a firm's external environment and the hiring of a non-standard workforce: implications for...

A firm’s external environment and the hiring

of a non-standard workforce: implications for

organisations

Dipankar Ghosh and G. Lee Willinger, Michael F. Price College ofBusiness Administration, University of OklahomaSucharita Ghosh, Department of Economics, University of AkronHuman Resource Management Journal, Vol 19, no 4, 2009, pages 433–453

This article empirically investigates organisations’ strategic decision to hire non-standard employees. Using US firm-level data and a matched pair design, the studyshows that firms operating in a more competitive environment and a less uncertainenvironment have a higher proportion of non-standard workers. Further, firms witha greater proportion of non-standard workers show higher financial growth. Andfinally, in a highly competitive environment, those firms that hire more non-standard workers achieve significantly higher financial growth. Similar growth isexperienced by those firms in the low uncertainty environment hiring morenon-standard workers. These results are all consistent with the research hypotheses.Contact: Dipankar Ghosh, Michael F. Price College of BusinessAdministration, University of Oklahoma, Norman, OK 73019, USA. Email:[email protected]_109 433..453

INTRODUCTION

The growth in non-standard employment is a fundamental change in the labourmarket, with significant implications for organisations’ performance. A reasoncommonly cited by managers for using non-standard employees is that they

give employers increased flexibility in adjusting employees’ work arrangements(Mangum et al., 1985; Houseman, 2001). However, what is the need for this flexibility?Two external environmental factors are suggested – competition (Cohany, 1996) anduncertainty (in the firm’s output demand, industry outputs, resource input, etc.)(Abraham and Taylor, 1996). In this research, we first seek to understand the increasein the strategic use of non-standard employees by organisations to interface with anuncertain environment or competitive environment. Specifically, we examine: (1) is thenon-standard workforce more prevalent in competitive or uncertain environment?;and (2) are there financial performance implications for firms’ increased use ofnon-standard employees for different levels of competition and uncertainty?

This research differs from prior studies on non-standard workforce in two ways.First, while prior research considers the firm’s environment as an important variableaffecting the decision to hire a non-standard workforce (Becker and Gerhart, 1996),it usually considers competitive and uncertain environments as equivalent, oftenused interchangeably and described using a common rubric like ‘environmentalturbulence’ (Davis-Blake et al., 2003). As discussed later, the two constructs aredifferent (Child, 1972). Second, to the best of our knowledge, almost all prior

doi: 10.1111/j.1748-8583.2009.00109.x

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 19 NO 4, 2009 433

© 2009 Blackwell Publishing Ltd.

Please cite this article as: Ghosh, D., Willinger, G.L. and Ghosh, S. (2009) ‘A firm’s external environment and the hiring of anon-standard workforce: implications for organisations’. Human Resource Management Journal, 19: 4, 433–453.

empirical studies on the non-standard workforce use aggregate data from thetemporary services industry (Standard Industrial Classification (SIC) 7363) to explainfirms hiring of non-standard workers and derived results at a macro level. Incontrast, this research derives results at a micro level by comparing individual firms’hiring of non-standard workers.

The strategic use of non-standard workforce is an important aspect of the labourmarket (Lepak and Snell, 1999). Following Mintzberg (1978) and the empirical workof Finkelstein and Hambrick (1996) and Geletkanycz and Hambrick (1997), wecharacterise strategy as the pattern resulting from a stream of resource allocationdecisions, such as firms’ choices in R&D, capital investment and labour forcecomposition. This view follows the strategic choice perspective of Child (1972),wherein the environment places considerable constraints on firms, but firms alsohave some latitude to act. Those acts, in turn, generate fundamentally different waysof acquiring and allocating resources (e.g. workforce composition) as evidenced bythe differences in their patterns across firms (Bowyer, 1972). We suggest that suchdifferences among firms in the hiring of non-standard employees are likely to createmicro-level opportunity structures, which in turn lead to differences in financialperformance among firms.

The remainder of the paper is organised as follows. Below is a discussion of thetheory and hypotheses, followed by the research methodology. Thereafter, theempirical analyses are presented, followed by some concluding comments.

THEORY AND HYPOTHESES

Theory

This study addresses three questions that translate into corresponding hypotheses.We first discuss the theory on using non-standard workforce given a firm’senvironmental conditions.

Non-standard workforce In the current research, standard employees are definedas those who put in set hours at a firm’s location under the firm’s control with theexpectations of continued employment. All remaining employees who do not fit thisdefinition are, by default, non-standard employees. In general, unlike standardemployees, non-standard employees lack the job stability and entitlement to fringebenefits, union membership, and the social security of full-time, standard employees(Marshall, 1998). Thus, employment arrangements such as independent contracting,part-time work, contract or on-call work, self-employment, seasonal work, andworking for a temporary help agency are all examples of non-standard employment.

Our source of non-standard employees is the firm-level data derived fromStandard and Poor’s annual Compustat data file tapes. Compustat information is froma firm’s audited annual financial statements, which includes a disclosure aboutwhether or not the proportion of non-standard to standard employees of the firm onan average exceeds 10 per cent in a given fiscal period. An ‘IE’ entry for footnotenumber 25 is used by Compustat to identify a firm having 10 per cent or more of itstotal employees as non-standard. Thus, for our research, the identification of firmshaving more than or less than 10 per cent of its employees as non-standard issufficient to test our hypotheses (similar to Nayar and Willinger, 2001).1

External environment and the hiring of a non-standard workforce

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 19 NO 4, 2009434


Firms’ external environmental conditions Environment is an importantcontingency factor that affects an organisation’s structure, internal behaviours andhow it is managed (Child, 1972; Williamson, 1975). Organisations are constrained bythe nature of their environment; nevertheless, managers do have opportunities torespond strategically to manage different components of their environment (Bowyer,1972; Miller & Leiblein, 1996). In describing the environment, organisational theorists(Duncan, 1972; Tosi et al., 1973) often include two components. The first componentis diversity, or the range of environmental factors faced by an organisation, includingcompetition. Leblebici and Salancik (1981) argue that diversity is more predictablebecause it can be evaluated and anticipated. Thus, diversity can be managedusing institutionally formalised procedures, such as pricing strategy, productdifferentiation and planned resource mobilisation, among others (Leblebici andSalancik, 1981).

The second component is uncertainty, which is the change or variability amongthese environmental factors, and reflects the environmental uncertainty a firm facesstemming from factors external to an organisation. The concept refers to the degreeof change that characterises environmental activities relevant to an organisation’soperations, such as the unpredictability in the actions of the customers, suppliers,competitors and regulatory groups that comprise the external environment (Child,1972; Ewusi-Mensah, 1981; Govindarajan, 1984). In general, uncertainty encompassesactivities in which elements of the environment are volatile and unpredictable; thus,probabilities cannot be associated with the occurring events because of their constantand frequent change (Duncan, 1972). Uncertainty, unlike competition, is stochastic innature and cannot be easily anticipated (Child, 1972; Drago, 1998). Organisationsestablish buffers to absorb the effect of uncertainty to allow organisation’s technicalcore to perform its primary activities (Buenger et al., 1996); for example, they shiftexcess resources toward activities considered critical for organisational success(Cheng and Kesner, 1997).

External environment and non-standard workforce A firm’s human resources(HR) system design should be aligned with its unique environment and internaloperations (Becker and Gerhart, 1996). HRM, from a transaction cost economicsperspective, focuses on managing employees, arguing that using standard employeesis appropriate when organisations can effectively monitor their performance andensure that their skills are employed correctly and efficiently (Williamson, 1975).Environmental implications per se are not directly addressed. Human capitaltheorists suggest that organisations develop HR internally only when investments inemployee skills are justifiable, that is, the decision to have standard or non-standardemployees depends on a comparison of the expected returns of employeeproductivity (Becker, 1964). Thus, human capital theory focuses on the labour costsrelative to the return on investment; nothing specific is addressed vis-à-vis theenvironment. A resource-based view of the firm suggests the value of human capitalis inherently dependent on its potential to contribute to the core competence of thefirm (Barney, 1991). This alludes to the importance of the environment, i.e. the needto establish buffers to absorb environmental uncertainty.

Lepak and Snell (1999) combine the above three schools of thought to infer thatas human capital becomes more firm specific, having more non-standard employees

Dipankar Ghosh, Sucharita Ghosh and G. Lee Willinger



is more infeasible and/or entails excessive costs. Further, the development offirm-specific expertise is path dependent (Barney, 1991), requiring tacit skills andknowledge (Polyani, 1966) that is acquired in situ (Williamson, 1975). Firm-specificexpertise connotes a more general knowledge about the firm, its operations andpersonnel, among others. Firms are unlikely to find such expertise in the open labourmarket (Lepak and Snell, 1999); they are acquired on the job and by working withan organisation over time (Becker and Gerhart, 1996; Spence and Brucks, 1997).

In discussing the mix of employee expertise and organisation HRM, Atkinson(1984) differentiates between an inner core of employees with high levels of taskflexibility and expertise, and an outer core of peripheral employees where theachievement of numerical flexibility is paramount (i.e. workers on a variety of lesssecure, shorter-term contracts). Core employees have ‘company know-how’ that isunique to the organisation and can only be learned internally over time (Purcell andPurcell, 1998). These employees are insulated from external fluctuations, whereasthose in the periphery are more exposed (to fluctuations), that is, they are ‘plug in’and not firm specific. Consequently, firms look to the external labour market to fillthese jobs, and seek numerical flexibility through a more direct and immediate linkto the external labour market than is sought for the core group.

Hypotheses

Competitive environment and non-standard workforce In a competitiveenvironment, as firms maintain their profit margin, they need to respond withgreater flexibility (Williamson, 1975; Matusik and Hill, 1998), dispense withunnecessary resources (and costs) and pursue its pricing strategy (Atkinson, 1984;Lepak and Snell, 1999). An impeding factor for a firm to be flexible is its prior legalcontracts with employees. If a firm wants to either exit or reduce the scope of anactivity, there are often high exit costs (e.g. severance pay, loss of reputation as a goodemployer and low morale of the existing workforce). This may make the firmunwilling to adapt to a competitive environment (Porter, 1980). Employers, however,can mitigate this problem by using non-standard workers with whom organisationshave pure economic exchanges, i.e. offer short-term incentives for well-specifiedcontributions by the employee (Tsui et al., 1997). Reliance on non-standard workerswill be greater in a more competitive environment (Abraham and Taylor, 1996);employers shift the burden of uncertainty arising from competition to labour becausethey are the ones who are more exposed to the uncertainty (Atkinson, 1984).Flexibility and costs are also related, as the lower fixed exit costs from non-standardemployees enables a firm to respond rapidly to changing market conditions. So,strategically, firms based in a more competitive environment have relatively more togain by using non-standard employees. In contrast, arguments for using non-standard employees are least compelling when firms are based in an environmentcharacterised by mild competitive pressures. Thus, our first hypothesis is:

Hypothesis 1a: The proportion of firms using non-standard employees is greaterin more competitive industries.

Uncertain environment and non-standard workforce Under uncertainty,managers have to make inferences about the cause and effect relationships of




probabilistic environmental factors vis-à-vis their organisations. Under lowuncertainty, management can make relatively more accurate predictions about themarket and the utilisation of its own resources (Gul and Chia, 1994). Whenuncertainty is high, making accurate predictions difficult, organisations seek to bufferthe effect of environmental influences by surrounding their technical cores (i.e. itsmain operations) with input (i.e. resources) components of a more permanent nature.This is where the standard, inner core of employees, with their high levels of taskflexibility, firm-specific knowledge and expertise, help an organisation to sustainitself. The firm’s own employees represent better human capital for a firm’s corecompetence, since they have the critical skills that a firm needs (and keeps) to beefficient (Baron and Kreps, 1999). They allow the production process to continuesmoothly in case of discontinuity in inputs, thus reducing the need for organisationsto respond to every environmental fluctuation (Cyert and March, 1963; Galbraith,1973). Thus, under high uncertainty, with less accurate predictions and probablevagaries in inputs, organisations are likely to have a relatively greater number ofstandard employees to protect its technical core (Tsui et al., 1997). In contrast, whenenvironmental uncertainty is low and making accurate predictions is easier, the needto protect the technical core is less critical. Discontinuities in inputs are less likely,and, therefore, organisations can employ more non-standard employees. Priorresearch shows that under high environmental uncertainty, organisations shiftresources toward activities considered critical for organisational success (Cheng andKesner, 1997). Thus, our next hypothesis is:

Hypothesis 1b: A non-standard workforce is less prevalent in firms facinggreater uncertainty.

Financial growth and non-standard workforce According to the resource-basedview of the firm (Barney, 1995), firms achieve competitive advantage and sustainedgrowth only by creating value in a way that is difficult for competitors to imitate.Though traditional sources like natural resources and technology create value, thesesources are easy to imitate in comparison to a complex employment system (Beckerand Gerhart, 1996). Thus, HRM strategies are an important predictor of firmperformance (Shipton et al., 2006). Research investigating relations between HRMand financial performance suggests that specific HR practices, such as HR planning(Koch and McGarth, 1996), profit-sharing and results-oriented appraisals (Delery andDoty, 1996), selectivity in staffing, training, and incentive appraisals (Delaney andHuselid, 1996), and having more non-standard workers (Nayar and Willinger, 2001)positively affect firm financial performance, while adopting pure employmentdownsizing strategy negatively affects firm financial performance (Cascio et al.,1997).

HRM strategies can also be an important source of sustained growth (Pfeffer, 1994).We thus examine this HRM strategy of having non-standard employees and theirimplications for financial growth in the future. The literature argues that non-standard workers are attractive to firms because their lower wage rates serve as acost-cutting measure (Segal and Sullivan, 1995). Thus, hiring less expensive non-standard workers as a cost-cutting measure can translate into better financial growthfor the firms in the future. Also, firms face substantial exit costs due to the legal




ramifications of letting go a worker (Dertouzos and Karoly, 1992). So a firms’ HRstrategy of hiring and monitoring non-standard workers and then offeringpermanent positions only to those who perform well (Houseman, 2001) can also helpfirms reduce their costs.2

Thus the increase in the proportion of non-standard workforce of a firm couldserve as an indicator of its future financial growth. Thus, our next hypothesis is:

Hypothesis 2: The proportion of a firm’s non-standard workforce is an indicatorof the firm’s financial growth.

Non-standard employees, competition and uncertainty levels, financial

growth Hypothesis 2 discusses the implications of a non-standard workforce for afirm’s financial growth. Previous discussion for Hypothesis 1a and 1b suggests thatthe environment in which a firm operates can affect its financial growth dependingon its hiring practice of non-standard workers. Taken together, the implications arethat a firm’s HR practice and environment complement each other to affect itsfinancial growth. For example, an appropriate combination of standard and non-standard employees, where there is high competition, may afford considerablereductions in a firm’s overall cost structure and enhance its financial growth(Atkinson, 1984; Abraham and Taylor, 1996). Thus, firms with greater non-standardworkforce should be a better indicator of financial growth in high competitiveindustries than in low competitive industries. Likewise, the HRM literature (e.g.Baron and Kreps, 1999) considers a firm’s own standard employees as representingbetter human capital for buffering its core competence against uncertainty. But underlow uncertainty, firms can resort to more non-standard workforce, thereby reducingits overall cost and possibly improving their financial growth. The hypotheses are:

Hypothesis 3a: Firms with a greater proportion of non-standard workforce havebetter financial growth in high competitive industries than in low competitiveindustries.

Hypothesis 3b: Firms with a greater proportion of non-standard workforce havebetter financial growth in low uncertainty industries than in high uncertaintyindustries.

RESEARCH METHODOLOGY

Matched-pair design

We test the hypotheses using a matched-pair design that requires a sample ortreatment group of firms and a control group of firms. The method entails pairmatching each firm in the sample group with another firm in the control group thatis different on the independent variable dimension but similar on all otherdimensions that are identified a priori as important (e.g. size of the firm and industrymembership). To illustrate, the ideal situation for matched-pair design on the effectof smoking will be that we use identical twins, one smoking and one not smoking,to do comparisons.

Matched-pairs create groups that are composed of similar members, thus reducingthe random error associated with within group variances, which, in turn, is expected




to increase internal validity. Matched-pair design also increases the external validityof the findings because there is no limit to who can participate, as long as there isa complementary subject in each group. However, although this design increases thepower of the study by reducing the effects of random error, it also decreases thedegrees of freedom (DF) by half, because each pair only counts for one DF (hence,the results are biased towards the null hypothesis). This means that the treatmenteffects have to be robust in order to obtain a significant t-value in a matched-pairdesign. It should be noted that the t-statistic is the statistic of choice for matched-sample design (Moore and McCabe, 1999).

In our study, all firms in the sample group are matched by year with control firmsin the same industry closest in sales, with sales being used as a measure of the sizeof the firm. The intuition behind this is quite straightforward. Given that the samplefirm from the treatment group and its matched firm from the control group are fromthe same industry, are the same size, and are from the same labour contract year, wehave eliminated all possible differences between our treatment group, and ‘control’group. Hence, we can now study the differential role of non-standard labour on thetwo matched firms.

Data description

This study encompasses 46 industries (at the two-digit SIC code level, a majorcategorisation of an industry), with a total of 2,293 firms (see industry details in theAppendix). Firm-level data are derived from Standard and Poor’s annual Compustatdata file tapes, including the merged industrial annual and full coverage annualtapes. The Compustat information is obtained from each firm’s audited annualfinancial statements for which Compustat uses an ‘IE’ entry for footnote number 25in their data file tapes to identify a firm having 10 per cent or more of its totalemployees as non-standard employees.

We applied two criteria to identify firms for our research purposes. First, we chosefirms having an ‘IE’ designation for at least five years during the 1990–2000 timeperiod (note that 2000 was the cut-off year as there were considerable fluctuations infirms’ performance subsequently because of the collapse of dot-com firms). Thesefirms are the sample group in this study. Of the 2,293 firms, 1,101 constituted thesample group. The control group (the remaining 1,192 firms) are those firms with lessthan 10 per cent non-standard workers (i.e. not designated with an ‘IE’ for footnote25) matched with the above sample group on sales and industry as described earlier.Second, to avoid having smaller firms in our study where management–labourrelationships tend to be different (Brown and Medoff, 1989), the firms in our studyhad at least 400 employees.

Research variables

Competitive environment (COMPETITIVE ) The concentration ratio of an industryis used in determining the competition level. Commonly used is the four-firmconcentration ratio, which is the percentage of market share of the four largest firmsin an industry. Therefore, for our study, the competition a firm faces in an industrywas determined by estimating the four-firm concentration ratio for each two-digitSIC code (note: two-digit is a broad categorisation of an industry). It is measured as




CONCEN pm ii

m

==∑

1

where m is the four largest firms in an industry in terms of

sales in an industry and pi is the market share of the ith firm as a percentage(Shephard, 1985). A low concentration ratio indicates a high degree of competition inan industry and vice-versa (Shephard, 1985).

Uncertain environment (UNCERTAINTY ) This is defined as the change orvariability in the organisation’s external environment (Tung, 1979), with more stablepatterns in environmental uncertainty across time, indicating a more stableenvironment (Tosi et al., 1973; Bourgeois, 1985). The accounting and managementliterature (Child, 1972; Milliken, 1987) consistently suggest that the most appropriateway to measure a firm’s environmental uncertainty is its market characteristics,namely, sales variance (Tosi et al., 1973; Snyder and Glueck, 1982). Thus, in ourresearch, UNCERTAINTY is a measure of environmental uncertainty a firm faces inan industry, and is the sales variance among firms within an industry (see Bourgeois,1985). To do this, we first compute the sales variance of each firm in a particularindustry (which includes the matched firms from the sample and control group), andthen take the mean of all sales variances in that industry. The sales variance isestimated using sales information for the period 1990–2000.

Growth Our measure of growth is earnings per share (EPS). Specifically, for eachfirm within an industry (i.e. within a two-digit SIC code), we computed the EPSgrowth for each 5-year block for our sample period, 1990–2000. We then took themean of the EPS growth for the firms within a specific industry and labelled thisvariable EPSGROWTH. To cross-check the validity of EPSGROWTH as a robustmeasure of firm growth, we also compute a second measure of firm growth, salesgrowth (SALESGROWTH). A positive correlation between these two variables wouldindicate the robustness of our EPSGROWTH measure. Note that we cannot use thismeasure for testing the hypotheses (Hypothesis 2 or 3), since the firms are matchpaired on sales. SALESGROWTH is computed as the growth in sales for each firmwithin a two-digit SIC code over the 1990–2000 period in blocks of 5 years; themean of sales growth of the firms across the two-digit SIC code is variableSALESGROWTH.

Proportion of firms with non-standard workforce (NSPROPOR) This variablerepresents the proportion of publicly traded firms in an industry that use 10 per centor more non-standard workforce (i.e. our sample group) to all firms in that industry.We compute this variable for each industry where there are at least 10 or more firmswithin that SIC code.

DATA ANALYSIS

Industry-wide analysis

Before discussing the hypotheses testing, we conducted a preliminary analysis usingdata on all 46 industries at the two-digit SIC code level to gain some insight into theindustry characteristics. Descriptive statistics are in the Appendix. To understand theinteractions of the variables (i.e. COMPETITIVE, UNCERTAINTY, SALESGROWTH,




EPSGROWTH, and NSPROPOR) that characterise the industries using non-standardworkforce, we correlated all the variables with each other (see Table 1). OnlySALESGROWTH and EPSGROWTH are significantly correlated (which suggests thatas revenues grow so do earnings because expenses do not increase linearly withrevenues). Hence, it confirms that EPSGROWTH is a robust measure of firm growth.Also, UNCERTAINTY and COMPETITIVE variables are not correlated. Sincethese variables are mutually exclusive at the industry level, we use these twocharacteristics as proxies for the environment in which a firm operates whenconducting the analyses. Also, the variable NSPROPOR is not correlated withany other variable. Thus, hiring of more or less non-standard workers by themanagement of a firm is not an automatic response to a firm’s competitive oruncertainty environment, sales growth, or growth in earnings per share.

Hypotheses testing

Competitive environment and non-standard workforce Hypothesis 1a statesthat the proportion of firms using non-standard employees is greater in morecompetitive industries. To test this hypothesis, we used the competition measure(COMPETITIVE) and the measure for the proportion of publicly traded firms in anindustry that use 10 per cent or more non-standard workforce (NSPROPOR). The1990, 1995 and 2000 data from Compustat were used to construct these two variables.The three years represented the two end points (i.e. 1990 and 2000) and the middle(i.e. 1995) of the time period.

Table 2a gives the descriptive statistics for COMPETITIVE and NSPROPOR foryears 1990, 1995 and 2000. We conducted a correlation test between COMPETITIVEand NSPROPOR to determine whether relatively more competitive firms tend to hiremore non-standard workers (note that COMPETITIVE and NSPROPOR were notnormally distributed as per Kolomogorov’s D test; hence, Spearman’s correlationcoefficient was used for testing Hypothesis 1a). Table 2b gives the correlation ratiosbetween COMPETITIVE and NSPROPOR for the same years. Recall that a lower scoreof concentration ratio used to measure COMPETITIVE indicates a higher degree ofcompetition and vice-versa. The results show a negative and significant coefficientcorrelation between COMPETITIVE and NSPROPOR for each of the three years.Thus, as stated in Hypothesis 1a, in an industry where the environment is morecompetitive, a greater proportion of firms use non-standard workers.

Uncertain environment and non-standard workforce Hypothesis 1b states thata non-standard workforce is less prevalent in firms facing a more uncertainenvironment. To test the hypothesis, we examined the difference in UNCERTAINTYbetween the control firms and the sample firms for the period 1990–2000. This wasdone at an overall level of matched pairs as previously described. For the period1990–1994 (i.e. a 5-year block), we computed UNCERTAINTY of each of the matchedpair firms. A 5-year block ensured that any abnormal occurrence a firm mayexperience between 1990 and 2000 did not significantly affect the UNCERTAINTYmeasure by smoothing the effect of such an occurrence (if there was one). We thenmoved the 5-year block by 1 year (i.e. dropped 1990 and included 1995), and againcomputed UNCERTAINTY of each matched pair, but now for the 5-year block from1991 to 1995. This moving block of 5 years (from 1990 to 1994 until 1996 to 2000) gave




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seven sets of UNCERTAINTY for each matched pair firms. We then computed thedifference in UNCERTAINTY between the control firms and the sample firms foreach matched pair and used the Wilcoxon signed-rank test to determine if this wassignificant.

Table 3 provides the analysis for testing Hypothesis 1b. We find that the differencein UNCERTAINTY (or $2,160,145.83) for the 531 matched pairs between the controland sample firms is significant (at p = 0.0001). Thus firms experiencing greaterUNCERTAINTY compared with its matched pair have a significantly lowerproportion of non-standard workforce, as predicted by Hypothesis 1b.

TABLE 2 Test of Hypothesis 1a: The proportion of firms using non-standard employees isgreater in more competitive industries

Part a: Simple statistics

Variable N(industries)

Mean Standarddeviation

Median

Year 2000COMPETITIVE 45 0.446 0.158 0.416NSPROPOR 45 0.095 0.123 0.049



Part b: Spearman correlation coefficient

COMPETITIVE NSPROPOR

Year 2000COMPETITIVE 1.000 -0.357

(p = 0.0058)NSPROPOR -0.357 1.000

(p = 0.0058)Year 1995

COMPETITIVE 1.000 -0.288(p = 0.0065)

NSPROPOR -0.288 1.000(p = 0.0065)

Year 1990COMPETITIVE 1.000 -0.250

(p = 0.0612)NSPROPOR -0.250 1.000

(p = 0.0612)

Note: COMPETITIVE and NSPROPOR are the same as in Table 1.




Financial growth and non-standard workforce Hypothesis 2 addresses thequestion of whether a firm with a more non-standard workforce is indicative offinancial growth. We tested the difference in the matched-pairs growth using growthfirm’s earnings per share or EPSGROWTH. (Note: as stated earlier, whileSALESGROWTH gives us information on firms’ profitability, we cannot use thisvariable because the firms are matched on sales.) This was done for both the sampleand control group of firms for the years in which complete growth information wasavailable. As in Hypothesis 1b, for each firm in the matched pair in the 1990–1994period (a 5-year block), we computed the EPSGROWTH. We used a moving block of5 years from 1990 to 2000 to compute EPSGROWTH; the years used depended on theyear in which the match occurred. The difference in EPSGROWTH was computedbetween the sample and control firms for each matched pair, and Wilcoxon signed-rank was used to determine if the difference was significant.

Table 4 shows the difference in EPSGROWTH ($0.071) between the sample groupand the control group is significant. Thus, in the matched firms, those firms withgreater than 10 per cent non-standard workforce have a higher EPS growth than

TABLE 3 Test of Hypothesis 1b: A non-standard workforce is less prevalent in firms facinggreater uncertain environment

Difference in UNCERTAINTY and non-standard workforce

Difference in UNCERTAINTY between control group firms andsample group firms (i.e. control UNCERTAINTY less sampleUNCERTAINTY)

$2,160,145.83

Number of matched firms 531Wilcoxon signed-rank test 16,005 (p = 0.0001)

Note: (1) UNCERTAINTY: same as in Table 1. (2) The p-values are for two-tailed tests for difference fromzero. (3) Sample group: firms with greater than 10 per cent non-standard workforce. (4) Control group:firms with less than 10 per cent non-standard workforce.

TABLE 4 Test of Hypothesis 2: The proportion of a firm’s non-standard workforce is anindicator of firms’ future financial growth

Difference in EPSGROWTH growth and non-standard workforce

Difference in EPSGROWTH between sample group firms andcontrol group firms (i.e. sample group EPSGROWTH lesscontrol group EPSGROWTH)

$0.071

Number of matched firms 730Wilcoxon signed-rank test 13,513.5 (p = 0.0176)

Note: (1) EPSGROWTH: same as in Table 1. (2) The p-values are for two-tailed tests for difference fromzero. (3) Sample group: firms with greater than 10 per cent non-standard workforce. (4) Control group:firms with less than 10 per cent non-standard workforce.




those employing fewer than 10 per cent non-standard workforce, as stated inHypothesis 2.

Environment, non-standard workforce and financial growth The last hypothesesinvestigate whether the environment in which a firm operates can affect the financialgrowth of a firm hiring relatively more or fewer non-standard workers. Specifically,does a matched pair with a non-standard workforce have better financial growth inhigh competitive industries or low competitive industries? Also, does a matched pairwith a non-standard workforce have better financial growth in low uncertaintyindustries or high uncertainty industries?

To test the hypotheses, we first split the matched pairs into two groups, one intohigh and low UNCERTAINTY industry groups, and the second into high and lowCOMPETIVENESS industry groups using the median scores for the two constructs.After creating the groups, EPSGROWTH was computed (as described earlier foranalysing Hypothesis 2), first for the UNCERTAINTY industry groups, and then forthe COMPETIVENESS industry groups. Next, the difference in the control and samplegroup’s growth in EPSGROWTH was computed, and a signed-rank test used todetermine if the difference was significant. From this analysis, we would discern ifthe competitive environment or the uncertainty environment and the use of non-standard workforce had any effect on the financial performance of a firm.

Table 5 shows the results from this analysis. The difference in mean EPSGROWTHbetween the sample and the control group in highly COMPETITIVE industries issignificant. However, the difference in mean EPSGROWTH between the sample andthe control group in low COMPETITIVE industries is not significant. These resultsare consistent with the expectations of Hypothesis 3a.

For high UNCERTAINTY and low UNCERTAINTY industries, we find that thedifference in mean EPSGROWTH between the sample group and the control groupfor low (high) UNCERTAINTY is significant (insignificant). Once again, these resultsare consistent with the expectations of Hypothesis 3b. Overall, the above resultsindicate complementarities between a firm’s labour policy and its environment – afirm hiring more than 10 per cent non-standard workers performs better financiallyin high competition and low uncertainty environments.

DISCUSSION

This article empirically investigates, using firm level data, the role of environment onan organisation’s strategy to hire non-standard employees and the implications ofsuch a strategy on firm growth. It is difficult to grasp the precise mechanisms bywhich the interplay of human resources practices and strategies generates firm value.Nevertheless, as environmental uncertainty and/or competition leads to decayof human capital (Lepak and Snell, 1999), we need to better understand howorganisations strategically use non-standard and full-time employees to competeover time. Consequently, this paper addressed two research questions: (1) is thenon-standard workforce more prevalent in competitive industries or uncertainindustries?; and (2) are there financial performance ramification for firms’ increaseduse of non-standard employees for different levels of competition and uncertainty?




Earlier empirical studies on these topics have typically used aggregate surveydata for their analysis, and considered competitive and uncertain marketenvironments of an organisation as synonymous. This article, however, used data atthe individual firm level and thereby provided some firm-level implications of anon-standard workforce. We use a matched-pair design to test the hypotheses andexamined individual firms that have 10 per cent or more of their employees asnon-standard workers (sample group) and compared their performance with firmsthat have fewer than 10 per cent of their employees as non-standard workers (controlgroup).

The results in this article show that, as theoretically argued in Hypothesis 1a and1b, firms operating in a more competitive and a less uncertain environment have ahigher proportion of non-standard workers. Further, consistent with the expectationof Hypothesis 2, we also find that firms with a greater proportion of non-standardworkers show higher financial growth. Finally, Hypothesis 3a and 3b investigatewhether the industry environment in which the firm operates affects the financialgrowth of a firm hiring relatively more or fewer non-standard workers revealsinteresting insights. Specifically, and consistent with our hypotheses, our analysis

TABLE 5 Test of Hypothesis 3: Industry characteristics and financial growth performance

Hypothesis 3a: EPSGROWTH, industry competition, and non-standard workforce

1. For high competitive industry (less than median for COMPETTITIVE)Mean of difference in EPSGROWTH (sample group –

control group)$0.091


2. For low competitive industry (more than median for COMPETITIVE)Mean of difference in EPSGROWTH (sample group –


Number of matched firms 166Wilcoxon signed-rank test 604.5 (p = 0.2641)

Hypothesis 3b: EPSGROWTH, industry uncertainty (or UNCERTAINTY), and non-standard workforce

1. For low UNCERTAINTY industry (UNCERTAINTY is less than the median)Mean of difference in EPSGROWTH (sample group –


Number of matched firms 251Wilcoxon signed-rank test 3,382 (p = 0.0031)

2. For high UNCERTAINTY industry (UNCERTAINTY is higher than the median)Mean of difference in earnings per share growth (sample

group – control group)$0.044


Note: The p-values are for two-tailed tests for difference from zero.




shows that in a highly competitive environment, those firms that do indeed hiremore non-standard workers (compared with their matched pair) achievesignificantly higher growth in their financial performance. Similarly, those firms inthe low uncertainty environment that hire more non-standard workers also achieve(compared with their matched pair) significantly higher financial growth. This mayindeed be the right strategy for the firms to follow. Shipton et al. (2006) argue thatit is rarely one specific variable that explains financial aspects of HRM, but acombined effect of interrelated factors. In our research study, the factors are non-standard employees and the external environment. We find that the results of ourstudy are in line with Kahn’s (2000) study, which found that the hiring of newnon-standard workers and other non-standard work arrangements are positivelyassociated with the financial performance of a firm.

Our study provides insight into the growing trend of hiring non-standardemployees in the labour market. Current research suggests that the use of non-standard employees allows employers to assess an employee prior to hiring for apermanent position because it is difficult in a litigious society to terminate even anincompetent permanent employee (Bureau of Labor Statistics, 1999; Houseman,2001). One way to resolve this dilemma is to hire and monitor non-standardworkers and offer permanent positions only to those who perform well, i.e. the ‘trybefore you buy’ HR technique (Houseman, 2001). The literature also argues thatnon-standard workers are attractive to firms because their lower wage rates serveas a cost-cutting measure (Segal and Sullivan, 1995). Our results in this study showthat no matter what the rationale may be for a firms’ decision to hire non-standardworker, firms operating in a less uncertain but more competitive environment canbenefit from their use and can serve as a strategic HRM practice. Since highercompetition is associated with lower profit margins, hiring less expensive non-standard workers as a cost-cutting measure translates into better financialperformance for the firms. Further, low uncertainty implies that a firm has a betteridea of the demand for its product or service and thus can better plan the hiringof a non-standard workforce, both in terms of numbers and location in theorganisation. This also helps in reducing their costs and enhancing their futurefinancial earnings.

One of this study’s strengths, i.e. using firm-level data to examine the researchquestions, is also this study’s limitation. We differentiate the firms with either moreor fewer non-standard employees using the 10 per cent cut-off point of the Compustatdata base. This cut-off does not allow us to do any kind of sensitivity analyses fordifferent levels of non-standard employees in an organisation, as well as theobjectives for which the employee was hired – functional flexibility or numericalflexibility. In addition, we have used only EPS growth as a measure of financialperformance. Other measures of outcome such as delivery time, throughputcontribution, and production time can also provide valuable insight into futurefinancial performance, since one of the advantages of non-standard employees is theflexibility that it offers firms. Additionally, archival data does not allow for anexploration of the relationship between employers and employees and obscures therole of non-standard employees to overall goals and structure of the organisation.For example, Tilly (1996) distinguishes between hiring non-standard employees foreither retention purposes (higher pay, greater variety of skills, and advancement




opportunities) or for secondary purposes (low pay, require minimum skills, and offerfew opportunities for advancement). These subtleties cannot be differentiated usingthe Compustat database and alternate databases need to be explored.

Acknowledgement

We would like to thank John Ham, two anonymous reviewers, and the editor forhelpful comments and suggestions. All remaining errors are, of course, theresponsibility of the authors.

Notes

1. The first author of this article discussed with two audit partners from big-fouraudit firms in the USA as to how they audited non-standard and standard statusof the employees of their client firms. Both of them said that the starting point isthe Wages Account and the Salaries Account – these two accounts include allpayments to all employees irrespective of the nature of their employmentarrangements. These can include those who work for a temp agency, with theirwages being paid directly to their agency, as well as the part-time members ofthe Board of Directors. From these accounts, all standard employees are firstidentified; the remaining are the non-standard employees. If the latter groupnumbered more than 10 per cent of all employees for the audit period (usually acalendar year), it is disclosed by the auditors in their notes to the shareholders.These notes are the basis for Compustat giving a firm an IE designation. For non-standard employees, the only audit that is done is to ensure that the firmcomplies with all tax issues. The nature of the employment arrangements withthe part-time employees per se is not audited.2. Evidence for this type of firm behaviour is seen in the 1998 Salary andEmployment Trends Survey by Accustaff, a large temporary help staffingcompany, which finds that the most frequently cited reason for usingsupplemental staff was to preview potential permanent employees (Report onthe American Workforce, BLS, 1999). Also, in surveys conducted by the NationalAssociation of Temporary and Staffing Services (1994), 38 per cent of temporaryworkers report that they were offered permanent jobs at firms where they werenon-standard employees (Segal and Sullivan, 1997).

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a firm's external environment and the hiring of a non-standard workforce: implications for...

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