Exporting Firms and Employment of Temporary

Exporting Firms and Employment
of Temporary Workers: Human
Capital and Firing Costs
1 October 2015
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.
Growth rate of GDP and Exports
20.0%
15.0%
10.0%
13.9%
9.2%
5.0%
0.0%
1.4%
7.0%
2.7%
1.9%
9.7%
8.4%
2.0%
2.4%
1.6%
-1.2%
-5.0%
-5.2%
GDP growth rate
Export
-10.0%
-15.0%
-20.0%
-23.9%
-25.0%
-30.0%
2003
2004
2005
2006
2007
2008
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.
2009
5.0%
4.0%
Growth rate of number of worker by employment staus
4.4%
3.7%
Regular worker
4.0%
Non-regular worker
3.3%
2.7%
3.0%
2.0%
1.6%
1.1%
1.0%
0.9%
0.0%
-0.6%
-1.0%
-2.0%
-1.3%
-1.0%
-1.1%
-1.2%
-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
contract) workers
• costly to fire (legal
costs and reputation)
• to make investment in
human capital (higher
skill levels)
Non-regular (temporary
contract) workers
• cheaper to fire (just
terminate the contract)
• firms have a smaller
incentive to train
worker skills
Trade-offs: Pros and Cons
Regular (permanent
contract) workers
• higher skill levels
Non-regular (temporary
contract) workers
• easier to adjust output
levels
• higher cost of firing
workers in case the
firms must adjust
output
• the firms cannot
expect high skill levels
from temporary
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 (OnoSullivan 2010, Ariga et al 2008, Genda
2008a,b, Kanbayashi-Ariga 2008, ChumaHiguchi 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 multiindustry 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 CobbDouglas form

u ( P,W )  max  Ci
i
such that Pi Ci  W
where   i  1 and P  (P1 , P2 ,...,PN )

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
Pi   
pi1, d 
  i

1
1
1
, σ
1
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)
R
1
R
2
R
1
T
2

Industrial Technology
• Industry level technology is assumed to
be the one of Cobb-Douglas.
 Hi 
qi   
 i 
i
1  i
 Li 


 1  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 wage ratefor skilled labor
and w is the wage ratefor unskilled labor
f i is a domesticproductionfixed cost
i , is productivity draw for thefirm
The demand function
• A firm faces another demand uncertainty
 pi, 
Di ,   i ,  
   iY
P
 i 
where i , is a demandshock
Di , is thedemandfor thefirm
andY is theGDP of thiscountry
Exporting by productive firms
exportfixed cost  f Xi  ( s ) i ( w)1 i
and the variablecost is an iceberg form
1
only a portion of theshipped quantity

arrivesat thedestination. (  1)
T heoptimalpricingis standard:
( s) i ( w)1 i
pi , (i , ) 
for domesticmarket
  i ,
  ( s)  ( w)1 
p Xi, (i , ) 
for exportmarket
  i ,
i
i
The demand function for exports
• A firm faces another export uncertainty

i ,
  p 
DXi ,   Xi ,  
   iY *
 Pi 
where Xi , is thedemandshock in exports
DXi , is theexportdemandfor thefirm
andY * is theGDP of thedestination 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:
Var  i   Var  iX  
i
2
3

 iX
3
2
Firm’s decision to hire m and n
• A firm hires both permanent workers
(m) and temporary workers (n)
m i , is thenumber of permanentworkershired
ni , is thenumber of temporaryworkershired
i , is theproductivity draw for t hefirm
Production by the firm
• In two period model, the endowment of skilled
and unskilled workers is determined as follows:
Endowmentof skilled workersH ,t     ,t  m ,t 1
Endowmentof unskilled workersL ,t  m ,t  n ,t
 ,t  (0,1]is thefractionof permanentworkerskept by thefirm
1   ,t is thefractionof workerswho must be let go
 ,t dependson therealization of demandshock
  1 is theincreasein productivity human capitaleffort
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 thefiringcost of thepermanent
workersin period2
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
Temporary worker ratio
0.5
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%
Changes in temporary worker ratio
10.0%
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%
Export share in 2006
Source: Authors' calculation from the Census of Manufacturer
16.0%
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
3
4
5
6
7
8
9
10
11
12
13
14
15
Food products and beverages
Textiles
Pulp ,paper and paper products
Chemicals
Petroleum and coal products
Non-metallic mineral products
Basic metal
Fabricated metal products
Machinery
Electrical machinery ,equipment and supplies
Transport equipment
Precision instruments
Others
2001
0.0%
0.1%
0.1%
1.9%
0.3%
0.3%
0.5%
0.1%
0.8%
1.2%
0.7%
1.2%
0.2%
2002
0.0%
0.1%
0.1%
1.9%
0.4%
0.3%
0.5%
0.2%
0.9%
1.3%
0.9%
1.5%
0.2%
2003
0.0%
0.1%
0.2%
2.1%
0.3%
0.3%
0.6%
0.2%
1.0%
1.4%
0.9%
1.9%
0.2%
2004
0.1%
0.1%
0.2%
2.2%
0.4%
0.3%
0.6%
0.2%
1.0%
1.4%
1.0%
2.0%
0.2%
2005
0.0%
0.1%
0.2%
2.3%
0.5%
0.3%
0.6%
0.2%
1.1%
1.5%
1.0%
2.0%
0.2%
2006
0.1%
0.1%
0.2%
2.5%
0.6%
0.4%
0.6%
0.2%
1.2%
1.7%
1.1%
2.2%
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
3
4
5
6
7
8
9
10
11
12
13
14
15
Temporary worker ratio
Food products and beverages
Textiles
Pulp ,paper and paper products
Chemicals
Petroleum and coal products
Non-metallic mineral products
Basic metal
Fabricated metal products
Machinery
Electrical machinery ,equipment and supplies
Transport equipment
Precision instruments
Others
2001
45.8%
23.9%
18.8%
14.3%
8.3%
12.6%
10.2%
16.1%
11.3%
18.4%
12.3%
17.8%
20.3%
2002
47.5%
25.5%
19.9%
14.8%
8.7%
14.0%
11.3%
16.9%
12.0%
20.7%
14.1%
19.2%
21.6%
2003
48.3%
26.3%
20.9%
15.9%
9.7%
15.4%
13.0%
18.5%
13.3%
22.8%
15.5%
21.3%
22.9%
2004
48.8%
27.1%
21.5%
17.1%
9.9%
17.0%
14.2%
19.7%
15.3%
23.3%
17.9%
22.0%
23.8%
2005
49.3%
27.6%
22.2%
17.7%
10.0%
18.1%
15.4%
20.3%
16.1%
23.8%
19.5%
22.8%
24.5%
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%.
2006
49.5%
28.2%
22.5%
18.9%
10.3%
19.1%
16.9%
21.3%
17.2%
26.4%
20.7%
24.2%
25.0%
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
Total
LP
LP
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.
Test of Mean
difference
***
***
***
***
Table 4
• Table 4 Temporary worker ratio by export status
Non-Exporter
Exporter
Total
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
Test of Mean
difference
***
• 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)
Temporary worker
Temporary
Finished
Overall M&E
Overall M&E
ratio
worker ratio
Products
2001
7.8%
6.2%
2001
7.8%
2006
12.1%
9.0%
2006
12.1%
Difference
4.3%
2.8%
Difference
4.3%
within effect
2.6%
1.9%
within effect
2.6%
by non-exporters
1.9%
1.0%
by small plants
0.6%
by exporters
0.7%
0.9%
by large plants
2.0%
between effect
0.4%
-0.1%
between effect
0.4%
by non-exporters
0.4%
-0.2%
by small plants
0.3%
by exporters
0.0%
0.0%
by large plants
0.1%
cross effect
1.3%
1.0%
cross effect
1.3%
by non-exporters
1.0%
0.8%
by small plants
0.4%
by exporters
0.3%
0.2%
by large plants
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.
(4)
Finished
Products
6.2%
9.0%
2.8%
1.9%
0.3%
1.6%
-0.1%
0.0%
-0.1%
1.0%
0.2%
0.8%
Table 5
Decomposition of changes in temporary worker ratio
(1)
(2)
(3)
(4)
Temporary worker
Temporary
Finished
Finished
Overall M&E
Overall M&E
ratio
worker ratio
Products
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.
Contribution
exporters
plants
become
2) •Plants
with less thanof100
employees or
are large
regareded
as small
plants. larger when we
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)
Scale
Labor Productivity
Export_share
Change in Export Share
Scale * Export Share
Scale * Change in Export Share
Constant
(2)
(3)
(4)
Finished
Finished
Finished
Overall M&E
Products M&E Products M&E Products M&E
0.003
-0.004
-0.015
-0.004
[3.76]***
[-1.61]
[-9.34]***
[-1.71]*
0.016
0.011
0.003
0.011
[11.99]***
[3.15]***
[1.16]
[3.13]***
-0.051
0.040
-0.025
0.136
[-3.13]***
[1.09]
[-2.25]**
[1.32]
-0.012
0.002
0.131
-0.363
[-0.77]
[0.05]
[9.16]***
[-3.30]***
-0.020
[-1.11]
0.081
[3.62]***
-0.075
-0.025
0.117
-0.024
[-8.91]***
[-1.13]
[6.39]***
[-1.07]
OLS
OLS
WLS
OLS
0.012
0.007
0.066
0.011
37,622
4,777
4,777
4,777
Estimation Method
R2
N
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.

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