Employment reconfiguration during exogenous shocks: evidence from COVID-19

Despite the increasing prevalence of freelancers in the workforce on a global scale, there is a dearth of research examining why and how firms change their human resource composition, especially during exogenous shocks. Our research aims to fill this gap by examining how firms reconfigure their human resources in response to the COVID-19 shock. We argue and show that firms, which are severely affected by the Pandemic, are more likely to (1) downsize (2) hire more freelancers, and (3) replace laid off permanent employees with freelancers. These strategic actions would allow firms to obtain much needed strategic flexibility (a) by reducing adjustment costs related to human resources, (b) building organizational resilience, and (c) rapid redeployment of resources. We test our hypotheses using survey data obtained from 1177 Danish SMEs during the COVID-19 Pandemic. To alleviate concerns regarding endogeneity, we use coarsened exact matching techniques to compare firms that were more (or less) affected by the crisis. We contribute to the literature on human resource management by combining ideas on employment externalization and strategic repositioning. We also contribute to the nascent research on strategic responses to crises, and provide a novel explanation of why firms might be inclined to externalize.