The tortoise and the hare: the impact of employment instability on firm performance

• Author: Yong‐Yeon Ji,Jake G. Messersmith,James P. Guthrie
• Date: 01 November 2014
• Published date: 01 November 2014
• DOI: http://doi.org/10.1111/1748-8583.12052

The tortoise and the hare: the impact of

employment instability on firm performance

Yong-Yeon Ji, College of Business and Economics, Towson University

James P. Guthrie, School of Business, University of Kansas

Jake G. Messersmith, College of Business & Technology, University of Nebraska at

Kearney

Human Resource Management Journal, Vol 24, no 4, 2014, pages 355–373

The main objective of this study is to assess the influence of employment instability on firm performance

in a sample of publicly traded firms. Competing theoretical arguments are considered with regard to

likely outcomes associated with employment instability. A large sample of cross-sectional time-series data

is then analysed using generalised estimating equations (GEE) regression techniques. Results indicate

that employment instability is negatively associated with firm performance, although the relationship is

also demonstrated to be quadratic (an inverse U-shaped relationship). This suggests that the main

relationship varies depending upon the level of employment instability. Industry characteristics are also

examined as moderators of this main effect. The results suggest a disordinal interaction effect for industry

differentiation, where employment instability is negatively associated with firm performance for firms in

highly differentiated industries and positively associated in less differentiated industries.

Contact: Dr Yong-Yeon Ji, Department of Management, College of Business and Economics,

Towson University, 8000 York Rd., Towson, MD 21252, USA. Email: yji@towson.edu

Keywords: employment stability; firm performance; industry differentiation

INTRODUCTION

There once was a speedy hare who bragged about how fast he could run. Tired of hearing him

boast, Slow and Steady, the tortoise, challenged him to a race. All the animals in the forest

gathered to watch. Hare ran down the road for a while and then paused to rest. He looked back

at Slow and Steady and cried out, ‘How do you expect to win this race when you are walking

along at your slow, slow pace?’ Hare stretchedhimself out alongside the road and fell asleep,

thinking, ‘There is plenty of time to relax.’Slow and Steady walked and walked. He never, ever

stopped until he came to the finish line. The animals who were watching cheered so loudly for

Tortoise, they woke up Hare. Harestretched and yawned and began to run again, but it was

too late. Tortoise was over the line. After that, Hare always reminded himself, ‘Don’t brag

about your lightning pace, for Slow and Steady won the race!’1

The classic fable from Aesop contrasts ‘slow, but steady’ with ‘fast, but erratic’ strategies.

This parable of conflicting styles can also be applied to human resource planning,

reflected in varying levels of employment instability. We define employment instability

as the degree to which a firm adjusts the size of its workforce across time. It is important to

understand that employment instability is different from downsizing or workforce reduction

because the notion of employment instability considers both the expansion and contraction of

employment levels. In addition, it differs from flexible employment arrangements (e.g. fixed

term and temporary contracts) because such provisions address the nature of employment

contracts rather than the magnitude of employment level adjustment. Thus, employment

instability reflects the volatility of a firm’s employment levels, capturing both increases and

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doi: 10.1111/1748-8583.12052

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 4, 2014 355

© 2014 John Wiley & Sons Ltd.

Please cite this article in press as: Ji, Y.-Y., Guthrie, J.P. and Messersmith, J.G. (2014) ‘The tortoise and the hare: the impact of employment

instability on firm performance’. Human Resource Management Journal 24: 4, 355–373.

decreases in employment by a given firm. While some companies react quickly and

aggressively to changing market conditions by expanding or contracting their workforce levels

(through hiring and layoffs), others adopt a steadier, less variable approach (Gerhart and

Trevor, 1996). There are also contrasting perspectives in the management literature regarding

the relative efficacy of employment volatility. While many scholars suggest that providing

employees with employment security and stability will enable long-term organisational success

(e.g. Lawler, 1992; Levine, 1995; Reichheld, 1996; Pfeffer, 1998; Guthrie and Datta, 2008), others

(e.g. Cappelli, 1999; Friedman, 2005) argue that employment volatility and diminished security

are the ‘new deal’ at work, necessitated by the demands of hyper-competitive markets.

Recent work has documented increases in the prevalence of employment instability. Hollister

(2011) describes a number of causes of these labour market changes including job growth in

sectors lacking a history of employment stability (e.g. retail), reduced union strength, growing

international competition, technological advances, shareholder activism and institutional forces.

The institutional explanation for changes in the employment relationship has also been

emphasised by a number of scholars. According to institutionalism, HR practices may gain

legitimacy when they obtain a ‘rulelike status’ (Meyer and Rowan, 1977) through the social

construction of reality and normalcy. Firms that face similar external environment exigencies

are likely to engage in organisational isomorphism (e.g. DiMaggio and Powell, 1983) by

imitating the practice of other firms (Scott, 1987). In particular, such mimetic behaviour is more

likely to take place in a liberal market economy (LME), where employment relations are

strongly tied to financial markets and are characterised by higher levels of employment

flexibility in terms of hiring, firing and compensating employees (Barry and Wilkinson, 2011).

Therefore, the change in LMEs over time may have created an environment more prone to

generating employment instability, which spreads via institutional mimicry.

While the concept of employment instability encompasses both the expansion and

contraction of employment, the literature has placed a heavier emphasis on the contraction of

employment levels. Employee reductions for reasons other than job performance (i.e.

downsizing) significantly increased as a result of the economic downturn of the early 1980s.

Following economic recovery, however, layoffs continued to be a common workplace

occurrence. The more recent recession has further stimulated employment volatility, with the

ensuing years witnessing continued and significant job loss. According to the Bureau of Labor

Statistics, over a recent 5-year period (2008–2012) there have been 104,332 ‘mass layoffs’

resulting in 10,256,654 job losses in the US.2In addition, since revenues are much less

predictable and controllable than costs and because labour costs are the single largest operating

expense for many firms, workforce reductions are an attractive option for companies seeking

increased profitability (Cascio, 2002; Datta et al., 2010). However, as noted earlier, it is important

to recognise that employment downsizing and upsizing are not mutually exclusive since many

firms simultaneously seek expansion and contraction. Firms undertaking downsizing are not

necessarily shrinking, but in fact may often be hiring at the same time. Moreover, even

relatively healthy firms will often engage in layoffs as ‘preventative first aid’ as a means to

restructure and reposition themselves for anticipated, future changes in demand for products

or services (Gerhart and Trevor, 1996; Cascio, 2002). Thus, from a financial capitalism

perspective (Kaplan and Strömberg, 2009; Appelbaum et al., 2013), employment volatility may

be seen as one option for creating short-term profits, which will please the investment

community and create shareholder wealth.

Despite the prevalence of employment instability in the labour market, extant research has

paid relatively little attention to the organisational implications of employment instability. As

such, a fundamental question remains: What are the implications of employment instability for

The tortoise and the hare: employment instability

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 4, 2014356

© 2014 John Wiley & Sons Ltd.