LABOR CONTRACTS AND FLEXIBILITY: EVIDENCE FROM A LABOR MARKET REFORM IN SPAIN

This paper evaluates the effects of a labor market reform in Spain that removed restrictions on fixed‐term or temporary contracts. Our empirical results are based on longitudinal firm‐level data that cover observations before and after the reform. We posit and estimate a dynamic labor demand model with indefinite and fixed‐term labor contracts, and a general structure of labor adjustment costs. Experiments using the estimated model show important positive effects of the reform on total employment (i.e., a 3.5% increase) and job turnover. There is a strong substitution of permanent by temporary workers (i.e., a 10% decline in permanent employment). The effects on labor productivity and the value of firms are very small. In contrast, a counterfactual reform that halved all firing costs would produce the same employment increase as the actual reform, but much larger improvements in productivity and in the value of firms. (JEL J23, J32, J41)     

Organizational Uncertainty and Labor Contracts in China's Economic Transition

Lifetime employment was a cornerstone of the Chinese socialist system constructed under Mao. In this system, organizations served the function of social security, and as a result, many organizations were overburdened with bloated work forces and retirees that drew from organizational coffers well into old age. Labor contracts fundamentally alter this system, as they allow firms to end the socialist institution of lifetime employment. Yet there is significant variation on the institutionalization of labor contracts in organizations. Based on a sample of 81 firms in industrial Shanghai, I show that organizations that are experiencing uncertainty in the economic transition are more likely to institutionalize labor contracts on an organizationwide basis. There are two types of organizational uncertainty in the economic transition: economic uncertainty and administrative uncertainty. In cases of economic uncertainty, firms that lost money in 1990 and firms that are burdened by large forces of retired workers are more likely to place their workers on labor contracts. In the case of administrative uncertainty, firms that are at the highest levels of the industrial hierarchy are also significantly more likely to place their workers on labor contracts. Although these upper level firms were the most protected under the command economy, they are being forced to handle the greatest among the responsibilities in the economic transition, and as a result, they experience the greatest sense of being set adrift by the state.     

THE CONSEQUENCES OF (DE)REGULATION ON EMPLOYMENT DURATION AND EFFICIENCY: AN EXPERIMENTAL STUDY

If the future market wage is uncertain, engaging in long‐term employment is risky, with the risk depending on how regulated the labor market is. In our experiment long‐term employment can result either from offering long‐term contracts or from repeatedly and mutually opting for rematching. Treatments differ in how regulations restrict the employer's flexibility in adapting the employment contract. All treatments allow for longer contract duration as well as for mutually opting to be rematched. Effort is chosen by employees after a contract is concluded. Treatments vary from no contract flexibility to no restriction at all. Will more (downward) flexibility be used in ongoing employment but reduce labor market efficiency? And will regulation crowd out long‐term employment, in the form of long‐term contracts or voluntary rematching? (JEL C72, C90, F16, J21, J24, L10)     

ANTI‐POACHING AGREEMENTS IN LABOR MARKETS

We analyze competition for experienced workers among wage‐setting firms. The firms can design poaching offers with higher wages to workers who switch from rivals relative to wages paid to their own existing employees. We evaluate the profit and welfare effects of anti‐poaching agreements that eliminate poaching offers as a recruiting method. Anti‐poaching agreements increase industry profits, whereas workers are made worse off. We show that the effects of anti‐poaching agreements on total welfare are determined by the magnitude of workers' switching costs and the productivity change associated with switching employers. (JEL L41, L40, J42)     

Does the early bird always get the worm? market institutions and the timing of employment decisions

Unravelling of appointment dates can be observed in some entry-level labor markets but not in others. A comparison of different markets shows how the costs of breaking contracts and being rematched can affect the timing of appointments and market behavior. If contracts can be terminated at any time by workers and if rematching costs are relatively small compared to the benefits from changing matches, early appointments in an entry-level labor market confers no benefit on firms. Firms then have no incentives to make early offers. However, if the costs offset the benefits from changing employment, firms that cannot compete with their principal competitors may prefer to make offers before some critical information becomes available rather than wait for the time when employment can actually start. Such a labor market may experience early appointments. But if the most desirable firms do not issue early offers, other firms may be rejected in any early period. Therefore, the most desirable firms can work together to halt unravelling. I am indebted to Esquire Donna Gerson and Koh Song Hui who extended help in writing this paper. My special thanks should be given to Alvin Roth for his suggestions and comments.     

THE EFFECTS OF EMPLOYMENT PROTECTION ON LABOR TURNOVER: EMPIRICAL EVIDENCE FROM TAIWAN

This paper investigates the effects of employment protection legislation on the rates of hiring, separation, worker flows, job reallocation, and churning flows for the case of Taiwan. Our empirical identification takes advantage of a reform created by Taiwan's enactment of Labor Standards Law, which has substantially increased the costs of firing, and the implementation of the law's enforcement measures. Moreover, our identification also exploits the fact that the stringency of the law's provisions and the intensity of the law's enforcement vary with establishment size. On the basis of the monthly data at the establishment level for the period 1983–1995, we find that Taiwan's Labor Standards Law and its enforcement measures have dampened labor turnover for medium‐sized and large establishments, while that of small establishments was not affected. (JEL J65, J63, J88)     

EMPLOYMENT AND DEADWEIGHT LOSS EFFECTS OF OBSERVED NONWAGE LABOR COSTS

To assess the employment effects of labor costs, it is crucial to have reliable estimates of the labor cost elasticity of labor demand. Using a matched firm‐worker data set, we estimate a long‐run unconditional labor demand function, exploiting information on workers to correct for endogeneity in the determination of wages. We evaluate the employment and deadweight loss effects of observed employers' contributions imposed by labor laws (health insurance, training, and taxes) as well as of observed workers' deductions (social security and income tax). We find that nonwage labor costs reduce employment by 17% for white collars and by 53% for blue collars, with associated deadweight losses of 10% and 35% of total contributions, respectively. Since most firms undercomply with mandated employers' and workers' contributions, we find that full compliance would imply employment losses of 4% for white collars and 12% for blue collars, with respective associated deadweight losses of 2% and 6%. (JEL J23, J32)     

BACK-LOADED WAGES AND ON-THE-JOB TRAINING IN A FRICTIONAL LABOR MARKET

This paper analyzes the coexistence of on-the-job (general) training and on-the-job search in a frictional labor market where firms post skill-dependent labor contracts to preemptively back-load compensation after training. The back-loaded compensation scheme discourages trained workers' efficient job-to-job transition, as if they accumulated relationship-specific capital, which induces overintensified training among more productive firms. The quantitative analysis predicts that the market equilibrium, relative to the efficiency benchmark, gets more skilled workers (training inefficiency) and less output (allocation inefficiency). It further demonstrates that efficiency loss is moderate due to positive externality and can be improved, as search friction is mitigated. (JEL J24, J31, J64)     

STRATEGIC ENFORCEMENT,INTELLECTUAL PROPERTY RIGHTS,AND CONTRACTUAL R&D

This study examines the role of intellectual property rights (IPRs) in contractual research and development (R&D) in developing countries. We find that strong IPRs provide incentives for firms, both multinational and local, to specialize in R&D activities in which they have competitive advantage (the specialization effect). They also facilitate the switching process from imitators to potential innovators for local firms (the switching effect). Moreover, we also demonstrate that a multinational firm's strategic IPRs enforcement behavior can be an effective instrument for subsidizing contractual R&D in developing countries (the subsidizing effect). We further illustrate how a policy mix of IPRs and a foreign direct investment subsidy in these countries affects R&D activities by adding an offshore R&D subsidiary as an additional organizational form. (JEL L13, O31, O34)     

ENFORCING TIME-INCONSISTENT REGULATION

Passage of legislation enacting a regulatory program does not ensure that the program will be successfully implemented. Certain regulations require significant long-term investment by firms prior to their enforcement date. If firms do not engage in the desired investment, enforcing the regulations may generate significant welfare losses for society. Firms know this and may behave strategically by not undertaking the investment, generating the well-known time-inconsistency problem. A game-theoretic model presented here shows how the time-inconsistency problem can be alleviated using administrative procedures as a device to commit an agency to carrying out its bureaucratic mission.     

A COMPETITIVE MODEL OF WORKER REPLACEMENT AND WAGE RIGIDITY

We adapt the models of Menzio and Moen (2010) and Snell and Thomas (2010) to consider a labor market in which firms can commit to wage contracts but cannot commit not to replace incumbent workers. Workers are risk averse, so that there exists an incentive for firms to smooth wages. Real wages respond in a highly nonlinear manner to shocks, exhibiting downward rigidity, and magnifying the response of unemployment to negative shocks. We also consider layoffs and show that for a range of shocks labor hoarding occurs while wages are cut. We argue these features are consistent with recent evidence. (JEL E32, J41)     

Boeing’s Diffusion of Commercial Aircraft Technology to Japan: Surrendering the U.S. Industry for Foreign Financial Support

Japanese firms have become increasingly important first-tier suppliers to the U.S. commercial aircraft industry (large passenger jets). Over time, this relationship has evolved from a simple “build to print” subcontractor arrangement to a turnkey “design and build” risk-sharing partnership. Using the Boeing 767, 777, and 787 as examples, we argue that the motives for Boeing’s commercial outsourcing to Japan are to access the Japanese market, spread risk, gain access to capital, and lower U.S. spending on research and development (R&D). This has clear implications for U.S. trade and employment, in that Japanese-subcontracting boosts foreign imports and reduces the need for domestic production workers and U.S. suppliers. From a trade perspective, however, a troubling feature of allowing the Japanese to produce large commercial aircraft subassemblies is that major Japanese public financial supports are involved which contravene existing international agreements on production subsidies. We review the types of production contracts that Japanese companies have sought on the Boeing 767, 777, and 787 programs. These contracts have allowed the Japanese to develop new capabilities in terms of production capacity, tooling, design, and final assembly. Ultimately, these capabilities imply that Japan will eventually enter the market as a fully-fledged producer of commercial aircraft. This does not bode well for the U.S. commercial aerospace sector.     

Wage indexation: Social benefits and private incentives

The question addressed in this paper is: Do social benefits from wage indexation coincide with private incentives to incorporate COLA clauses in union contracts? In general, market forces provide an “approximately correct” solution so that legislative remedies are not required. Based on the work of Gray and Fischer, full indexation is beneficial when the economy is subjected to stochastic nominal shocks, but only partial indexation is optimal when real disturbances dominate. If unions and management of firms are risk-averse they both have an incentive to adopt full indexation when monetary uncertainty exists. On the other hand, when the economy faces real shocks, union negotiators oppose indexation if the demand for labor is elastic, but insist on full indexation if demand is inelastic. Managers of firms prefer nominal wage contracts in either case. This suggests that both parties will agree to omit COLA clauses in the first case, but are likely to compromise with partial indexation in the second case. A role for government intervention is indicated only to the extent that bargaining strength may dictate a degree of indexation that deviates from the social optimum. The analysis is extended briefly to other assumptions about the utility function of the two parties at the bargaining table.     

Are labour inspections effective when labour regulations vary according to the size of the firm? Evidence from Peru

This article analyses the impact of enforcement of four labour standards (pension system enrolment, minimum wage, maximum weekly working hours and written employment contract) on compliance in Peru, where labour regulations and penalties vary according to firm size. The author uses household survey data to analyse a factor not previously studied – adjustment by firms through downsizing to benefit from lower fines and less stringent regulations. The empirical findings indicate that enforcement efforts have little effect on either the degree of compliance or the size of firms.     

TRADING UNCERTAINTY, ENFORCEMENT AND LABOR UNIONS

It is shown that when contracts can be perfectly enforced, trading uncertainty leads to discrimination among workers with the same skills and experience. In this case anti-discrimination laws lead to inefficiencies. In the absence of perfect enforcement, anti-discrimination practices may be used as enforcement devices and need not lead to inefficiencies. In particular, firms may wish to precommit to an anti-discrimination policy, say by inviting in a labor union, in order to offer credible insurance to its workers. This leads to an equilibrium in which union workers get a higher wage than non-union workers, but unions do not have monopoly power.     

FIRMS' EXPECTATIONS ABOUT THE IMPACT OF AI AND ROBOTICS: EVIDENCE FROM A SURVEY

This study presents new evidence on firms' views about the impact of artificial intelligence (AI) and robotics on their business and employment, using data from an original survey of more than 3,000 Japanese firms. The focus of this study is on technology‐skill complementarity. Firms with highly educated employees tend to expect positive impacts of AI‐related technologies on their business, and vice versa. Larger firms and firms that engage in global markets tend to have positive views about the impacts of AI‐related technologies. (JEL O33, J23, J24, M15)     

Employment discrimination against older workers: an experimental study of hiring practices

Pairs of resumes, one for a 57-year-old and the other for a 32-year-old, were mailed to 775 large firms and employment agencies across the United States. Although the resumes presented equal qualifications, the older job seeker received a less favorable employer response 26.5% of times when a position appeared to be vacant. Vigorous enforcement of equal opportunity laws as well as initiatives to change employer attitudes are appropriate responses to such discrimination. The technique of employment testing, demonstrated in this research, can be useful in both efforts.     

Employment Discrimination Against Older Workers

Pairs of resumes, one for a 57-year-old and the other for a 32-year-old, were mailed to 775 large firms and employment agencies across the United States. Although the resumes presented equal qualifications, the older job seeker received a less favorable employer response 26.5% of times when a position appeared to be vacant. Vigorous enforcement of equal opportunity laws as well as initiatives to change employer attitudes are appropriate responses to such discrimination. The technique of employment testing, demonstrated in this research, can be useful in both efforts.     

MANDATORY RETIREMENT AS A CLAUSE IN AN EMPLOYMENT INSURANCE CONTRACT

This paper postulates the existence of an "employment insurance contract" in which firms insure the employment of workers, at a predetermined wage, against potential, age related declines in productivity. To limit its liability the firm establishes an age limit to its promise ––– the mandatory retirement age. It is demonstrated that Pareto-efficient contracts exist which involve mandatory retirement at a specific age. The existence of these contracts, including mandatory retirement, increases workers' life-time utility and encourages the accumulation of human capital. Empirical results are consistent with the predictions of the model.     

How temporary is temporary employment in Spain?

I use a multinomial logit model and the Spanish Active Population Survey (EPA) for the period 1987–1996 to study labor force transitions of temporary workers. These workers hold fixed-term employment contracts, which Spanish labor law distinguishes from indefinite contracts. Since the EPA questionnaire allows the identification of workers with either type of contract, I use matched EPA files to analyze transitions from temporary to permanent employment and explore the extent to which workers holding fixed-term employment contracts tend to be trapped in temporary employment relationships. I am grateful to an anonymous referee for helpful comments and suggestions. Pedro Albarrán-Pérez provided excellent research assistance.