Work Flexibility and Firm Growth

In the last decades, work flexibility emerged as a key requirement firms must meet to face volatile markets and highly differentiated product demand. This paper compares two alternative approaches to strengthen work flexibility: internal flexibility, i.e. practices that focus on the employees’ ability to perform a variety of highly qualified tasks in a context of stable employment relationships; and external flexibility, i.e. practices that align employment and labour costs to demand fluctuations using a buffer of non-standard employees involved in routine tasks. We empirically verify whether both practices are able to boost sales growth using a linked employer-employee panel of manufacturing firms from the Emilia-Romagna region (Italy). While internal flexibility positively affects firm growth, external flexibility appears to hamper it. Such a negative effect, however, decreases when we limit the analysis to industries with high demand volatility and cost-based competition. The related managerial and policy implications are discussed.