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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?. Marco Malgarini (ISTAT) MASSIMO MANCINI (ISTAT) Lia Pacelli (UNIVERSITY OF TURIN AND LRR). ISTAT, Roma, 20-21NOvember, 2011. OUTLINE. Aim Background Data Empirical Strategy Results.

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Marco Malgarini (ISTAT) MASSIMO MANCINI (ISTAT) Lia Pacelli (UNIVERSITY OF TURIN AND LRR)

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  1. Temporary contracts and innovative investments: are they substitute or complements at the firm level? Marco Malgarini (ISTAT) MASSIMO MANCINI (ISTAT) Lia Pacelli (UNIVERSITY OF TURIN AND LRR) ISTAT, Roma, 20-21NOvember, 2011

  2. OUTLINE • Aim • Background • Data • Empirical Strategy • Results Istat, Rome, 21-22 November, 2011

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. Data description: Hiring Istat, Rome, 21-22 November, 2011

  15. Data description: Investments Istat, Rome, 21-22 November, 2011

  16. 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

  17. 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

  18. Hiring and Investment Istat, Rome, 21-22 November, 2011

  19. 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

  20. 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

  21. 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

  22. 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

  23. Main results • The model is estimated for all the years 2006-2010. • Up to 2008: Positive relationshipamongpermanenthiresand innovativeinvestments • Since2008: positive increase in temporaryhires with innovative investments. • Possibleinterpretation: cyclical pattern. • No correlationbetweenhires of permanent and temporaryworkers. • Decision to invest in substitutioninvestment and innovative capital isconstantlycorrelated. Istat, Rome, 21-22 November, 2011

  24. Main results • Probability of making innovative investments • islower for non exportingfirms • Ishigher for firmsnotfacingliquiditycontraints • PermanentHires • depend on Demand (notincrease in labourcost). • Presence of liquidityconstraints • decreasespermanenthires • decreasestemporaryhirestoo (surprisingresult) Istat, Rome, 21-22 November, 2011

  25. Main results • INSERIRE TABELLA Istat, Rome, 21-22 November, 2011

  26. 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

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