There’s Power in Numbers—For Business Groups and Their Employees

Safety in numbers. Belonging to a large group can help keep us out of harm’s way in a variety of scenarios. It’s even true for employees and companies operating within a business group. This network of independent firms provides stability and opportunity by absorbing members of one another’s workforce, in good times and in bad. Using innovative analyses, a team led by Prof. Francis Kramarz of ENSAE ParisTech is, for the first time, studying just how the phenomenon operates. Their research is unique for addressing data on the firm level (profits, productivity, debt), combined with measures of workers’ movements and, uniquely, each group’s precise business composition. The team’s results show how internal mobility among firms functions as insurance for workers, helping ensure employment when times turn tough.
Such business groups possess their own internal labor market (ILM). Sometimes it functions in a vertical fashion: employees may move to another company in the group, in order to climb the career ladder. Prof. Kramarz investigates a horizontal kind of ILM activity, where workers move sideways within the group. He found that, in good times, there is more horizontal mobility than ever, with hiring drawing more from the group’s population than from outside. This is especially true for groups that are diverse—in their products or locations, for instance—and for their managers, engineers, and professionals.
What happens in business groups when times are tough? The Kramarz team showed that if one firm closes, more of its workers are taken up by fellow firms than return to the general job market. The effect is especially pronounced for less-skilled workers. Importantly, the fraction of the company’s former workforce that ends up unemployed is drastically lower than for those without a business group. By belonging to such a network, a firm provides workers with insurance on their employment, even if, as Prof. Kramarz found, the workers concerned suffered a decrease in their hours and, so, their overall earnings. In a sense, this movement across the ILM insures the firm, too, against some of the high severance payments it would normally owe when parting ways with its workforce.
The work of Prof. Kramarz and his team has taught us which mechanisms are at play when business groups manage to keep their workers employed and even to seize opportunities for growth, thanks to the appropriate workforce right in their midst. Such knowledge could help shape more of the business world into structures that are at once productive and resilient for the greatest number.

Scientific title: (Why) Are Business Groups Special? Internal Labor and Capital Markets in French Business Groups

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