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Employment Contract for Temporary Worker document sample
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Exporting Firms and Employment
of Temporary Workers: Human
Capital and Firing Costs
30 January 2011
Toshihiro Ichida (Waseda University)
Toshiyuki Matsuura (Keio University)
Introduction
• The rise in temporary worker employment
share in Japan: 25% (1999)⇒ 35% (2008)
• Job losses after the Lehman shock (2008)
hit harder for temporary workers than the
regular workers.
20.0% Growth rate of GDP and Exports
15.0% 13.9%
10.0% 9.2% 9.7% 8.4%
7.0%
5.0%
2.7% 1.9% 2.0% 2.4%
1.4% 1.6%
0.0% -1.2%
-5.0% -5.2%
-10.0% GDP growth rate
Export
-15.0%
-20.0%
-25.0% -23.9%
-30.0%
2003 2004 2005 2006 2007 2008 2009
Source: System of National Account (Cabinet Office, Japan)
• Japanese GDP fell after the Lehman shock.
• The decline of exports was the main culprit for negative growth.
5.0%
Growth rate of number of worker by employment staus
4.4%
4.0% Regular worker Non-regular worker
4.0% 3.7%
3.3%
3.0% 2.7%
2.0% 1.6%
1.1%
0.9%
1.0%
0.0%
-1.0% -0.6%
-1.0% -1.1%
-1.3% -1.2%
-2.0%
-2.2%
-3.0%
2003 2004 2005 2006 2007 2008 2009
Source: Labor Force Survey (Ministry of Health and Labor, Japan)
• Non-regular worker employment (temporary workers) had increased
for the period between 2003-2008.
• After the recession hits in 2008, the decline of non-regular workers exceeds
that of regular workers.
Research Questions
• Why did the Japanese firms increased the
ratio of temporary workers recently?
• What is the trade-off between regular and
temporary worker employments?
• How did globalization (exporting behavior)
of firms contributed to the increase in
temporary worker employment?
Research Questions
• Which industry do firms hire larger
proportion of temporary workers?
• What characteristics of firms do contribute
to the differences in the ratio of temporary
workers?
• Do exporting firms tend to hire smaller or
larger share of temporary workers?
Trade-offs
Regular (permanent Non-regular (temporary
contract) workers contract) workers
• costly to fire (legal • cheaper to fire (just
costs and reputation) terminate the contract)
• to make investment in • firms have a smaller
human capital (higher incentive to train
skill levels) worker skills
Trade-offs: Pros and Cons
Regular (permanent Non-regular (temporary
contract) workers contract) workers
• higher skill levels • easier to adjust output
levels
• higher cost of firing • the firms cannot
workers in case the expect high skill levels
firms must adjust from temporary
output workers
Globalization and temporary
employment: Employer’s view
• Globalization ⇒ harder international
competition ⇒ need to have flexible
management of labor cost in order for the
firms to survive
(Nippon Keidanren of Japan, May 2004)
http://www.keidanren.or.jp/japanese/policy/
2004/041/honbun.html
Today’s Index
• Introduction (done)
• Literature
• Theoretical model
• Empirical Analysis
• Conclusion
Literature
• Lots of studies about temporary
employment in Labor Economics (Ono-
Sullivan 2010, Ariga et al 2008, Genda
2008a,b, Kanbayashi-Ariga 2008, Chuma-
Higuchi 1995, etc.)
• Almost none looking at the relationship
between globalization and temporary
worker employment.
Related Literature
• Labor market flexibility and trade: Cuñat
and Melitz (2010), Helpman, Itskhoki and
Redding (2009, 2010), Helpman and
Itskhoki (2009)
• Firing costs: Saint-Paul (1997), Haaland
and Wooton (2007)
• Theoretical framework of heterogeneous
firms: Melitz (2003) model and its multi-
industry version by Kamata (2010)
Theoretical model
• 2 period model (many period model)
• human capital investment by regular
(permanent) workers
• Melitz heterogeneous firms model
• Kamata’s (2010) multi-industry version
with two factors of production
Consumers-Workers
• 1 unit of labor (endowment)
• hired as a temporary worker or a (regular)
permanent worker
• A permanent worker must make a human
capital investment effort at level e > 0 in
period 1 and work as a skilled labor in
period 2.
• A temporary worker work as unskilled
labor in both periods.
Preferences
• Two-tier utility function
U (W , e) u ( P,W ) v(e)
where v' () 0, v' ' () 0, and v(0) 0
• 1st term is the indirect utility function from Cobb-
Douglas form
u ( P, W ) max C i
i such that Pi Ci W
where i 1 and P (P , P2 ,..., PN )
1
The composite goods
• Ci is a composite good in the sector i.
• This composite good is a combination of
varieties within the sector i.
1
Ci q d
i
• From here, we can derive the price index
1
Pi 1
pi , d 1
, σ
1
1
i
1
Participation Constraint
• Ex ante, all workers are identical and
must be indifferent between becoming
temporary and permanent workers.
U (W1R , e) E U (W2R ,0) U (W1T ,0) E U (W2T ,0)
1 is a discount factor
Incentive Compatibility Constraint
• Permanent workers must undertake
human capital investment effort.
U (W , e) E U (W ,0) U (W ,0) E U (W ,0)
1
R
2
R
1
R
2
T
Industrial Technology
• Industry level technology is assumed to
be the one of Cobb-Douglas.
i 1 i
Hi Li
qi
1
i i
where qi is output in sector i
H is the amount of skilled labor in sector i
L is the amount of unskilled labor in sector i
Ranking of the industry
• We rank the industry by the order of skill
intensity.
• The higher the number of industry index,
the higher the skill intensity becomes.
1 2 ...... N
Firms within the industry
• A firm pays sunk entry cost fe to know φ.
• Production cost for the firm in the industry i
qi i 1 i
i , f i ( s) ( w )
i ,
where s is the wagerate for skilled labor
and w is the wagerate for unskilled labor
f i is a domestic production fixed cost
i , is productivity draw for thefirm
The demand function
• A firm faces another demand uncertainty
pi,
Di , i , iY
Pi
where i , is a demand shock
Di , is the demand for thefirm
and Y is the GDP of this country
Exporting by productive firms
export fixed cost f Xi ( s ) i ( w)1 i
and the variable cost is an iceberg form
1
only a portion of the shipped quantity
arrives at the destination. ( 1)
The optimal pricing is standard:
( s ) i ( w)1 i
pi , (i , ) for domestic market
i ,
( s ) ( w)1
i i
p Xi, (i , ) for export market
i ,
The demand function for exports
• A firm faces another export uncertainty
p
i ,
D Xi , Xi , iY *
Pi
where Xi , is the demand shock in exports
D Xi , is the export demand for thefirm
and Y * is the GDP of the destination country
Demand shocks θ
• We posit that the demand shock is larger
for the exporting than the domestic
production.
• For simplicity, assume that θ is uniformly
distributed around the mean 1.
• The support of the distribution is
[1 i ,1 i ] for θi
[1 iX ,1 iX ] for θiX Assume i iX 1
Demand shocks θ
• Variance is larger for the exports than the
domestic production:
2 2
i iX
Var i Var iX
3 3
Firm’s decision to hire m and n
• A firm hires both permanent workers
(m) and temporary workers (n)
m i , is the number of permanent workers hired
ni , is the number of temporary workers hired
i , is the productivity draw for the firm
Production by the firm
• In two period model, the endowment of skilled
and unskilled workers is determined as follows:
Endowment of skilled workersH ,t ,t m ,t 1
Endowment of unskilled workersL ,t m ,t n ,t
,t (0,1]is the fraction of permanent workerskept by the firm
1 ,t is the fraction of workerswho must be let go
,t depends on the realizatio n of demand shock
1 is the increasein productivity human capital effort
Firing of the permanent workers
• If g ≥ 0 is the firing cost per worker, then
the total cost from period 1 and 2 will be
TC W1R1 m ,1 W1T n ,1 W1R 2 H ,1
E W1R1 m , 2 W1T n , 2 W2R 2 H , 2 g (1 , 2 )m ,1
where g (1 , 2 ) is the firing cost of the permanent
workersin period 2
If g 0, then , 2 1.
Assumption about timing
1. Firms pay entry (sunk) fixed cost to know
its productivity φ∼G(φ).
2. Firms decide to exit, or to produce
domestically, or to produce for both
domestic and export markets.
3. Firms write contracts with both upstream
and downstream about price and quantity.
4. Firms know the realized value of demand
shock θ.
5. Some firms may fire some permanent
workers by paying firing cost g.
• From Proposition 1 to 3, we assume
that the firing cost for permanent
workers is zero: g=0. Therefore, μ=1.
Proposition 1
When g=0, then the followings hold true.
• The optimal ratio of permanent and
temporary workers differs across industry.
• The higher the index number (the larger
the βi ) is, the higher the ratio is.
• Skill intensive industry tends to hire larger
proportion of permanent workers.
Assumptions
• This country is skill abundant.
• Trade partner is unskilled labor abundant.
• This country has comparative advantage
in the higher index number industries, i.e.,
the industries with larger βi .
Proposition 2 : Kamata (2010)
When g=0, then the followings hold true.
• This country has larger shares of
exporting firms for industries in which
the country has a comparative
advantage.
• The industry with higher βi has higher
share of exports.
Proposition 3
• There must be a negative correlation
between the ratio of temporal worker
employment (versus permanent worker
employment) and the ratio of exports within
the total production of the industry. The
higher the index number is, the proportion of
regular permanent workers is larger (the
proportion of temporary workers is smaller),
and the higher the percentage of exports
within the total production.
Figure 3 Temporary worker ratio and
Export ratio by Industry in year 2006
0.6
0.5
Temporary worker ratio
0.4
0.3
0.2
0.1
0
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16
Export ratio
Source: Authors' calculation from the Census of Manufacturer
• For Propositions 4 and 5, we
assume that the firing cost for
permanent workers is positive: g>0.
Therefore, we should have μ<1.
Lemma
• The larger the volatility (of the firm) is, the
larger the number of fired permanent
workers in the equilibrium.
• In order to minimize total cost, the firms
with larger volatility tends to reduce the
number of permanent workers compared
to the case of g=0.
• Therefore, high var(θ) implies low value
of μ.
Proposition 4
• When g>0, the more productive firms
(hence the firms with higher exporting
ratio) tend to reduce the amount of
permanent workers compared to the case
with g=0.
Proposition 5
• When exports increase in the industry
(due to increase in Y*, or reduction of
trade cost τ, or positive demand shock for
export goods, and so on), the exporting
firms tend to reduce the amount of
permanent workers compared to the case
with g=0. Hence, we should observe
higher ratio of temporary workers.
Figure 4
Changes in temporary worker ratio and the level of Export ratio by Industry
12.0%
10.0%
Changes in temporary worker ratio
8.0%
6.0%
4.0%
2.0%
Basic Organic Chemical
0.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Export share in 2006
Source: Authors' calculation from the Census of Manufacturer
Data Overview
• Data source
– Plant level individual data from Census of
Manufacturer (Ministry of Economy, Trade
and Industry of Japan)
– Sample periods: 2001-2006
– Temporary worker ≡ the sum of part-timers,
temporary help-service workers dispatched
from other companies and day laborers.
Table 1
Export ratio by industry
2001 2002 2003 2004 2005 2006
3 Food products and beverages 0.0% 0.0% 0.0% 0.1% 0.0% 0.1%
4 Textiles 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
5 Pulp ,paper and paper products 0.1% 0.1% 0.2% 0.2% 0.2% 0.2%
6 Chemicals 1.9% 1.9% 2.1% 2.2% 2.3% 2.5%
7 Petroleum and coal products 0.3% 0.4% 0.3% 0.4% 0.5% 0.6%
8 Non-metallic mineral products 0.3% 0.3% 0.3% 0.3% 0.3% 0.4%
9 Basic metal 0.5% 0.5% 0.6% 0.6% 0.6% 0.6%
10 Fabricated metal products 0.1% 0.2% 0.2% 0.2% 0.2% 0.2%
11 Machinery 0.8% 0.9% 1.0% 1.0% 1.1% 1.2%
12 Electrical machinery ,equipment and supplies 1.2% 1.3% 1.4% 1.4% 1.5% 1.7%
13 Transport equipment 0.7% 0.9% 0.9% 1.0% 1.0% 1.1%
14 Precision instruments 1.2% 1.5% 1.9% 2.0% 2.0% 2.2%
15 Others 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Source: Authors' calculation from the Census of Manufacturer
• Chemicals and Machinery and Equipment sectors have higher export ratio.
• The ratios for those sectors has been increasing.
Table 2
Temporary worker ratio by industry
Temporary worker ratio 2001 2002 2003 2004 2005 2006
3 Food products and beverages 45.8% 47.5% 48.3% 48.8% 49.3% 49.5%
4 Textiles 23.9% 25.5% 26.3% 27.1% 27.6% 28.2%
5 Pulp ,paper and paper products 18.8% 19.9% 20.9% 21.5% 22.2% 22.5%
6 Chemicals 14.3% 14.8% 15.9% 17.1% 17.7% 18.9%
7 Petroleum and coal products 8.3% 8.7% 9.7% 9.9% 10.0% 10.3%
8 Non-metallic mineral products 12.6% 14.0% 15.4% 17.0% 18.1% 19.1%
9 Basic metal 10.2% 11.3% 13.0% 14.2% 15.4% 16.9%
10 Fabricated metal products 16.1% 16.9% 18.5% 19.7% 20.3% 21.3%
11 Machinery 11.3% 12.0% 13.3% 15.3% 16.1% 17.2%
12 Electrical machinery ,equipment and supplies 18.4% 20.7% 22.8% 23.3% 23.8% 26.4%
13 Transport equipment 12.3% 14.1% 15.5% 17.9% 19.5% 20.7%
14 Precision instruments 17.8% 19.2% 21.3% 22.0% 22.8% 24.2%
15 Others 20.3% 21.6% 22.9% 23.8% 24.5% 25.0%
Source: Authors' calculation from the Census of Manufacturer
• Food products and Textiles have higher temporary worker ratio.
• If we look at the changes (growth rate) in the temporary worker ratio,
the ratio for Electrical machinery and transport equipment substantially
increased and its difference (growth) amounts to 8%.
Sample selection
• We focus on Machinery and Equipment
(General Machinery, Electrical Machinery,
Transportation Equipment and Precision
Instrument)
– Both export ratio and temporary worker ratio
increased for these sectors.
• We highlight Finished-product manufacturer
– Parts and Components producers might be
affected by the foreign demand fluctuation
through Input-Output linkage.
Table 3(a)
• Comparison of temporary worker ratio and export ratio
– Comparison by level of labor productivity (LP)
Plant with low Plant with high Test of Mean
Total
LP LP difference
Temporary worker ratio 37.7% > 19.7% 27.6% ***
Changes in Temporary worker ratio 4.5% 3.4% 3.9% ***
Export ratio 0.4% < 1.8% 1.1% ***
Changes in export ratio 0.1% 0.7% 0.4% ***
Note: "***", "**", and "*" show 1%, 5% and 10% statistical significance, respectively.
• Low productivity plants hire larger proportion of temporary worker.
• Export ratio is higher for high productivity plants.
Table 4
• Table 4 Temporary worker ratio by export status
Test of Mean
Non-Exporter Exporter Total
difference
Temporary worker ratio 28.0% > 20.2% 27.6% ***
Changes in Temporary worker ratio 3.9% 4.5% 3.9%
Note: "***", "**", and "*" show 1%, 5% and 10% statistical significance, respectively.
Source: Authors' calculation from the Census of Manufacturer
• Temporary worker ratio is higher for no-exporting plants.
• No significant difference in changes in the ratio between exporters
and non-exporters.
Table 5
Decomposition of changes in temporary worker ratio
(1) (2) (3) (4)
Temporary worker Finished Temporary Finished
Overall M&E Overall M&E
ratio Products worker ratio Products
2001 7.8% 6.2% 2001 7.8% 6.2%
2006 12.1% 9.0% 2006 12.1% 9.0%
Difference 4.3% 2.8% Difference 4.3% 2.8%
within effect 2.6% 1.9% within effect 2.6% 1.9%
by non-exporters 1.9% 1.0% by small plants 0.6% 0.3%
by exporters 0.7% 0.9% by large plants 2.0% 1.6%
between effect 0.4% -0.1% between effect 0.4% -0.1%
by non-exporters 0.4% -0.2% by small plants 0.3% 0.0%
by exporters 0.0% 0.0% by large plants 0.1% -0.1%
cross effect 1.3% 1.0% cross effect 1.3% 1.0%
by non-exporters 1.0% 0.8% by small plants 0.4% 0.2%
by exporters 0.3% 0.2% by large plants 0.8% 0.8%
Source: Authors' calculation from the Census of Manufacturer
Notes
1) Exporters are defined as those plants who have engaged in export at t-1.
2) Plants with less than 100 employees are regareded as small plants.
Table 5
Decomposition of changes in temporary worker ratio
(1) (2) (3) (4)
Temporary worker Finished Temporary Finished
Overall M&E Overall M&E
ratio Products worker ratio Products
2001 7.8% 6.2% 2001 7.8% 6.2%
2006 12.1% 9.0% 2006 12.1% 9.0%
Difference 4.3% 2.8% Difference 4.3% 2.8%
within effect 2.6% 1.9% within effect 2.6% 1.9%
by non-exporters 1.9% 1.0% by small plants 0.6% 0.3%
by exporters 0.7% 0.9% by large plants 2.0% 1.6%
between effect 0.4% -0.1% between effect 0.4% -0.1%
by non-exporters 0.4% -0.2% by small plants 0.3% 0.0%
by exporters 0.0% 0.0% by large plants 0.1% -0.1%
cross effect 1.3% 1.0% cross effect 1.3% 1.0%
by non-exporters 1.0% 0.8% by small plants 0.4% 0.2%
by exporters 0.3% 0.2% by large plants 0.8% 0.8%
Source: Authors' calculation from the Census of Manufacturer
• Large part of industry-level changes is explained by within effect.
Notes
1) Exporters are defined as those plants who have engaged in export at t-1.
2) • Contribution of exporters or large plants become larger when we
Plants with less than 100 employees are regareded as small plants.
focus on Finished Products Machinery and Equipment sectors. Plant
size as well as exporting status might be important factor.
Table 6
Result of Simple Regression Analysis
(1) (2) (3) (4)
Finished Finished Finished
Overall M&E
Products M&E Products M&E Products M&E
Scale 0.003 -0.004 -0.015 -0.004
[3.76]*** [-1.61] [-9.34]*** [-1.71]*
Labor Productivity 0.016 0.011 0.003 0.011
[11.99]*** [3.15]*** [1.16] [3.13]***
Export_share -0.051 0.040 -0.025 0.136
[-3.13]*** [1.09] [-2.25]** [1.32]
Change in Export Share -0.012 0.002 0.131 -0.363
[-0.77] [0.05] [9.16]*** [-3.30]***
Scale * Export Share -0.020
[-1.11]
Scale * Change in Export Share 0.081
[3.62]***
Constant -0.075 -0.025 0.117 -0.024
[-8.91]*** [-1.13] [6.39]*** [-1.07]
Estimation Method OLS OLS WLS OLS
R2 0.012 0.007 0.066 0.011
N 37,622 4,777 4,777 4,777
Note: t-values are in parentheses.
"***", "**", and "*" show 1%, 5% and 10% statistical significance, respectively.
Results from data
• If we focus on the data for final goods
producers in Machinery and Equipment
sectors, the temporary worker ratio has
increased for larger plants with the recent
increase in exportation.
Conclusion
• We looked at the multi-industry version of
the heterogeneous firms model where
firms hire both permanent and temporary
employees.
• Skill intensive industry tends to hire larger
portion of permanent workers.
• Therefore, skill-abundant country (Japan)
observes negative correlation between
export ratio and temporary worker ratio.
Conclusion
• If we look closely about firms within a
particular industry, the larger firms (hence
higher productivity) tend to export more,
and tend to increase the number of
temporary worker employment.
• This is probably because there is a firing
cost if the firms must adjust output levels
by reducing permanent workers.
