Temporary hires and innovative investments

Abstract

The flexicurity approach claims a positive effect of flexible labour on firm performance, also through an increased ability to innovate. Critics consider it a deregulation of the labour market, decreasing investment in human capital and innovation. We contribute to this broad debate providing an estimate of the relationships linking innovative investment, substitution investment, permanent hires and temporary hires. In particular, we aim at affirming or denying that innovative investments are accompanied by a specific kind of workforce, being it stable or flexible. In doing so, we contribute to bridge the gap among two quite separate strands of literature, as existing literature usually analyses capital and labour separately. Estimating a nonlinear recursive equation system we highlight a significant increase in the likelihood of hiring on a permanent base when the firm innovates; this holds till 2008. Afterward, during the crisis, innovating firms are more likely to hire using temporary contracts instead, a possible signal of a cost saving strategy adopted in a loose labour market by firms still able to innovate. Furthermore, both permanent and temporary hires never depend on increases in labour costs; however, substitution investment increases when labour cost increases, maybe in an attempt to increase labour productivity through a more efficient capital equipment.

Keywords:

• EPL
• investment
• innovation
• flexicurity
• survey data

JEL Classification::

• J41
• J6
• D22
• D24

Acknowledgements

Lia Pacelli gratefully acknowledges financing from Regione Piemonte, within the project ICT4LAW ‘per la convergenza fra tecnologie informatiche, diritto ed economia’.

Notes

¹ The term flexible labour here is referred to the various forms of temporary contracts.

² The ISAE has been responsible for carrying out the survey until December 2010. Starting from 1 January 2011, ISAE activities have been transferred to ISTAT, that is now in charge of the survey.

³ For an empirical analysis on the relationship between productivity and innovative investments using firm level on manufacturing firms see also Mate-Garcia and Rodriguez-Fernandez (2008).

⁴ http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm.

⁵ An empirical analysis on factors that may affect employer's search is in Russo et al. (2005).

⁶ Statistics referred to the other years are not very different and are available upon request from the authors.

⁷ See again footnote 6.

⁸ E.g. permanent workers enjoy higher investment in firm-specific human capital, as empirical analysis seems to confirm (De Graaf-zijl, 2006).

⁹ See Rota (2007).

¹⁰ On top of the exogenous and costless negative drift there can be an endogenous/costly negative adjustment (firings) triggered by hitting the upper threshold of the (S,s) band. These lumpy events are unobservable to us, and are de facto included in the error term. To grasp their eventual impact we compare estimates referred to different phases of the business cycle, expecting layoffs to be more common during the crisis than in previous years.

¹¹ Goux and Pauchet (2001) estimate – in a convex adjustment cost framework – substantial costs to adjust the level of permanent contract workers in France; on the contrary they cannot find significant costs involved in adjusting the number of temporary contract workers. Aguirregabiria and Alonso-Borrego (1999) – in a linear adjustment cost framework – estimate that firing costs are between one third and half of the gross annual wage of permanent workers in Spain. They impose that hiring is made only with temporary contracts and estimate that hiring costs are about 15% of the gross annual wage of temporary workers. Rota (2001) estimates a labour demand model with fixed and linear adjustment costs with Italian data; she finds that fixed costs are substantial, around 40% of annual wage costs, and linear costs are much less important (3.6% of annual wage costs).

¹² The model is not dynamic, as no panel data can be used to estimate it due to high attrition, as discussed in the online supplementary material section of the journal.

¹³ The only significant coefficient ‘alpha-5’ in Table 3 (permanent hiring in the equation of flexible hiring) has a p-value of 0.096 and it is referred to 2008, the ‘transition year’ in which innovative investment are positively correlated to both kinds of hiring.