Exporting Firms and Employment of Temporary Workers: Human Capital and Firing Costs 7 August 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.

Japanese GDP fell after the Lehman shock. The decline of exports was the main culprit for negative growth.

Non-regular worker employment (temporary workers) had increased for the period between 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) /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 1 st term is the indirect utility function from Cobb- Douglas form

The composite goods C i is a composite good in the sector i. This composite good is a combination of varieties within the sector i. From here, we can derive the price index

Participation Constraint Ex ante, all workers are identical and must be indifferent between becoming temporary and permanent workers.

Incentive Compatibility Constraint Permanent workers must undertake human capital investment effort.

Industrial Technology Industry level technology is assumed to be the one of Cobb-Douglas. where q i 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.

Firms within the industry A firm pays sunk entry cost f e to know φ. Production cost for the firm in the industry i

The demand function A firm faces another demand uncertainty

Exporting by productive firms

The demand function for exports A firm faces another export uncertainty

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

Demand shocks θ Variance is larger for the exports than the domestic production:

Firm’s decision to hire m and n A firm hires both permanent workers (m) and temporary workers (n)

Production by the firm In two period model, the endowment of skilled and unskilled workers is determined as follows:

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

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 β i ) 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 β i.

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 β i 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 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 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: –Temporary worker ≡ the sum of part-timers, temporary help-service workers dispatched from other companies and day laborers.

Table 1 Export ratio by industry 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. 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 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%. 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) Low productivity plants hire larger proportion of temporary worker. Export ratio is higher for high productivity plants. Low productivity plants hire larger proportion of temporary worker. Export ratio is higher for high productivity plants. < >

Table 3 Comparison of temporary worker ratio and export ratio > < > Low productivity plants hire larger proportion of temporary worker. Export ratio is higher for high productivity plants. Temporary worker ratio is higher for large plants. Low productivity plants hire larger proportion of temporary worker. Export ratio is higher for high productivity plants. Temporary worker ratio is higher for large plants.

Table 4 Table 4 Temporary worker ratio by export status Temporary worker ratio is higher for no-exporting plants. No significant difference in changes in the ratio between exporters and non-exporters. 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

Large part of industry-level changes is explained by within effect. Contribution of exporters or large plants become larger when we focus on Finished Products Machinery and Equipment sectors. Plant size as well as exporting status might be important factor. Large part of industry-level changes is explained by within effect. Contribution of exporters or large plants become 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

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.