‘high commitment’ organizations or ‘trans-
formed’ workplaces – are positively correlated with good corporate performance. It is
also found that human resource management practices are more likely to contribute to
competitive success where they are introduced as a comprehensive package, or ‘bun-
dle’ of practices. Significant interaction effects between human resource systems, trade
unions and flexible work practices add further support to the bundling hypothesis.
1This work was funded by The Leverhulme Trust
(grant number F/112/AL), the Royal Economic Society
and the University of London Central Research
Fund, to whom we are grateful. We are indebted to
Dr Sharon Milner who worked on the project full-time
for a year, and who undertook much of the work
arranging and supervising the survey of firms. We are
also grateful to Dr Milner’s successor, Elaine McDonald,
for research assistance. We have benefited from dis-
cussing these issues with a number of colleagues, par-
ticularly Professor David Guest, Dr Neil Conway and
Dr Linda Trenberth, with whom we are working on a
related project, funded by the ESRC’s Future of Work
Programme; participants at the series of ‘HRM and
performance’ workshops held in Birkbeck College’s
School of Management and Organizational Psych-
ology, in particular Mark Huselid; and also Professor
Paul Teague. A number of colleagues generously
supplied copies of their own questionnaires and details
of their results, in particular Professor Steve Nickell,
Dr Sandra Black and Professor Lisa Lynch, Professor
Ichniowski, Dr Peter Berg and Dr Aileen Appelbaum,
and Professor Paul Osterman. Patrick Burns, Director
of Policy for the Industrial Society provided invalu-
able advice on the use of HRM practices in UK firms.
We are also grateful for comments from participants at
a June 2000 Institute of Work Psychology seminar,
University of Sheffield, in particular Dr Carolyn
Axtell and Professor Toby Wall; from participants at
the September 2000 British Academy of Management
Annual Conference, Edinburgh and the April 2001
European Academy of Management Annual Confer-
ence, Barcelona; and from three anonymous referees
of this Journal.
(Wood, 1999; Wood and Albanese, 1995; Wood
and de Menezes, 1998), ‘high-commitment prac-
tices’ (Huselid, 1995; Huselid and Becker, 1996),
or ‘high performance workplaces’ (Ramsay,
Scholarios and Harley, 2000), and corporate and
organizational performance on the other.2
The most common measures of performance in
this literature are labour productivity; measures
of quality and financial performance; employee
turnover; absenteeism; and industrial disputes.
Perhaps surprisingly, given its strategic import-
ance to firms’ competitive advantage and sus-
tained performance, the link between human
resource management (HRM) practices and
firms’ innovative activities has received only
minimal attention in the literature.3The lack of
research into this particular link may reflect, to
some extent at least, the difficulties in measuring
and categorizing ‘innovative’ activities, as well as
perhaps the ways in which innovation is viewed
by economists and management researchers
respectively. While financial performance is
generally regarded in both the economics and
management literature as a ‘bottom-line’ measure
of performance, innovation is viewed slightly
differently by these literatures. In the manage-
ment literature, innovation is often regarded as an
intermediate variable, in particular, as a proxy for
business strategy (see for example, Delery and
Doty, 1996; Hambrick, 1983; Miles and Snow,
1978, 1984; Segev, 1989; Shortell and Zajac, 1990).
In contrast, in the economics literature, inno-
vation is generally regarded as a key indicator not
only of firm performance, but also as an integral
part of the process of economic growth at the
national level (see for example, Archibugi, Howells
and Michie, 1999; Brouwer and Kleinknecht, 1999;
Freeman, 1994). We are not suggesting that inno-
vation is necessarily ‘pigeon-holed’ in this way in
all contributions to these separate literatures, but
this general pattern may nevertheless help to
explain to some extent the rather different em-
phasis and analytical treatment of innovation
across the two literatures.
We conducted a survey of UK firms to produce
the sort of data necessary to test for firms’
innovation performance and the relation of this to
their HRM practices and to labour-market factors
more generally, and in particular to investigate
the relationship between firms’ use of flexible
work practices, human resource management and
industrial relations on the one hand, and cor-
porate performance on the other.
The next section briefly surveys the existing
literature that links, on the one hand labour
market flexibility, training policies, human re-
source management and work practices to, on the
other, firm performance. The third sets out
the hypotheses to be tested, and the fourth
describes the database. Then we describe the
variables used and the method of analysis. The
sixth section presents our results, and the final
section concludes.
Labour markets, HRM and corporate
performance
Labour market deregulation has been seen as
playing a key role in the drive for competi-
tiveness: ‘excessive regulation stifles growth,
destroys jobs, raises prices and drives companies
elsewhere’ (DTI, 1995, p. 18). The flexibility of
the UK and US labour markets has been iden-
tified as a key explanation for the high growth
rates of these two economies in recent years, and
there is increasing pressure on other countries to
reduce perceived labour market rigidities. While
the assumed benefits of labour market flexibility
receive much attention in public discussion, little
is known, with some exception in relation to
employee training, about its effect on the use by
firms of new work practices, or of the results on
corporate performance – from labour market
flexibility per se, or from the new HRM policies
that might be adopted as a result of the changed
macro/external environment.4
On the one hand, the use of flexible work
practices can result in savings on wage costs. First,
work may be hired and paid for only when there
is work to be done (for example, during tem-
porary production peaks), and second, because
many ‘flexible’ workers earn less than compar-
able tenured workers and may not be entitled to
288 J. Michie and M. Sheehan-Quinn
2See Richardson and Thompson (1999) for a recent
survey.
3Although see Kleinknecht (1998), Michie and
Sheehan (1999a, 1999b) and Michie and Sheehan-
Quinn (forthcoming) for previous empirical work in
this area.
4For an analysis of the relationship between training
and labour market flexibility, see Arulampalam and
Booth (1998).
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