The impact of Private Equity on employment, wages and human resources management
The impact of private equity backed leveraged buyouts (LBOs) has attracted increased regulatory scrutiny in the past two decades. Private equity’s growing presence in continental Europe in particular has caused considerable controversy. This paper explores the impact of private equity LBOs on three labour management issues central to recent debates: employment and wages; human resource management practices; and industrial relations.
For several years a concerted campaign by the Party of European Socialists in the European Parliament and the European Trade Union Confederation (ETUC) led to increased regulation of alternative investment funds, including private equity. Some European politicians and labour unions argue that private equity takes a short-term approach to corporate ownership and increased regulation is required of an industry portrayed unfavourably as 'locusts', 'asset-strippers' and 'parasites'. These attacks form part of a broader concern that a new era of financial capitalism threatens employment and social protection in the European social model in particular. As increased regulatory scrutiny and the financial crisis in 2008 raised the stakes for both investors and critics of the private equity industry, new legislation was introduced in Europe and the US. The European Commission's Alternative Investment Fund Managers' Directive (AIFM) came into force in July 2011 with transposition by member states by July 2013. In the US, the Wall Street Reform Act & Consumer Protection Act 2010 required Securities and Exchange Commission registration for private equity firms.
This paper explores the impact of private equity LBOs on three labour management issues central to recent debates: employment and wages; human resource management practices; and industrial relations. We concentrate on these aspects because the impact of private equity LBOs on labour management and workers' interests continues to inform debates concerning the appropriate regulatory framework in which the private equity industry operates. Unless a cost-benefit analysis informs this regulatory framework, poorly-designed legislation may fail to protect workers' interests and hinder economic recovery and growth by favoring potentially less efficient organisational forms.
Both sides of the debate have cited cases to support their arguments. As there is no reason to suggest that examples from the private equity industry are any more objective than those from the unions, we draw on evidence from a wide variety of systematic prior empirical studies to assess the overall impact of LBOs, the heterogeneity of private equity deals, and the varied effects in different business and national contexts. In addition, we contrast labour management in private equity LBOs with labour management under alternative forms of ownership.
The paper makes the following contributions. We develop a framework to analyse the labour management aspects of private equity LBOs, emphasising the impact of long and short term ownership and whether increasing value involves efficiencies or growth. We show that the effects may vary between buyout types and it is inappropriate to regard most private equity LBOs as a zero-sum game with value transferred to shareholders at workers' expense. Our conclusions are that further regulation of private equity in favour of alternative forms of ownership such as managerial capitalism will not necessarily advance workers' interests. In so doing, we reflect briefly on the relationships between financial markets, firms and workers in the 21st Century.
A version of this paper appeared in Academy of Management Persepectives. The full article can be downloaded at the link below.