marco malgarini (istat) massimo mancini (istat) lia pacelli (university of turin and lrr) temporary...

Marco Malgarini (ISTAT)

MASSIMO MANCINI (ISTAT)

Lia Pacelli (UNIVERSITY OF TURIN AND LRR)

Temporary contracts and innovative investments: are they substitute or complements at the firm level?

ISTAT, Roma, 20-21NOvember, 2011

OUTLINE

Istat, Rome, 21-22 November, 2011

• Aim• Background• Data• Empirical Strategy• Results

AIM

• Offer a contribution to the debate on labour market flexibility (i.e. temporary contracts) and its relationship with innovation (at a firm level)

• providing new insights on complementarity or substitutability• different kinds of labour contracts

(more or less flexible).• between different kinds of investment

(more or less innovative) Are innovative investments inside the

firm accompanied by a specific kind of workforce?

Which are the factors underlying investment and hiring decisions?


Background

Flexibility debate:

Positive effect of flexible labour on firm performance due to a decrease in labour cost and an increased ability to innovate and compete on the global markets.

Negative effect of deregulation of the labour market due to a decrease in investment in human capital and hence performance and competitiveness in the longer run.


Background

Large part of the economic literature in the ‘90s and early 2000’s states that LM flexibility (i.e. temporary contracts), allows firms to adapt more rapidly to fluctuations of demand, increasing marginal efficiency and determining productivity gains via a reduction of labour hoarding.

The human resource managerial literature challenged this vision (Hailey, 2001 for a survey), underlying that a high turnover of employees hinders the development of new ideas and hence of innovation.


Background

From an empirical point of view, evidence on the relationship between flexible contracts and (labour or total) productivity is rather mixed.

On the other hand, the relationship

between innovation and productivity is a well established, positive one.


Background

If flexible contracts are found to be positively related with innovative investment, they may also be considered to be productivity-enhancing. And viceversa.

Is this a stable relationship? Does it change with the business cycle (or the crisis)?


Our contribution

To investigate the Innovative Investment-type of contract and effect of firm characteristics on investment and hiring decision…

… We estimate a recursive mixed-process model postulating a chronological ordering in the decisions to invest and to hire at the firm level.


Data

Business tendency surveys generally collect entrepreneurs’ and managers’ opinions on current trends and expectations for the near future, regarding both their own business and the general situation of the economy.

Firms are asked to report about: the current situation of a given variable their short-term forecasts on possible outcomes in

the near future (usually three months ahead).

Questions are qualitative, in the sense that firms have to report their opinions, usually choosing among three different alternatives arranged on a Linkert scale


Data

In the paper, we integrate firm-level data from the Manufacturing Confidence Survey (ISA-001) with those from the Investment Survey (ISA-002) and from the Export of the Manufacturing Sector Survey (ISA-008)

The three surveys are realized on the same panel of roughly 4,000 manufacturing firms

Starting from January 2011, the surveys are carried forward by ISTAT, in the framework of the EU-Harmonized Program of Business and Consumers Surveys

We also provide a longitudinal integration among ISA-001 survey data available on a monthly, quarterly and annual basis, the latter referred to, respectively, capacity utilization and the labor market Istat, Rome, 21-22 November, 2011

Data

The data used in the paper cover the period 2006-2010

Considering the Manufacturing Confidence Survey (ISA-001), in the paper we use: Data available on a monthly basis:

Assessments and expectations on the level of demand, production, cash availability, growth of unit labor costs (in percentage points), inventories

Data available on a quarterly basis: Plant utilization (in percentage points); obstacles to

production; working hours


Data

The manufacturing survey also contains an annual section concentrating on the labour market

The Labor Market Section (LMS) focus on the hiring behaviour of firms

It provides qualitative (and also quantitative) information

about:

Stock of workers at the end of the year Hiring Distribution of hiring and stock by type of contract (i.e. fixed

term contracts, temporary agency work, trainees …) Skills of the new entrants Recruitment channels preferred by firms Previous employment status of hired workers


Data

The Investment survey (Isa-002) provides twice a year (April and October) both quantitative and qualitative information upon: Actual amount of investment in 3 consecutive

years Its shares for substitution/rationalization/Increase

production (With new or existing products) Factors influencing the revision of investment

plans during the year

The quarterly Export activity survey ((ISA-008) contains information referred to: Export share on total turnover (in percentage points);

competitive position on national and international markets


Data description: Hiring


Type of contract 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010% all % all H % all % all H % all % all H % all % all H % all % all H

no hiring 68.1 71.4 70.8 79.7 77.0only open ended 12.0 37.7 13.5 47.3 12.9 44.1 8.2 40.4 7.3 31.7only fixed term 10.5 33.0 7.8 27.3 8.1 27.7 8.1 39.9 9.4 40.9only training 3.4 10.6 2.4 8.3 2.0 6.9 1.1 5.5 2.0 8.7only agency n.a. n.a. 1.1 3.9 1.2 4.1 0.8 4.1 1.0 4.5Open ended and fixed term 3.3 10.5 1.4 5.0 1.9 6.5 0.7 3.4 1.0 4.2Open ended and training 0.8 2.7 0.5 1.8 0.8 2.7 0.1 0.5 0.4 1.8Fixed term and training 0.8 2.4 0.4 1.4 0.6 2.0 0.3 1.6 0.1 0.4Other combinations 1.1 3.1 1.5 5.0 1.7 6.0 1.0 4.6 1.8 7.8

Data description: Investments


Investment in t No Yes No YesNo 73.5 19.7 78.4 40.8Yes 26.5 80.3 21.6 59.2

Substitution 54.2 48.3 76.9 68.2Innovative 26.0 16.4 14.5 17.6

Both 19.8 35.4 8.6 14.3

investment in t-12006 2010

Merged Dataset

We start matching the 2896 firms in the November 2006 investment survey and the 3816 firms in the December 2006 labour market survey obtaining 2700 matches.

We then match the 2700 firms to their monthly questionnaires one year before, to obtain the exogenous determinants of the above decisions (exogenous variables).


Merged Dataset

After the match with the monthly questionnaires collected in December 2005 and in January 2006 (3726 observations) we are left with 2272 firms (78.5% of the potential sample of 2896 firms). We then repeat the same for the following years.

Conditional probability of being out of the final sample is marginally higher among large firms (above 100 employees) regardless of their hiring decisions.Istat, Rome, 21-22 November, 2011

Hiring and Investment


2006Hiring No investments Substitution Innovative Both Total

No Hiring 32.3 18.9 6.8 9.5 67.5Permanent 5.1 4.7 1.7 3.2 14.8Temporary 4.9 3.5 1.6 2.9 12.9Both 1.4 1.0 0.6 1.9 4.8Total 43.7 28.1 10.7 17.5 100.0

2010Hiring No investments Substitution Innovative Both Total

No Hiring 47.5 21.5 5.1 2.9 77.0Permanent 6.6 4.5 1.0 1.2 13.3Temporary 3.6 2.3 0.7 0.7 7.3Both 0.8 1.0 0.1 0.5 2.4Total 58.5 29.3 7.0 5.2 100.0

Investment

Investment

Empirical strategy

Estimation of a recursive mixed-process model postulating a chronological ordering in the decisions to invest and to hire.

Interactions among different decisions are captured by including sequentially the decisions on more “rigid” factors into equation of the more flexible ones;

The size of adjustment costs generate the length of time that defines short/long run: longest for innovative capital, shortest for flexible labour.

The size of adjustment costs generates the sequence of decisions embedded in our recursive model.


Empirical strategy

innovative capital: highest non-convex adjustment costs (research, patents, search of the right asset ...)

permanent labour: high non-convex adjustment costs (search and training, investment in human capital)

ordinary capital: low non-convex adjustment costs (replace existing capital, production disruption when installed ...)

temporary labour: lowest non-convex adjustment costs (search, no investment in HC)


Empirical strategy

Decisions on innovative investment will not depend on adjustment of other production factors.

Permanent hiring will depend on innovative investments

Substitution investment will also depend on permanent hiring

Temporary hiring (last decision) will depend upon the decisions that the firm has made


Model

We estimate the following interdependent equations:

Alpha1 measures the likelihood of hiring perms given that the firms has invested in innovative K, wrt firms that have not. Etc …

X are predetermined observable firm characteristics capturing the Q*-Q gap; X includes measures of demand and production process characteristics registered at the end of the year preceding the investment/hiring decisions.

Errors are assumed to be identically and independently jointly normally distributed with an unrestricted covariance matrix S, to be estimated.


4*

6*

5*

444*

3*

3*

233*

2*

122*

111*

replpermtemp

perm

IHIXH

HIXI

IXH

XI

innov

innovrepl

innovperm

innov

Main results

The model is estimated for all the years 2006-2010.

Up to 2008: Positive relationship among permanent hires and innovative investments

Since 2008: positive increase in temporary hires with innovative investments. Possible interpretation: cyclical pattern.

No correlation between hires of permanent and temporary workers.

Decision to invest in substitution investment and innovative capital is constantly correlated.


Main results

Probability of making innovative investments is lower for non exporting firms Is higher for firms not facing liquidity

contraints

Permanent Hires depend on Demand (not increase in labour

cost).

Presence of liquidity constraints decreases permanent hires decreases temporary hires too (surprising

result)


Main results

INSERIRE TABELLA


Caveats

The model is not dynamic, due to attrition in the panel dimension (questa non so se dirla)

Endogeneity and unobservable factors.


marco malgarini (istat) massimo mancini (istat) lia pacelli (university of turin and lrr) temporary...

Documents

outline istat

flexible contracts

firm level

labour market flexibility

labour cost

firm performance

innovative investment

innovative investments