The Impact of Industrial Relations on Organizational Performance
University of Montreal
University of Montreal
September 15, 2002
Relations Industrielles/Industrial Relations, Vol. 57, No. 3, 2002
Do industrial relations (IR) influence organizational performance? This remains a fundamental question in IR since it is a matter of credibility and “bread-and-butter” for both academics and practitioners. Economic literature has explored the union impact on organizational performance, especially on the productivity dimension of performance. More recent studies state that performance is not determined by union presence per se but rather by the workplace climate and the union influence on the practices implemented. In the human resource management (HRM) literature, the system of practices is viewed as the proper unit of analysis in order to understand and evaluate the full impact of the IR or HRM practices on performance.
This study examines the economic conception of performance through three dimensions: productivity, efficiency (production costs), and profitability. The effects of HRM-IR practices and workplace climate on these dimensions of economic performance are tested here. Three complementary economic models are used in multivariate regression analysis to verify these relationships: production and cost functions, and a profitability determination model. Designed for the banking sector, all these models have already been tested in the same sector or on the same population and they control for many variables such as capital, assets, and labour input.
The evidence put forward in this article is based on 1994 data from 241 establishments affiliated with the Desjardins’ credit union Federation. Research data came from two main sources. The first source is the Federation where access was granted to information on the financial performance of credit unions and on the work force. The second source is a questionnaire on the HRM-IR practices in effect (presence and age) and on the workplace climate prevailing in each establishment. The questionnaire was distributed to every affiliate (324) and a rate of return of 74.4% was obtained. The establishments studied provide the ideal framework for this type of research in several ways: very similar activities and technologies, autonomy of the credit unions, availability of establishment-level performance data, etc.
The following indicators have been introduced in the estimates. First, we introduced indicators of three HRM-IR practices system dimensions that were created on factor analysis conducted on the HRM-IR practices indicators (number of years since implementation). In this sample, the system of workplace practices is found to be made up of three dimensions: (1) Mobilization, involving the presence of a monetary incentive plan, social activity committee, training program, succession plan, performance appraisal and information meetings; (2) Voice, associated with problem/grievance resolution, labour-management/personnel committee, written specification of working conditions, health and safety committee, and training committee; and (3) Involvement, associated with a suggestion system and colloquium. Second, a workplace climate index, based on turnover, disciplinary actions per employee, days of absenteeism per employee, and days lost because of work accidents per employee, was also included in the estimates to test the influence of work climate.
Statistical analysis shows that all dimensions have positive and statistically significant links with productivity. None of the factors has a significant impact on production costs or on profitability. Finally, a poor workplace climate is associated significantly in all estimates with lower productivity and higher production costs as expected. The net effect of this variable on profitability is negative although not significantly. This study reveals that IR features have a significant impact on organizational performance.
The results suggest that the HRM-IR practices system and workplace climate represent more adequate and precise indicators of the IR system at the establishment level than do for instance, union presence or individual practices. In accordance with the configurational approach, the results confirm that the most substantial effect on performance is obtained when practices are considered as a system. This implies that there is no “magic bullet,” no single practice that can achieve the same kind of results. Other results suggest, based on the age of the practices implemented, that costs associated with the IR-HRM practices can be written off over time. The implication is that there is a delay before the practices achieve the desired outcomes and one must be patient before judging the value of the practices implemented. The research also suggests that the workplace climate is a determinant of the economic performance. So climate should also be considered when practitioners are looking for ways to improve their organization’s performance. The results show finally that more than one dimension of firm performance should be considered in order to understand how HRM and IR do influence the firm performance. It remains necessary to continue the research with larger data banks, collected over a longer time period, and to study other industries and individual cases in order to corroborate our original contribution to this complex but important question.
JEL Classification: J53, M12
Date posted: September 1, 2010