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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?
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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)?
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
Data description: Hiring
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
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).
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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)
Istat, Rome, 21-22 November, 2011
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
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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.
Istat, Rome, 21-22 November, 2011
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)
Istat, Rome, 21-22 November, 2011
Main results
INSERIRE TABELLA
Istat, Rome, 21-22 November, 2011
Caveats
The model is not dynamic, due to attrition in the panel dimension (questa non so se dirla)
Endogeneity and unobservable factors.
Istat, Rome, 21-22 November, 2011