The Dynamics of Informality: Employment Relations in Small Firms and the Effects of Regulatory Change

Abstract

This paper addresses two related issues: the effect of the 'regulatory shock' of the National Minimum Wage on small firms and the consequent effects on the commonly observed practice of 'informality' . It draws on a survey of such firms but primarily uses case study evidence from five firms to examine the processes at work. Detailed case studies of such firms remain rare, and they tend to analyse a largely unchanging world. We show how patterns of informality change over time. The regulatory shock had varying effects, as some firms moved up-market and others were pressed to the edges of the legitimate market and in some cases out of business altogether. In the firms moving up-market, informality was redefined into a more disciplined and formalised approach, while those going down-market relied even more heavily on family and other ties to survive. The NMW led to some improved wages, though there was also evasion, and it has sharpened the divide between the legitimate and illicit areas of business.

Are the HR responses of small firms different from large firms in times of recession?

“…Informal workplace relations have been defined as "a process of workforce engagement, collective and/or individual, based mainly on unwritten customs and tacit understandings that arise out of the interactions of the parties at work" (Ram et al, 2001: 846), and that the close working proximity and mutual dependence of employer and employees encourages informal accommodation and flexibility. Again, this rejects a unitarist view of workplace relations, and suggests the need for some regulation of employment, and the accommodation of sometimes competing stakeholder interests to achieve a 'negotiated order' (Ram, 1994). Informality may be the result of management preference or experiences of what has worked in the past, indifference or even a dislike of more formal HRM, believed to be at odds with entrepreneurial firms.…”

Informality and Formality in Medium‐sized Companies: Contestation and Synchronization

“…Rainnie (1989) argued that labour management in small firms is largely determined by the market, as managers are constrained by the competitive environment in which they are marginal price takers. This notion of market determinism has been repeatedly challenged (Edwards and Ram, 2006;Moule, 1998;Ram, 1994;Ram and Edwards, 2003;Ram et al, 2001) by findings and analysis that suggest there is an uncertain interaction between market forces and the internal social relations of production leading to a more negotiated employment relationship. Gilman et al (2002, Q5 p. 54) summarize this succinctly: 'the whip of the market is likely to be mediated by employee skill, scarcity value and the extent to which there are fraternal or familial relationships within a firm'.…”

“…Gilman et al, 2002;Marlow, Patton and Ram, 2005;Moule, 1998;Ram, 1994;Ram and Edwards, 2003;Ram et al, 2001;Wilkinson, 1999). It is said to represent 'a key exemplar of analytical advance [where] research has made empirical and analytical progress' (Ram and Edwards, 2003, p. 719).…”

A Burden on Business? Reviewing the Evidence Base on Regulation and Small-Business Performance

“…Qualitative studies provide greater detail of these causal processes and are more sensitive to the specific content of regulations, owner-managers' awareness and adjustments, and the business context. further adaptations to business practice; raising product prices; reducing employment, workers' hours and work intensification; cuts in training and non-pay benefits; product and process innovations; or by choosing not to comply (Bullock et al 2000(Bullock et al , 2001Ram et al 2001Ram et al , 2003Gray 2001, 2004;Gilman et al 2002;Lucas and Langlois 2003; and other employment regulations, that the law often exerts only a limited impact on small business owners' decision-making and business competitiveness. Most were able to adapt to regulatory change with limited disruption to existing practice either because the cost increases imposed by regulation were minimal, or because the firm's product market position and 'informal' workplace relationships enabled cost increases to be absorbed or passed on to customers as higher prices without serious problems.…”