Business groups’ internal labour markets and SME labour productivity

Abstract

Labour market regulation constrains small and medium-sized enterprises’ (SMEs) ability to minimize redundant labour. However, it is often neglected that many SMEs might circumvent these constraints by accessing a business group’s internal labour market (ILM). In this study, we analyse whether SMEs with ILM access—i.e., with an increasing number of sister group companies in the same subnational region-industry—enjoy a labour productivity premium and whether this potential productivity premium depends on the bargaining power of labour. Because intra-group reallocation of redundant personnel often involves substantial changes in employment conditions, we argue that the value of ILM access might be reduced when the bargaining power of workers is high as they can oppose the reallocation or demand significant compensation. Using a panel of 119,801 European SMEs during 2011–2019 (639,675 firm-year observations), we find that SMEs with ILM access show relatively higher labour productivity. Further, our findings suggest that this productivity premium is higher in those contexts associated with lower labour bargaining power.

Plain English Summary Intra-group reallocation of unused labour can enhance SME labour productivity, but its feasibility and value-adding potential depend on labour bargaining power. This article explores differences in SME labour productivity attributed to internal labour market access, that is, the flexibility to reallocate unproductive labour to other sister companies in the group network. We also analyse if any potential productivity premium associated with internal labour market access depends on the bargaining power of labour. Our statistical analysis shows a labour productivity premium associated with internal labour market access. Furthermore, it is especially significant in contexts associated with low employee bargaining power. For instance, when collective bargaining coverage is low (very low) we predict a labour productivity premium of 3.3% (4.5%) for all SMEs embedded in a network of 10 companies in the same region-industry. Thus, our study contributes to sharpening our understanding of SME productivity and the value they receive from group affiliation.